Employee Insolvency Priorities and Employment Protection in France, Germany, and the United Kingdom
| Date | 01 June 2017 |
| DOI | http://doi.org/10.1111/jols.12025 |
| Published date | 01 June 2017 |
JOURNAL OF LAW AND SOCIETY
VOLUME 44, NUMBER 2, JUNE 2017
ISSN: 0263-323X, pp. 255±82
Employee Insolvency Priorities and Employment Protection
in France, Germany, and the United Kingdom
Federico M. Mucciarelli*
When an employer becomes insolvent, employees' claims for unpaid
wages and contributions may be protected through statutory priorities,
social security schemes, or a combination of both. This article com-
pares the interplay of employee statutory priorities, if they exist, and
social security schemes in France, Germany, and the United Kingdom.
While France protects employees through both a statutory priority and
a social security scheme, Germany and the United Kingdom have
progressively reduced employment protection over the last forty years.
Theories of varieties of capitalism and of legal origins cannot fully
describe and explain the development of employment protection
strategies in these countries. The evolution of the German and British
regimes, in particular, are better explained as a sign of profound
cultural shifts regarding the position of labour within firms and vis-a
Á-
vis other stakeholders. Finally, I also show that a cumulative applica-
tion of employee priorities and insurance schemes is not necessarily
redundant.
INTRODUCTION
A standard principle of all insolvency regimes is that secured creditors take
priority over other creditors and unsecured creditors are treated equally. In
several jurisdictions, however, specific categories of unsecured claims,
255
*SOAS, University of London, School of Finance and Management,
Thornhaugh Street, Russell Square, London WC1H 0XG, England;
University of Modena and Reggio Emilia, Department of Economics and
CEFIN, viale Berengario 51, 41121 Modena, Italy
fm11@soas.ac.uk federicomaria.mucciarelli@unimore.it
Preliminary versions were presented at the 2015 SLSA annual conference, University of
Warwick, and the 2015 WINIR annual conference in Rio de Janeiro. I would like to thank
Richard Alexander, Davide Casale, Carsten Gerner-Beuerle, Nicholas Foster, Mathias
Siems, and Nikhilesh Sinha for comments and suggestions. All errors and opinions are
mine.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
notably employees' claims for unpaid wages and contributions, are entitled
to preferential treatment. Several comparative works have classified em-
ployee priorities around the world
1
and have addressed the complex issue of
creditor statutory priorities,
2
but only few of them have assessed the
instit utiona l enviro nment in w hich the se prio rities a re embed ded.
3
Employees, indeed, may also be protected through social security schemes
established for compensating due wages and contributions that the insolvent
employer has not paid. Thus, to understand how employees are protected
against this risk, it is necessary to analyse the interplay between employee
priorities (if they exist) and social security schemes across different juris-
dictions, looking for common patterns or divergences. A common explana-
tion for diverging combinations of institutional strategies across jurisdictions
is the idea that such divergences are closely linked with specific national
production regimes or with historical legal background. Within this con-
ceptual framework, the theory of `varieties of capitalisms' and the `legal
origins hypothesis' have gained a particular relevance: the former classifies
all countries along the distinction between `liberal' and `coordinated market
economies', while the latter argues that capital market developments depend
on whether the legal origin of each jurisdiction is rooted in common law or
civil law.
4
This article will critically compare the interplay between employee
priorities (if they exist) and social security schemes in three member states of
256
1 W. Huaiyu, `An international comparison of insolvency laws' (2006) (comparing
insolvency regimes in 42 countries), at ;
G.W. Johnson, `Insolvency and social protection: employee entitlements in the event
of empl oyer in solven cy' (20 06), at < http: //www .oecd .org/ daf/ca /corp orate
governancepr inciples/381 84691.pdf> (bot h at OECD Fifth Fo rum on Asian
Insolvency Reform, 2006); J. Sarra, `Recognizing workers' economic contributions:
the treatment of employee and pension claims during company insolvency, a
comparative study of 62 jurisdictions' (2008), at
jdownloads/finish/572/5379.html>; P.M. Secunda, `An Analysis of the Treatment of
Employee Pension and Wage Claims in Insolvency and Under Guarantee Schemes
in OECD Countries: Comparative Law Lessons for Detroit and the United States'
(2014) 41 Fordham Urban Law J. 867.
2 See the works of J.M. Garrido: `The distributional question in insolvency: compara-
tive aspects' (1995) 4 International Insolvency Rev. 25; Preferenza e proporzionalita
Á
nella tutela del credito (1998); `No two snowflakes the same: The distributional
question in international bankruptcies' (2011) 46 Texas International Law J. 459.
See, also, J.L. Westbrook, `Universal Priorities' (1998) 33 Texas International Law J.
27; J.A. Pottow, `Greed and pride in international bankruptcy: the problems of and
proposed solutions to local interests' (2006) 10 Michigan Law Rev. 1899; A.
Piekenbrock, `Insolvenzprivilegien im deutschen, auslaÈndischen und europaÈischen
Recht' (2009) 122 Zeitschrift fu
Èr Zivilprozessrecht 63; P. Omar, `The challenge of
diverse priority rules in European insolvency laws' (Autumn 2011) Eurofenix 32; J.L.
Westbrook et al., A Global View of Business Insolvency Systems (2010) 184±95.
3 See the studies of Johnson and Secunda, op. cit., n. 1.
4 See the seminal paper of R. La Porta et al., `Legal determinants of external finance'
(1997) 52 J. of Finance 1131.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
the European Union: France, Germany, and the United Kingdom.
5
These
jurisdictions are representative of different `varieties of capitalism' and
`legal origins': while the United Kingdom is a model of `liberal market
economies', and England is the birthplace of all common law jurisdictions,
Germany and France are typical `coordinated market economies' and models
for civil law systems around the world.
6
Comparing the strategies of these
three countries for protecting employees from the risk that an insolvent
employer does not pay due wages, therefore, casts light on the use of the
theory of `varieties of capitalisms' and the `legal origins' hypothesis in
comparative company and insolvency law. Interestingly, this perspective
also challenges the separation between private law, dealing only with inter-
private conflic ts, as opposed to pub lic law, dealing wi th top-down
regulations and redistribution mechanisms. Although creditors' priorities
are private law instruments, they also serve a social function, which could
also be fulfilled by typical public law strategies, such as social security
schemes. This question may be alternatively formulated by asking whether
employee priorities and social security schemes are functional equivalents.
The article is structured as follows. The next section describes the
`varieties of capitalism' theory and the legal origin hypothesis. The third
section addresses the main goals of insolvency proceedings and illustrates
the reasons why many insolvency regimes deviate from the principle of
equal treatment of creditors. The fourth section compares French, German,
and British regimes; it will be shown that in the last forty years, the United
Kingom and Germany have developed in the same direction ± namely,
reducing or repealing employee priorities ± while the French regime of
employment protection has remained unaltered. A historical analysis,
therefore, reveals a complex scenario that does not fully reflect the fracture
between `liberal' and `coordinated' market economies, and between com-
mon law and civil law countries. The last section tries to make sense of this
complex scenario; first of all, it will be shown that the tendency to replace
employee priorities through social security schemes reveals a conceptual and
cultural shift as to the position of labour in business; finally, it will be argued
that that employee priorities and social security mechanisms are not mere
functi onal equi valent s, with th e conseq uence tha t their cu mulati ve
application is not always redundant.
257
5 For simplicity, this study will refer to English law and to the English insolvency
regime, codified by the Insolvency Act 1986, which applies in England, Wales and,
with few exceptions, Scotland. In Northern Ireland, however, insolvencies are
regulated by the The Insolvency (Northern Ireland) Order 1989, which entails rules
that are in line with those of the Insolvency Act 1986. Therefore, all arguments
discussed in this study are to be extended to all countries of the United Kingdom.
6 P.A. Hall and D. Soskice, `Introduction to varieties of capitalism' in Varieties of
Capitalism: The Institutional Foundations of Comparative Advantage, eds. P.A. Hall
and D. Soskice (2001).
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
SETTING THE SCENE: VARIETIES OF CAPITALISM, LEGAL
ORIGINS, AND CREDITOR PROTECTION
Two theories on the interplay of different institutional settings in different
jurisdictions have gained prominence in the most recent scholarly researches
on comparative company and insolvency law and have triggered a quite
intense and still on-going debate: the `varieties of capitalism' approach, and
the `legal origin' hypothesis.
The `varieties of capitalism' approach, rather than a single theory, is a
bundle of theories having some common elements. According to its first
conceptualization, national political economies can be segmented into five
institutional spheres: i ndustrial relations, voca tional training, corporate
governance, inter-firm relations, and worker-management relations.
7
National
equilibriums among these spheres are clustered into two ideal-types of
economies: `liberal market economies' and `coordinated market economies'.
In the former, firms and other social actors coordinate their relations mostly by
way of competitive market arrangements and market transactions. By contrast,
in coordinated market economies, firms and other social actors also rely upon
non-market relationships and top-down regulation.
The interplay and the combinations betwee n different institutional
settings are commonly characterized by ref erence to the concept of
`complementarity' between institutions. The starting point is that in each
national economy, different institutional settings normally provide coherent
incentives, reinforcing each other's efficiency and returns.
