The Theories Underpinning Corporate Example for Free

Check out more papers on Civil Law Economy

Introduction The corporate insolvency concerns different parties with an interest in the business and those interests may resulted in conflicts and tensions between them. The existence of corporate insolvency law attempts to balance the interests of the competing stakeholders, such as creditors, employees, local community and the public. While on one hand, insolvency law is to focus on the creditors’ interest, on the other hand, insolvency law serves to embrace a wider role as to consider interests of various constituents in the society.

Don't use plagiarized sources. Get your custom essay on

“The Theories Underpinning Corporate Example for Free”

Get custom essay

Thus, this has pointed to the debates on the fundamental principles such as the theoretical foundations and objectives of corporate insolvency law. UK insolvency law has developed in a pragmatic and piecemeal way[1], with various perspectives exerting varying degrees of influence over the current law. In view of the importance of theories underpinning corporate insolvency law to a proper understanding of the objectives and principles of the law, it is necessary to review various theories on how they have constructed and moulded the insolvency procedures. Creditor Wealth Maximisation vs Communitarian vision According to the Creditor Wealth Maximisation (CWM) theory, the main objective of insolvency law is to maximise the collective return to creditors whereby the company creditors agree to a collective procedure to enforce their claims rather than procedure of individual actions.

[2] It follows that rehabilitation of the corporate enterprise is not a legitimate goal of insolvency law except to the extent that it is intended to maximise returns for the existing creditors. These theories emphasises that the insolvency law must respect the existing pre-insolvency creditor’s rights where distribution is relied upon. Therefore, insolvency law is not considered to concern itself to protect the interests of other than creditors affected by the failure of corporate enterprise. Keeping firms in operations is this not seen as an independent goal of insolvency law. The problem with this approach is that strict adherence to this rule is likely to produce injustice vis-A -vis other parties, such as the employees and members of the community. In contrast with the emphasis on private rights contained within the CWM approach, the communitarian vision sees insolvency processes as weighting the interest of a broad range of different constituents. It does not just take on board the creditor’s interest but the interests of other like employees, suppliers, and local community

[3] are also considered.

This approach permits the insolvency procedures to rehabilitate commercial enterprises where this would have a better result for the community in protecting jobs even at the expense of some other rights. The communitarian theory also argues that insolvency law should cater for the survival of businesses and to their proper dissolution.

Competing objectives and various theories have provided a fundamental basis of how may the design of procedures a jurisdiction be based. However, based on different historical, social and cultural background of different countries, the balance and collaboration of different objectives may seek to shape the best design for insolvency law. Liquidation Liquidation is the most commonly used insolvency procedure and it has been widely used for centuries in the UK. It is the final step before a company’s dissolution and is the process whereby the assets of the company are collected and realised. Upon dissolution, the liquidator will then need to use the assets to meet the company’s debt and liabilities. The distribution of assets is generally subject to the pari passu rule, which means that creditor receive an equal share of the company’s assets.

However, the pari passu rule is subject to several exceptions according to the statutory creditor priorities. To certain extent, the foundation of the liquation procedures seems to lie in the CWM doctrine which has dominated the insolvency field and continues to have a profound influence. The process of liquidation is designed to ensure that the return to creditors as a group is maximised. This collective approach of liquidation procedure has reflected in Jackson’s assertion

[4] that insolvency law is essentially a debt collection device where the creditor bargain provides for the individualistic regime to be replaced by a collective one. However, the CWM theory is fundamentally flawed in alleging that pre-insolvency entitlements are designed with an eye to ongoing contractual relationships. This argument can be supported by asserting that a core and proper function of insolvency law is to pursue different distributional objectives than are implied in the body of pre-insolvency rights; that insolvency law does so by adopting a base-line rule on equality- pari passu- and by then making considered exceptions to that rule.

