“Bankruptcy law, at its core, is debt-collection law.”

Is an appropriate representation of corporate insolvency law, both descriptively and normatively?

Written by Holly Eve Hay

Context and outline

In governance of company failure, and regulation of debtor-creditor relationships, corporate insolvency is an area of major practical importance.[1] It is therefore vital the framework is legitimated by robust underlying theory.[2] Consequently, in response to the quintessential Jacksonian statement provided, current domestic framework shall be descriptively analysed. Thereafter, focus shifts to assess Jacksonian ideology against competing normative arguments.

Understanding Jackson’s statement

It is prerequisite to first ‘unpick’ Jackson’s overarching theory. Per Durrant and Milman, Law and Economics proponent Jackson favours ‘big business,’ heavily endorsing creditor rights with disregard for debtors.[3] This captures creditor wealth maximisation principle, governed by hypothetical “creditor’s bargain” agreements for collective creditor benefit.[4] This is to the detriment of third parties due to stringent adherence to pre-existing rights.[5] By applying overarching contractarianism to the provided statement, specific debt-collection elements are identifiable. Principally, legal scope is limited to distribution and dissolution. Seconding Keay and Walton, this renders the debt-collection argument solely reactive, not proactive, to insolvency.[6] Secondly, this captures the essence of the “single value approach,” with singularity of purpose rooted in fixed area focus for fixed parties, (namely economic motivations for creditor benefit,) foregoing broader considerations.[7]

Descriptive representation

Cork Report

The catalyst which provoked regime change was the colloquially-named ‘Cork Report.’ Assessing the state of insolvency law, the committee published principal objectives in its recommendations most desirable/necessary for a fully functioning insolvency system.[8] On analysis, efficient debt-collection remained significant post-review, exemplified by Objectives D through G.[9] Nonetheless, the provided statement is not wholly descriptive of the report. Concurring with Fletcher, the overall report demonstrates progressive, holistic “communitarian” perspective reflective of broader parties and economic impacts.[10]

Furthermore, an anticipatory/proactive approach is adopted to prevent insolvencies. This fosters rescue culture respecting the tangible benefits of business longevity.[11] Sealy states an effective system should assimilate well within its operational environment.[12] Consequently, the comprehensive approach more accurately mirrors complex/competing realities of insolvency. (Alternatively, others counterargue the structure lacks the clarity of the creditor-oriented system.)[13] To elaborate, Finch and Milman acknowledge stark development from historically uncompromising attitudes towards debtors as punishable/makers of their own misfortune which, coupled with creditor sympathies, instituted a “debt-collection” aligned regime.[14]

By the report’s publication, the committee’s viewpoint had significantly evolved, with sympathetic regards for debtors who may be faultless on insolvency. St Clair and Drummond Young elaborate, identifying internal and external insolvency-inducing factors.[15] Whilst natural justice easily aligns with creditors where debtors induce insolvency via board mismanagement or sub-par book-keeping, failure due to uncontrollable/unforeseeable factors is differential.

Statutory framework

It is now crucial to critically assess against the inspired framework. Corporate insolvency is a typically UK-wide statutory framework under the Insolvency Act 1986 (IA). Gibb illustrates the “menu-style” options for selection at parties’ disposal.[16] This provides a practical framework with insolvency solutions cater to a range of viewpoints/business scenarios. For example, the debt-collection aligning liquidation procedure per IA 1986 Part IV embodies contractarianism. The singular objective is the final winding up, with both the nominated practitioner gaining significant powers to collate and distribute for creditors,[17] and mandated removal of prior management.[18]

However, conceding Brown, most of the IA’s insolvency responses and overall effects tend towards communitarian visions.[19] This is demonstrated through a proactive, interventionist stance which attempts to revitalise businesses positing liquidation as a last resort. Administration provisions specifically institute hierarchal objectives that mandate rescue should be pursued principally.[20] The Enterprise Act 2002 further enhanced administration procedure, superseding administrative receivership, pushing the rescue agenda.[21] There are however criticisms of pre-packaged administration, which arguably sacrifices quality for efficiency of arrangements.[22]

Supporting Parkinson, remaining ancillary methods collectively boast holistic functions beyond Jackson’s statement, by revitalising debtor companies at an earlier stage of financial distress.[23] Company Voluntary Arrangements (another Cork Report product) facilitate negotiation/co-operation between the debtor and creditor on debt reduction as ‘refereed’ by practitioners.[24] This permits autonomous decision making and tailored arrangements to avoid insolvency deterioration. Alternatives include major business restructuring procedure[25] and recently introduced “breathing space” moratoriums,[26] imposed due to pandemic-induced disruption to prevent mass business collapse. The communitarian scheme operates as a temporary ‘legal shield’ offering protection from creditors, which on reflection, acknowledging the potential faultlessness of debtors struggling in the whilst facilitating recovery efforts.

