Given its often4proclaimed central role for insolvency law, it appears to be appropriate to start with some thoughts about the just mentioned principle of equal treatment of the creditors (alternatively: pari passu principle5), in particular, whether or not it is rightfully seen as a core principle. After all, despite its alleged centrality, there is no explicit mention to be found neither in the German Insolvency Ordinance (InsO) nor in many other insolvency codes around the world. Quite to the contrary, the history of bankruptcy legislation could even be delineated as a never-ending fight for privileges.6To name but one example: For literally centuries,7the sovereign as legislator has (ab)used its power of rule-setting to grant itself as executive a bankruptcy
Inhalt der Vertragstreue und die Eigentumsgarantie, JZ 2013, 957, 962 ff.), for instance, by means of overnight transactions such as repo-trading.
4 See justHäsemeyer, Insolvenzrecht, 4th ed., 2007, 2. 24 ff.;Prütting, Allgemeine Verfah-rensgrundsätze der Insolvenzordnung, in: Kölner Schrift zur Insolvenzordnung, 3rd ed., 2009, Kapitel I marg. no. 61 ff., p. 19 ff.;Brinkmann, The Position of Secured Creditors in Insolvency, in: Eidenmüller/Kieninger (eds.), The Future of Secured Credit in Europe, 2008, 249, 250 f. Rather sceptical, however,Knospe, Scharfes Schwert oder harmlose Gerechtigkeitsregel? – Die insolvenzrechtliche Monstranz der Gläubigergleichbehand-lung, ZInsO 2014, 861 ff.
5 On this particular principle’s central role in the present practice of sovereign debt re-structuring, seeSandrock, Griechenland und Zypern in der Finanzkrise: die Rechtsstel-lung ihrer privaten Finanzinvestoren, RIW 2014, 16 ff.;Paulus, Jüngste Entwicklungen im Resolvenzrecht, WM 2013, 489 ff.; ders., ZIP 2013, Resolvenzrecht im Werden – NML, Inc. vs. Argentina, 2. Runde, ZIP 2013, 2190 ff. See, additionally, below text around and footnotes 19 and 20.
6 Cf., for instance, etwaJ. Bauer, Ungleichbehandlung der Gläubiger im geltenden Insol-venzrecht, DZWIR 2007, 188.
7 See, for instance, sec. 13 of the famous Freiburg Town Charter “Nüwen Stattrecht und Statuten der loblichen Stadt Fryburg im Pryzgow gelegen” from 1520 (drafted by Ulrich Zasius). On this, cf.Knoche, Ulrich Zasius und das Freiburger Stadtrecht von 1520, 1957, p. 75;Nassall, Das Freiburger Stadtrecht von 1520 – Durchsetzung und Bewährung, 1989, p. 206 ff.
privilege8in the form of what was called sometimes “prince’s penny” some-times “crown’s privilege” and somesome-times “fisc privilege”. Germany9is cur-rently one of the few jurisdictions in this world where this privilege is (allegedly10) abolished;11 but, telling enough, the fisc fought ever since the privilege’s abolition in 1999 until today for its re-introduction.12
1. Dogmatics
A closer look into the principle reveals that differentiations are necessary: after all, equal treatment might refer to the procedural steps within a insolvency proceeding or, alternatively and additionally, to the distribution process. Be-sides of procedural rights granted to all insolvency creditors – as defined in sec.
38 InsO – who are to pursue their satisfaction exclusively within the insol-vency procedure, sec. 87 InsO,13suffice it to mention here the plan proceeding alone.14Even though this modern instrument introduces private autonomous flexibility15into insolvency law which has served for centuries, if not millen-nia, as paradigm of the strict to be appliedrigor iurisit obliges the drafters to procedural equal treatment in sec. 222, 226 InsO.16