Notwithstanding the drawback of CWM theory, protection and maximization of creditors’ wealth is still a basic objective in the present Insolvency Law. To facilitate the development of a capitalist economy, new business venture and entrepreneurialism must be encouraged. However, due to the lack of funds and loans, the Government is counting on private credit lending such as banks and building society to provide such funding. As such, there is a need for this society to promote creditor lending and hence the insolvency regime to ensure the privilege of creditors is preserved. Although the CWM vision may have dominated and that public interest is not the major aim for instigating insolvency proceeding, the procedure itself still underpins a notion of public protection. This can be exemplified by the fact that liquidation procedure involves the investigation of the affairs of an insolvent company, to ensure any conducts of violation by the debtors or management of the insolvency company will be subjected to criminal or statutory sanctions.

Supporting the above view, Morkal[5]argues that ‘liquidation, aside taking care of the interest of the creditors, also regards the public interest by making sure the insolvent company has not violate commercial morality.’ The Cork Report

[6] In regard of the ambiguity created between competing interests in an insolvency procedure, devising principles based on sound theory is critical to insolvency law. However, thus far, the law has developed in an ad hoc fashion largely devoid of clear principles.

[7] In view of formulating clear objectives of the English insolvency law, the Cork Committee (1982) has played a vital role in framing a sound system for the Insolvency Act 1986 and later provisions. The Cork Committee suggested that reform was needed to shift UK’s insolvency procedure away from the pro-creditor regime towards a more practical rehabilitation approach. This is to encourage viable business to continue operate as possible in order to obtain more value than which might be obtained from standard liquidation. Although the legislation still not yet lay down a formal statement or set of objectives of the purpose of insolvency law, the introduction of various procedures does evident that UK insolvency law tends to foster a business rescue culture. The rescue culture Corporate rescue law is regarded as an essential feature to promote well functioning of market economy. It aims to enable companies to overcome difficulties and to restore financial health.

The introduction of Administration procedures suggests a move away from the old receivership process by which a company might be saved, rather than to dissolute, in times of financial difficulties. It facilitates the preservation of the economic value of the business in a manner that would not be possible in case of liquidation, resulting in higher returns to creditors. This illustrates the UK’s commitment to the goal of saving business from fatality at all costs and to safeguard the prosperity of a capitalist jurisdiction.

Likewise, the introduction of voluntary arrangements addresses the weakness of ‘debt collection’ agenda and move towards a rescue approach to promote rehabilitation process through arrangements agreed by the company with its creditors. These new provisions provide an easier and more efficient initiation of corporate rescue. Lower cost and simpler procedure will benefit the corporations, especially small entrepreneurships. The rescue culture does coincide with the communitarian vision which emphasises on a variety of constituent interest especially the public interests.

[8] This approach supports the insolvency procedures to rescue commercial entities where this would yield a better outcome for the community even at the expense of some other rights.

[9] The communitarian vision contests that insolvency law should cater for the public benefits resulting from business continuity. In this respect, the Cork Committee’s statement endorses aspects of communitarian theory in emphasising that insolvency not only affects interests in community beyond insolvents and their creditors, but that the procedure should offer means to preserve viable businesses capable of contributing to the economic prosperity of the country.[10] At the outset, the corporate rescue laws may seem to endorse solely the communitarian vision in acknowledging broad interests of the society.

Indeed, the statutory goal of the rescue procedures has reflected the CWM vision to certain extent in achieving realisation of assets for creditors while upholding the fundamental role of protecting creditor’s rights. This can be seen that while rescuing the business is a concern to facilitate the capitalist economy, the ultimate goals still lies in providing higher and better returns to creditors. In addition, the practice nature of the court in dealing with cases also shed some light on the situation of the insolvency reality. In England, judges tend to favour the financiers; bankers appear to have acquired respectability over the centuries whereas those who take risks in business have not. It is just to say that generally these parties are given special treatment in insolvency because of the profound regulatory concerns that affect these industries. This indicates that a more creditor-favoured regime is the prevailing phenomenon within the insolvency procedures. Albeit the rescue culture has been seen as being biased towards the enforcement of the creditor’s rights,[11] yet as suggested by Finch, “the route to a clear design of a rescue regime is to decide on an appropriate balance of interests and to set up a procedure that pursues those interests consistently with that balancing.” [12] Ongoing trend towards a rescue culture While it cannot be said with certainty that there is a uniform adherence to either end of the theory spectrum in designing the insolvency procedures, it is safe to say that different jurisdictions are continually making changes to their insolvency laws to focus on continuation of the business and preservation of jobs rather than on assets realisation for the benefits of creditors and on liquidation of insolvent companies. Similarly, the UK’s Insolvency Act of 1986 has been reformed by the Enterprise Act 2002 to reflect the UK government corporate rescue incentive.

