 And it's a it's a it's a great pleasure welcoming Professor Richard Squire for this evening's 3cl seminar, which we are presenting with thanks to Trevor Smith who are supporting our seminar series. And I'd like to introduce Richard to you. Richard is the Alpin J Cameron chair in law at the University of Fordham Law School. He has been a member of that law school for 15 years now so it's a it's a little celebration perhaps for you Richard 15 years. But he has, he has taught at other places. For example at Yale Law School, Columbia, Columbia Law School and Duke Law School as visiting professor, his primary interests are corporate law, corporate bankruptcy or as it's correctly called corporate insolvency Richard I assume. Similarly, antitrust, which we call competition or I think and securities regulation. But there may be terminology differences, but we have a lot in common and that is our interest in debt finance and debt finance law. Richard, I think we'll present something that may be interesting, both from a research perspective but also from a perspective of starting the law, as it hopefully nicely ties in with those of you taking the corporate finance course and looking into debt finance at this time of the year. Just a few more words on Richard and before I hand over Richard has twice been elected teacher of the year at Fordham. And he has clerked for Dutch Robert sec on the US Court of Appeals for the second circuit and has also a short history of three years as a lawyer, Richard, if I'm not mistaken. That said, Richard seminar is on the law of corporate debt, a unifying theory, which I'm very grateful that you found the time for us today in particular knowing that you've taught today. And you still have some voice left for us after long teaching day. It's great to have you here. I can also say on a personal basis because we're working on a project together, and I'm very much looking forward to your seminar over to you Richard, and also of course a very warm welcome to Professor Lewis Gallifere also joined us. Thank you for all the two three cell directors are present now over to you Richard. And before you start start speaking, can I please invite everyone to signal in the chat. If you would like to ask questions will have time for questions and I think it's always a good thing if you know already if questions come up during the course of the presentation that you leave a note for me and then later. If you have the opportunity to discuss, comment or ask questions and please do make use of that this evening. I'm aiming to then really close punctually at 7pm so that you can all run to batteries or wherever you get your food from. Now speaking of really speaking enough now and over to you Richard and thanks again for being with us today and we're really very much looking forward to the seminar with you. Thank you Felix for that very kind introduction it's a pleasure to be with you today. And I'm very pleased to see such a large turnout to hear me talk about our project. And it is our project Felix is besides being a good friend of mine and a colleague generally it's also a co author on this particular paper and so we are in an early stage. Not for a while but we're still putting our thoughts together because there's some complexity I think to what we're trying to do. Good complexity, but, but we are, but we're but it's a work in progress and so we'll be very interested to hear your comments and questions. And I should also say that although Felix is a co author on the paper that I'm presenting today, it doesn't mean that he's responsible for anything I have to say. I completely expect that at some point he may interrupt or may I well not Felix he's very restrained so he'll hold to the end but he may have questions of what I'm saying so we're each of this thinking about it in his own way, although there is a significant amount of overlap in what we're trying to do and the final project, obviously will be a joint work so so I prepared some PowerPoint slides so as Felix said here's the name of the paper the law of corporate data unifying theory. There are three co authors. That's there's me and Felix but Zohar Goshen is a Columbia Law School is also on this. This project with us. Now, we have some goals in the paper that I'll kind of lay out first and the this this title, the law of corporate data unifying theory, what are we trying to unify exactly well. I'm interested in a category of legal mechanisms that we are calling. Maybe for lack of a better word, although I think there is some usefulness in the term the law of corporate debt and by that we mean all positive law mechanisms non contractual positive law here we have a notion. We have in mind statutes or regulations or maybe judge made law but not contracts so general law positive law all positive law mechanisms that augment amend or override private debt agreements between business debtors and their creditors so we're interested here in bankruptcy bankruptcy law Felix claim there's another term for that and and but it's business bankruptcy that we're interested in or insolvency law and not not consumer bankruptcy which we think are consumer insolvency which we think has some special purposes and some considerations. Now what are, what are some examples of all of these positive law mechanisms that we are throwing a umbrella around our term around that we're calling the law of corporate debt. Well obviously it includes bankruptcy and insolvency law which significantly augments or amends by the debt agreements, most conspicuously the automatic stay or the moratorium interferes with collection mechanisms that are available available under contract acceleration clauses and so on. So that would be one such mechanism, but fraudulent transfer law, or maybe the law fraudulent conveyances and Felix