A discussion of insolvency law
‘It is best if insolvent companies are liquidated as soon as possible and creditors paid out. Doing anything else with such companies is just not efficient’.
INTRODUCTION
It can be said that the actual development of the insolvency law has taken place over the last decade or so. Before, I embark on this paper, I feel it is imperative to define insolvency; it means the inability to pay debt or where the liability is more than the assets. For any business to grow and flourish it requires credit. ‘Credit gives a company leverage to increase its profit by undertaking more business than would be possible if it were restricted its own funds’1. If t he company is unable to repay its debts then insolvency law comes into the picture.
It appears that the legislators have envisaged to change the law from being a solely creditor- originated law towards it being sympathetic towards the debtor and striking a balance between both these aspects.
The essay that is being presented, deals with the controversial topic, as to whether an insolvent company should be immediately liquidated and the creditors should be satisfied, to the extent possible, or whether any other possibilities should be pondered over. The essay proposes to discuss the main objectives of the law, the changes brought in and the reasons why other options are viable. The essay then discusses the development and the importance and advantages of the rescue culture and the criticism it has faced. Finally, I have tried to reach to a conclusion as to whether an insolvent company shall be liquidated immediately or if it deserves a second chance.
The basic aim of insolvency law and the development of the rescue culture
It is interesting to note that the purposes of the insolvency law in this country were:
- To protect the creditors
- To balance the interest of competing groups on corporate insolvency
- To control and punish directors responsible for the fundamental collapse2.
However, insolvency of a corporate entity affects the economy and people at large. Keeping this in mind, the law has undergone a change and now the foremost aim is:
- To promote rescues. This aim is becoming increasingly valued, as society recognizes the need to minimise unemployment resulting from corporate insolvency3.
The Insolvency Act, 19854, was the first step towards the rescue culture by introducing the administration procedure; this was the recommendation of the Cork Committee5.
The Cork C ommittee stated that “we believe that the aims of a good modern insolvency law are:
(j) to provide means for the preservation of viable commercial enterprise capable of making a useful contribution to the economic life of the country6…”
The need for a rescue culture was felt after the dramatic failures of major corporates and their effects on the economy, community and the difficulties these failures brought. For instance, Olympia and York sank in 1991 under the weight of over $17 billion worth of debts. Bank of Credit and Commerce International collapsed in 1991; it had 250 branches operating in 69 countries with about $100 billion in total liabilities. It had 800,000 depositors scattered across the globe7.
The following words of Lord McIntosh8 bring out the intention of the legislature very clearly in this regard: “Company rescue is at the heart of the revised administrative procedure. We want to make sure that viable companies do not go to the wall unnecessarily…”.
The main aim of the rescue culture lies in the fact that not all companies become insolvent due to mismanagement or fraud. At times, the companies are unfortunate to be caught in a bad economic condition and are helpless to deal with situations.
The most important method that was introduced by the Act was Administration9. O ther informal ways to rescue a company include the Company Voluntary Arrangement, the London Approach, and re-organisations, also shows the various ways to rescue a company.
Arguments in favour of the rescue culture
‘Corporate rescue is to be defined as a major intervention necessary to avert eventual failure of the company10’.
Insolvency of any corporate entity affects many. In the first instance, it is the shareholders, creditors, management and employees. The important question that arises is when a company becomes insolvent, ‘should the primary concern be to maximise the benefits to the creditors? Or should it be to preserve the company or its business, even if this can only be done at some expense to creditor s’ rights? Is the primary concern the protection of private rights or of public interest?11’
It is a known fact that insolvency proceedings involve complex legal processes, further, to get all the claims organised and getting the assets evaluated requires a strenuous amount of work. Keeping all these factors in mind, the need was felt to develop and promote a rescue culture.
‘While the fact remains that most insolvent companies end up in liquidation, a number of companies whose fate would previously have been liquidation have been saved and nursed back to health and even where liquidation has ultimately supervened, administration and work outs have facilitated the sale of the company as a going concern or a more advantageous realisation of its assets and for a better return for creditors in the winding up12’.
The other opinion is that in insolvency, other matters should not be taken into consideration, but as stated by Karen Gross13 “The inability to translate the interests of community into money does not mean that they lack worth. Instead, it means that we have to consider ‘worth’ in both economic and noneconomic terms.”
