Wrongful trading

Abstract: © Rizwaan Jameel Mokal, 2005. All rights reserved. This book analyses corporate insolvency law as a coherent whole, stemming from common fundamental principles and amenable to being justified or criticized on that basis. The book explains why consistency of principle must be sought, and how it might be found in the relevant statutory and case law. It then draws on political and legal philosophy to construct an egalitarian theory for the analysis of corporate insolvency law based on the premise that all the parties affected by this law are to be treated as equals. The book argues that this theory can reconcile the dictates of fairness with the demands of economic efficiency. The theory is employed to analyze some of the most important aspects of insolvency law. Why should the individualistic method of enforcing claims against solvent companies give way to a collective method during insolvency? Why are there different formal mechanisms for dealing with troubled companies? What role does the pari passu principle play in the distribution of an insolvent company's assets? The controversial issues of whether and when secured creditors should be accorded priority over others receives detailed consideration. The functional role of the floating charge and its relationship with receivership are also analyzed in this context. The many questions relating to the operation of the new administration procedure introduced by the Enterprise Act 2002 are considered in the light of principle. The book also analyzes the role of the wrongful trading provisions. It examines, finally, why insolvency law objects to certain transactions at an undervalue and those having a preferential effect.

Abstract: Improving European corporate governance after Enron requires company and capital market law reforms. This article discusses shareholder decision-making; the choice between the onetier and the two-tier board system; appointment, compensation and audit committees with a majority of independent members; checks on exorbitant payments to the directors; a special investigation procedure and wrongful trading. As to capital markets a European framework rule on prospectus liability is proposed. A key problem is the need for loyal and competent intermediaries. If the 13th Directive on takeovers fails, then hopes will be pinned on the Court to continue its golden share case law. The German Volkswagen Act will be the test case.

Abstract: Protection of corporate creditors has become an important topic within the EU. At EU level, discussion has been sparked by widespread dissatisfaction with some very rigid and cumbersome provisions, and even with the whole concept of the Second Company Law Directive; at EU Member States' level, three landmark decisions by the European Court of Justice - Centros, Uberseering, Inspire Art - opened the way for an all-out competition between the different company forms provided for by national company laws. At both levels, albeit for different reasons, British company law - and in particular the absence of any legal capital in the private limited company - acts as the main driving force putting pressure on the concept of legal capital as enshrined in the Second Directive which, in turn, was modeled on German company law notions. The High Level Group of Company Law Experts provided the appropriate starting point for the present discussion by dealing not only with the raising and maintenance of capital, but by also taking up the wrongful trading remedy (Sect. 214 British Insolvency Act) and the equitable subordination remedy. This present article builds upon this broader approach, seeking to develop a conceptual framework for an efficient creditor protection regime within a purely national setting, i.e., leaving aside the additional problems created by pseudo-foreign companies and the impact of the provisions of the EU treaty for the free movement of companies on national company laws. Given the rich variety of creditor protection mechanisms within EU Member States, any attempt at developing even a high-level framework has to start by identifying the relevant risks, against which creditors need protection, and the required extent of creditor protection. Against this backdrop, any jurisdiction has to make a choice whether to rely mostly on creditor self-help or on mandatory protection rules. Since all mechanisms for creditor self-help are inherently costly and fail to protect involuntary (tort) creditors and "weak" contractual creditors as effectively as they do "strong" contractual creditors, in principle, there is a case for mandatory protection rules. The article then goes on to review the different well-known mechanisms for mandatory creditor protection. In line with earlier findings and the criticism mostly from English scholars, the case for a German-style legal capital regime turns out to be weak, at best. On the other hand, since shareholders' incentive to act to the detriment of creditors increases with the company becoming financially distressed, it is important to provide for mechanisms that will work to effectively control any opportunistic behavior on the shareholder's part. In this respect, equitable subordination of a shareholder's right as well as the wrongful trading remedy may serve important roles. The article concludes by taking a brief look at the resultant high-level framework for an efficient creditor protection regime.