The Creditors’ Bargain and the Collectivity of the Liquidation Regime

This chapter examines the Creditors' Bargain Model of insolvency law. This well-known model asserts that the most prominent features of insolvency law are best seen as reflecting the notional agreement the creditors of a company themselves would strike if given the chance to bargain with each other before anyone lends anything. The perspective of the ex ante bargain is supposed to illuminate the deep structure of this law, and to confer justification on its rules by having reference to the virtue of autonomy. The chapter asks if the model is consistent with its own premises, whether it can provide useful insight into insolvency law, and most importantly, whether it can generate normative appeal on egalitarian or indeed any other grounds. The principles underlying the stay on unsecured claims are used to demonstrate that the model has no explanatory or justificatory force. It seeks to rely on the self-interest of those subject to the stay to suggest they would consent to it. But it is based on nothing but creditors' hypothetical preferences, and provides no reason why these preferences should be considered binding. The model suggests no non-arbitrary time at which to make a determination of creditors' self-interest. Also, the point at which it asserts creditors would consent to the stay is such that creditors actually asked to bargain then would never come to any agreement. Or if they do, the agreement would be oppressive of weaker parties, would be strongly anti-egalitarian, and therefore would have no normative appeal. It follows that principles which can be argued for within the model have nothing to do with autonomy. Nor would they necessarily be efficient.