As stated in the Cork Report: “ We believe that a concern for the livelihood and well being of those dependent upon an enterprise, which may well be the lifeblood of a whole town or even a region, is a legitimate factor to which a modern law of insolvency must have regard. The chain reaction consequent upon any given failure can potentially be so disastrous to creditors, employees and the community that it must not be overlooked14.”
Lord Sainsbury15 outlined the following objectives in the House of Lords16 :
- With a clearer focus on company rescue
- To secure a better return to creditors and a whole where company rescue is not practicable.
The rescue of Northern Rock17 proves the intention of the legislators. The purpose of the rescue of Northern Rock was seen to be to allow the company to continue to operate ‘ as a going concern’ . The Government was therefore intent on ‘ rescuing the company as a going concern18’.
According to Honourable Judge Saville, “ Administration is designed to revive and to seek the continued life of the company if at all possible19”.
The side of the coin – to what extent is a rescue culture helpful?
The other aspect for discussion is the point about the arguments against the rescue culture. It is rightly mentioned that a corporate reorganisation is like a gamble in which shareholders, creditors, managers, suppliers and workers all win with success, but where only creditors bear the cost of failure20. Once the company is having financial instability and will in every probability become insolvent, the question which arises is who is to be given more importance? Because the truth is all ‘rescues can be seen as, in some sense partial21’. Corporate rescue always involves a significant risk of failure22.
It appears that the new view is that public interest should be given importance and taken into consideration, but this opens a Pandora’s Box and questions arise as to what is public interest? What is the definition? To the extent all this can be taken into consideration?
Professor Andrew Keay states that it is a difficult task ascertaining the meaning of ‘ the public interest23’. The other difficulty is to reach a balance between the extreme views and to choose whether creditors’ benefits should be taken or the benefit of larger number.
The point that in administration the control of the company goes into the hands of a third party proves to be an impediment for companie s to opt for this method of rescue.
The fact that lies beneath is ‘liquidation is the end of the road for the troubled company’24.
The other opinion of many scholars is that as the relation between the creditor and debtor is a contractual one, there is no place for any other interest to be taken into consideration and it should be left for the parties to resolve the problems. This is an extreme view in favour of the creditors, but other aspects, like the affect on economy and employee problems, have been overlooked.
Conclusion
Should an insolvent company be liquidated immediately or does it deserve a second chance , is a question to be looked from both the angles. It is clear that to incorporate public interest in insolvency is a very difficult task25. Owing to the different interest involved in insolvency proceedings, it becomes difficult to achieve a balance. The nature of insolvency is such that it leaves room for someone to suffer and to complain26.
However, it is imperative to note that insolvency law cannot be treated like ‘an island; it affects other areas of law and other areas of life27.’ An insolvent company is bound to have an e ffect on others as well. It is a good option to give the company a second chance in order to stop the continuing e ffect which insolvency of one company may have.
BIBLIOGRAPHY
TEXTBOOKS
Belcher Alice, ‘Corporate Rescue: A Conceptual Approach to Insolvency Law’, (Sweet & Maxwell, 1997).
Bhandari Jagdeep S, Weiss Lawrence A, ‘Corporate Bankruptcy: Economic and Legal Perspectives’, (Cambridge University Press, 1996).
Carruthers G Bruce, and Halliday C. Terrence, ‘Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States’ (Clarendon Press, 1998).
Dennis Vernon, Fox Alexander, ‘The New Law of Insolvency: Insolvency Act 1986 to Enterprise Act 2002’, (Law Society, 2003).
Finch Vanessa, ‘Corporate Insolvency Law: Perspective and Principles’, (Cambridge University Press, 2002).
Gavin Lightman, Moss, Gabriel S, ‘The Law of Receivers and Administrators of Companies’, (Sweet & Maxwell, 2000).
Goode Roy, ‘Principles of Corporate Insolvency Law, (Sweet and Maxwell, 2005).
Hicks Andrew and Ghoo S.H, ‘Cases and Materials on Company Law’, (Blackstone Press, 4th edition).
Keay Andrew and Walton Peter, ‘Insolvency Law: Corporate and Personal’, (Jordans, 2008).
Milman D and Durrant C, ‘Corporate Insolvency Law and Practice’, (Sweet & Maxwell, 1994).
Mokal Rizaan J, ‘Corporate Insolvency Law’, (Oxford University Press, 2004)
Pennigton’s Corporate Insolvency Law, (Butterworths, 1997).
