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Academic Discussion and the Relevance of Third-Party Creditor Protection

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Abstract

The bilateral private governance system allows the bank to react to a debtor company’s worsened financial situation before the debtor company is bankrupt. The bank can use the information advantage provided by information undertakings to take corrective action before (adjusting) third-party creditors can react. This, for example, enables the bank to receive additional collateral from the debtor company. The additional collateral, however, may lessen the chances of third-party creditors’ claims being satisfied, because it reduces the debtor company’s pool of assets. This shows that the bilateral governance system created by covenants and the event of default clause can affect third-party creditors’ claims. To understand these effects, the work will first describe their treatment as externalities under law and economics theory. Then, their relevance for the current legal discussion will be shown. Afterwards, the specific potential externalities of the bilateral governance system will be presented. This part will systematise the theoretical considerations in the literature to allow for an overall assessment. It will be completed by the subsequent chapter, which will establish the general presumption that banks behave in a self-interested way as well as show the legal limits of such behaviour under German and US law.

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Notes

  1. 1.

    For a detailed analysis of the historical development see Papandreou (1998). See also Dahlman (1979); he states i.a. that “It is thus doubtful whether the term "externality" has any meaningful interpretation, except as an indicator of the political beliefs and value judgments of the person who uses (or avoids using) the term.” Dahlman (1979) 156. See further Cornes and Sandler (1996), p. 39.

  2. 2.

    Cf. Dahlman (1979), 142 et seq.

  3. 3.

    This approach aims at the evaluation of the actual economic performance according to the maximum welfare solution (Walrasian general equilibrium); Pigou (1932).

  4. 4.

    Coase (1960); cf. Furubotn and Richter (2005), p. 101 et seqq.

  5. 5.

    Cf. Furubotn and Richter (2005), p. 101; Richter and Furubotn (2010), p. 109.

  6. 6.

    Furubotn and Richter (2005), p. 106; Richter and Furubotn (2010), p. 114.

  7. 7.

    See above 1.2.

  8. 8.

    See above 1.2.

  9. 9.

    Cf. Siegel (1998), 594; Hopt, in: Wank et al. (eds) (2002), 1019; Merkt (2004), 313 et seq.; Mankowski, in: Lutter (ed) (2006), 496.

  10. 10.

    Seminal for covenants as alternative to bankruptcy law Thießen (1996); for an overview about the debate regarding Company Law see e.g. Nikoleyczik (2007), p. 1 et seqq.

  11. 11.

    Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (Law for the Modernisation of the German Limited Liability Company Law and the Prevention of Misuse).

  12. 12.

    Communication from the Commission to the Council and the European Parliament - Modernising Company Law and Enhancing Corporate Governance in the European Union - A Plan to Move Forward COM/2003/0284.

  13. 13.

    See, for example, Zur entwicklung des europäischen gesellschaftsrecht: Stellungsnahme der arbeitsgruppe europäisches gesellschaftsrecht (group of german experts on corporate law) zum report of the high level group of company law experts on a modern regulatory framework for company law in Europe (2003); Merkt (2004); Nikoleyczik (2007); Grade and Wauters, in: Geens, Hopt (eds) (2010).

  14. 14.

    See, for example, Centros Ltd v. Erhvervs- og Selskabsstyrelsen (1999) C-212/97, ECR [1999] I-1459, para. 36; Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd (2003) C-167/01 ECR [2003] I-10155, para. 135; nuanced Bezzenberger (2005), 108 et seqq.; Heinrich (2009), p. 43, 45. Both argue that the information asymmetry obscures an appropriate risk allocation by adjusting creditors. This argument is particularly questionable in the context of covenants. The adjusting creditors might not be able to evaluate the credit risk properly ex ante but covenants allow them to adjust ex post and to collect more information over the life of the loan.

  15. 15.

    As previously mentioned this work considers the debtor company as a limited (public or private) company.

  16. 16.

    See above 4.2.1.1. Generally see Heinrich (2009), p. 42 et seqq. with further references.

  17. 17.

    Wiedemann (1980), p. 515.

  18. 18.

    Nikoleyczik (2007), p. 11 et seq.

  19. 19.

    Rickford (2004), 967, 971; cf. Mülbert (2006), 365.

  20. 20.

    Cf. Schön (2004a), 293 et seqq.; Bachner (2009), p. 7; Thole (2010), p. 15; Mülbert (2006), 370; Teichmann (2006), p. 455; Heinrich (2009), p. 41 et seqq. (he, however, classifies the argument as an economic one but at the same time acknowledges that the concept of limited liability does not endanger the creditors’ interests).

  21. 21.

    Überseering BV v. Nordic Construction Company Baumanagement GmbH [2002] C-208/00, ECR I-9919, para. 92.