but at any point it's useful for you to translate what I'm saying into English. And you may you should feel free to do you should feel free to do that, but these are this is a type of remedy where a creditor can sue a third party to return value to the debtors estates to make it generally available for all creditors it's not contemplated by contract in fact it can't be amended by contract under current law. And secure transaction law would be another example it does augment private debt agreements by giving priority to certain creditors over and others, also it effectively override certain debt agreements if the unsecured creditor ends up being unable to collect it's not overseeing effectively does this kind of thing it's not available in contract, but it's an extra mechanism added to contract essentially a corporate creditors equitable sport nation and so on this is a very large category of remedies, and measures that have this augment a impact on private debt agreements. So, first of all we want to just recognize this this category exists we offer a term for it. But we want to go beyond that. And also, I'm getting used to how you advance this here. We also want to in this talk about. I'm going to bring just for a moment, just so I can see a little bit better, certain things. Okay, excuse me for this interruption. I want to be able to see the time so I know I'm not going too long. So I need to, I need to adjust that on my screen. Now I bring this back up. Okay. If you look in the current literature, and you ask, what are the purposes of these various mechanisms that that augments or override the change in some way. You don't get one answer for everything so we've identified a general category but we don't see one if we look out there and what's out there we don't see one identified purpose and you see a variety of purposes, and purposes vary not just in terms of what is defined by commentators or maybe judges to a specific type of remedy, or, or mechanism, but also amongst mechanisms so these are just samples I pulled out of law review articles. I'm not attributing them to anyone in particular first of all because none of them is particularly controversial original but second of all, there's nothing important about them, you could find a different definition for a lot of these things. Bankruptcy law or insolvency law very standard definition is something like this its purposes to solve a collective action problem of creditors provide a fresh start that's more typical if it's an individual business or commercial debtor rather than a consumer debtor and preserve going concerned by the business okay so that's a very typical thing you'll see in the literature what about secure transactions you'll see things like promote economic security because it provides lenders with a promise of repayment sounds good who doesn't want that. It's a fraudulent transfer law purpose of fraudulent transfer law I just found this this morning the argue article, it's a protect creditors from unfair transactions that hamper their efforts to collect from the debtor. Okay, I don't think any of these is controversial in itself I don't think they're wrong, but we know from studying insolvency law that all of these features of law interact in an insolvency proceeding. Obviously the bankruptcy law itself sets that creates a setting, but then secure transactions certain creditors will have different rights than others that are enforced in that context frontal transfer actions may be brought they're certainly brought under in American law. On behalf of the estates you might think well, if all of these are happening together. Maybe to think about are they serving a common purpose and interestingly if you look at these definitions, there's actually a certain amount of conflict so if the purpose of secure transactions promote economic security by providing a lender with a promise of repayment. That's actually a bridged or limited by bankruptcy law, certainly the promise of immediate repayment is impaired by the moratorium or automatic stay. Now the repayment may eventually happen but certainly it's not as good as it is insecure transaction law without bankruptcy law. So these two purposes seem to be now partly cross purposes. Look at fraudulent transfer law protect creditors from unfair transactions that hamper their efforts to collect from the debtor. Well, a secure transaction makes it easier for some creditors to recover. For some to recover but harder for others. So, and you cannot listen the United States typically set aside a secure transaction with fraudulent transfer law so these two as a written now start to look like there's a bit of a conflict. And so the question is, are we satisfied with this collection of individual purposes, often referencing different concerns and seemingly in conflict with each other when we look at how they are enforced collectively well. In this, this paper we say, maybe we can not only define a general category which is the law of corporate debt but also identify a unifying purpose for all of these different mechanisms. So that's an ambition of our paper, and we offer the following we say that the, the purpose of all of these different mechanisms under this umbrella term bankruptcy law. Secure transactions and so on is to reduce what we call the conflict costs of debt, and not to reduce them as far as to zero but reduce them beyond the point to which parties can reduce them by contract alone. So these are extra extra contractual mechanisms, and they're doing something their goal beyond what can be done by contract alone and reducing this thing that we're going to define as the conflict costs of debt. What, so what's the definition of the conflict costs of debt this this this thing that all these mechanisms are aiming to reduce. They're the costs that