CORPORATE INSOLVENCY LAW

Corporate Insolvency Law



Corporate Insolvency Law

Introduction

The principle is that a limited company's creditors must look at the capital, the limited fund, and that only. Limited liability discourages shareholders from monitoring and controlling their company's commercial ventures. The company's creditors bear the burden of the risks inherent in dealing with limited liability companies. At issue is whether it is right that limited liability should operate to restrict the size of the company's capital. Different types of creditors have different capacities to protect themselves against these risks. While banks and similar financial creditors easily overcome such risks, the same cannot be said of trade creditors, employees and tort creditors. Because trade creditors rarely insist on security before they supply goods on credit, they bear a considerable part of the risk of corporate insolvency. Employees are in an even more precarious position. In stark contrast to finance and trade creditors, employees have no opportunity to obtain security or diversify the risk of their corporate employer's insolvency. Moreover, the majority of employees has minimal information about their employer's financial standing (but see the Corporations Act). While contract creditors bear a degree of risk when they deal with a limited liability company, they at least enter into the contract by their own will. This is not so for a company's tort creditors. Victims of torts committed by a company bear an uncompensated risk in case of the company's insolvency.

Discussion

In terms of insolvency law, corporate insolvency law is in most respects the same or similar in the two jurisdictions while non-corporate insolvency (or bankruptcy) law remains distinct. This is reflected in the terms of the 1998 Act, with the majority of corporate insolvency law being reserved to the Westminster Parliament while the majority of bankruptcy law is devolved to the Scottish Parliament. In proposing the current reforms to Scottish bankruptcy law, however, the Scottish Executive identified as one of the drivers for change the recent reforms to bankruptcy law in England and Wales and one of the main policy considerations behind the proposed introduction of similar reforms in Scotland has been the need to maintain a level playing field between the two jurisdictions. There does, therefore, remain an element of commonality of purpose in the field of personal insolvency despite devolution.

The ultimate formal response to personal insolvency in England and Wales is bankruptcy under Part IX of the Insolvency Act 1986. The High Court or a relevant county court can make a bankruptcy order in prescribed circumstances on the petition of either the debtor or a hostile creditor. Debtors filing for bankruptcy must lodge a statement of affairs with the court demonstrating an inability to pay their debts,15 a much less onerous threshold than the pre-conditions for sequestration in Scotland (discussed below). All bankruptcies are administered, at least on an interim basis, by an official receiver who is a state official employed by the Insolvency Service, an executive agency of the Department of Trade and ...