By Kevin Davis (New York University), Mariana Pargendler (Harvard Law School), and Maria Eduarda Lessa (No affiliation)
Our recent working paper examines how priority of workers’ claims vis-à-vis secured claims in insolvency varies across jurisdictions and over time to provide a window into the shifting treatment of distributional or social justice considerations in private law. The comparative literature has traditionally focused on the extent to which laws in the Global South are either legal transplants from European countries belonging to the same legal family or have adhered to “neoliberal” prescriptions from the United States or international organizations such as the World Bank and UNCITRAL. At the same time, recent scholarship on legal heterodoxy suggests that Global South jurisdictions have innovated in incorporating broader distributional or public policy objectives in private law.
In this paper, we map the evolution of workers’ and secured creditors’ priorities in the five largest economies in each of the Global North (the U.S., Germany, Japan, the U.K. and France) and the Global South (China, India, Brazil, Mexico and Indonesia). We find that the influence of external models does not fully explain the variation we observe. First, there is significant diversity within the Global North: strict secured creditor priority—promoted by international organizations and adopted in the U.S., Germany and Japan—is not universal. France prioritized workers over all creditors as early as 1935. The U.K. limits secured creditors’ priority over workers to fixed charges.
More significantly, our findings provide evidence of legal heterodoxy in the Global South. In a display of South-driven legal innovation, Mexico enshrined the priority of workers’ claims over all other claims in its 1917 Constitution, nearly two decades before comparable French legislation. Brazil enacted laws giving rural workers priority in 1906. India departed from the U.K. model in 1985, ranking certain workers’ claims on par with secured creditors. While Indonesia’s Supreme Court initially interpreted contradictory laws in favor of an IMF-supported bankruptcy law prioritizing secured claims, it reversed course in 2015 holding that the constitution required worker priority over secured creditors. Even China, which formally adopted orthodox approaches in 2006—following extensive internal debate—has maintained a more heterodox, worker-protective regime for key economic sectors. In sum, four of the five largest Global South jurisdictions have not merely imported laws from Global North origin systems or yielded to international pressure favoring creditor-friendly models.
An important caveat, however, is that jurisdictions that recognize wage priority—including France, Mexico, and Brazil—have witnessed the emergence of bankruptcy-remote security devices which undermine workers’ rights to preferential payment. We conclude by suggesting that Global South jurisdictions maintain heterodox priority rules because of limited capacity to establish and maintain effective wage guarantee funds. None of the states in the Global South which give priority to workers’ claims have created wage guarantee funds while such funds are common in the Global North. In short, our study documents significant Global South innovation in insolvency law, exposes the limits of accounts focused on legal transplants and neoliberal influence, and underscores the need to recognize the agency and distributive choices of Global South lawmakers in shaping business law.
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