result from the fixed prior structure of debt claims that structure enables parties to engage in actions that enrich themselves not by creating wealth but by shifting losses or if you prefer risk on to others. So, I always find it very useful when teaching business law and thinking about business to think of two different types of transactions. One where it's mute there's mutual gain there's there's it's non zero sum, and I think the law should encourage people to engage in mutual gain transactions but people can also take actions that don't produce mutual gain, because one person to be enriched at the expense of another, and, and certainly debt contracts, create a structure, a payout structure that enables certain such conduct, or we're going to call it misconduct, because it's not socially beneficial. It enables such misconduct and, and any such misconduct that results from this, the structure of debt is generated we call the conflict costs of debt, and we're saying that these these mechanisms exist to, to reduce it. Now, this debt induced misconduct that we are concerned with comes into general forms, depending on who is exercising control. The debtor is exercising control we call it debtor misconduct, and if the creditors are exercising control we call it creditor misconduct we're taking all debt induced misconduct and dividing it into two categories. Okay. So let's talk about debt or misconduct first. The debtor misconduct results from residual loss and difference. The term we're, we're suggesting here to think about the structural problem that we're concerned with with debt with with debt. Once a debtor isn't solvent further losses fall on the creditors rather on the debtor itself, or if the debtors not it's person on the equity holders who control the debtor. And so this creates a structural incentive so just think about this for a moment if you have a company that has $100 in, in debt, and the assets are worth $150. The first $50 in losses if the assets are declining in value, all fall on to the shoulders of the equity holders, born by the equity holders, but any losses be on $100. If the value goes to 90 or 80 or remember the debt still $100. All of that loss is now falling onto the creditors instead and so be on that beyond the point of solvency or the point of insolvency. The shareholders experience residual loss and difference there and difference to losses beyond that amount. That is the structural problem that creates incentives for these types of value destroying misconduct. And that is very well known the literature is over investment or asset substitution this where the company invests in high risk high reward projects that may not having a positive expected value if you take into consideration their impact on all investors but if you just take into into consideration their impact on the equity holders they're positive, but that's because there's a greater negative expected impact on the creditors, a deep loss in insolvency, more than is not born by the equity holders because of their residual loss and difference. If a company is insolvent and it does this it bets the remaining assets let's say I'm buying lottery tickets to try to get back into solvency. This is called gambling for resurrection. And I think it's very evocative, but that is just a special variation on over investment asset substitution. The point is this though. If a company had no debt, or if the equity and the debt were held in equal amounts by the same people, there would be no incentive to go to engage in this misconduct it only is an incentive it's created because of the possibility to externalize losses on the creditors because of the shareholder due to the loss of difference. Lingering for resurrection might be more common, although not as I think spectacular sounding sensational I should say as gambling for resurrection. This is a big problem in American bankruptcy proceedings where a company files for bankruptcy the debtor is in possession the managers keep running the company. It's currently insolvent but maybe it will be restored to insolvency to insolvency excuse me in the future, just because of variability in earnings and so you can think of a company as a call option from the perspective of the equity holders. And even if the option is not now currently in the money. It may to go into the money in the future. And so if you hold on to your equity claims long enough, maybe that future will arise and we'll lift back into solvency and then you can emerge from bankruptcy. However, during all of that lingering time the cost of the bankruptcy proceeding are being borne by the creditors and so you have this lingering for resurrection problem, probably more common than gambling for resurrection and bankruptcy. And that also is a type of debtor misconduct debt dilution is a very common one we know if you increase the company's debt equity ratio, without increasing the interest rate being paid to the old creditors the one who went when there was a lower debt equity ratio. That tends to shift value from the creditors to the equity holders, because of greater losses experienced by the creditors in case of insolvency, which the shareholders are indifferent to. There are some others in voluntary support nation correlation seeking under investment is a problem when a debtor is a solvent, I could dilate on any of these but these are all examples of debtor misconduct, but they all result ultimately from the residual loss and difference, which is down to the structure of debt claims. So how do we prevent debtor misconduct. Well, you can try to do it by contract. You can put financial covenants in your debt agreement. Also any acceleration clause is basically a way to do this once you see that the debtor is is engaged in some kind of mischief. You say okay I want my full