8
Institutions are
considered complementary to each other when the presence of one institution
reinforces the efficiency and the returns of other institutions (`comple-
mentarity as reinforcement').
9
In Germany, for example, companies rely on
long-term investments and require employers to enter into firm-specific
engagement, which corresponds to higher job stability and employment
protection.
10
A consequence may be that different institutional settings, in
order to work efficiently, should be coherent and should aim at attaining the
same goals, while contradictory incentives and non-coherent institutions risk
being inefficient.
11
This approach has triggered an intense debate. Indeed, within the same
country, different institutional settings could be combined in several, some-
times apparently inconsistent, manners. Therefore, other scholars have
258
7 id.
8 id., pp. 19±22; P.A. Hall and D.W. Gingerich, `Varieties of capitalism and institu-
tional complementarities in the political economy: an empirical analysis' (2009) 39
Brit. J. of Political Studies 449.
9
Hall and Soskice, id., p. 7; B. Amable, The Diversity of Modern Capitalism
(2003).
10 Hall and Soskice, id., p. 6.
11 Hall and Gingerich, op. cit., n. 8.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
argued that the concept of institutional complementarity should also explain
institutional combinations and developments in the absence of a system
designer that exclusively pursues abstract concepts of efficiency.
12
Institu-
tions, in particular, could `mutually compensate for each other's deficien-
cies', instead of pursuing identical goals.
13
This is the case when the
tendency of an institution offsets the outcomes of other institutions or other
social mechanisms (`complementarity as compensation').
The legal origin hypothesis, by contrast, is a coherent theory, according to
which financial development and investor protection largely depend on
whether a country's legal origin is common law or civil law.
14
The first
papers that tested the legal origin hypothesis argued that common law
countries (England and all derivative legal systems, including the United
States) are better equipped for protecting creditors and outside investors, and
that this origin explains their greater financial development in comparison to
`civil law' systems, in particular, French-derived jurisdictions.
15
According
to this view, the main reason for this difference is that common law countries
have a higher judicial flexibility and that they better protect property rights.
In one of their latest contributions, La Porta et al. expand the concept of legal
origin by adopting a broad conception of legal origin as a `style of social
control of economic life', according to which `common law stands for the
strategy of social control that seeks to support private markets outcomes,
whereas civil law seeks to replace such outcomes with state-desired
allocations.'
16
Interestingly, such an expanded concept of legal origin fits
perfectly into the distinction between liberal and coordinated market
economies. Along this line of thought, it has been argued that a correlation
exists between variety of capitalism and legal origin, since most liberal
market economies have a common law origin, whereas most civil law juris-
dictions are coordinated market economies.
17
The legal origins hypothesis
259
12 W. Streeck, `Requirements for a useful concept of complementarity' (2005) 3 Socio-
Economic Rev. 359, at 363.
13 C. Crouch, Capitalist Diversity and Change (2005) 50; C. Crouch, `Welfare state
regimes and industrial relations systems: the questionable role of path dependency
theory' in Comparing Welfare Capitalism: Social Policy and Political Economy in
Europe, Japan and the USA, eds. B. Ebbinghaus and P. Manow (2014) 105.
14 This classification is just one of the possible classifications of legal systems
developed by comparative le gal scholars; for an overvi ew see: M. Siems,
Comparative Law (2014) 74±80.
15 See, in particular: La Porta et al., op. cit., n. 4, p. 1131; R. La Porta et al., `Law and
finance' (1998) 106 J. for Political Economy 1113.
16 R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, `The economic consequences of
legal origins' (2008) 46 J. of Economic Literature 285, at 286.
17 K. Pistor, `Legal Ground Rules in Coordinated and Liberal Market Economies' in
Corporate Governance in Context: Corporations, States, and Markets in Europe,
Japan, and the US, eds. K.J. Hopt et al. (2005) 249.
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was also applied to classify labour relations.
18
Botero et al., in particular,
selected three main areas of states' regulatory intervention (employment
laws, collective relation rules, and social security) and coded the rules
included in these areas. The conclusion of this study was that common law
countries protect employees less than civil law countries, and that higher
protection is associated with certain inefficiencies, such as higher unemploy-
ment and a larger unofficial economy.
19
Their work, however, does not
include employment protection through insolvency priorities.
Several scholars, however, have raised methodological objections to the
legal origin hypothesis. One of the main criticisms is that, in the La Porta et
al. study, variables representing laws and law systems are time-invariant and
the analysis is simply cross-sectional.
20
Therefore, this approach does not
take into account historical developments and cannot exclude reverse-
causality.
21
Furthermore, in the legal origin model the legal dimension is an
entirely exogenous phenomenon, while in reality the law is, at least in part,
endogenous to economic development and political and social dynamics.
22
Some authors also maintain that the legal origin approach suffers from two
other substantial flaws under a comparative viewpoint. First of all, legal
families are depicted in an oversimplified fashion, which is biased in favour
of common law countries.
23
Secondly, the descriptions of the institutional
settings within each country, and within each legal family, do not take into
account that in different countries functional substitutes could be in place
aiming at attaining similar goals.
24
With the aim of addressing these
problems, other scholars have recently constructed a new comparative scale
considering a wider range of v ariables related to credito r-protection
260
18 J.C. Botero et al., `The regulation of labor' (2004) The Q. J. of Economics 1339. For
an overview, see Z. Adams and S. Deakin, `Quantitative labour law' in New Frontiers
in Empirical Labour Law Research, eds. A. Ludlow and A. Blackham (2015) 31±50.
19 Botero et al., id., p. 1378.
20 J. Armour et al., `Law and financial development: what we are learning from time-
series evidence?' (2009) Brigham Young University Law Rev. 1435.
21 See, for instance, J.C. Coffee Jr, `The rise of dispersed ownership: the roles of law
and the State in the separation of ownership and control' (2001) 111 Yale Law J. 1; J.
Armour et al., `How do legal rules evolve? Evidence from a cross-country com-
parison of shareholder, creditor, and worker protection' (2009) 59 Am. J. of
Comparative Law 579, at 586.
22 Armour et al., op. cit., n. 20, p. 1450; J. Buchanan, D.H. Chai, and S. Deakin,
`Empirical analysis of legal institutions and institutional change: multiple methods
approaches and theory application to corporate governance research' (2014) 10 J. of
Institutional Economics 1, at 12.
23 P. Lele and M. Siems, `Shareholder protection: a leximetric approach' (2007) 7 J. of
Corporate Law Studies 17.
24 B. Ahlering and S. Deakin, `Labor regulation, corporate governance and legal origin:
a case of institutional complementarity?' (2007) 41 Law & Society Rev. 865; S.
Deakin, P. Lele, and M. Siems, `The evolution of labour law: calibrating and
comparing regulatory regimes' (2007) 146 International Labour Rev. 133, at 136±
41.
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mechanisms (hereinafter, the `CBR Index').
25
The CBR Index, differently
from the comparative scale developed by La Porta et al., in order to capture a
more realistic picture of creditor protection strategies also considers other
variables, including mechanisms for protecting unsecured creditors.
26
Despite this significant difference, the index developed by La Porta et al.
and the CBR Index share a similar approach regarding the variable
measuring creditor protection, since a country receives a score of 1 when
secured lenders are prioritized over any other creditors and when they can
enforce their rights outside the procedure, whereas countries where statutory
priorities are in place, or where a statutory stay applies to secured creditors,
receive a lower score.
27
In other words, these specific variables only measure
the priority system and the protection of secured creditors, not the protection
of any kinds of creditors, and seem to move from the implicit assumption
that secured creditors' absolute priority is, as such, a desirable policy goal.
28
In this regard, the most common argument supporting secured creditors'
protection is that it avoids debtors' moral hazard, reduces the overall cost of
credit, and increases the willingness to lend.
29
It is worth stressing, however,
261
25 J. Armour et al., `CBR Creditor Protection Index for the UK, the US, Germany,
France, and India' (2006) Centre for Business Research, University of Cambridge.
This index has been recently extended to cover 30 countries for a period stretching
between 1990 and 2013: see whole updated dataset at ; and S. Deakin, V. Mollica, and P. Sarkar,
handle/1810/256566>.
26 See S. Deakin and P. Sarkat, `Does creditor protection matter? Legal and financial
dev elo pme nt in f our O ECD c oun tri es, 1 970 /20 05' , wor kin g pap er at
`Varieties of creditor protection: insolvency law reform and credit expansion in
developed market economies' (2016) 14 Socio-Economic Rev. 1. The same authors
have also coded labour protection in France, Germany, the United Kingdom, India,
and the Unite d States ( tp://www. cbr.cam.ac .uk/resea rch/resea rch-proje cts/
completed-projects/law-finance-development/>). See, also, J. Armour, S. Deakin,
and M. Siems, `CBR Lexim etric Datas ets', at tp://dx.d oi.org/10 .17863/
CAM.506>, coding the labour law of 117 countries.
27 See La Porta et al., op. cit., n. 15, p. 1135; Armour et al., op. cit., n. 25.
28 We should remember that a difference exists between the La Porta index and the
CBR Index, as seen above: while the former is based exclusively upon this variable
measuring secured creditor protection, the latter also measures, through other
variables, the level of protection of unsecured creditors and is, consequently, more
balanced and accurate.
