The Avoidance of Pre-Bankruptcy Transactions: An Economic and Comparative Approach

Most insolvency jurisdictions provide several mechanisms to reverse transactions entered into by a debtor prior to the commencement of the bankruptcy procedure. These mechanisms, generally known as claw-back actions or avoidance provisions, may fulfil several economic goals. First, they act as an ex post alignment of incentives between factually insolvent debtors and their creditors, since the latter become the residual claimants of an insolvent firm, but they do not have any control over the debtor’s assets while the company is not yet subject to a bankruptcy procedure. Thus, avoidance powers may prevent or, at least, reverse opportunistic behaviors faced by factually insolvent debtors prior to the commencement of the bankruptcy procedure. Second, these devices may also prevent the creditors’ race to collect when insolvency threatens. Therefore, the existence of avoidance actions may reduce, at an early stage, the “common pool” problem that bankruptcy law seeks to solve. Third, avoidance powers also protect the interests of both the debtor and its creditors when the former is facing financial trouble and some market participants want to take advantages of this situation. Finally, the avoidance of pre-bankruptcy transactions can also be helpful for the early detection of financially distressed debtors, so it may encourage managers to take corrective actions in a timely manner. As a result of these goals, the existence of avoidance powers can create several benefits. However, the use—and even existence—of avoidance actions is not costless. On the one hand, the use of these actions may generate litigation costs. On the other hand, the existence of these mechanisms may harm legal certainty, especially in countries in which it is relatively easy to avoid a transaction, usually because bad faith is not required, the look-back period may be too long, or no financial conditions are required to avoid a transaction. Therefore, insolvency legislators should carefully deal with these costs and benefits in order to make sure that the existence of avoidance powers does not do more harm than good. On the basis of this exercise, this paper analyzes, from a comparative and functional approach, the optimal way to design claw-back actions across jurisdictions

The Low Usage of Bankruptcy Procedures: A Cultural Problem? Lessons from Spain

While filing for bankruptcy does not seem appealing for any debtor regardless of the jurisdiction, the reluctance to use the bankruptcy system varies across countries. This article explores the underlying reasons and economic effects of the low usage of bankruptcy procedures in Spain, where the rate of business bankruptcies is one of the lowest in the world. Some authors have argued that the low usage of bankruptcy procedures in Spain is due to a “cultural” problem faced by Spanish entrepreneurs. According to this hypothesis, the lack of a “bankruptcy culture” makes Spanish entrepreneurs afraid to use the bankruptcy system. In this article, however, I advocate for a totally different hypothesis. In my opinion, the low rate of business bankruptcies in Spain is not due to a “cultural” problem but to an institutional one. Namely, I argue that the low rate of business bankruptcies is better explained by the unattractive insolvency regime for debtors and creditors traditionally existing in Spain, as well as other legal and institutional factors including a creditor-friendly corporate law, an efficient mortgage system, a rigid labor law, and a poor law of secured transactions. All these factors encourage both debtors and creditors to avoid the use of insolvency proceedings either by minimizing the risk of insolvency or by postponing—and, if possible, even avoiding—the bankruptcy system once a debtor becomes insolvent. By exploring the underlying reasons for the low usage of the bankruptcy system in Spain, this article seeks to contribute to the general understanding of the low rate of business bankruptcies around the world while assessing the economic effects potentially associated with a low usage of insolvency proceedings. The article concludes with several recommendations to enhance the attractiveness of Spanish bankruptcy procedures

Addressing the Auditor Independence Puzzle: Regulatory Models and Proposal for Reform

Auditors play a major role in corporate governance and capital markets. Ex ante, auditors facilitate firms’ access to finance by fostering trust among public investors. Ex post, auditors can prevent misbehavior and prevent financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors must perform their functions in an independent manner. Unfortunately, auditors are often subject to conflicts of interest, for example, resulting from the provision of nonaudit services but also because of the mere fact of being hired and paid by the audited company. Therefore, even if auditors act independently, investors may have reason to think otherwise. Policymakers and scholars around the world have attempted to solve the auditor independence puzzle through a variety of mechanisms, including prohibitions and rotation requirements. More recent proposals have also included breaking up audit firms and the empowerment of shareholders. This Article argues that none of these solutions is entirely convincing. Drawing from corporate governance, law and economics, and accounting literature, this Article proposes a new model to solve the auditor independence puzzle. Our proposal rests on four pillars. First, this Article argues that, in the context of controlled firms, auditors should be elected with a majority-of-the-minority vote. Second, while auditors in many jurisdictions are subject to certain temporal prohibitions to be hired by previous clients, the Article proposes that the length of these temporal prohibitions should be extended. Moreover, regulators should also restrict the type of services potentially provided to the audit client. Third, policymakers must pay closer attention to the internal governance and compensation systems of audit firms. The Article argues that increased transparency of audit firms is essential to enhance the independence of auditors. Finally, studies have shown that audit committees often fail to perform their monitoring functions, a major reason being the influence of corporate insiders on the committee. For this reason, we propose to increase the power and presence of public investors in the audit committee