Here too, the ethos is the assisting of the rehabilitation of viable businesses to be accomplished by tilting the balance in favour of the administration procedure deemed capable of accounting for the interests of all affected parties and restricting the use of administrative receivership which used to give a single secured creditor effective control over the insolvencyprocedure. In view of employment protection, there is also an emerging trend which suggests the notion that when a company is insolvent the only interests deserving consideration are those of its creditors can no longer be sustained. Employees are beginning to find favour for the protection of their interests in the legislative arena in which insolvencylegislation has been previously crafted. The insolvency Act 1986 provisions on preferential debts also offer some assistance to employees.[13] It was seen that the legislation gives preferential priority to unpaid wages and accrued holiday pay owed.[14] This means that such payments are payable out of the available assets of the company prior to unsecured claims and claims secured by floating charges but after relevant insolvency expenses and other secured claims. [15] In addition, source of statutory protection also flows from employment and the social security system.[16] Employees of an insolvent company are entitled to claim against the state National Insurance Fund on the terms set out in the Employment Rights Act 1996.[17] These provisions enable employees to launch a claim for a range of compensations such as unpaid arrears of wages and award for unfair dismissal. Further evidence in supporting employment protection can also be seen in the TUPE Regulations.[18] Under the Regulations, a transfer of an undertaking passed contracts of employment over to the transferee and previously employed persons became employees of the transferee under the same terms and conditions as were set out in their initial contracts.[19] The provisions make it easier for insolvent business to be transferred to new employers and thus facilitate the rescue of the business as an “ongoing concern”.[20] Future development Regardless the ongoing trend of the society in favouring a rescue culture, ambiguity of theoretical consistency in the legal framework still produce high cost, inefficiency and unfairness. It may be responded that laws can never be certain, that judges have to apply rules to differing circumstances, and to adjust criteria, standards, and rules to cope with changes in such matters as business practices and ways of setting up commercial relationships.

There is however, an important distinction to be drawn between the unavoidable uncertainties that flow from the factors and the unnecessary uncertainties that arise because inconsistent theories are varying with each other in driving legal developments. It is therefore suggested that the issue of theoretical deficiency can be addressed by adopting an ‘explicit values’ approach[21] to the design and evaluation of corporate insolvency process. This is an approach that is applicable to all corporate insolvency procedures and encourages the development of mechanisms that are consistent in so far as they are to a common philosophy and to a limited number of identifiable values. It seeks to embrace both the public and private dimensions of corporate insolvency law. Such an approach does not offer the certainty or the authority that flows from a single theoretical vision of the just insolvency system but on a much safer outcome and practical ground with incorporating values of efficiency, expertise, accountability and fairness. It is envisaged that insolvency law should be assessed and redesigned with an eye to operational matters and not merely to the formal rules. Albeit the explicit value approach is merely an academic point of view, it provides a structural foundation in offering guidance to the future development of insolvency procedures. Conclusion Insolvency Law can be seen, to date, as a chaotic piece of legislation encompassing different theoretical ambiguities. Notwithstanding the lack of consistency, theories play a pivotal role in providing fundamental basis of the purpose and limit of insolvency doctrines.