29 T.H. Jackson and A.T. Kronman, `Secured financing and priorities among creditors'
(1979) 88 Yale Law J. 1143; G. McCormack, `Reforming the law of security
interests: national and international perspectives' (2003) Singapore J. of Legal
Studies 1, at 5; J. Armour, `The Law and Economics Debate About Secured
Lending: Lessons for European Lawmaking?' in The Future of Secured Lending in
Europe, eds. H. Eidenmu
Èller and E.-M. Kieninger (2008) 3. See, also, the empirical
works of S.A. Davydenko and J.R. Franks, `Do bankruptcy codes matter? A study of
defaults in France, Germany, and the U.K.' (2008) 63 J. of Finance 565; R.
Haselmann, K. Pistor, and V. Vig, `How law affects lending' (2010) 23 Rev. of
Financial Studies 549 (positive correlation between rules on collateral and lending,
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
that the rationale for secured creditors' absolute priority is debated and still
puzzling. Several scholars, indeed, argue that secured credit absolute priority
only redistributes value from non-sophisticated and involuntary creditors to
sophisticated creditors,
30
and that efficiency gains are not, or not always,
ascertainable.
31
It is now clear why, and to what extent, the `varieties of capitalism'
approach and the `legal origin' hypothesis are significant for comparative
legal researches and for understanding employee priorities. These theories,
indeed, make possible a comparison of the interplay among complex and
interdependent institutional settings pursuing similar goal s. Regarding
employee priorities, which alter after the event free-market bargains between
a debtor and its creditors, both theories would predict that in `liberal market
economies' (and common law countries) no employee priorities should exist,
and that `coordinated market economies' (and civil law countries) should be
more open to statutory priorities shaping the balance among stakeholders.
THE MYTH OF INSOLVENCY LAW NEUTRALITY
1. Creditors' equal treatment versus statutory priorities
One of the main goals of insolvency proceedings is addressing collective
action problems faced by creditors when their debtors become insolvent.
First of all, in order to prevent creditors from individually seizing their
debtors' assets, a widespread strategy is providing a general stay of indivi-
dual creditors' claims. Secondly, in order to avoid the risk that creditors
reject a restructuring plan hoping to be paid in full if the plan succeeds (hold-
out problem), rules on restructuring proceedings require that rescue plans are
binding for all creditors when they are approved by a majority of creditors.
According to a widespread view, insolvency rules should exclusively aim at
facilitating the efficient liquidation of a debtor's assets or the most value-
enhancing restructuring plan, to the advantage of all creditors, without
altering pre-insolvency entitlements deriving from private bargains, such as
262
while bankruptcy variables ± including the variable `secured creditors first' ± have a
lower relevance). The same philosophy is followed by the `doing business' report
developed by the World Bank:
getting-credit#close>.
30 Non-sophisticated and involuntary creditors are commonly labelled `non-adjusting
creditors', while sophisticated creditors are defined as `adjusting creditors', since
they can `adjust' their market and contractual conditions: see L.A. Bebchuk and J.M.
Fried, `The uneasy case for the priority of secured claims in bankruptcy' (1996) 105
Yale Law J. 857, at 885±7 and T. Guzman, `International Bankruptcy: In Defense of
Universalism' (1999±2000) 98 Michigan Law Rev. 2177.
31 See A. Schwartz, `Security interests and bankruptcy priorities: a review of current
theories' (1981) 10 J. of Legal Studies 1; L. Lo Pucki, `The unsecured creditor's
bargain' (1994) 80 Virginia Law Rev. 1886; Bebchuk and Fried, id.
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pledges, mortgages, and other security interests.
32
It goes without saying
that, in this conceptual framework, asset distribution should follow the
principle of pari passu, according to which secured creditors rank in priority
to unsecured creditors and all unsecured creditors rank equally.
As a matter of facts, however, insolvency regimes are never neutral for the
distribution of a debtor's estate to creditors and other stakeholders. Without a
statutory stay of creditors' claims, for instance, creditors would seize the
debtor's estate on a `first come, first served' basis, which would replicate a
Hobbesian state of nature, where men are wolves for other men and the
strongest prevails.
33
In the business world, the most sophisticated and best-
informed creditors would prevail over the less sophisticated, and probably less
affluent, credit ors. A statutory s tay, however, resp ects pre-insolve ncy
creditors' entitlements, such as privately negotiated securities. By contrast,
statutory priorities and any other rules altering pre-insolvency entitlements
have a more pronounced distributive impact.
34
In this regard, it is worth
remembering that rules on creditors' ranking and priorities vary greatly from
country to country, reflecting political options for the preferred equilibrium
between classes of creditors,
35
as well as domestic legal concepts, so that any
classification is likely to be incomplete.
36
Priorities, for instance, may be
shaped in the form of privileges over proceedings deriving from the sale of
specific debtor assets; such privileges could be characterized either as rights in
rem,such as liens in common law jurisdictions, or as statutory alterations of
creditors' ranking with regard to certain assets.
37
Regardless of specific
national classifications and rules, what matters for the purposes of this study is
classifying statutory priorities according to their impact on other creditors'
claims; we should, therefore, distinguish between: (i) statutory priorities that
treat certain unsecured creditors preferentially to other unsecured creditors,
while secured creditors take a higher priority than all unsecured creditors
(hereinafter, `simple priorities'); (ii) statutory priorities that treat certain
unsecured creditors preferentially to all other creditors' claims, including
secured claims (hereinafter, `super-priorities').
263
32 T.H. Jackson, The Logic and Limits of Bankruptcy Law (1986) 21±5.
33 T. Hobbes, De Cive (1642); Philosophicall rudiments concerning government and
society (1651); see the Dedicatory Epistle to the Earle of Devonshire at p. 1: `To
speak impartially, both sayings are very true; That Man to Man is a kind of God; and
that Man to Man is an arrant Wolfe.'
34 Garrido, op. cit. (1995), n. 2, p. 31. Priorities follow local values and policy options,
but do not necessarily protect local creditors only, as foreign creditors can also make
use of these priorities: Pottow, op. cit., n. 2, p. 1911.
35 F.M. Mucciarelli, `Not just efficiency: insolvency law in the EU and its political
dimension' (2013) 14 European Business Organization Law Rev. 175.
36 Garrido, op. cit. (1995), n. 2.
37 With regard to systems deriving from the French civil code, see Garrido, id.; for
Germany, see Piekenbrock, op. cit., n. 2, pp. 87±93 and C. Paulus, `The Wonderful
World of Privileges ± The Par Condicio Creditorum vs. Closeout-Netting' (2014) 15
European Company and Financial Law Rev. 531.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
Both simple priorities and super-priorities alter, albeit to different extents,
the economic relations among creditors to the advantage of the preferred
claims. Since an insolvent debtor's estate is unlikely to be sufficient to
satisfy all creditors' claims, statutory priorities, in practice, transfer value
from other creditors to the prioritized class of creditors. While simple
priorities just shift the economic burden of a debtor's insolvency from one
class of unsecured creditors to another,
38
super-priorities also disregard
privately negotiated guarantees to the advantage of certain categories of
creditors. It is interesting to note that such rules produce redistributive
effects among social actors by simply altering privately negotiated entitle-
ments between a debtor and his or her stakeholders, instead of through tax-
paid mechanisms. Needless to say, statutory priorities create tensions
between prioritized and non-prioritized creditors. In this regard, we may
borrow the words of the Cork Report, claiming that priorities should be
`justified by reference to principles of fairness and equity which would be
likely to command general public acceptance.'
39
2. Strategies for protecting employees
When a firm enters into insolvent liquidation, employees lose the financial
resources aimed at supporting them and their families, unless social security
mechanisms exist that sufficiently support their needs until they find another
job. Employees are in a particularly vulnerable position since their invest-
ment is firm-specific and undiversified.
40
Employers, therefore, could
exploit their position and behave opportunistically at workers' expense.
Additionally, when the insolvent employer is a company, limited liability
264
38 Garrido, op. cit. (1998), n. 2, pp. 32±6.
39 Report of the Review Committee on Insolvency Law and Practice (1982; Cmnd.
8558) (`Cork Report') 1398.
40 See H. Hansmann, `When does worker ownership work? ESOPs, law firms,
codetermination, and economic democracy' (1990) 99 Yale Law J. 1749, at 1764±5;
O.E. Williamson, The Economic Institutions of Capitalism (1985) 250±62; H.
Hansmann, The Ownership of Enterprise (1996) 26: `with time it may become
increasingly costly, both professionally and personally, [for a worker] to change
employers', with the consequence that:
her present employer is in a position to act opportunistically toward her in setting
wages or other terms of employment, compensating her only well enough to
prevent her from leaving and thereby, in effect, appropriating the value of the job-
specific investments, both professional and personal, that she has made.
See, also, O.E. Williamson, `The theory of the firm as governance structure: from
choice to contract' (2002) 16 J. of Economic Perspectives, 171, at 185: `workers
who acquire firm-specific skills will lose value if prematurely terminated (and firms
will incur added training costs if such employees quit)' and the risk of moral hazards
on the employers' side `will result in demands by workers for a hazard premium, and
recurrent contractual impasses, by reason of conflict, will result in inefficiency'; R.
