ABSTRACT
This research considers compensation reserves and mandatory residual tort liability insurance to solve the judgment-proof problem. This insurance policy covers only the remaining tort liability after company liquidation. This research examines a situation in which companies can raise funds through equity financing to increase their compensation reserves instead of enhancing this mandatory insurance coverage. In this case, any company in operation is willing to raise sufficient funds to solve the judgment-proof problem, and the socially first-best situations are then achieved. These results are shown to hold even under incomplete information when companies raise funds from their existing shareholders, even though those shareholders have only the same information as do outside investors. Furthermore, this research explains that the extended liability to a company’s secured creditors can also achieve the same results as this mandatory insurance scheme, provided that companies can use the compensation reserves considered in this research.
Seshimo, Hiroyuki, Mandatory Residual Tort Liability Insurance and Compensation Reserves: A Proposal for Solving the Judgment-Proof Problem. Posted to SSRN 8 July 2025.
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