History of Insolvency and Bankruptcy EDITED BY KARL GRATZER AND DIETER STIEFEL SÖDERTÖRN ACADEMIC STUDIES 38 History of Insolvency and Bankruptcy from an International Perspective Edited by Karl Gratzer and Dieter Stiefel Södertörns högskola 2008 Södertörns högskola S-141 89 Huddinge 2008 Södertörn academic studies 38 ISSN 1650-433X ISBN 978-91-89315-94-5 Picture on front cover: Portrait of Eduard Kosmack by Egon Schiele, 1910 Picture on back cover: The Capture of the Nuremberg patrician Hieronimus Paumgärtner by A.v. Rosenberg at Windsheim, 1552, by Mathias Zündt, German artist, 1498 – 1572. The Publishing Committee of Södertörns högskola gratefully acknowledges the sup- port of the Foundation for Baltic and East-European Studies for the publication of this volume. Contents Karl Gratzer Introduction.....................................................................................................5 Part I: National macro-oriented studies Karl Gratzer Default and Imprisonment for Debt in Sweden: From the Lost Chances of a Ruined Life to the Lost Capital of a Bankrupt Company ......................15 Margrit Schulte Beerbühl The Risk of Bankruptcy among German Merchants in Eighteenth-century England .........................................................................................................61 Sakis Gekas Credit, Bankruptcy and Power in the Ionian Islands under British rule, 1815-1864 .....................................................................................................83 Part II: Micro-oriented studies Michel Fior Financial Instability in Transition Economies during the 1920s: The European Reconstruction and Credit-Anstalt Insolvency...........................119 Philip Ollerenshaw Innovation and Corporate Failure: Cyril Lord in UK Textiles 1945-1968 ...................................................................................................143 Mirko Ernkvist Down Many Times, but Still Playing the Game: Creative Destruction and Industry Crashes in the Early Video Game Industry 1971-1986 .........161 Richard D. Gritta , Bahram Adrangi, Sergio Davalos & Don Bright A Review of the History of Air Carrier Bankruptcy Forecasting and the Application of Various Models to the US Airline Industry, 1980-2005.....193 Jeanette Fors A Network Perspective on Bankruptcies, Mergers and Acquisitions .........215 Part III: A comparative legal perspective M. Teresa Ribeiro de Oliveira Economic Policies and Bankruptcy Institutions: Brazil in a Period of Transition from Colony to an Independent Nation .....................................241 Paolo Di Martino The Historical Evolution of Bankruptcy Law in England, the US and Italy up to 1939: Determinants of Institutional Change and Structural Differences..................................................................................................263 Dieter Stiefel Insolvency and Privatization: The European Transition Economies in the 1990s...........................................................................................................281 Annina Persson Security Interest and Insolvency: A Comparative Analysis between Swedish, Estonian, Latvian and Lithuanian Law........................................299 Introduction Karl Gratzer This book brings together new international research on bankruptcy and in- solvency. The book is divided into three sections and consists of 12 chapters. The first section deals with national and macro-oriented studies. Micro- oriented case studies are collected in section 2. Studies with a comparative legal perspective are presented in section 3. However, two major themes connect the studies in sections one, two and three. In particular, the book is held together as a unit by the institutional theoretical framework, which is very clear in several cases while it serves more as an underlying screen in others. The second theme that ties the chapters in the book together is the explanations for the reasons of bankruptcy. The analysis of underlying rea- sons for insolvency plays an important role in several articles. All contributions try to answer questions about these problems from dif- ferent perspectives, subject-specific traditions and levels of investigation. The researchers who participate in the book are from various disciplines in the social sciences but are brought together by the same object of study. The represented disciplines are law, business administration, financial eco- nomics, economics, statistics, history and economic history. The interdisci- plinary approach is illustrated in the mixture of chosen empirical, methodo- logical and theoretical connections. It is hoped that the book can provide more in-depth insights into some of the general problems that research on insolvency is wrestling with today. In particular, this applies to questions that concern explanations, processes and effects: Why did the bankruptcy system emerge? How and why did the system change? Was the change in the bankruptcy system related to other parallel processes? What were the effects of the institutional changes? The contributions in the book put these ques- tions into a larger context of Europeanization, globalization and change. The emergence and change of the bankruptcy system A connecting concept that links together the chapters of the book is institu- tional change. The history of credit is probably as long as the history of hu- manity. When an individual applies for credit or borrows money, he or she enters some kind of written or oral agreement. If there is no repayment, the 5 debtor breaks a contract that is considered fundamental in every economy. The treatment of people who have become insolvent can thus give us an in- dication of how those who failed or could not fulfill their borrowing con- tracts have been considered from the point of view of the legislator. Already in Classical Antiquity, different systems were created to deal with insol- vency. Bondage, corporal punishment and debtors’ prison were used. Europe remained without a (well-) functioning bankruptcy system for a long time. Such a system did not develop until the period of the prosperous Italian me- dieval commercial towns. An insolvent person was thus dealt with according to common law or according to regulations that had emerged before or out- side a bankruptcy system. The debtor was dealt with in harsh terms and in- solvency was thus considered as equal to theft from the creditor. A reason for this was that in Europe the Roman notion fallitus ergo fraudator (insol- vent thus a swindler) worked like a distorting shadow to explain how insol- vency had occurred. This continued late into the nineteenth century. Thus, undesired characteristics, such as pride, vanity and an exaggerated tendency to speculate, were often considered as reasons for insolvency. Debtors’ prison was created to force a debtor who a priori was considered a swindler to reveal possibly hidden sources. The system of debtors’ prison allowed time-limited custody in jail or “debtors’ prison” for a debtor who did not ful- fill his or her financial obligations. For several centuries, the system co- existed with a slowly emerging bankruptcy system. Corporal punishment and prison sentences were disappearing and the debtor was less and less sub- jected to social stigma during the eighteenth and nineteenth centuries. The emergence and spread of joint stock companies, changes in the credit market and knowledge about the existence of the business cycle movements were factors that served to depersonalize further the notion of the reasons for in- solvency. A more varied picture of the reasons for economic failure slowly emerged and many countries established modern bankruptcy laws in the mid-nineteenth century. From the mid-nineteenth century and onwards, bankruptcies are increasingly seen as an economic rather than as a moral failure. It became easier for entrepreneurs who had failed to return with a new business after a bankruptcy. The original aim of the bankruptcy system was to achieve equality among creditors in questions of loss upon debtor’s insolvency. If there were no rules regulating insolvency, all possibilities of obtaining any kind of payment in connection with a debtor’s insolvency would be entirely dependent on being first with one’s execution claims. There would be a race among creditors for the debtor’s assets. A bankruptcy system creates a completely different situa- tion. There is a decrease in the incentives for racing since each creditor and debtor can file for bankruptcy and thus obtain equal conditions for the credi- tors. At the same time, it then becomes possible to make other agreements that ensure the continued existence of viable firms in crisis. The regulatory system thus affects the frequency of bankruptcies. In general, creditors and 6 debtors have contradictory motives and goals. The legislator must try to find an acceptable compromise between these two parties. The law can also be debtor-biased or creditor-biased. On a sliding scale, it is thus either the debtor or the creditor who is most favored in a bankruptcy. The creditor- biased perspective means that the focus is on the executive procedure and that the creditors are to be paid on as equal conditions as possible. The legis- lation builds on the old classical view of the principle of fairness and equal- ity. This view has long been predominant in European legislation. In the 1990s, there was an intensive ongoing debate on the design of the future bankruptcy legislation. One of the bases for this discussion originated