Goode, Principles of Corporate Insolvency Law (2011) 235±40.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
protects shareholders' private assets from creditors' claims, including
employees' claims. Limited liability, therefore, exacerbates the risk of
employers' opportunism
41
and, indeed, not paying due wages and contribu-
tions in the vicinity of insolvency should certainly be added to the list of
such opportunistic behaviours. Bearing this in mind, it is clear that employee
priorities related to due wages and contributions are strategies for addressing
the risk that employers use their insolvency as a shield for avoiding labour
obligations.
In contin ental Eur ope, emp loyee pri orities w ere proba bly first ly
introduced by a reform of Tuscany insolvency law in 1713,
42
but the most
famous version was in the French Civil Code of 1804, which codified
previous French customary law that was aimed at protecting domestic
workers.
43
In an era when a fully-fledged social security was not developed,
employee priority was mainly justified as a form of workers' social
protec tion. D uring t he twent ieth ce ntury , the Inte rnati onal La bour
Organization codified the necessity of having such priorities in place. In
1949 the ILO convention on protection of wages stated that:
in the event of the bankruptcy or judicial liquidation of an undertaking, the
workers employed therein shall be treated as privileged creditors either as
regards wages due to them for service rendered during such a period prior to
the bankruptcy or judicial liquidation as may be prescribed by national laws or
regulations, or as regards wages up to a prescribed amount as may be
determined by national laws or regulations.
44
Each state should establish the `relative priority' of those claims in relation
to other creditors, giving regard to specific domestic circumstances and,
obviously, to domestic welfare state infrastructures. This convention was
adopted in an era where progressive and `Keynesian' ideas were functional
to post-war reconstruction and were, therefore, shared values at international
level.
265
41 E. Tucker, `Shareholder and Director Liability for Unpaid Workers' Wages in
Canada: From Condition of Granting Limited Liability to Exceptional Remedy'
(2008) 26 Law and History Rev. 58. In general, on the role of limited liability:
Bebchuk and Fried, op. cit., n. 30, p. 899; J. Armour, G. Hertig, and H. Kanda,
`Transactions with creditors' in The Anatomy of Corporate Law, eds. R. Kraakman
et al. (2017, 3rd edn.) 111±12; S. Blankenburg, D. Plesch, and F. Wilkinson,
`Limited liability and the modern corporation in theory and in practice' (2010) 34
Cambridge J. of Economics 821, at 831.
42 Riforma degli Statuti di Mercanzia, issued motu proprio by the Grand Duke of
Tuscany Cosimo III on 11 April 1713; see Garrido, op. cit. (1998), n. 2, p. 22, fn.
51.
43 French Civil Code (Code Civil des FrancËais), original version issued on 21 March
1804 (usually called `Code Napoleon'), articles 2101 and 2104. See Garrido, id., p.
35, and A. Bronstein, `The protection of workers' claims in the event of the
insolvency of their employer' (1987) 126 International Labour Rev. 715, at 718±20.
44 Protection of Wages Convention, 1949 (No. 95) adopted 1 July 1949, entered into
force 24 September 1952, article 11.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
In 1992, however, the same organization approved a further convention on
labour protection,
45
which watered down the original provisions. Indeed,
according to the new convention, workers' claims should be paid before other
unsecured creditors, while secured creditors are not mentioned;
46
furthermore,
employee priority could be reduced or abolished `where workers' claims are
protected by a guarantee institution'.
47
This innovation was the signal that the
cultural and economic climate was changing ± or had already changed ± and
that the interests of sophisticated secured lenders had gained relevance in the
policy discourse. Indeed, a few years later, the Principles and Guidelines for
Effective Insolvency and Creditor Rights System, issued in 2001 by the World
Bank, gave more weight to the interests of business and banks and to the aim
of protecting secured lenders. In particular, it stressed that:
[a]ny priority placed ahead of the secured party represents a substantial cost,
which is generally transferred back to borrowers in the form of higher interest
rates and transaction costs. Often the public policy represented by the priority
(say, benefiting workers) receives a minor and occasional benefit at a substantial
cost to the entire commercial system. Such priorities should be eliminated,
reduced, and, where public policy concerns are compelling, addressed by other
legal reforms that do not compromise the system for secured lending.
48
In other words, only if pressed by `compelling political concerns' to protect
workers should politicians intervene, preferably by not altering pre-existing
entitlements deriving from private bargains between a debtor and his or her
creditors. This strategy clearly advantages sophisticated creditors, such as
banks or large corporations, which have sufficient market power to require
guarantees from their debtors. In a similar vein, the UNCITRAL legislative
guide to cross-border insolvencies, issued in 2004, emphasized that:
[s]ome priorities are based on social concerns that may be addressed more
readily by law other than the insolvency law, such as social welfare legislation,
than by designing an insolvency law to achieve social objectives that are only
indirectly related to questions of debt and insolvency. Providing a priority in
the insolvency law may at best afford an incomplete and inadequate remedy
for the social problem, while at the sam e time rendering insolvency
proceedings less effective.
49
266
45 Protection of Workers' Claims (Employer's Insolvency) Convention, 1992 (No. 173)
± adopted 23 June 1992, entered into force 8 June 1995.
46 id., article 5.
47 id., article 8.
48 World Bank Principles (2001) para. 58. See, also, para. 147:
There is an observable tendency to increase the categories of debts enjoying such
priority, for example by giving this status to each new form of tax or duty or each
additional employee entitlement. Indeed, in countries with a strong tradition of
worker protection there is sometimes an acute tension between the provision of
safeguards for employees against the consequences of their employers' insolvency
and the need of the bankruptcy trustee to keep the business viable and, if possible,
restore it to profitability, which may involve a sharp reduction in the workforce.
49 UNCITRAL, Legislative Guide on Insolvency Law (2004) part 2, section V, para. 68.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
The idea behind this suggestion is that employee priorities and social
security schemes are like communicating vessels, so that if a social security
scheme is sufficiently broad, employees can recover the full amount of due
wages, and contributions and priorities are not necessary or less important.
In the European Union, a preference for social security mechanisms can
probably be read between the lines of the Directive on Employees' Protection,
50
according to which member states should put in place mechanisms that
guarantee the payment of employees' outstanding claims relating to their
employment, by establishing a `guarantee institution' for securing the `payment
of employees' outstanding claims resulting from contracts of employment or
employment relationships'.
51
Member states can exclude certain employees'
claims from social guarantee's protection `by virtue of the existence of other
forms of guarantee if it established that these offer . . . a degree of protection
equivalent to that resulting from this directive.'
52
What is extremely interesting
is that the Directive requires a factual and empirical comparison on whether a
certain institutional setting is as effect ive as the mandatory `guarantee
institution'. The English regime is a telling example for alternative protections.
The National Insurance Fund protects employees' claims for due wages, with
the exception of seamen's claims that are only covered by maritime lien. This is
a guarantee created by operation of law over a ship and its cargo,
53
granting
seamen a priority over other creditors. The question arises as to whether these
two strategies (social security versus statutory priority) produce equivalent
effects for employees. In this regard, the European Commission stressed that
this lien `may not always offer a degree of protection equivalent to that of the
National Insurance Fund.'
54
Implicitly, the Commission argues that employee
priorities are not as effective as social security schemes, and that member states
cannot repl ace the guaran tee institu tion forese en by the Direct ive on
Employees' Protection through insolvency priorities. It is worth mentioning,
however, that the Insolvency Regulation Recast of 2015 clearly stresses that
different employee priorities across member states are to be respected and that
the next review of the regulation should identify further measures in order to
`improve preferential rights of employees at European level'.
55
267
50 Council Directive 80/987/EEC on the approximation of the laws of member states
relating to the protection of employees in the event of the insolvency of their
employer [1980] OJ L 283/23. This directive was amended several times and
eventually codified by Directive 2008/94 of the European Parliament and the
Council [2008] L 283/36 (Directive on Employees' Protection).
51 Directive on Employees' Protection, id., article 1(1).
52 id., article 1(2).
53 International Convention on Maritime Liens and Mortgages, 1993, articles 4 and 5.
54 Report from the Commission to the European Parliament and the Council on the
implementation and application of certain provisions of Directive 2008/94/EC on the
protection of employees in the event of the insolvency of their employer, 28.2.2011,
COM (2011) 84 Final, 3.
55 Regulation (EU) 2015/848 of the European Parliament and of the Council, on
insolvency proceedings (recast) [2005] L141/19, recital 22.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
EMPLOYEE STATUTORY PRIORITIES IN FRANCE, GERMANY,
AND THE UNITED KINGDOM
In the next section, employee priorities and social security mechanisms in
France, Germany, and the United Kingdom will be compared and contrasted.
These countries share a common element, namely, the implementation of the
Directive on Employees' Protection. Nevertheless, rules on employees'
ranking and social security schemes are combined in different ways,
according to each country's own domestic political and economic agenda.
1. France
According to the French regime, when an employer enters into an insolvency
proceeding, all claims deriving from labour contracts are protected by a
super-priority that curbs secured creditors' claims.
56
Employees' super-
priority has a broad scope, as it protects any employees' claims against their
employers, including claims for paid leave. Such priority is capped at a
monthly threshold of twice the amount used to calculate social and pension
contributions, which can be increased and updated through a government
regulation.