Theory can assist in explaining what the means and ends of insolvencylaw should be, without dictating what the best or most efficient proposal for achieving that end should be.[22] Yet, the paramount goal of a normative theory of insolvency law is, as suggested, to ascertain an fundamental perspective on values that underpin current law.A theory provides direction for resolving problems of conflicting values inherent in insolvency procedures[23] and may yield explicit, but never perfect, solutions to particular insolvencyproblem.[24]As opined by Etukakpan, ‘The success of any given theory should not be justified by how well it resolves every value-based insolvencyquestion.’[25] Rather, it is judged by its competence to recognise the nature of the values and objectives on which the law is founded, and then in its ability to provide a meaningful prescription regarding how the current law should be balanced or preserved. [26]

[1] Christopher F. Symes, Statutory Proirities in Insolvency Law (Ashgate, 2008) p.51

[2] Thomas Jackson, The Logic and Limits of Bankruptcy Law (Harvard University Press 1986) Chapter 1 and 2

[3] Andrew Keay & Peter Walton, Insolvency Law: Corporate & Personal (Pearson, Longman 2008)

[4] DG Baird, TH Jackson ‘Corporate Reorganisations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy” (1984) 51 University of Chicago Law Review 97.

[5] Rizwaan Mokaal, ‘What Liquidation does for Secured Creditors, and what it does for you’ (2008) 71 MLR 699-733

[6] Report of the Review Committee on Insolvency Law and Practice(1982) Cmnd 8558

[7] Andrew Keay, ‘Balancing interests in Bankrupcty Law’ [2001] CLWR206.

[8] K Gross (1994) ‘Taking Community Interests into Account in Bankruptcy: An Essay.’ Washington University Law Quarterly 72

[9] Vanessa Finch, Corporate Insolvency Law: Perspective & Principles (2nd ed. Cambridge University Press, 2009) [10] Cork Report, para. 198(i) and (j). [11] Douglas Baird & Thomas Jackson, , ‘Corporate Reorganisation and the Treatment of Bankruptcy’, 51 University of Chicago Law Review, 98. [12] Vanessa Finch, ‘The Measures of Insolvency Law’ (1997) 17(2) OJLS 227. [13] Insolvency Act 1986 s. 386 and Sch.6. [14] Ibid. Sch.6, Category 5. [15] Ibid. Sch.6, Category 5. [16] L. Clarke and H. Rajak, ‘Mann v. Secretary of State for Employment’ (2000) 63 MLR 895. [17] Employment Act 1996 ss. 166-70 and 182-90. [18] Transfer of Undertakings (Protection of Employment) Regulations 2006. [19] Ibid.

Regulation 4, 7 and 10. [20] Insolvency Act 1986 Sch. B1 para3. [21] V. Finch, Corporate Insolvency Law: Perspective & Principles (2nd ed. Cambridge University Press, 2009) [22] K. Mooney, ‘A Normative Theory of Bankruptcy Law’(2003) < id=425120>Accessed 28 March 2014 [23] Donald R. Korobkin, “Contractarianism and the Normative Foundations of Bankruptcy Law” (1993) 71 Texas Law Rev. 111. [24] E. Warren, “Bankruptcy Policy” (1987) 54 U. Chi. L. Rev. 775, 797. [25] Samuel Edwin Etukakpan, ‘Business rescue and continuity of employment: analysing policy through the lens of theory’ (2011) Comp. Law. 2011, 32(4), 113 [26] ibid.

Did you like this example?

Cite this page

The Theories Underpinning Corporate Example For Free. (2017, Jun 26). Retrieved January 28, 2023 , from

Save time with Studydriver!

Get in touch with our top writers for a non-plagiarized essays written to satisfy your needs

Get custom essay

Stuck on ideas? Struggling with a concept?

A professional writer will make a clear, mistake-free paper for you!

Get help with your assigment
Leave your email and we will send a sample to you.
Stop wasting your time searching for samples!
You can find a skilled professional who can write any paper for you.
Get unique paper

I'm Chatbot Amy :)

I can help you save hours on your homework. Let's start by finding a writer.

Find Writer