The origins of corporate creditor protection mechanisms

Bibliogr. s. 44-51

This article presents the origins of corporate creditor protection mechanisms in the Western legal tradition. It begins with Roman law and its conception of corporate juristic persons (universitas). The Medieval institutions of law merchant (lex mercatoria), guilds, and mining and banking businesses are presented as containing the elements of modern corporations. An extensive discussion of the developments in the modern period, including the Atlantic and industrial revolutions, reveals the complex background surrounding joint-stock companies and issues that arise from introduction of their financial instruments to trading on public stock exchanges. The historical analysis ends with a discussion of contemporary trends that affect the rules designed to protect creditors of corporations, such as accounting, valuation, and asset partitioning within corporate groups. The author traces creditor protection rules to the separation of capital and profits. This separation is shown to create material issues in accounting and, by extension, in corporate law. Initially, creditor protections rules were either non-existent or rudimentary in form. More sophisticated formulations of those rules appear to have emerged as a response to the rapid liberalization of corporate law with the introduction of "freedom of incorporation". The article concludes by putting creditor protection in perspective by linking it back to modern theories of capital structure and priority of property rights. The absolute priority rule developed in American case law serves as a simplified model that enables a logical reconstruction and justification of corporate creditor protection mechanisms.