amount of the principle do now and certainly contract law has a big role to play. And the biggest one when it comes to debtor misconduct is that the standard remedy for breach of contract in common law jurisdictions is damages. And usually debtor misconduct is not discovered until you know that you to the debtor is already insolvent and not only that but insolvency increases the incentive for debtor misconduct. At that point the damages remedy is going to be ineffective. What good is a 100 pound judgment against someone who already has his or her assets or its assets if it's a company blanket it over several times with debt owed to other people. So, and so contract law the main remedy available is simply not effective, because your typical defendant doesn't have the money to pay the damages which is the remedy offered this is a, this insight here is not original to our paper. It's fairly well known in the literature. We're just identifying here, the contractual limitations. Again, the limitations on contract law or in contract law on preventing debtor misconduct. So what does positive law do well effectively what the positive law does, and this would be anything aimed at debtor misconduct project transfer law would be the biggest example, secure transaction laws to get another big example. It gives creditors a property or quasi property right in the debtor's assets security interest does this explicitly. The collateral now is something that you can grab, even if it's been conveyed to a third party if you're a secure creditor but fraudulent transfer law kind of does the same thing it throws a, a kind of a collective property interest around the debtors states once it's insolvent enabling creditors to recall assets and so on. So this is giving us if it's a property interest it's good against the world it's good against third parties and you want to write against third parties because you're, you're, you're the second party to your contract debtor is going to be insolvent and therefore effectively judgment avoidable preference rules have a similar effect. They prevent the debtor from paying out some creditors in favor of others. Okay, so here, some, so that what the positive law is doing it's plugging a hole in the limitations of contract law. Now, so creditors can also exploit the, the structure of debt claims to enrich themselves at the expense of others. But here, there's a symmetrical problem remember the problem with debtor is the residual loss and difference as assets drop in value. Once the debtor hits insolvency any losses beyond that point, the debtors indifferent to. Well, and we call that residual loss and difference. I didn't update my slide here. I, there's a typo. So, but I'll just, I think I can keep talking as I do this. This should say creditor misconduct. It's creditor misconduct that results from residual gain in difference. So, let me bring my screen back up. Let me make sure that says that correctly. Okay. So here we go. Okay, so creditor misconduct, creditor misconduct results from residual gain and difference. Okay, so what's happening here is that as creditors recover money. They only care about recoveries up to the amount of their claim any increase beyond that they're indifferent to, because it it will be down to the benefit of other creditors or if the company is solvent to the, to the debtors to the equity holders of the debtor itself. And so they, they will be indifferent to gains beyond what they are owed and in fact they may engage in conduct the destroys value beyond what they are owed, because those gains beyond that they're indifferent to they fall in other people just the symmetrical nature of a debt. There are structural incentives for creditors to do some familiar things. First of all, value destroying asset grabs as soon as you know that the debtor is struggling, you immediately foreclose you try to grab your collateral you bring a lawsuit and try to grab as much as you can. This can, this will maximize the individual creditors recovery but it will destroy going concern value. So, additional value going concern surplus is destroyed but you don't care as long as you're being paid in full as a creditor. Also, this is going to increase payout variability. Others get everything others get nothing. And that's will be value destroying recent creditors or risk neutral. There's some other ways that residual gain and difference creates creditorless conduct which are these two that I just mentioned a fairly well known literature but we're going to identify some others in the paper. Often creditors are entrusted with running auctions, either explicitly so if they're secured creditors or you effectively have creditors running auctions and American bankruptcy proceedings under section 363 or they're doing it in collusion with the debtor. And think about if you're a creditor and you're selling off your collateral, you actually don't care if the price of the collateral that is fetched exceeds the amount you're owed because you can't keep the excess. So you may prefer a fast sale or a collusive sale. So your residual gain and difference is going to skew incentives there as well. Also, the fact that you have residual gain and difference will make you under monitor the debtor for debtor misconduct. If you are a very good creditor in your monitoring to make sure that the debtor doesn't give away assets or engage in asset substitution and all those things. When you monitor as a creditor for such misconduct you bear the full cost of your monitoring, but any benefit that is exceeds what you would recover is externalized to others so you create a positive externality. And we know that if there is a positive externality from something that generally be under supplied. And so this residual gain and difference will result in under monitoring