Legal Heterodoxy in the Global South: Priority of Workers versus Secured Creditors in Insolvency

Our recent 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 business law. We focus on the extent to which innovation, rather than legal transplantation or adoption of international models, explains the trajectory of insolvency law in the Global South. 

The comparative literature has long emphasized the influence of external forces on legal development in the Global South, focusing on transplants from European countries within the same legal family or, more recently, adoptions of ‘neoliberal’ prescriptions advocated by international organizations such as the World Bank and UNCITRAL. Similarly, Duncan Kennedy’s classic work describes how France and Germany drove the globalization of ‘the social’ in the first half of the twentieth century, while casting recent decades as a period of neoliberal triumph.

Recent scholarship on legal heterodoxy (here and here) has highlighted the limits of such accounts, suggesting that Global South jurisdictions have at times innovated in incorporating broader distributional or public policy objectives into private law. In this paper, we map the evolution of workers’ and secured creditors’ priorities in the five largest economies of both the Global North (the US, Germany, Japan, the UK, and France) and South (China, India, Brazil, Mexico, and Indonesia). By focusing on this area — which directly implicates the conflict between capital and labor — we are able to characterize legal systems in terms of their ex post distributive orientation. We find that the influence of external models does not fully explain the patterns of variation we observe. 

First, there is significant diversity within the Global North: the strict priority of secured creditors promoted by international organizations and embodied in U.S., German, and Japanese law is not universal. For example, France gave workers priority over all other creditors as early as 1935. The UK limits secured creditors’ priority over workers to fixed charges. 

More significant, however, is the record of legal innovation in the Global South. Mexico granted workers’ claims priority over all other claims in its 1917 Constitution, nearly two decades before comparable French legislation. Brazil enacted laws designed to give rural workers priority as early as 1906. More recently, in 1985, India departed from the UK model by ranking certain workers’ claims on par with secured creditors holding fixed charges. Finally, after initially endorsing an IMF-supported bankruptcy law favoring secured claims, in 2015, the Supreme Court of Indonesia reversed course and ruled that giving workers’ claims priority over secured creditors was required by the constitution.

In short, four of the five largest Global South countries did not simply import laws from origin systems in the North, nor did they yield to pressures from international financial institutions to adopt creditor-friendly models.  Even in China, which formally adopted the orthodox approach in 2006, the process was shaped by internal debate and important segments of its economy remained subject to a more heterodox, worker-protective regime.

Our findings should be interpreted in light of the substantial complexity and contestation that characterizes this body of law. We encountered significant disagreement over the meaning of statutory text, constitutional challenges to existing provisions, and a practical reality where the order of payment is often subverted through sub rosa legal reforms. Jurisdictions that recognize wage priority—including France, Mexico, and, most conspicuously, Brazil—have witnessed the emergence of bankruptcy-remote security devices which effectively circumvent workers’ rights to preferential payment. 

We also explore potential explanations for legal heterodoxy in the Global South. Our earlier work points to a variety of possible factors, including state capacity, institutional complements, and high background levels of inequality. Here, we focus on state capacity. An alternative to giving workers’ claims priority is to create a wage guarantee fund. These funds are much more prevalent in the Global North than in the Global South. We tentatively suggest that states in the Global South embraced heterodox priority rules because they historically found it difficult to establish effective wage guarantee funds. 

In sum, our study documents and helps to explain significant innovation in insolvency law in the Global South. It highlights the limitations of dominant accounts focused on legal transplantation and neoliberalism, and underscores the need to recognize the agency, adaptation, and distributive choices of Global South lawmakers in shaping business law.

The authors’ paper can be accessed here. 

Mariana Pargendler is Beneficial Professor of Law, Harvard Law School.

Kevin E. Davis is Beller Family Professor of Business Law, New York University School of Law.

Maria Eduarda Lessa is an LLM Candidate, Harvard Law School.