Contracts, Markets, and Laws in the US and Japan
Edited by Zenichi Shishido
Chapter 7: Cramdown versus extinguishing security interests: secured claims in bankruptcy in the United States and Japan
A challenging legal task in bankruptcy is how to treat different kinds of claims and interests. Claimants with different priorities in a bankrupt firm have different interests, which can cause serious coordination problems. In an ideal Coasean world with no transaction costs, conflicts of interest could be resolved by voluntary negotiations. As long as the going-concern value of a bankrupt firm is greater than its liquidation value, all claimholders would agree to refrain from enforcing their claims and share the going-concern surplus. More often than not, however, negotiation costs and/or information asymmetries prevent efficient transactions from taking place. Carefully designed bankruptcy law can mitigate the coordination problem and help the firm reorganize when it is worthwhile to do so. Designing an efficient bankruptcy system is a difficult task, however, and the law may cause, rather than solve, a problem.
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