Rethinking Priority Rules in Insolvency

Priority rules shape the core dynamics of insolvency law: distributive outcomes, bargaining in reorganization, and the ex ante behavior of debtors and creditors alike – including their decisions about risk taking, capital structure, and the cost of credit. This Article maps significant cross-jurisdictional variations in priority rules, examining how various countries’ insolvency laws treat different classes of claimants including secured creditors, employees, tax authorities and equity holders, and special categories of claims such as those for rescue financing, tort damages, environmental obligations and shareholder loans.

The Article then evaluates the desirability of the observed priority rules. This evaluation provides several normative lessons about the appropriate design of insolvency law, including guidance on when to deviate from the principles of full priority and equal treatment. In particular, the Article addresses whether and when to subordinate shareholder loans, the special protections that should be afforded to tort victims and employees, the right legal tools to address environmental threats, and the safeguards necessary when priority is given to administrative claims and rescue financing.