The Covid-19 pandemic and business law: a series of posts from the Oxford business law blog

The COVID-19 Pandemic is the biggest challenge for the world since World War Two, warned UN Secretary General, António Guterres, on 1 April 2020. Millions of lives may be lost. The threat to our livelihoods is extreme as well. Job losses worldwide may exceed 25 million. Legal systems are under extreme stress too. Contracts are disrupted, judicial services suspended, and insolvency procedures tested. Quarantine regulations threaten constitutional liberties. However, laws can also be a powerful tool to contain the effects of the pandemic on our lives and reduce its economic fallout. To achieve this goal, rules designed for normal times might need to be adapted to ‘crisis-mode’, at least temporarily. Business Laws in particular fulfil an important function in this context. Our livelihoods depend on how well businesses are able to navigate through the current crisis. Beginning in early February 2020, the Oxford Business Law Blog has published posts on how Business Laws could contribute to containing the effects of the COVID-19 Pandemic, and on how they need (or need not) to be adapted to achieve the desired effect. This working paper collects the posts published throughout March in chronological order. Thematically, the focus is on finance, financial regulation and insolvency laws. This is not surprising as the most pressing problem businesses face right now is to manage their cash flow. We hope that the contributions in this paper inspire more work by scholars and help policymakers worldwide to adopt the right measures to reduce the damage caused by the Pandemic

Incidence rate trends for colorectal cancer in Navarre (North of Spain) in the 1990-2005 period

Fundamento. En España, se ha observado un aumento de la incidencia de cáncer colorrectal (CCR) en ambos sexos en los últimos años, posiblemente debido a las mejoras diagnósticas, a la occidentalización de la dieta y al empeoramiento de los niveles de obesidad entre otros. En este trabajo se han estudiado las tendencias de la incidencia de CCR en las diferentes áreas de salud de Navarra (norte de España) durante el período 1990-2005. Métodos. Para cada sexo y área, se obtuvieron las tendencias de las tasas de incidencia y los correspondientes intervalos de confianza mediante modelos de P-splines. Resultados. Se observa una tendencia creciente de la incidencia de CCR en la mayoría de las áreas para ambos sexos, siendo menos pronunciada en las mujeres que en los hombres. En la zona centro de Pamplona (la capital) se observa una tendencia decreciente para los hombres durante el período estudiado. Conclusiones. Para cambiar las tendencias crecientes observadas en la mayoría de las áreas de la provincia, la prevención primaria es la mejor estrategia. Sin embargo, adquirir estilos de vida saludables tiene resultados a largo plazo por lo que un programa de detección temprana serviría como estrategia de prevención a más corto plazo.Background. In Spain, an increase in the incidence of colorectal cancer (CRC) has been observed in both sexes in recent years, probably due to an improved diagnostic, the westernization of dietary habits, and worse obesity levels, among others factors. In this work, CRC incidence rate trends in different health areas in Navarre (northern Spain) are studied during the 1990-2005 period. Methods. An estimated incidence trend curve for each health area and the corresponding confidence bands were obtained for each gender using P-spline models. Results. These results show an increasing trend of CRC in most of the areas in both sexes, being less pronounced in women than in men. In the central area of Pamplona (the capital city) a decreasing trend has been observed for men during the studied period. Conclusions. Primary prevention is the best strategy to change the increasing trend observed in most areas of the province of Navarre. However, a healthy lifestyle has long-term results, so it is important to have an early detection program that would serve as a short-term prevention strategy.Este trabajo ha sido financiado por el Ministerio de Ciencia e Innovación (Proyecto MTM2008- 03085 y MTM2011-22664) y por el CIBER de Epidemiología y Salud Pública (CIBERESP)

The Avoidance of Pre-Bankruptcy Transactions: An Economic and Comparative Approach

