Document Type
Article
Publication Title
International Review of Law and Economics
Volume
26
Publication Date
2009
Keywords
Close corporations; Bankruptcy; Subordination; Recharacterization; Equity substitution; Capital structure
Abstract
Bankruptcy and corporate laws in several countries allow or require courts to subordinate loans by shareholders to corporations. Examples include the German Eigenkapitalersatzrecht and the equitable subordination and recharacterization doctrines in the US. I use a model to show the incentive effects of subordination when a controlling shareholder attempts to rescue a closely held corporation by extending a loan. Even though subordination has some beneficial effects, it deters some desirable rescue attempts and is an insufficient deterrent for some undesirable ones. Legal reform should thus focus on narrowing down the scope of application to undesirable shareholder loans, where more severe penalties than subordination should apply.
Recommended Citation
Martin Gelter,
The subordination of Shareholder Loans in Bankruptcy, 26 Inter. Rev. L. Econ. 478
(2009)
Available at: https://ir.lawnet.fordham.edu/faculty_scholarship/1169