Tolmie Fiona, ‘Corporate and Personal Insolvency Law’, (Cavendish Publishing, 2003).
ARTICLES
Dawson Ian, ‘The Administrator, Morality and the Court’, Journal of Business Law, (1996).
Finch Vanessa, ‘The Measures of Insolvency Law’, 17 Oxford J. Legal 227 (1997).
Finch Vanessa, ‘Security, Insolvency and Risk: Who Pays the Price’, 62 Mod. L. Rev 633 (1999).
Gross Karen, ‘Taking Community Interest into Account in Bankruptcy: An Essay, 72 Wash. U. L. Q. 1031 (1994).
Keay Andrew, ‘Balancing Interests in Bankruptcy Law’, 30 Comm Law World Rev 206 (2001).
Keay Andrew, ‘Insolvency Law: A Matter of Public Interest? 51 N.Ir Legal Q 509 (2000).
ELECTRONIC RESOURCES
Association of Business Recovery Professionals – www. r3.org.uk
HeinOnline – www.heinonline.org
Insolvency Services – www.insolvency.gov.uk
Westlaw UK – www.westlaw.co.uk
1Roy Goode, ‘Principles of Corporate Insolvency Law’ (Thomson, Sweet & Maxwell, 2005, Student edition), 2.
2Milman and Durrant ‘Corporate Insolvency Law and Practice’ (Sweet and Maxwell, 1999), 1
3ibid
4Henceforth referred as the Act.
5The Review Committee on insolvency law and practice was set up in 1976 to review insolvency law and practice and to consider what reforms were necessary and desirable, it was chaired by Sir Kenneth Cork.
6Report of the Review Committee, para 198.
7These instances were cited in the book by Bruce G. Carruthers and Terence C. Halliday- ‘Rescuing Business – The Making of Corporate Bankruptcy Law in England and the United States’ – Clarendon Press, 1998 – 1.
8While steering the Enterprise Bill through the House of Lords.
9Under this process an administrator is appointed to achieve the preservation of the company. It offers the opportunities to rescue companies or their business. As stated in Andrew Hicks and S. H. Goo ‘ Cases and Materials on Company Law’ – Blackstone Press.
10Alice Belcher ‘Corporate Rescue’ (Sweet and Maxwell- 1997), 36.
11Roy Goode, ‘Principles of Corporate Insolvency Law’ (Thomson, Sweet & Maxwell, 2005, Student edition), 4.
12Roy Goode, ‘Principles of Corporate Insolvency Law’ (Thomson, Sweet & Maxwell, 2005, Student edition), 315
13Karen Gross ‘Taking Community Interests into Account in Bankruptcy: An essay, 72 Wash. U.L.Q 1031, 1994- 1046
14As stated in para 204. This was referred in the article by Andrew Keay, ‘Insolvency law: A Matter of Public Interest? 51 N. Ir. Legal Q. 509- 518.
15Parliamentary Under- Secretary of State of Trade Industry.
16These objectives were stated, on the second reading of the Enterprise Bill on July 2, 2002.
17Northern Rock is a British Bank. The collapse and rescue of which took place in September 2007. The Bank of England, to rescue the bank decided to give £28 billion in public funds.
18Professor Roman Tomasic ‘Corporate Rescue, Governance and Risk-taking in Northern Rock: Part 1’ Comp. Law. 2008, 29(10), 297-303, This article was originally presented at the Colloquium on Future Trends in International Insolvency Law, held at Nottingham Trent University in June 2008.
19In Re MTI Trading Systems Limited (1996) B.C.C 400 at 403.
20Bruce G. Carruthers and Terence C. Halliday ‘Rescuing Business- The Making of Corporate Bankruptcy Law in England and the Unites States’ (Clarendon Press) 1998, 244
21Alice Belcher ‘Corporate Rescue’ (Sweet and Maxwell, 1997), 23.
22Ibid, 85
23Andrew Keay ‘ Insolvency Law: A Matter of Public Interest’ 51 N. Ir. Legal Q. 509, 520.
24Vanessa Finch ‘Corporate Insolvency Law – Perspective and Principles’ (Cambridge University Press-2002), 369.
25Andrew Keay, Balancing Interests in Bankruptcy Law, 30 Comm. L. World Rev. 211, 2001- 216
26Ibid, 235.
27Andrew Keay, Insolvency Law: A matter of Public Interest? 51 N. Ir. Legal Q. 509- 530.