Law and Economics of the Floating Charge

A. THE CHALLENGE(1) Introduction(2) Scots law's justifications(3) Law and economics and securityB. EFFICIENCY(1) Efficiency generally(2) Efficiency and law(3) Measuring efficiencyC. THE PARETO SUPERIORITY OF THE SCOTS LAW FLOATING CHARGE(1) Position without floating charge(2) Effect on debtor(3) Effect on the secured creditor(4) Effect on adjusting creditors(5) Effect on non-adjusting creditorsD. CRITIQUE AND CONCLUSION(1) Critique(2) ConclusionA. THE CHALLENGE (1) Introduction ‘Much, and perhaps most, legal scholarship has been stamp collecting. Law and economics, however, is likely to change all that and, in fact, has begun to do so.’The structure of this chapter arose following a discussion between the author and Professor Hector MacQueen in which Professor MacQueen provided a challenge to the author. Defenders of the floating charge in Scotland, said Professor MacQueen, had always asserted the horrors that would arise if the floating charge was suddenly removed from Scots law without being replaced by any functional equivalent. However, they had never demonstrated any advantages that the floating charge provided to Scots law. The Professor's challenge to the author was, therefore, to use this chapter to demonstrate the economic advantage to market participants of the floating charge under Scots law.To meet this ‘Challenge’, this chapter is split into four parts. This first part (Part A) will explore the Challenge in further detail. It will review existing Scottish defences of the floating charge to examine whether the Challenge remains unanswered, and explore the general law and economics approach to security rights. The second part (Part B) will then examine the concept of efficiency and its use in law and economics. Having identified the strengths and weaknesses of different measurements of efficiency, the third part (Part C) will make the most ambitious claim of this chapter: that the floating charge under Scots law reflects a Pareto improvement: it makes at least one participant better off without making anyone worse off. It shall review this from the position of the debtor, the creditor and third parties. The fourth part (Part D) critiques these findings.The economic issues outlined point to a clear conclusion: the Scots law floating charge provides a clear economic advantage to companies in Scotland.