Most insolvency jurisdictions provide several mechanisms to reverse transactions entered into by a debtor prior to the commencement of the bankruptcy procedure. These mechanisms, generally known as claw-back actions or avoidance provisions, may fulfil several economic goals. First, they act as an ex post alignment of incentives between factually insolvent debtors and their creditors, since the latter become the residual claimants of an insolvent firm, but they do not have any control over the debtor’s assets while the company is not yet subject to a bankruptcy procedure. Thus, avoidance powers may prevent or, at least, reverse opportunistic behaviors faced by factually insolvent debtors prior to the commencement of the bankruptcy procedure. Second, these devices may also prevent the creditors’ race to collect when insolvency threatens. Therefore, the existence of avoidance actions may reduce, at an early stage, the “common pool” problem that bankruptcy law seeks to solve. Third, avoidance powers also protect the interests of both the debtor and its creditors when the former is facing financial trouble and some market participants want to take advantages of this situation. Finally, the avoidance of pre-bankruptcy transactions can also be helpful for the early detection of financially distressed debtors, so it may encourage managers to take corrective actions in a timely manner. As a result of these goals, the existence of avoidance powers can create several benefits. However, the use—and even existence—of avoidance actions is not costless. On the one hand, the use of these actions may generate litigation costs. On the other hand, the existence of these mechanisms may harm legal certainty, especially in countries in which it is relatively easy to avoid a transaction, usually because bad faith is not required, the look-back period may be too long, or no financial conditions are required to avoid a transaction. Therefore, insolvency legislators should carefully deal with these costs and benefits in order to make sure that the existence of avoidance powers does not do more harm than good. On the basis of this exercise, this paper analyzes, from a comparative and functional approach, the optimal way to design claw-back actions across jurisdictions

The Low Usage of Bankruptcy Procedures: A Cultural Problem? Lessons from Spain

While filing for bankruptcy does not seem appealing for any debtor regardless of the jurisdiction, the reluctance to use the bankruptcy system varies across countries. This article explores the underlying reasons and economic effects of the low usage of bankruptcy procedures in Spain, where the rate of business bankruptcies is one of the lowest in the world. Some authors have argued that the low usage of bankruptcy procedures in Spain is due to a “cultural” problem faced by Spanish entrepreneurs. According to this hypothesis, the lack of a “bankruptcy culture” makes Spanish entrepreneurs afraid to use the bankruptcy system. In this article, however, I advocate for a totally different hypothesis. In my opinion, the low rate of business bankruptcies in Spain is not due to a “cultural” problem but to an institutional one. Namely, I argue that the low rate of business bankruptcies is better explained by the unattractive insolvency regime for debtors and creditors traditionally existing in Spain, as well as other legal and institutional factors including a creditor-friendly corporate law, an efficient mortgage system, a rigid labor law, and a poor law of secured transactions. All these factors encourage both debtors and creditors to avoid the use of insolvency proceedings either by minimizing the risk of insolvency or by postponing—and, if possible, even avoiding—the bankruptcy system once a debtor becomes insolvent. By exploring the underlying reasons for the low usage of the bankruptcy system in Spain, this article seeks to contribute to the general understanding of the low rate of business bankruptcies around the world while assessing the economic effects potentially associated with a low usage of insolvency proceedings. The article concludes with several recommendations to enhance the attractiveness of Spanish bankruptcy procedures

Addressing the Auditor Independence Puzzle: Regulatory Models and Proposal for Reform

Auditors play a major role in corporate governance and capital markets. Ex ante, auditors facilitate firms’ access to finance by fostering trust among public investors. Ex post, auditors can prevent misbehavior and prevent financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors must perform their functions in an independent manner. Unfortunately, auditors are often subject to conflicts of interest, for example, resulting from the provision of nonaudit services but also because of the mere fact of being hired and paid by the audited company. Therefore, even if auditors act independently, investors may have reason to think otherwise. Policymakers and scholars around the world have attempted to solve the auditor independence puzzle through a variety of mechanisms, including prohibitions and rotation requirements. More recent proposals have also included breaking up audit firms and the empowerment of shareholders. This Article argues that none of these solutions is entirely convincing. Drawing from corporate governance, law and economics, and accounting literature, this Article proposes a new model to solve the auditor independence puzzle. Our proposal rests on four pillars. First, this Article argues that, in the context of controlled firms, auditors should be elected with a majority-of-the-minority vote. Second, while auditors in many jurisdictions are subject to certain temporal prohibitions to be hired by previous clients, the Article proposes that the length of these temporal prohibitions should be extended. Moreover, regulators should also restrict the type of services potentially provided to the audit client. Third, policymakers must pay closer attention to the internal governance and compensation systems of audit firms. The Article argues that increased transparency of audit firms is essential to enhance the independence of auditors. Finally, studies have shown that audit committees often fail to perform their monitoring functions, a major reason being the influence of corporate insiders on the committee. For this reason, we propose to increase the power and presence of public investors in the audit committee