57
Since the monthly amount for calculating social pensions in
2015 was ¨3,170,
58
the statutory floor for employees' super-priority was
¨6,340. Employees' claims exceeding the monthly amount of the super-
priority are entitled to a fourth-rank privile
Áges ge
Âne
Âraux (a `general
privilege') on movable assets
59
and a second-rank general privilege on
immovable assets
60
of their insolvent debtor. It is worth remembering that in
France, like in other southern-European countries,
61
creditors' priorities have
proliferated over recent decades and, in some cases, they have probably
reached a saturation point beyond which preference creditors are scarcely
protected or not protected at all.
62
By introducing a super-priority, therefore,
the French legislator tried to effectively protect employees, since simple
priorities are likely not to be effective.
268
56 Code de commerce, article L625-7 (this rule was originally in article 128 of the Loi
85-98 25 January 1985 on the redressement et a
Ála liquidation judiciaires des
entreprises and was transferred in article L6211-130 of the Code de commerce by
the Loi 94-475, 10 June 1994, art. 92) referring to Code du Travail, article L143-10;
this rule was originally introduced by De
Âcret 73-1046, 15th November 1973 and
since 2008 is embodied in Code du travail, article L3253-2.
57 Code du travail, article L3253-2.
58 Ministre des affaires sociales, de la sante
Âet des droits des femmes ± ministre de
l'agriculture, de l'agroalimentaire et de la fore
Ãt ± secre
Âtaire d'Etat charge
Âdu
budget: Arre
Ãte
Âdu 26 novembre 2014 portant fixation du plafond de la se
Âcurite
Â
sociale pour 2015.
59 Code civil, article 2331.
60 id., 2375 (formerly in article 2104).
61 Garrido, op. cit. (1995), n. 2, pp. 39±40.
62 id., p. 36.
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Besides these prioriti es, employees are also prote cted through an
insurance mechanism based upon employers' contributions.
63
In particular,
all employers should insure the payment of all due salaries, including
pension and insurance payments. This insurance mechanism is implemented
through a special entity, created for that specific purpose by the national
employer organizations, in agreement with the labour minister.
64
The insur-
ance fund protects any contracts of employment, including part-time con-
tracts, fixed-term and temporary contracts, and guarantees any due payment
without time limitation, up to a maximum amount which is updated every
year (in 2015 the amount was ¨76,080). When this insurance fund indemni-
fies employees, it is subrogated to employees' rights and is, therefore,
entitled to super-priority vis-aÁ-vis other creditors. The statutory priority,
therefore, is a crucial element of this complex mechanism for protecting
employees, for it allows the insurance fund (and indirectly its contributors:
the employers as a class) to recover what it paid for protecting employees'
claims. The ultimate burden of this mechanism is hence placed upon other
unsecured creditors' shoulders.
2. Germany
Germany has a reputation for strong social security mechanisms and worker
protections, and is considered a typical example of coordinated market
economies. Bearing this in mind, we can predict that German employees
should be entitled to both a statutory priority for claims related to due wages
and a strong social security, similarly to France. Nevertheless, the German
Insolvency Act 1994, which entered into force in 1999,
65
abolished all
creditor priorities, including priorities protecting employee claims for due
wages, with the sole exceptions of a limited list of statutory liens
66
and few
other cases.
67
The lack of employee priority is balanced by a social fund
collectively financed by German employers.
68
The policy goal of the
German insolvency regime is to canalize employees' protections into just
one strategy that socializes costs among the employers as a class. This social
fund covers outstanding employees' claims related to a period of three
months prior to the decision to open an insolvency proceeding, including
wages, holiday pay, bonuses, and pension contributions (Insolvenzgeld). This
fund protects any employees with outstanding pay claims, including part-
269
63 This insurance mechanism was also created in 1973: Loi 73/1194, as amended. See
now Code de travail, article L143-11-1.
64 id., article L143-11-4 (Association pour la Gestion du re
Âgime d'assurance des
cre
Âances des Salaires).
65 Insolvenzordnung (InsO), 5.10.1994, BGBl. I 2866, as amended.
66 Piekenbrock, op. cit., n. 2, p. 63.
67 In particular, set-off rights and rules on close-out netting operate, in practice, as
priorities or privileges: see Paulus, op. cit., n. 37, pp. 531±53.
68 Sozialgesetzbuch III 1997, s. 165.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
time employee s, employees wi th fixed-term o r temporary con tracts,
regardless of whether they are also protected by statutory unemployment
schemes. In 2004, the maximum amount of Insolvenzgeld was capped at the
level of the monthly unemployment scheme payment.
69
After a payment, the
social fund is subrogated to employees' position vis-aÁ-vis the employer.
Therefore, the social fund does not enjoy any priorities and can only partially
recover what it paid to employees.
A retrospective analysis, however, reveals that former insolvency rules of
West Germany (Konkursordnung)
70
were amended in 1974 to introduce
employee super-priority, similarly to the French regime. In particular,
employees' claims for due wages over six months before their employers'
insolvency ranked in priority to other creditors' claims, including secured
creditors.
71
In the same year, the West German parliament introduced the
guarantee mechanism protecting emp loyee's claims for due wages.
72
German employees' protection, therefore, followed the same path of France,
just one year apart. In 1994, however, the parliament of unified Germany, by
reforming the insolvency law,
73
repealed all insolvency priorities, including
employees' priority for due wages. This decision granted the pari passu
principle to its full extent.
74
Another consequence is that any payments made
a short time before filing for insolvency, including employees' wages paid
within three months prior to the opening of the insolvency proceeding, are
avoidable, if the employees were aware of the insolvency.
75
The official
motivations for the Insolvency Act maintain that any creditor priorities are
ultimately based upon arbitrary political decisions and, therefore, that these
priorities are not logically justified.
76
The 1994 reform also increased the
likelihood of rescue proceedings, while under previous Konkursordnung an
insolvent debtor' liquidation was the most likely outcome of insolvency.
77
This issue was, however, intensively debated and the question arose as to
whether this strategy would have harmed workers facing their employer's
insolvency. In 1992, while debating the reform proposal, the main opposition
270
69 Sozialgesetzbuch, 3d book [1997] BGBl, I/594, s. 167.
70 Konkursordnun g, Deutsches Reich sgesetzblatt [1 879] Nr. 10, 351±38 9. See
Piekenbrock, op. cit., n. 2, p. 84.
71 Konkursordnung s. 59(1) No. 3-a, s. 60(1), and s. 61(1) No 1-a, introduced by the act
of 17 July 1974, BGBl I, 1481, article 2, s. 1, No. 1-b.
72 Arbeitsfo
Èrderungsgesetz (AFG) [1969] BGBl. I/582, s. 141a, as amended in 1974.
The AFG was repealed in 1997 through the Sozialgesetzbuch, 3d book.
73 Insolvenzordnung (InsO) [1994] BGBl I/2866, entered into force on 1 January 1999.
74 The only exception is related to employee contracts signed by the provisional
administrator: InsO, s. 55(2). For an overview see M. Balz, `Market conformity of
insolvency proceedings: policy issues of the German insolvency law' (1997) 23
Brooklyn J. of International Law 167.
75 InsO, s. 130.
76 German Parliament [Deutscher Bundestag], 12 legislative period, Drucksache 12/
2443, 15.04.92, at 90.
77 Balz, op. cit., n. 74.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
party (SPD) agreed to repeal other creditor priorities, with the sole exception of
employee priorities.
78
Two years later, however, the SPD accepted the idea of
also repealing employee priorities, arguing that `in practice, in at least
3
4
of
cases such priorities are only on paper and in the residual
1
4
of cases these
priorities are effective only in few cases', and that other social security
strategies, such as the Insolvenzausfallgeld, `and other rules' (perhaps referring
to the whole social security mechanisms) provide better protection for
employees.
79
Similarly, the official motivations for the Insolvency Act argued
that the Insolvenzgeld was a sufficient protection for workers. The problem,
however, was ± and still is ± that the Insolvenzgeld only covers the payment of
the last three months of due wages, while the former super-priority protected
due wages of the last six months before insolvency. Nevertheless, the official
motivation for the Insolvency Act argued that this gap of three months was of
scarce practical relevance, without further explaining why this was the case.
80
3. United Kingdom
In the United Kingdom, creditor priorities are almost unknown, and
insolvency rules respect pre-insolvency entitlements and private bargains
between a debtor and its creditors. In this regard, it is worth remembering
that in 2002 the Crown preference for unpaid taxes was also abolished.
81
The
only exception is employees' preferential treatment regarding claims for due
wages and contributions. Employees' claims, in particular, rank higher in
priority than other unsecured creditors, while fixed secured creditors and
insolvency practitioners' fees are prioritized over any other unsecured
creditors, including employees. This protection covers any employees' due
wages, including holiday remuneration and related rights,
82
for a period of
four months prior to the starting day of the insolvency proceeding.
83
This
271
78 See the arguments of Mr Pick MP, German Parliament [Deutscher Bundestag] 12
legislative period, 94 Sitzung, 3.6.1992, at 7774.
79 Mr Pick MP, German Parliament [Deutscher Bundestag] 12 legislative period, 222
Sitzung, 21.4.1994, at 19119.
80 German Parliament [Deutscher Bundestag], 12 legislative period, Drucksache 12/
2443, 15.04.92, at 90: `It is to be expected that employees will not suffer any
hardship, since a specific fund (Konkursausfallgeld) will compensate for loss of
salary for the last three months before the opening of insolvency proceedings.'
