Basel II and the Protection of Creditors in Company Law

Abstract

What is a good and effective creditor protection system? Can a creditor protection system, understood as a variety of mechanisms employed jointly or individually to protect the interests of creditors, deliver for all creditors, or are there different systems of creditor protection needed for different types of creditor? Is one system of creditor protection better than another, or is their efficacy in protecting creditors dependent on a number of external factors, such as the nature of the problem the system is supposed to address, the legal environment in which the system is operating, or the incentives of the parties making use of the system? Is the protection of creditors’ interest achieved better by using one particular set of mechanisms pertaining to one system, or does the combination of various systems of creditor protection deliver better results? These and other related questions on creditor protection have occupied legal literature for a long time. It seems that it will continue to do so for as long as the dynamic creditor-debtor relationship brings up new challenges for the legal profession and there is a need to address these challenges in order to ensure a fair and balanced distribution of business risk among the parties involved in the relationship. The challenge is the old one: the creditor faces the risk that it will not be repaid by the debtor due to her opportunistic behaviour to the disadvantage of the creditor. The stream of legal research on creditor protection deals with the question how to provide the incentives as well as the enforcement mechanisms that align debtor’s behaviour ex-post with what was agreed with the creditor ex-ante.