1.1.1. Deployment

The first central objective of insolvency law is to optimise the value of the estate. The

rules on individual debt collection are inadequate for this purpose. The situation of

insolvency essentially represents a 'collective action dilemma'. This game-theoretic

model is characterised by the fact that rational individual behaviour results in a socially

or collectively sub-optimal result."

Non-insolvency law regarding debt-collection generally operates on a 'first come, first

served' basis. Outside the situation of insolvency this is unproblematic. Efforts by a

single creditor to enforce a claim against the debtor will not directly affect the claims

of other creditors.''1 Their chances of the debtor performing, or ot being able to successfully

enforce their claim against the debtor's assets in case of default, are not at

stake. However, in cases where the debtor is insolvent this is different. Insolvency

implies (the risk) that the debtor's assets are insufficient to repay all debts in full.11

Accordingly, where the debtor i s insolvent the enforcement of a c l a im by o n e creditor

will have immediate consequences for the remaining creditors. In particular, it will

reduce the chances that they will be able to recover the debt owed to them. Therefore,

under non-insolvency law there exists a strong incentive for the individual creditor

to 'grab as much as possible, as quickly as possible' or otherwise run the risk of receiving

nothing at all. The ensuing 'race to the courthouse' leads to uncoordinated and

piecemeal dismemberment of the debtor's estate. This is likely to destroy value which

would have been available with co-ordinated efforts.

The situation ot insolvency i s therefore analogous to a ' c o m m o n pool' dilemma.1 The

dilemma derives its name from the standard model involving a common pool offish.

If a pool ot fish is owned by a single fisherman, s/he may catch all the fish at the same

time. This would produce (for instance) a ton offish to sell, but there would be no

fish left in the pool. Or, the fisherman could decide to catch only half of the fish. This

would produce half a ton offish to sell, but would leave enough fish for the pool to

replenish itself in time. This would allow the fisherman to periodically sell half a ton

of fish. Since, mutatis mutandis, having more fish is preferable to having less fish,

catching only half of the fish is the better approach. As long as there is a single (wealth- the Struggle over Jurisdiction

maximising) fisherman, s/he should prefer to limit his or her allowance to halt the fish.

However, if there are several fishermen fishing in the same pool a problem arises.

Catching only half the fish would still be the better approach. This would require the

owners to co-ordinate their fishing so as to catch collectively no more than half of the

fish. At the same time, as long as there is no way of knowing whether the total amount

offish caught exceeds half o f t he stock, the individual owner has no interest in limiting

his or her fishing. Instead, there is an incentive to catch as much fish as possible each

time, so as not to run the risk of ending up with no fish at all. Without co-ordinating

the fishing efforts the pool will quickly be depleted, producing less fish for all.

Taking the analogy above to its logical conclusion, co-ordination and co-operation

between the various creditors in an insolvency situation (the fishermen) may preserve

and enhance the value of the common pool of assets (the fish). Frequently, a debtor's

assets are worth more in combination than they are when sold in a 'piece-meal

fashion." Most prominently this is the case in terms of going concern value, or the

continuation of business for a limited period of time. In addition, insolvency law may

further contribute to the optimisation of deployment of the estate by preventing

strategic costs and providing for administrative efficiency. Insolvency law provides

a specialised forum, procedure and legal rules tuned to the specific circumstance of

insolvency. It is generally assumed that co-ordinating and centralising litigation is

more efficient than each creditor initiating a separate procedure.1 1 Creating the opportunity

to deploy the insolvent estate in an optimal fashion by substituting collective

proceedings for destructive individual creditor behaviour is the first central objective

of insolvency law.

The ' c o m m o n pool' analogy i s essentially neutral regarding the normative question

of exactly what should be considered the 'optimal' result of deployment.1 A rough

distinction can be drawn between those who take a narrow, economic view and those

who take a broader, open-ended view of'optimal deployment'." However, proponents

of both views accept that insolvency law is designed, at least to a significant extent,

to respond to a collective action dilemma posed by the situation of general default by

a debtor.1

I Krom s t r a g g l e TO i . o - o p e r a r i on

In the narrow, economic account, insolvency law is essentially a debt-collection device

in the interest oI creditors only.1" Insolvency law's primary or sole aim is the maximisation

of wealth or return tor those creditors who would have had recourse to debt

collection law under non-insolvency law. " In essence, these creditors are considered

to be 'owners of the debtor's estate' leading to diverse ownership and the common

pool. The creditors are assumed to be solely concerned with recovering as much as

is possible on their claim. 'Optimal deployment' therefore means that use of the estate

which yields the highest return for the creditors.

It follows that under the economic account of insolvency law there is no a priori

preference for termination or continuation of business. Whether a business should

be terminated or continued and whether this should be achieved by means of reorganisation

in hands of the debtor or by means of a sale to a third party as a going concern,

depends in the first place on which form of deployment yields the highest return

for the creditors as a group. " The emphasis in the economic account is on how and

by whom the optimal value can be determined.

In contrast, the broader, open-ended account of insolvency law views insolvency law

as a response to a wider problem of'financial distress' as opposed to debt-collection

o n l y / 1 It therefore rejects the view that the interests involved in insolvency proceedings

should be limited to those who have a claim recognised under non-insolvency law,

nor does it accept that maximisation of return for the benefit of the creditors is the

single interest involved. Enterprises are viewed not in isolation but as entities intertwined

with many aspects of society. Financial distress in those terms affects not only

creditors with a claim enforceable under non-insolvency law, but also parties with

other real, but not necessarily monetary, interests. These could be the interests of

employees in being employed, the interests of suppliers in the continuation of a

particular business, or the interests of society at large in terms of employment policies,

regional development and/or economic infra-structure.

In such a broad vision, the economic account's sole focus on value maximisation for

the benefit of the creditors is too narrow. If the central concern of insolvency law is

taken to be the response to a situation of financial distress or business failure, and not

debt-collection, then restricting the dilemma to creditors in the strict sense (those who

have a legally enforceable claim outside insolvency proceedings) would allow those

creditors to externalise some of the costs of financial distress.- In other words, maximum

yield tor the creditors would not result in a socially optimal outcome. Conversely,

deployment may achieve a socially optimal outcome even where it does not

produce the highest possible dividend for the creditors. To various degrees the costs

of financial distress may be internalised by insolvency laws - generally not by giving

the affected parties enforceable rights in insolvency proceedings, but by promoting

and accommodating reorganisation and rehabilitation of the d e b t o r . 1

The broader view of insolvency law does not change the fact that insolvency law

functions to resolve a collective action dilemma in respect of deployment. However,

whereas the economic account provides lor a process which forces the creditors to act

like a wealth-maximising single creditor, the broader view rejects both the restriction

to single interest and the limitation to creditors in the strict sense. The process under

the open-ended account is not geared towards any particular economic outcome as

the'optimal' mode of deployment."'' Rather, the collectivity imposed serves as a forum

in which 'competing and various interests and values accompanying financial

distress may be expressed and sometimes recognised.''" Insolvency law's function is

to co-ordinate and civilise debt collection and to organise and rationalise the hard

decision-making that is inevitably called for in any major business insolvency.