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Crawford, Keith (2013)
Languages: English
Types: Unknown
What is effective insolvency law? Effective insolvency laws play an important role in the health of an economy, and particularly upon the framework of investment decisions. Understanding how this works is particularly relevant during a period of financial crisis. International Monetary Fund and World Bank guidelines for “Orderly and Effective” insolvency laws were intended to encourage law reforms that would stimulate investment by improving returns to investors in the event of insolvency. The guidelines were strongly influenced by an efficiency approach to insolvency. This approach posits that absolute priority for secured creditors is allocatively efficient and therefore the best means to achieve maximum social welfare. The guidelines also drew heavily on the principles and practices of ‘creditor friendly’ English law, seen by some as a paragon of efficient insolvency. But how accurate is this appraisal of English law or the impact of efficient insolvency? The Enterprise Act 2002 sought to develop a rescue culture by improving inclusivity and increasing distribution of both control and returns amongst stakeholders. Instead of reducing overall returns, as an efficiency model would suggest, research into insolvency outcomes suggests that the revised administration procedure may provide better returns to all groups of creditors, including secured creditors. This thesis uses empirical data to explore the limitations of an efficiency approach to insolvency, and explain why in a developed legal regime inclusivity improves returns by increasing the likelihood of effective rescue. The changes in English law are reflective of an increased private sector investment in informal workouts and a growing emphasis on reputational and relationship concerns. An element of redistribution and inclusivity will provide better global returns to investors than a slavish approach to secured creditor priority.
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    • Acharya VV, Amihud Y and Litov L, “Creditor Rights an-dTakiCnogr”p,orate Risk Journal of Financial Economics 102 (2011) 150-166
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