The IP Lottery: The Role of Noise in Balancing Creditor and Stakeholder Interests in Insolvency Proceedings

Abstract

Abstract. Insolvency practitioners (IPs) manage and liquidate bankrupt estates. While their primary responsibility lies in prioritizing the interests of the collective creditors, they must also consider various other (societal) interests in their decision making. The law typically grants IPs discretion in balancing these interests, but this flexibility leads to variability in bankruptcy proceedings, resulting in legal uncertainty and inequality. This paper aims to introduce the reader to the psychological concept of noise (variability in judgments or decisions that ought to be identical) and to highlight the considerable level of variability in IPs’ decisions when balancing interests. More specifically, using examples from empirical studies we conducted in the Netherlands, the paper demonstrates how stakeholders in bankruptcy proceedings are at the mercy of IPs’ subjective judgements and that there is very little uniformity in their judgments. To reduce the level of legal uncertainty and inequality, this paper proposes further clarification on how IPs should navigate and balance interests in insolvency proceedings.