of debtor misconduct. It also may result in under enforcement of credit or protection mechanisms, such as fraudulent transfer law if the creditor who brings the action, there's all the litigation costs. There's also an investment problem the debtors and solvents if creditors exercise control again because gains beyond the amount of their own they don't care about. So how do we prevent creditor misconduct again you can try to do it by contract so contract role has a contract has a role to play here. The most common way that we see an attempt to do this is by having a collective action clause and a bond indenture. This prevents the hold out problems you can have a workout, whereby a value creating work out lifts a company back and back to a tax going concern value, and it binds all creditors, not as long as a majority vote for us. So that's a classic creditor misconduct solution to creditor misconduct by contract auction rules can be imposed in American law this is typically done by a judge trying to make sure that an auction of the company is not just for the benefit of the senior creditor creditor. Again though there are limitations on contract law. There's a lack of contractual privity amongst creditors often they're lending at different times, and so they may not be subject all to the same indenture. And so, then you can't use this cannot prevent creditor misconduct by contract if there's no contractual privity. And there's an under incentive of debtors to place cut creditors and privity you can think well they'll all do it for the debtor, but the debtor has an incentive, often as incentive to collude with one creditor at the expense of the others such as by giving a creditor a late creditor security interest, in exchange for a lower interest rate that would subordinate previous claims, make fordwell preference, make preferential claim payments and so on so debtors lack incentive actually to place creditors in privity. And the law thus once again comes in, and makes that some mandatory things here there's a mandatory collective procedure the bankruptcy or insolvency proceeding would be the classic example. So we have an automatic stay or a moratorium. And this is the maybe the sine qua non the defining feature of your typical insolvency proceeding internationally really. It prevents the asset grab amongst creditors. There's another thing however we want to exercise and sorry emphasize in this paper which is that collective proceedings insolvency proceedings also usually have collective enforcement of debtor misconduct remedies so we think of bankruptcy law and solvency law is a really solving problems, or the literature normally talks about it in terms of solving problem creditor misconduct. In terms of the common pool problem where creditors are putting their individual interest over the collective interest. But we also say that's true but it's also solving problems of debtor misconduct by having collective enforcement of debtor misconduct remedies for transfer actions are brought, but will preference actions are brought equitable sport nation is enforced. Why is it done in a collective proceeding well it's done in a collective proceeding because the positive externalities that are generated by debtor misconduct remedies now could be captured by the creditors collectively. So it's not just an individual creditor, bringing a lawsuit for himself or herself which is possible in America under state law under fraudulent transfer law, but but but but a but a trustee bring on behalf of all of the creditors so there, you also have a a debtor misconduct solution happening in the collective proceeding as well and there's a good reason for it again that has to do with the structure of debt claims in here again with the residual gain in difference the creditors face. Okay. So, so, so, so so far we've kind of described a problem and we propose a way to think about it so we've said okay, there's the, the the positive law of corporate debt we've defined what it is very broad category and we've said it, but we can we can distill or identify an underlying purpose, which is to reduce the conflict cost of debt, which result from debtor and creditor misconduct, which is this kind of conduct resulting from the structure of debt claims. So, what are the practical benefits of this analysis of this description of the problem, well, we propose that not only should the purpose of corporate debt to be reduced misconduct costs of debt but that means it's not reducing debt or conflict costs individually, or creditor conflict costs individually but the sum of the two which we're calling the misconduct costs of debt, or the conflict costs of debt. What's the trade offs between these two are unavoidable measures to reduce one will tend to increase the other. So the goal is not to get creditor misconduct all the way to zero or debtor misconduct all the way to zero you can't do that because almost any measure is shifting control from one group to the other, you shift control in one direction, reduce one type but you'll increase the other type. Rather we just want to make conspicuous trade offs that the current way of thinking about these mechanisms is conspicuous largely because it doesn't talk about them in terms of a common purpose. So here's just one example bankruptcy proceedings or insolvency proceeding with an automatic stay or a moratorium. Certainly the automatic stay which prevents creditors from collecting individually reduces creditor conflict costs reduces your common problem. But it actually increases debt or conflict costs both pre bankruptcy and post bankruptcy. How does it do it pre bankruptcy. As we saw earlier, there is an under incentive for creditors to monitor for debt or misconduct because of the mismatch between individual cost and collective