81 Enterprise Act 2002, s. 251.
82 Insolvency Act 1986, Schedule 6, Category 5. Such priority, however, dates back to
the Preferential Payments in Bankruptcy Amendment Act 1897, s. 2. See, now,
Financial Services (Banking Reform) Act 2014 (Commencement No. 7) Order 2014,
S.I. 2014/3160. For Northern Ireland, see the Insolvency (Northern Ireland) Order
1989, s. 149 and Schedule 4, Category 5.
83 Four different `relevant dates' trigger this priority, according to the specific
procedure: the date on which the company entered administration, the date on which
a voluntary arrangement takes effect, the date of the appointment of a provisional
liquidator, or the date of the winding-up order: Insolvency Act 1986, s. 387.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
priority, however, is capped at a maximum amount of £800, which has
remained unaltered since 1976.
84
In this respect, the Cork report of 1982,
which set the conceptual framework for the Insolvency Act 1986, recom-
mended an increase of this threshold, while the Trade Union Congress
requested a complete abolition of any thresholds.
85
Employees' residual
claims above this threshold rank equal to other unsecured claims and,
although a `prescribed part' of debtors' estate should be made available for
unsecured creditors,
86
the residual estate is likely not to be sufficient to
satisfy employees' claims. The employee preferential treatment, therefore,
only marginally alters pre-insolvency entitlements. In 1976, however, the
nominal value of £800 had a much higher purchasing power than today. A
commonly used calculator of currencies' relative value
87
shows that in 2015
the relative value of 1976's £800 ranges from £4,820 to £11,520, depending
on the purposes for which this sum is to be used. The value of the `historic
standard of living', measuring the ability to purchase a bundle of `basic'
goods and services, is about £5,200 today. This means that all political
parties that have been in government since 1976, by not adjusting this
nominal value to inflation, have tacitly decided to continuously shrink the
protection of employee priority to a quite low real value. Of course, there
might be several justifications for this lack of adjustment: one of those could
be that this mechanism for protecting employees is relatively unimportant, or
that workers are mainly concerned with future unemployment rather than
with past losses (which may be minimal since employees are paid monthly).
Be that as it may, even if we assume that the total amount of unpaid due
wages is relatively unimportant, the decrease in value of this priority is
tantamount of a creeping abolition of this protection.
88
272
84 This amount was originally increased to £800 by the Insolvency Act 1976, Schedule
1, Part 1 (amending Section 33(1)(b) and (c) of the Insolvency Act 1914) and then,
following the enactment of the Insolvency Act 1986, it was confirmed by the
Insolvency Proceedings (Monetary Limits) Order 1986, S.I. 1986/1996, s. 4.
85 Cork Report, op. cit., n. 39, p. 1433.
86 Insolvency Act 1986, s. 176 .
87
I use the online calculator developed by L.H. Officer (University of Illinois at Chicago)
and S.H. Williamson (Miami University), at
ukcompare/>.
88 A further form of employee super-priority existed under the original version of the
Transfer of Undertaking (Protection of Employees) Regulation 1981, S.I. 1981/1974
(TUPE 1981), which implemented the Business Transfer Directive (Council
Directive 77/187/EEC on the approximation of the laws of the member states
relating to the safeguarding of employees' rights in the event of transfers of
undertakings, businesses or parts of businesses, OJ 1977 L61/26). TUPE Regulations
1981 s. 5(2) maintained that the transferee inherited all liabilities of the transferor
vis-aÁ-vis its employees. The House of Lords decision in the Litster case included in
the scope of TUPE Regulations 1981 any unfair dismissals that took place before a
transfer of undertaking, with the consequence that the transferee of an insolvent
undertaking inherited all labour debts and that employees were put in a privileged
position as compared to other creditors: see Litster v. Forth Dry Dock and
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
In the present scenario, where employees' priorities have been reduced to
a quite low amount, employees' protection is mainly based upon social
security. In this regard, the Employment Rights Act 1996, which codified
previous legislation and implemented the Directive on Employees' Protec-
tion, offers a security scheme for protecting workers.
89
If an employer
becomes insolvent, the National Insurance Fund, which is funded through
the contributions of both employee and employers, must pay debts owed to
employees, including (if there was no unfair dismissal and the employer has
given proper notice) arrears for a maximum of eight weeks at a rate of £464 a
week, unused holiday pay, with a maximum of six weeks and up to a weekly
limit of £464, and a statutory redundancy payment. The Insolvency Service
protects any employment contracts, excluding merchant seamen (who, as
noted above, are supposed to be sufficiently protected by maritime liens).
90
Furthermore, this protection does not cover masters or members of the crew
of fishing vessels when their payment is a share of profits or gross earnings
of the vessel.
91
The National Insurance Fund is subrogated to the rights of
employees and is entitled to the same preferential status within the limit of
£800 per employees.
92
Finally, in order to have a full picture of employees' protection mecha-
nisms, it is necessary to consider that the risk of being held liable for
fraudulent trading or for wrongful trading, and the risk of disqualification,
could deter directors from not paying due wages and contributions to
273
Engineering Co Ltd [1989] IRLR 161. The new Tr ansfer of Undertakings
(Protection of Employees) Regulations 2006 clarified that the regulation only
applies to insolvency proceedings opened for restructuring the insolvent under-
taking, and `not with a view to the liquidation of the assets of the transferor': S.I.
2006/246 (TUPE 2006), regulation 8(6). This reform implemented a provision of the
new Business Transfer Directive (see Council Directive 2001/23/EC OJ 2001 L82/
16, article 5) which, however, leaves member states the possibility of opting out: see
S. Deakin and G.S. Morris, Labour Law (2012, 6th edn.) 588. This debate is far from
being peculiar to the United Kingdom regime. In France, the transferee inherits all
liabilities of the transferor, except when the latter has entered an insolvency
procedure of sauvegarde,redressement judiciaire or liquidation judiciaire: Code de
travail, article L1224-2. In Germany, on paper the transferee should inherit all
liabilities of the transferor without exceptions (s. 613a BGB), but, according to case
law of the Federal Labour Court, when the transfer occurs after an insolvency
procedure has been opened, the transferee does not inherit liabilities that arose
before the filing for insolvency; see Bundesarbeitsgericht, 20 June 2002, 8 AZR
459/01, in ZIP (2003) 139.
89 Employment Rights Act 1996, s. 166±169.
90 id., ss. 199(4) and 199(5).
91 id., s. 192(2).
92 id., s. 167(3)(a). Interestingly, the Cork Report in 1982 recommended that the
Secretary of State should not enjoy any preferential status and that he should be
subrogated as an unsecured creditor, not as a preferred one. The reason was that `the
priority accorded to employees in an insolvency is a social measure, intended to
alleviate special financial hardship, and that in modern times the cost of meeting
such social needs ought properly to be borne by the community'.
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employees. First of all, directors could be held liable towards the company
when they intentionally defrauded creditors (fraudulent trading),
93
for
instance, when they deliberately pay only some of their company's creditors,
with the consequence that other creditors are not paid in full.
94
Furthermore,
directors risk being liable to contribute to their company's assets, unless they
`took every step with a view to minimising the potential loss to the company's
creditors' when insolvency was unavoidable (wrongful trading).
95
In both
cases, however, the liquidator should commence litigation and the insolvency
assets support all costs, which makes such actions infrequent.
96
Directors'
disqualifications, by contrast, are financed through public funding and prove
much more effective.
97
Courts, in particular, can issue a disqualification order
for `unfitness' when satisfied that a director' conduct `makes him unfit to be
concerned in the management of a company'.
98
A typical case of `unfitness'
occurs when directors of a nearly insolvent company only pay certain classes
of creditors, disregarding other creditors' claims.
99
Therefore, the risk of
being disqualified might prevent directors from disregarding employee wages
and contributions when insolvency approaches.
MAKING SENSE OF DIFFERENT EMPLOYMENT PROTECTION
STRATEGIES
1. Complementarity between employee statutory priority and insurance scheme
The comparative analysis undertaken so far reveals that France, Germany,
and the United Kingdom provide for social security schemes that protect
employees' claims for due wages and contributions. Their strategies, by
contrast, diverge significantly regarding the question whether employees
also should be protected through insolvency priorities. France combines an
employee `super-priority' (within a high threshold) and a security scheme.
This is, therefore, a case of `complementarity as reinforcement', where two
institutional settings (social security and statutory priority) aim at attaining
the same goal and mutually reinforce each other. In Germany, employees do
274
93 Insolvency Act 1986, s. 213.
94 Starglade Properties Ltd v. Nash [2010] EWCA 1314.
95 Insolvency Act 1986, s. 214.
96 P. Davies and S. Worthington, Gower: Principles of Modern Company Law (2016,
10th edn.) 217±18.
98 id., s. 6
99 Sevenoaks (Stationers) Retail [1991] Ch 164; Secretary of State for Trade and
Industry v. McTighe [1997] B.C.C. 224; Official Receiver v. Barnes [2001] B.C.C.
578; Official Receiver v. Roger Charles Gawn [2014] Ch. WL 1219446. Ironically,
in most of these cases, directors neglected the Inland Revenue, which did not press
for payment, and prefer paying other creditors, including workers.
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not enjoy any priorities and are only protected by a social security scheme
based upon employers' contributions. Therefore, the interplay between
insolvency rule and social security scheme is clearly a case of `comple-
mentarity as compensation', where the social security scheme compensates
the lack of employee priorities.
