How lenient should the law on business failures be?

Summary The objective of this thesis is to determine the optimal degree of leniency in corporate default law. The French, American and British laws have different orientations. The French law is lenient towards the troubled manager, while the British law is severe. The American law falls between these two extremes. A lenient law increases the bargaining power of the distressed company's manager. On the other hand, a harsh law increases the bargaining power of creditors. But too much leniency or too much severity encourages the manager to invest in a suboptimal way. We analyze the game that pits the manager-owner, the bank and the judge. There is a problem of moral alea between the bank and the manager. In some states of the world, their interests may conflict. The manager can be incited, in case of difficulties of the company, not to provide all the efforts necessary to the success of his project. Anticipating these problems, the bank can be led to refuse to finance the project of the manager, which leads to a situation of credit rationing. We analyze the link between these problems and the degree of leniency of the law on business failures. On the one hand, a lenient law allows to avoid ex-post an inefficient liquidation of the firm. On the other hand, ex-ante, the law should not be too lenient in order to encourage the manager to make efforts. Finally, the degree of leniency of the law influences the possibility of reaching an amicable settlement of the difficulties which leads to efficiency gains. In fact, the optimal law acts in such a way as to restore the incentives of the bank and the manager to implement the project ex-ante, by rebalancing their chances of seeing their interests respected, in the event of bankruptcy, by the judge's decision to reorganize or liquidate ex-post.