benefit. Interestingly, grab law, the law whereby the rule whereby creditors can race for the assets and if they win, they get to collect in full before the late, the slower moving creditors get get anything. That's somewhat offsets the under incentive to monitor because if you monitor in there by pounds first you may get paid in full. You capture more of the benefits of your monitoring for yourself. So that actually is a non bankruptcy mechanism that somewhat corrects the problem associated with the creditors residual gain and difference but if instead you have a rule of pro rat a rule where all creditors recover equally. And that incentive is now blunted so pre bankruptcy debt or conflict costs may rise in anticipation of the automatic stay and the moratorium. Finally there's post bankruptcy debt or misconduct arise. If you give the, the management of the company more time to gamble for resurrection or linger for resurrection because the company is not instantly dismembered. Okay. So, there will be lots of other trade ops among these mechanisms that's just one illustration. Now, we, we have we identify a positive purpose for the law of corporate debt which is to reduce the conflict costs of debt, but we also identify something that should be excluded so we also are theory suggests and this is just a hypothesis but I think it's about, we're making an affirmative statement that certain things are not the proper concern of lawmakers who might override debt contracts, commercial debt contracts, and that would be the, any measure that is aimed not at reducing conflict costs but at reducing the cost of debt. The competence cost of debt or the cost of good faith mistakes made by debtors or creditors and exercising control. So, let's say our lend some money to Felix to run a company. Felix is an entrepreneur has got a great idea. I have some money lying around, and I want to make an investment. Now why would I if I'm going to lend my money to Felix, why wouldn't I also say well I'm going to run the company since it's my money's at stake. Why would I let Felix run it. Well, presumably and certainly would be true in this case because the competence costs would be lower. I would say you know what Felix will do a better job knows the business better it's his idea maybe he has time to focus on this whereas I currently am distracted by other things. And so I think that if either one of us runs the company, we're going to make good faith mistakes, not resulting from conflict of interest but just because humans are humans. That that reduce the value of the company, but I think that I'm going to he's going to make fewer mistakes than I am and so I am going to delegate to him. So the original lending, or any investment starts with a transfer of money of capital from investors and it could be equity or debt to managers with the goal of reducing competence costs as an inevitable byproduct conflict costs arise. Felix is not just managing his money but my money as well so there's that conflict. But, but the original goal is to reduce competence costs. What we're going to argue is that competence costs generally can be reduced effectively by contract alone, and there is not a legitimate reason for the law to override contracts for purposes of reducing competence costs. Now we're not making that about claiming about consumer debt but we are making it about a commercial debt. So we are defining a broad purpose for the law of corporate debt or also cabiting it in a certain way. Why do we think there's no systematic reason for contract law to be unable to deal adequately with competence costs well first of all damages are not usually uses the remedy for good faith mistakes. Usually it's simply a relief of someone for his position. If you seem to be incompetent, you'll see this in the business judgment rule, for example, contractual privities are necessary so long as claims are tradable so the less competent people can sell their claims to more competent people. There's an illustration I could talk about this something the American Trust and Denture Act which is clearly a provision designed not to reduce conflict costs but to reduce competence costs the American Trust and Denture Act actually makes it more difficult for denturers to by contract use a collective action provision and a bond indenture it's called a collective action pause or a majority action pause to override to punish holdouts. And the American statute actually interferes with that we it does it for paternalistic reasons, and we will argue in the paper I will get into it now except limitations on time. But that would be an example of what we think is not legitimate. Okay, I'm almost done here so summary summary of our contributions from our paper and this is a preliminary list. So the contributions list may shrink we hope it expands but anyway, by offering a unifying purpose for the law of corporate debt we aim to one provide a pedagogical framework for understanding this area I just like having this notion that that maybe all of these, these, these different provisions can be thought of in terms of a common purpose that we can identify and discuss. I think just pedagogically in terms of teaching ourselves and other people what's going on that's interesting. But obviously if you review review reveal a common purpose amongst different mechanisms trade offs become clear. And finally we've established a limitation on the proper role of the law. So there's some there, but the second and third bullet points here have as a reform implications, or they have prescriptive rather than just descriptive. Okay, so I went longer. I apologize for that Felix, but, but anyway, that's all I have to say in terms of the presentation. And, and if anybody has any questions or comments, I would love to hear them and Felix would as well I'm sure.