The English regime combines a priority and a social security scheme, but
the employee priority is not as effective as their French counterparts:
employees' claims are only prioritized over unsecured claims and floating
charges, and their priority is capped at a low amount (£800). The picture is
furthe r compli cated b y the fact t hat dire ctors fa ce the ri sk of a
disqualification order when they treat one class of creditors preferentially
to the disadvantage of other creditors. The interplay between insolvency
rules, social security schemes, and disqualification rules is to be classified as
`complementarity as compensation', where certain institutional settings (the
social security and the disqualification rules) compensate other institutions'
weaknesses (employee prior ity). This comparative anal ysis is briefly
summarized as follows:
Table 1
Country Employee priority Social Complementarity
security
France Yes (Super-priority) Yes `Reinforcement'
Germany No Yes `Compensation'
United Yes (Simple priority with Yes `Compensation'
Kingdom low cap)
The historical analysis conducted hitherto has revealed a much more
complex scenario. In particular, France's policy has remained unaltered
since its introduction in 1973. The most interesting developments, however,
occurred in the United Kingdom and in Germany. In the former, the nominal
value of the priority has never been adjusted to inflation and currency
devaluations, so that its real value in 1976 was roughly six times what it is
today. Originally, therefore, the interplay between employee priorities and
social securities was to be classified a weak version of `complementarity as
reinforcement'. In Germany, between 1974 and 1999 a super-priority was
combined with a guarantee fund, and, therefore, its regime was identical to
the French employees' protection regime. The institutional settings in these
countries in 1976 (date of the British insolvency reform) is summarized as
follows:
275
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Table 2
Country Employee priority Social Complementarity
security
France Yes (Super priority) Yes `Reinforcement'
Germany Yes (Super priority) Yes `Reinforcement'
United Yes (Simple priority with Yes `Weak
Kingdom high cap) reinforcement'
This longitudinal analysis leads to two interesting remarks. First, in the
United Kingdom and Germany, albeit along different paths, the institutional
complementarity between the ranking of employees' claims and social
security schemes has changed. As we have seen, in both regimes these
institutional settings were originally connected in the guise of a `comple-
mentarity as reinforcement', while at the turn of the twenty-first century, the
social security schemes were balancing deficiencies as to labour priorities.
Such evolution indicates that institution building (such as the decision to
repeal employee priority or not to adjust the nominal value of its cap) may be
independent from previous institutional complementarities, and may derive
from specific political motivations and dynamics.
100
The second remark is that the `varieties of capitalism' theory and the
`legal origin' hypothesis can only partially explain the interplay between a
priority system and social security schemes. Notably, today's British and
French regimes are coherent with their standard classifications, while
Germany is not. The British regime, indeed, fits into its common classifica-
tion as a `liberal market economy' and into the `broad conception whereby
`common law stands for the strategy of social control that seeks to support
private markets outcomes';
101
the French regime, by altering free-market
bargains to the employees' advantage, is coherent with its classification as
`coordinated market economy' and with the core tenet of civil law countries.
Germany, by contrast, shows a quite puzzling regime: the decision taken in
1994 of abolishing creditor priorities is much more coherent with the ideal-
type liberal market economy rather than with a coordinated market economy,
since its underlying philosophy is that free-market private bargains should
not be altered; this was quite a drastic U-turn from previous policy options
and German political elites seem to have imported into the German system a
276
100 W. Streeck, `Introduction: Explorations into the Origins of Nonliberal Capitalism in
Germany and Japan' in The Origin of Nonliberal Capitalism: Germany and Japan in
Comparison, eds. W. Streeck and K. Yamamura (2001) 1. See, also, M. HoÈpner,
`What Connects Industrial Relations and Corporate Go vernance? Explaining
Institutional Complementarity' (2005) 3 Socio-Economic Rev. 331, at 346, arguing
for an increasing `shareholder orientation' of German capitalism since the 1990s.
101 La Porta et al., op. cit., n. 14.
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regulatory choice rooted in other legal and economic environments.
102
If we
turn our attention to the 1970s, however, the classification of the British
regime would have been much more controversial, while the German
regime, being identical to the French one, was in line with the ideal-type of a
coordinated market economy.
2. The tendency towards labour `commodification'
Since employee priorities in France, Germany, and the United Kingdom do
not perfectly fit into the distinction between liberal and coordinated market
economies, other explanatory tools should be developed in order to make
sense of the interplay between employee priorities and social security
schemes. To this aim, we can turn our attention to the fundamental relation-
ship between labour and capital. In the last pages we have noted an
increasing tendency to protect employees through insurance-based schemes,
rather than through statutory priorities that alter pre-insolvency entitlements.
This tendency is to be found in the official policy documents of the World
Bank and the OECD over the last decades, as well as in British and German
policy choices. This strategy maintains that there is no rational justification
for altering the ranking of creditors to the advantage of any particular class
of unsecured creditors, including employees, and that the policy goal of
protecting employees is to be achieved without modifying free-market
private bargains. This idea is based upon the implicit assumption that
contracts between an undertaking and its employees are not different from
contracts with other trade partners or suppliers, and that employees are akin
to any other creditors.
This assumption has a precise legal foundation. In the world of legal
concepts, indeed, entrepreneurs, employees, and other contractual parties
equally have legal personality and, therefore, are placed on the same footing
from a legal standpoint. The concept of legal personality paves the way for
creating a market in which relations between an undertaking and its em-
ployees are identical with any other contractual relations with trade partners
or suppliers, with the consequence that labour power is bought and sold like
any other commodity.
103
It would be wrong, however, to downplay the
relevance of this ingenious legal construction as a mere ideological super-
277
102 On the effectivity of legal transplants of legal institutions, according to their
connection to specific fragments of society, see G. Teubner, `Legal Irritants: Good
Faith in British Law or How Unifying Law Ends Up in New Differences' (1998) 61
Modern Law Rev. 11, at 17±19.
103 K. Marx, Das Kapital, Vol. 1 (1863) ch. 6: `labour-power can appear upon the
market as a commodity, only if, and so far as, its possessor, the individual whose
labour-power it is, offers it for sale, or sells it, as a commodity' and if employees and
employers `meet in the market, and deal with each other as on the basis of equal
rights, with this difference alone, that one is buyer, the other seller; both, therefore,
equal in the eyes of the law.'
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
structure. Far from it, the formal equality between employers and employees,
which derives from the concept of legal personality, reflects the fact that in
capitalist economies labour power is to be treated as a commodity and labour
itself becomes wage-labour. The concept of legal personality hides and
politically neutralizes the position of labour within the business and the
intrinsically unequal position between these parties.
104
In reality, however,
labour relations are not like other relations between an undertaking and its
trade partners or suppliers, for the simple reason that employees are
embedded in the business and in production. Furthermore, the capacity to
work cannot be separated from the worker as a human being, and `cannot be
shoved about, used indiscriminately, or even left unused, without affecting
also the human individual who happens to be the bearer of this peculiar
commodity', with the consequence that the `commodity description of labor
. . . is entirely fictitious'.
105
This idea is clearly expressed in the declaration
of Philadelphia on the aims and purposes of the International Labour
Organization, which maintains that `labour is not a commodity'.
106
These arguments allow us to understand the relevance of rules on
prioritization of employees' claims in insolvency proceedings. The common
argument against employee priorities is that there is no logical justification
for such preferential treatments, which are exclusively based upon political
decisions. The implicit assumption is that there is no difference between
employees' claims and any other creditors' or trade partners' claims. In other
words, this argument accepts as a reality the description of labour as a
commodity, which the entrepreneur purchases like any other commodity; the
equivalence between employees and other creditors leads to the conclusion
that there is no logical justification for any preferential treatment. The
entrepreneur is conceptually placed at the centre of a web of contractual
relations, whereby any distinctions among different creditors blur and the
specificity of labour in the business vanishes. A further consequence is that
the sphere of the market and economy and the sphere of politics are
conceptually separated and are constructed as mutually independent.
107
By contrast, employee priorities are based on the assumption that, in
reality, a profound difference exists between employees and other creditors of
the same undertaking, and that labour is not like any other commodity that a
company purchases from trade partners. Furthermore, labour priorities also
bridge the conceptual divide between the `economic' and the `political'
278
104 P. Barcellona, I soggetti e le norme (1984) 119±23.
105 K. Polanyi, The Great Transformation: The Political and Economic Origins of Our
Time (2001/1944) 76. See, also, J.F. Weeks, Economics of the 1% (2014) 30.
106 ILO, 26th session, 10 May 1944, article 1(a).
107 See Polanyi, op. cit., n. 105, p. 74:
A self-regulating market demands nothing less than the institutional separation of
society into an economic and political sphere. Such a dichotomy is, in effect,
merely the restatement, from the point of view of society as a whole, of the
existence of a self-regulating market.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
sphere. Therefore, rules on employee ranking in insolvency, and on insolv-
ency priorities, cast light on profound tendencies in a country's political
economy, much more than other statutory priorities that protect certain classes
of unsecured creditors. The tendency that we have observed in Germany and
Britain, although through different country-specific patterns, can be explained
as a piece of a more general cultural shift that increasingly treats employees
like any o ther cre ditor, a nd labou r like any o ther comm odity th at
entrepreneurs purchase. This tendency also reveals the increasing centrality
of entrepreneurs, as compared to labour, in legal and economic discourse.