8 Informative on this, by far not unique, methodH.Lang, Gesetzgebung in eigener Sache, 2007.
9 Others are, for instance, Austria (which served as model for Germany) or England.
10 Cf.J.-P. Meier, Privilegien des Fiskus und der Sozialversicherungsträger in der Unter-nehmensinsolvenz, 2010, passim.
11 See also infra at III 2.
12 Occasionally by means which were not entirely beyond any doubt regarding their legitimacy, cf.Vallender, Par conditio creditorum ade?, NZI 2005, 599 ff.;Marotzke, Die Anfechtbarkeit von Vollstreckungsmaßnahmen wegen Benachteiligung konkurrie-render Gläubiger, ZInsO 2006, 7 ff.;idem, Ketzerisches aus der ersten Instanz, ZInsO 2006, 190 ff.; ders., Der insolvenzrechtliche Gläubigergleichbehandlungsgrundsatz in der neueren Rechtspolitik, Insolvenzjahrbuch 2007, 10 ff.;idem, Sinn und Unsinn einer insolvenzrechtlichen Privilegierung des Fiskus – zugleich eine Stellungnahme zu Art. 3 des Haushaltbegleitgesetzes 2011 i. d. F. des Gesetzesbeschlusses des Deutschen Bunde-stages vom 28. 10. 2010, ZInsO 2010, 2163 ff.;J.-P. Meier, Die Wiedereinführung von Insolvenzvorrechten durch das Hauptportal, ZInsO 2010, 1121.
13 On this cf. BGH, dec. from 29 Jan. 2009 – III ZB 88/07, ZInsO 2009, 662; OLG Stuttgart, dec, from 5 Nov. 2013 – 1 Sch 2/11, ZInsO 2014, 720, 721.
14 This is all the more permissible as there has been published only recently a comprehen-sive study on this subject, cf.Kodek, Der insolvenzrechtliche Gleichbehandlungsgrund-satz in vergleichender Perspektive – eine Skizze, KTS 2014, 215.
15 On the discussion about the contractual nature or facet of the insolvency plan, see primarilyMadaus, Der Insolvenzplan, 2011.
16 Madaus, ZIP 2014, 500, 506 ff., correctly admonishes the insolvency court of the Suhr-kamp case in Berlin to take this into account when sanctioning the plan in that proceed-ing.
With regard to the distribution equality, above all, the abolition of privileges in the German Insolvency Ordinance comes to mind. Following the Austrian model (and thereafter copied by several other jurisdictions such as the English one), sec. 38 InsO refrains from any distinction between unsecured creditors;
they share the same rank. This implies that, of all possible distribution meth-ods in cases of a common pool problem, each creditor is to receive the same proportional dividend.17
2. Psychology
If this more or less positivistic explanation should not suffice, at least two others are possible: a psychological one and an economic one. As to the first,18 the question arises when, for instance, investment bankers tell that, before going into a certain country, they examine the effectiveness and efficiency of the local enforcement and insolvency law. Why do they do that, given the fact they know perfectly well that their investment might yield profit or might be lost? What is it that makes them want to be treated in the worst case scenario of an insolvency proceeding efficiently and effectively? The return will anyway be low if not zero.
It is my assumption that here is a fundamental feeling of fairness at stake which behavioural economists have made likely decades ago when they started to examine all over the world the result of the so called ultimatum game.19Two test-persons were put together and one of them was given5100 with the order to divide this money between her and the other test-person in whatever pro-portion. When and if the other test-person agrees to that distribution they both were allowed to keep the money. Otherwise they would have to return it to the investigator. The economists expected as result that this division would be something like5 1 for the other person and the original recipient of the money would keep599. After all, the other one would receive 51 for just saying “okay”.
17 On this, cf.Paulus, Freiheit und Gleichheit als Grenzmarkierung zwischen Zivilrecht und Insolvenzrecht, in: Beuthien/Fuchs/Roth/Schiemann/Wacke (eds.), Perspektiven des Privatrechts am Anfang des 21. Jahrhunderts – Festschrift für Dieter Medicus zum 80. Geburtstag, 2009, p. 281 ff.
18 As to what follows, seePaulus, Ist das Insolvenzrecht wirklich eine Schlüsselmaterie für die Wirtschafts- und Finanzstabilität eines Landes? – Der Versuch einer Antwort, in:
Dahl/Jauch (eds.), Festschrift für Klaus Hubert Görg, 2010, p. 361 ff.
19 The literature has grown endlessly; therefore, just as an “appetizer”Lehrer, Wie wir entscheiden – Das erfolgreiche Zusammenspiel von Kopf und Bauch, 2009, 232; Sieg-mund / Fehr / Nowak, Teilen und Helfen – Ursprünge sozialen Verhaltens, Spektrum der Wissenschaft – Dossier, issue 5 / 2006, p. 55.
