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Summary: Law Market for the Asset Based Financing

On the issues discussed in this section, the Cape Town Convention does not simply “unify” the laws of various jurisdictions, but improves them. For the registries and the registration practice, it modernises the existing law of states, which are often outdated, complicated or maintained only by the practice unintended by the original lawmaker. On the status of international interests in insolvency proceedings, it offers (in the form of an alternative) a set of rules responsive to the market’s demands. In other words, the benefits of the Cape Town Convention derive not merely from eliminating the differences, but from replacing its rules for the existing, less efficient law.[1]

In the background of such a focus on modernisation is the emergence of the competition of legislation, sometimes referred to as the “law market.” The competition of legislation has been a well known phenomenon in American corporate law. In the United States, a large number of public companies are incorporated in Delaware, while their business activities are conducted elsewhere. It was once argued that Delaware’s victory in attracting incorporation was due to its law’s indulging corporate directors by applying lax rules on directors’ liability (“race to the bottom”),[2] but the more recent view attributes it to the development by the equity court and legislature of efficient rules that the market finds reasonable (“race to the top”).[3] According to the last view, the genius of the American corporate law lies in the competition of law-making among the states.

The law market on the global level is not based on the freedom of choosing the law of incorporation as in the traditional competition for charter in the United States. Rather, it is a competition between the countries motivated by the firms’ pursuit for a cheaper finance.[4] A study by a group of economists assessing the relationship between the legal system and economic growth of the countries in the world may be relevant here.[5] While the technical details of the study has been extremely controversial,[6] the idea that the legal environment favourable to the suppliers of finance, whether investors or creditors, leads to larger economic welfare has come to be widely accepted.

It was no surprise in this context that an economic impact assessment was conducted in the course of drafting the Cape Town Convention to find how beneficial the instrument could be to the debtor and, ultimately, society as a whole. In the sector of aircraft financing, where asset based financing has become the mainstream method of financing, the enhanced status of the secured creditor will bring about a larger legal certainty and foreseeability, which will be reflected in the more favourable conditions for finance that the debtor can avail of. The empirical study assessed the impact by referring to the reform of section 1110 of the United States Bankruptcy Code as an event study and concluded that the estimated economic benefit will be a decrease in interest spread by 150 basis points, which will generate “pass through” benefits to passengers and users of airline services, reduction in transaction costs and profits from enhanced fleet efficiency.[7] It seems that the study played an important role in convincing many States to adopt the Cape Town Convention, and then to ratify it.

The result of empirical study indicates that strengthening the rights of a secured creditor will be beneficial to the aviation industry and, therefore, should be the goal to pursue in the competition of legislation. Such an implication, however, appears contrary to the path that the bankruptcy laws of many jurisdictions are taking. The general trend is to limit the creditors’ rights and promote early reorganisation of the debtor to avoid the quick deterioration of the value of the debtor’s business.[8] One possible view is that the policy of the Cape Town Convention can be justified only “in a restricted and highly specialized economic sector.”[9] Alternatively, a distinction might be found useful between the creditors in general and the financier of asset-based financing. A further exploration in the economic theory in this respect is called for.

  • [1] For distinction between eliminating the differences and introducing a better law, see SouichirouKozuka, The Economic Implications of Uniformity in Law, in: Jurgen Basedow & Toshiyuki Kono(eds.), An Economic Analysis of Private International Law, p.73 (Mohr Siebeck, 2006), reprintedin: [2007] Uniform Law Review p.683.
  • [2] William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, Yale Law Journal,Vol.83, p.663 (1974).
  • [3] Roberta Romano, The Genius of American Corporate Law (The AEI Press, 1993).
  • [4] Henry Hansmann and Reinier Kraakman, The End of History for Corporate Law, GeorgetownLaw Journal Vol.89, p.439, at p.454 (2001).
  • [5] Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert Vishny, LegalDeterminants of External Finance, Journal of Finance, Vol.52, p.1131 (1997); Rafael La Porta,Florencio Lopez-de-Silanes, Andrei Shleifer & Robert Vishny, Law and Finance, Journal ofPolitical Economy, Vol.106, p.40 (1998); Rafael La Porta, Florencio Lopez-de-Silanes, AndreiShleifer & Robert Vishny, Investor Protection and Corporate Valuation, Journal of Finance,Vol.42, p.1147 (2002).
  • [6] See for example, Holger Spamann, The “Antidirector Rights Index” Revisited, Review ofFinancial Studies, Vol.23, p.467 (2010).
  • [7] Saunders, Srinivasan, Walter & Wool, supra note 53.
  • [8] See Chaps. 13 and 19.
  • [9] See Chap. 16.
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