  22. 22.

    Cf. Armour et al., in: Kraakman et al. (eds) (2009), p. 120.

  23. 23.

    In that direction, probably, Grundmann, in: Grundmann et al. (eds) (2010), p. 85 et seqq.

  24. 24.

    Publicity duties can be regarded as a fourth instrument. For a detailed overview see Wiedemann (1980), p. 520 et seq., 552 et seqq.; Escher-Weingart (2001), p. 107 et seqq.

  25. 25.

    Cf. Armour (2000), 371 et seq.; Kübler, in: Hopt, Wymeersch (eds) (2003), p. 100 et seq.; Schön (2004b), 437 et seq.

  26. 26.

    See for Germany Schulte (2016), p. 105; see also, generally, Armour (2000), 372. For the European legal capital doctrine see Enriques and Macey (2001), 1185 et seqq.

  27. 27.

    Cf. Siegel (1998), 594; Hopt, in: Wank et al. (eds) (2002), p. 1018 et seq.; Merkt (2004), 313.

  28. 28.

    Cf. Servatius (2008), p. 367; Burger and Buchhart (2001), 101.

  29. 29.

    Servatius (2008), p. 426 et seqq.; Engert (2012); Majic (2013), p. 45 et seqq.

  30. 30.

    Cf., for example, Mankowski, in: Lutter (ed) (2006), p. 491 et seqq.

  31. 31.

    Thießen (1996), 31 (“markwirtschaftlich Alternative zum staatlichen Insolvenzrecht”).

  32. 32.

    Burger and Buchhart (2001); Thole (2010), p. 46.

  33. 33.

    Burger and Buchhart (2001), 101 et seqq. with further references; similarly see Köndgen, in: Prütting (ed) (1997), 154.

  34. 34.

    See e.g. BGH WM 2013, 1504, 1507 (“Windhundrennen”).

  35. 35.

    Cf. Schmidt (1980), p. 37; Rausch (1985), p. 33.

  36. 36.

    Rapoport and Chammah (1965); Engel (2004), p. 55 et seqq.; Grünewald (2015), p. 97 et seqq.

  37. 37.

    Jackson (1986), 10 et seq.; Eidenmüller (1999), p. 19 et seqq.; Zirener (2005), p. 186 et seqq.; Thole (2010), p. 56 et seqq.; Eidenmüller (2016), 145.

  38. 38.

    This collective enforcement mechanism is based on the bargaining theory. It represents the mechanism to which all creditors would have agreed ex ante (before bankruptcy) without knowing what will happen; cf. Jackson (1982), 861 et seqq.; Rausch (1985), p. 21 et seq.

  39. 39.

    Cf. Schmidt (1980), p. 35; Rausch (1985), p. 25 et seqq.

  40. 40.

    Cf. Schmidt (1980), p. 28 et seqq.

  41. 41.

    “Entscheidend ist vielmehr, daß [sic.] Effekte zu Lasten und zugunsten Dritter auftreten können, daß [sic.] unklar ist, in welchem Verhältnis diese Effekte stehen und daß [sic.] deshalb auch unklar ist, wie die Effizienz von covenants zu beurteilen ist.”; Eidenmüller (1999), p. 148.

  42. 42.

    Similar discussions can, of course, be found in other legal jurisprudences. For Germany see e.g. Schmidt, in: Jürgens (ed) (2007).

  43. 43.

    Seminal for debt as part of corporate governance Williamson (1988); for an current perspective see e.g. Tirole (2006), p. 51 et seqq. and Gullifer and Payne (2011), p. 80 et seqq.

  44. 44.

    Williamson (1988), 579 et seqq.

  45. 45.

    Triantis and Daniels (1995), 1082; the immense creditor influence was proven in the empirical study by Nini et al. (2012).

  46. 46.

    Cf. Deakin and Konzelmann, in: Armour, McCahery (eds) (2006).

  47. 47.

    This conflict goes back to the Berle-Dodd debate: Berle (1931); Berle and Means (1947); Dodd (1932); Dodd (1935).

  48. 48.

    Levmore (1982); Triantis and Daniels (1995), 1077.

  49. 49.

    Blair and Stout (1999).

  50. 50.

    Triantis and Daniels (1995).

  51. 51.

    Triantis and Daniels (1995), 1079.

  52. 52.

    Hoffmann (2012).

  53. 53.

    Fischel (1989), 138.

  54. 54.

    Cf. Lipson (2010) with further references.

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    Daniela Matri

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Matri, D. (2017). Academic Discussion and the Relevance of Third-Party Creditor Protection. In: Covenants and Third-Party Creditors. Springer, Cham. https://doi.org/10.1007/978-3-319-62036-7_4

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