However, the factual result was almost diametrically opposed to that expect-ation – and has been repeated over and over again all over the globe: If the original recipient would not offer either half of the5100 or something close to 50 %, the other one would reject (fifty-fifty is a wide-spread distribution scheme but there are some regions in the world with a different understanding of fair distribution). The conclusion drawn from this game is the assumption that humans do have a fundamental feeling for fairness. It is not icy egoism that dominates exclusively inter-human cohabitation but there is also a kind of sensibility for the others’ expectations and one’s own adjusted behaviour to them.
If this conclusion is valid – after all the game has been tested around the world innumerable times ever since – one might be justified to see here an explan-ation for the importance of an efficient insolvency proceeding. After all, it appears to comply with a fundamental feeling of justice that of all distribution methods the equal sharing is the most appropriate one. If I have to suffer a loss due to my debtor’s inability to pay me, such loss should be also borne in the same way by my co-creditors. To be sure, the loss is part of the business risk;
however, this risk should be transparent and fairly distributed between all stake-holders.
It is in this context that the uneasiness begins with quite a famous case engag-ing in these days the courts of the United States.20As of now, it seems as if NML Capital, commonly called a vulture fund, will receive full satisfaction whereas other creditors of Argentinian bonds who have consented to a hair-cut will receive only partial satisfaction. The issue at stake is the exact meaning of thepari passuprinciple21which is just another term of art for the equal treatment of creditors. The creditor, NML, who has bought bonds at a steep discount due to the dropped prices in the wake of restructuring efforts of the debtor, Argentina, and its subsequent agreements with creditors on a
reduc-20 NML Capital, Ltd. vs. Argentina, see above at fn 5. For NML’S efforts in Europe cf.
Audit, Sovereign Bonds and National Relativism: Can New York Law Contracts Safely Cross the Atlantic?, forthcoming Capital Market L.J. 2014; available at: http://paper-s.ssrn.com/sol3/papers.cfm?abstract_id=2396856.
21 On this clause, cf.Olivares-Caminal, To Rank Pari Passu or Not to Rank Pari Passu:
That is the Question in Sovereign Bonds After the Latest Episode of the Argentine Saga,15 Law and Business Review of the Americas 2009, 745 ff.;idem., The Pari Passu Interpretation in the Eliott Case: A Brilliant Strategy but an Awful (Mid-Long Term) Outcome? 39 Hofstra Law Review 2011, 39 ff. Additionally,Panizza, Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion, sub II, in:
Paulus (ed.), A Debt Restructuring Mechanism for Sovereigns – Do We Need a Legal Procedure?, to appear in 2014. See alsoChabot/Gulati, Santa Anna and His Black Eagle:
The Origins of Pari Passu?, available at: http://papers.ssrn.com/sol3/papers.cfm?ab-stract_id=2397929.
tion of the face value are now claiming payment in full and seem to succeed.
The courts (and the law?) make this success of selfish behaviour – champerty – possible but leave a bad after-taste.
3. Economics
A final approach to understanding the key function of thepar condicio cred-itorum is an economic one. Accordingly, the question to be raised in the beginning is a hypothetical: what if there were no insolvency law at all? In such a scenario, it is to be assumed that the best informed creditors would receive full satisfaction whereas the others would be left with little or nothing.
The priority principle prevails which allows the first to come to become served first – in full. This means there is no equality at all in distribution. Supposing the above given psychological explanation as being valid, it is further quite likely that potential creditors would abstain from investing into the particular debtor unless granted full transparency from the debtor. But as a whole, it is to be assumed that the risk of belonging to the “losers” would in most if not all cases be calculated as being too high. Historical and present day examples can serve as proof: In 151222the town fathers of Antwerp – then the economic capital of entire Europe – wrote a letter to the later emperor Charles V. asking him for permission to enact a bankruptcy law. Their argument was that other-wise the “dear foreign merchants” would leave the city since they lost too much to unfaithful debtors. The permission to enact such law not only gave birth to a remarkable piece of legislation but also initiated a wave of bank-ruptcy legislation that stretched from other Dutch cities to France (Lyon) and England (Henry VIII). The modern example is the inclusion of “insolvency and creditor rights” into the elaterin compendium of twelve key standards established by the Financial Stability Board.23The purpose of that list is, in the words of the Board’s website:
The Compendium of Standards lists the various economic and financial standards that are interna-tionally accepted as important for sound, stable and well functioning financial systems. The international community attaches much importance to the adoption and implementation of these standards because of their beneficial effects on the stability of financial systems both inside countries and globally.
