Enhancing efficiency through negotiation and minimizing transaction costs: application of Coase theorem to corporate insolvency

Abstract

Purpose Coase theorem is more interested in increasing the economic value of the transaction through a libertarian approach, i.e. free bargain than a utilitarian approach, i.e. maximum benefit to a maximum number of people. Ex ante Corporate Insolvency Resolution Process (CIRP) ensured that the stakeholders would arrive at an efficient outcome through bargaining and negotiation regardless of the initial allocation of legal rights. It also minimizes transaction costs to facilitate a voluntary resolution/settlement process; otherwise, it is costly to determine how much stakeholder value the same. The purpose of this study is to examine how the Coase theorem can enhance efficiency in corporate insolvency by facilitating effective bargaining and negotiation among stakeholders, minimizing transaction costs and ensuring optimal outcomes, regardless of the initial allocation of legal rights. Design/methodology/approach This research relies on a mixed method – quantitative data and qualitative data from the relevant stakeholders in the CIRP to verify the Coase theorem in the real world. The quantitative data collection involves a sample of 103 individuals categorized into three groups: advocates (71 participants), creditors (five participants) and resolution professionals (RPs) (27 participants). Qualitative data collection involves conducting personal interviews (PI) as the primary method, supplemented by panel discussions and observations during National Company Law Tribunal proceedings. Findings Insolvency and Bankruptcy Code (IBC) helps creditors to recover their dues through a cost-efficient ex ante CIRP process. The structure of IBC is to minimize the harm caused by the failure of a private agreement/settlement. However, when private negotiation/settlement fails, the insolvency law allocates the rights to the party who values them most. The CIRP process has prioritised the economic principle of high-value ownership, thus allocating the rights to the higher-value owner. Practical implications This study focuses on practitioner responses within the CIRP, including practical insights from advocates, creditors and RPs. Originality/value The IBC has substantially reduced transaction costs by streamlining provisions and imposing stringent timelines to facilitate smoother negotiations. CIRP is a unique mechanism that provides a group solution while maintaining the balance between the stakeholders’ welfare and the process’s efficiency.