3. Are employee priorities and security schemes functional equivalents?
Even accepting the critical analysis put forward hitherto, a pragmatic approach
may induce scholars and policy makers to argue that a cumulative application
of employee priority and social security schemes (namely, a combination of
these strategies in the guise of `complementarity as reinforcement') is
redundant. In this regard, the question arises as to whether, and under which
conditions, a legal institution in a given jurisdiction is to be considered the
functional equivalent of a different legal mechanism in another jurisdiction that
pursues the same goals or protects the same social needs.
108
Along this line of
thinking, employee priorities and security schemes aim at satisfying the same
social need and, therefore, they may be considered functional equivalents or
functional substitutes; thus, we could argue that different national insolvency
regimes are equivalent when they protect employees in one way or another.
From a policy standpoint, a possible consequence is that a cumulative
application of both mechanisms is considered redundant. This was also the
implicit assumption behind the recommendation of the World Bank Principles
of 2001 and the UNCITRAL legislative guide of 2004, which stressed that the
most adequate strategy for protecting employees or other weak stakeholders is
through social security or insurance schemes.
This way of conducting a functional comparative analysis, however, does
not consider how employee priorities and security schemes are connected to
each other, and the impact of these connection on social actors involved in
the insolvency of a company or an entrepreneur.
109
In this regard, it is worth
279
108 See K. Zweigert and R. KoÈtz, Comparative Law (1998, 3rd edn.) 37±41; R.
Michaels, `The functional method of comparative law' in The Oxford Handbook of
Comparative Law, eds. M. Reimann and R. Zimmermann (2006) 340. It is beyond
the scope of this article to address the much-debated issue of the merits and limits of
a `functional approach' to comparative law; on this debate, see Siems, op. cit., n. 14,
pp. 25±8 and J. De Coninck, `The Functional Method of Comparative Law: Quo
Vadis?' (2010) 74 RabelsZ 318.
109 On the interplay of legal institutions and economic factors, shaping coalitions among
social forces, see R.V. Aguilera and G. Jackson `The Cross-national Diversity of
Corporate Governance: Dimensions and Determinants' (2003) 28 Academy of
Management Rev. 447, at 459.
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
remembering that these rules govern the mutual relations among four classes
of stakeholders: financial institutions (secured creditors), employees, other
unsecured creditors, and the insolvent employer. Their mutual relations also
depend on how the priority system and the security scheme of a given
jurisdiction are connected to each other. In the three countries considered in
this study, the insurance scheme, after having paid employees' due wages
and contribution, has the right to be subrogated in employees' claims on the
debtor's estate and enjoys the same priority.
110
Such subrogation also affects
the recovery rate of the insurance scheme.
In France, therefore, whe re employees take priorit y over secured
creditors, the security fund is likely to recover a significant portion of the
amount paid, while unsecured creditors carry the main cost of employment
protection. This institutional setting reflects a coalition between labour and
employers, while unsecured creditors suffer a haircut; to a certain extent,
banks and financial institutions are also likely to suffer a partial haircut up to
the value limitation of employee super-priority, which depresses their
returns.
111
The same conclusions were valid for the German regime until
1999, while in today's German system, where no priority exists, the security
fund will suffer a haircut as it is reimbursed pro rata as an unsecured creditor.
In Britain, since employee priority is capped at a low amount, the National
Insurance Fund is also likely to recover a small portion of the amount paid.
The institutional settings of Britain and Germany, therefore, seem to reflect a
coalition between financial institutions (secured creditors) and employees.
112
This analysis reveals that different combinations of statutory priorities
and insurance mechanisms produce different social and economic outcomes.
Although insurance funds and statutory priorities protect the same social
need, these institutional settings cannot be described as mere functional
substitutes. When the insurance scheme is subrogated in the employees'
position and enjoys the same rights and priority on the debtor's estate, it is
not irrelevant for the overall balance of interests whether workers also enjoy
a super-priority, a simple priority or no priority at all. Indeed, when
employees are treated preferentially, the insurance scheme will be able to
recover a larger amount of the employees' claims, which will contribute to
280
110 In other countries, however, the insurance scheme subrogated in the employees'
rights does not receive the same priority as employees and is treated as a normal
unsecured creditor (for example, Denmark, Sweden, Switzerland): Secunda, op. cit.,
n. 1, p. 919.
111 This is one of the reasons why France ranks at a lower position in the World Bank
`doing business' report: tp://www.doingbusine ss.org/data/exploree conomies/
france/getting-credit/>.
112
Germany, in other words, revealed its profound nature of being a `bank-based system':
Aguilera and Jackson, op. cit., n. 109, p. 447. See, also, the `doing business reports' for
Germany ( data/exploreeconomies/germany/getting -
cre dit />) a nd th e Uni ted K ing dom ( tp: //w ww.d oin gbu sin ess .or g/d ata /
exploreeconomies/united-kingdom/getting-credit/>).
ß2017 The Author. Journal of Law and Society ß2017 Cardiff University Law School
its bargaining power and its long-term financial viability.
113
This conclusion
also has a significant policy implication, namely, that when the insurance
scheme has the right to be subrogated to employees' claims, a cumulative
application of employee priorities and social security is not always redun-
dant, mostly so when employees also take priority over secured creditors.
CONCLUSIONS
This article comparatively describes employee priorities for wages and
contributions due in three jurisdictions: France, Britain, and Germany. These
jurisdictions are representative of different production regimes or `varieties
of capitalism': Britain is the model of `liberal market economies', whereas
Germany and France are commonly classified as `coordinated market
economies'. Furthermore, these jurisdictions are emblematic of common law
(Britain) and civil law countries (France and Germany); according to the
legal origin hypothesis, this classification explains different level of financial
development across different countries. This article has, in particular,
addressed the interplay of employees' priorities (if they exist) with social
security sc hemes aimed a t protectin g employees ' interests i n these
jurisdictions.
Following the `variety of capitalism' approach and the `legal origin'
hypothesis, we would expect that no priority should exist in Britain, whereas
France and Ger many should prot ect employee s' through ins olvency
priorities. A comparative analysis has revealed a much more complex and
faceted scenario. In particular, the German regime, by abolishing priorities in
1999, seems to be more in line with an ideal-type of `liberal market
economy', while the British regime and the French regime are more coherent
with their standard classifications. Furthermore, if we turn our attention to
the situation during the seventies, we note that in Britain the real value of the
cap placed on employee priority was quite high and that in Germany
employees also enjoyed a super-priority, similarly to the French system. This
longitudinal picture, therefore, reveals a quite univocal result: that employ-
ment protection has been reduced over the last forty years in Britain and in
Germany, and is now entrusted only (or predominantly) to social security
schemes.
At a more general level, the classification of the United Kingdom as a
pure liberal market economy can explain why secured creditors' preferential
treatment has never been challenged. Nevertheless, this classification cannot
fully explain why in the seventies the British government decided to increase
the cap of employee priorities to a high value, which altered their relations
with other unsecured creditors. In the United Kingdom, therefore, different
281
113 Secunda, op. cit., n. 1, p. 874.
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social and political forces can succeed in imposing their interests and views
and can alter established equilibriums, although these forces have not
managed to alter the economic and political predominance of the financial
system, which requires secured creditors' absolute priority to be respected.
The case of Germany is even more complex and curious: in 1994, German
political elites decided to completely abolish any statutory priorities, includ-
ing employee priorities; the consequence is that the German regime of today,
at least in this regard, by fully respecting pre-insolvency entitlements, is
much more in line with the ideal-type of a `liberal' market economy.
In order to make sense of this development, we have turned our attention
to the relation between labour and capital. When employees are not
prioritized, their claims are treated like any other trade partners' claims and,
consequently, labour is conceived of as any other commodity that is pur-
chased by a company on a market. By contrast, if employees enjoy a
statutory priority, politics treats workers differently from other creditors.
Therefore, rules on employees' ranking shed light on profound tendencies in
a country's political economy, which can probably only be explained as an
element of much broader and long-term historical developments. Finally,
this article takes issue with the idea that employee priorities and social
security schemes are functional equivalent. This study has shown that it is
not irrelevant whether employees, besides social security protection, also
enjoy a priority or not. These mechanisms are indeed strictly intertwined,
because social security schemes in France, Germany, and Britain are
subrogated to employees' rights and, therefore, if employees rank in priority
over other creditors (in the guise of either a super-priority or a simple
priority), the insurance fund should also be treated preferentially, whereas if
no employee priority exists, the claims of the insurance fund towards the
insolve nt employ er are rank ed equal wi th other un secured c laims.
Employees' priorities, therefore, reinforce the long-term financial viability
of social security schemes, but, ironically, they also place the ultimate
burden on other unsecured creditors' shoulders. In a system with a super-
priority, such as France (or Germany until 1999), the insurance scheme can
recover a significant portion of the total amount paid, while in systems
without priorities (Germany) or with a priority capped at a low level
(Britain) the social security scheme suffers a haircut like any unsecured
creditor. Therefore, a mere description of these two mechanisms ± statutory
priority and a social security scheme ± as functional substitutes does not give
a proper account of their legal interconnections and their reciprocal
embeddedness.
282
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