This means that this Board is of the opinion that a modern and effective insolvency regime is key for a prospering economy all over the world. The UNCITRAL Legislative Guide describes this as:
22 On this, see more elaboratePaulus, Ein Kaleidoskop der Geschichte des Insolvenz-rechts, JZ 2009, 1148 ff.
23 Cf. http://www.financialstabilityboard.org/cos/key_standards.htm.
Insolvency laws and institutions are critical to enabling States to achieve the benefits and avoid the pitfalls of integration of national financial systems with the international financial system. Those laws and institutions should promote restructuring of viable business and efficient closure and transfer of assets of failed businesses, facilitate the provision of finance for start-up and reorgan-ization of businesses and enable assessment of credit risk, both domestically and internationally.24
Whereas the total lack of an insolvency system, thus, would lead to rather unpleasant economic consequences, let us assume what it means within a functioning and effective insolvency system to have a privileged position.
Privilege in this context means to get full satisfaction even within an insol-vency proceeding before any one of the general unsecured creditors receives any dividend. The insolvency risk, thus, is mitigated and the respective cred-itor can be more relaxed in observing and controlling his or her debtor. It was exactly this relaxation which had served the German legislator as argument to abolish the fisc privilege25and to impose the position of a general unsecured creditor on tax authorities pursuant to sec. 38 InsO. Since tax authorities are usually the first to recognize a person’s inability to pay its obligations. Being equipped with a privilege they could be mild and adopt a wait-and-see policy.
In the effort to come to earlier commencements of insolvency cases, the “tax-non-payment” indicator was supposed to become instrumentalised and to have the tax authorities filing earlier a petition.
The relaxation issue is what will be addressed below (at C II) when the priv-ilege of close-out netting will be discussed. Therefore, it should be kept in mind for now that privileges imply a diminution of the need to control the debtor. This is not in itself good or bad; to be sure, the control can possibly impede the debtor’s activities and transform it into a puppet-on-the-string of the creditor – a phenomenon well known in company and tax law (shadow director etc.). On the other hand, to impose control duties on, for instance, the debtor’s workers would mean to burden them with the more than unpleasant task to possibly deprive themselves from the cow that feeds them, as it were.
But there are certainly creditors that are particularly apt to exercise such control. We will come back to this.
Finally, let us have a look at the equal treatment principle, the par condicio creditorum. Here, creditors do bear the insolvency risk – however, they all share this fate.26In order to minimize the risk, yet, they will check carefully with whom they enter into transactions and, once done so, they will monitor the debtor closely in order to have the chance to react quickly in case of need.
This is all the more imperative as there is additionally the shadow of
insol-24 Legislative Guide on Insolvency Law, 2005, p. 9 and 10.
25 Cf.Balz/Landfermann, Die neuen Insolvenzgesetze, 2nd ed., 1999, p. 161 f.
26 On this, see alsoSkeel/Jackson, Transaction Consistency and the New Finance in Bank-ruptcy, 112 Columbia L.R. 152, 185 ff. (2012).
vency’s avoidance powers at stake: transactions in the period of three months preceding the petition are subject to a more (sec. 131, 132 InsO) or less (sec. 130 InsO) strict regime of recovery.27 Thereby, the principle of equal treatment is extended into the period prior to the commencement of the case.28 The consequence therof is that creditors, from a point of time unknown ex ante, share an obligation towards each other to respect the interests of the co-creditors. It is perfectly understandable that individual creditors do see this imposition as a major impediment to their activity; after all, control does not come for free. However, abstracting from the individual creditors the check and balance system between debtor and creditors has its advantages for the general good.29An effective insolvency system exercises, thus, a disciplinary function of the market participants and provides incentives for responsible lending and borrowing.30
The alternative to such a creditor-monitoring system would be that state authorities or whichever other institutions do such monitoring. To a certain degree, this is the very task of the rating agencies;31and there have been – and there still are – numerous jurisdictions which, as a matter of fact, do employ such state institutions.32However, not only that this demands an enormous bureaucracy and creates, thus, considerable costs; it depends also very much on the size of the particular country how effective such authority can work.