The Authentic Consent Model: Contractarianism, Creditors' Bargain, and Corporate Liquidation


The first part of this article asks if the Creditors’ Bargain Model, long employed by insolvency scholars as the starting point for many an analysis, can explain or justify even the most distinctive and fundamental feature of insolvency law. After examining the defining features of the model’s construction, the role of self-interest and consent in it, and its ex ante position, it is concluded that the Bargain model can neither explain nor legitimate the coercive collective liquidation regime.

The second part of the article develops an alternative model to analyse and justify insolvency law. The starting premise is that all (but only) those affected by issues peculiarly governed by insolvency law are to be given a choice in selecting the principles which would determine their rights and obligations. Once these parties have been identified, they are to be given equal weight in the selection process, since their legal status (whether they are employees, secured or unsecured creditors, etc.), wealth, cognitive abilities, and bargaining strength, all are morally irrelevant in framing rules of justice. This part of the article introduces the notion of a constructive attribute, characteristics this society accepts its citizens should have in their role as legislators. So all parties affected by insolvency issues are regarded as free, equal, and reasonable. The model sketched out in this part of the article requires all principles to be selected from its choice position. Here, all the parties are deprived of any knowledge of personal attributes, and must reason rationally. It is shown that parties in the choice position would in fact choose the principles laying down the automatic stay on unsecured claims. The article concludes with the demonstration that because of the construction of the choice position and the constructive attributes of the parties bargaining in it, the principles chosen are fair and just, and chosen in exercise of the parties’ autonomy. As it happens, they are also efficient.


Banking and Finance Law | Bankruptcy Law | Business Organizations Law | Law and Economics

Date of this Version

May 2006