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Pursuing Preservation of Pre-Bankruptcy Entitlements: Corporate Bankruptcy Law's Self-Executing Mechanisms
Berkeley Bus. L. J. (2007)
  • Yaad Rotem

Much analogous to corporate law, the core problem of which could be described as the agency problem, corporate bankruptcy law’s nucleus problem is the Problem of Preservation: attempting to prevent inasmuch as possible unnecessary alteration of pre-bankruptcy entitlements. Pursuing preservation, however, is of course only a second order goal. Corporate bankruptcy law was not created as a means to accomplish preservation, but rather to deliberately alter pre-bankruptcy entitlements in order to pursue a first order goal—effectively help firms in financial distress. Thus, it becomes apparent that corporate bankruptcy law cannot rely on the decisions of a single regulator (i.e., the bankruptcy judge) to prevent excessive alteration of pre-bankruptcy entitlements, because attaining preservation inherently—but blatantly—conflicts with bankruptcy’s first order goals. Consequently, corporate bankruptcy law must also employ other mechanisms in order to truly support a policy of preservation. It is argued here that corporate bankruptcy law demonstrates its commitment to preservation by deploying specially crafted self-executing mechanisms. At least three types of such mechanisms can be identified in corporate bankruptcy settings: internal mechanisms that monitor against excessive redistribution; discretion-limiting mechanisms; and external monitoring and enforcement market mechanisms. The line of reasoning presented here supplies a new point of view from which to explain certain corporate bankruptcy doctrines, and the structure of corporate bankruptcy law in general. Moreover, analyzing the bankruptcy phenomenon from the perspectives of the preservation problem and self-executing mechanisms leads to important normative conclusions. First, lawmakers ought to consider several additional preservation mechanisms, some of which are easily available. Second, future research ought to contemplate whether corporate bankruptcy law is indeed successful in preventing excessive alteration of pre-bankruptcy entitlements by deploying its specified self-executing mechanisms. More importantly, research should examine the relative efficacy of the various types of mechanisms.

  • Bankruptcy,
  • redistribution
Publication Date
Citation Information
Yaad Rotem. "Pursuing Preservation of Pre-Bankruptcy Entitlements: Corporate Bankruptcy Law's Self-Executing Mechanisms" Berkeley Bus. L. J. Vol. 5 Iss. 1 (2007)
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