The government’s proactivity in devising moratoriums to meet real world business needs indicates the wider UK position. As first instituted by the Cork Report and carried through to the current framework, our insolvency infrastructure exceeds simple debt collection by recognising the value of business recovery, and is practically responsive to changing world contexts. Debt-collection remains intrinsic through liquidation, but Jackson’s blunt approach is softened by pro-communitarian/holistic alternatives.

Normative representation

The ideology most cohesive to the debt-collection sentiment is Jackson’s contractarian theory maximising returns to creditor wealth, eschewing wider objectives.[27] Underlying Jackson’s theory is hypothetical collective creditor bargains, conducted behind a Rawlsian “veil of ignorance.”[28] Supporting Jackson and Scott, the straightforward approach has efficiency appeal, simplifying chaos facing creditors on insolvency.[29] This avoids exacerbating conflict through competing claims, streamlining debt-collection and reducing costs.[30] Reflecting on real world observations, undeniable debt-collection undeniably remains a core component. Statistical evidence authenticates this highlighting the primacy of liquidation amongst insolvencies.[31] Recognising highly developed legal systems have implemented wealth maximisations provides substance.[32] This is further legitimised by globally observed creditor-biased guidance published by United Nations Commission on International Trade Law, (UNICTRAL).[33] Nevertheless, should simplification/efficiency outweigh competing factors? Referencing Nyombi, legal systems are complex which the framework should reflect.[34] Restricting to one aim may be glib/oversimplistic.[35]

Moreover, Jackson’s legal theories feed from political conservatism, favouring capitalism.[36] That does not automatically mitigate against Jackson’s transparently-held beliefs: it is understandable why corporate context would invokes conservative arguments. What is problematic is Jackson’s debt-collection strictly serves economic values, disregarding social/moral values looking beyond efficiency to fairness.[37] As Finch notes, consider insolvency’s domino effects on local economics and affected individuals.[38] The all-encompassing communitarian vision is arguably better placed to accommodate this by respecting community interests, including those without strict legal rights.[39] Indeed, this has been recategorised as the “multiple values approach.”

To provide balance, Warren’s communitarianism presents its own faults. When ‘trading in’ contractarianism’s oversimplifications, this may be replaced by a communitarian regime which attempts too much in different directions. Placating a multitude of competing parties is complex by Warren’s own admission, and can curtail/usurp creditors’ hard legal rights. Per Mokal, whilst moral motivations are laudable, practically this introduces indeterminacy into the insolvency process, and there is a recognised need for certainty of procedure/outcome to both facilitate processes and reassure parties amidst insolvency chaos.[40]

Korobkin instead argues for broad-based contractarianism which acknowledges wider parties, whilst retaining economic value perspective.[41] Prima facie, this creates workable compromise between the debt-collection efficiencies and proactive communitarianism’s inclusivity. However, delving deeper Korobkin’s theory displays impracticalities and indeterminacies. Per Nsubuga, the theory doesn’t specify framework for resolving conflicts between factors such as efficiency and fairness.[42] Furthermore, the ranking of parties is muddied without guidance to the hierarchy of protected rights.

The disregard for rehabilitation is another flaw in Jackson’s debt-collection ideology. Seconding Finch and Milman, the company is an “organic” device open to development, and hence business reorganisation/revitalisation is a cogent ‘Plan A’ before liquidation.[43] It is important to recognise business inevitably involves risk: some weaker businesses fail whilst others succeed. However, the remorseless blanket debt-collection of contractarianism neglects tangible benefits of trying to ‘stay afloat’ opposed to ‘sinking the ship.’

Another normative consideration of contractarianism is unwavering adherence to prior rights. Jackson advocates rights should not be redistributed (especially to new parties) on insolvency, as non-creditor interests are otherwise protected.[44] From a technical standpoint, it is difficult to deny the rationalism. It is, however, more difficult to agree from a practical perspective. Firstly, blunt Jacksonian ideas from federal American context do not necessarily translate domestically. English law is unafraid to equitably deviate from black letter law; and whilst there is no equivalent in Scotland, mitigatory mechanisms like good faith are longstanding. Secondly, corporate insolvency law exists within the legal system as a whole and hence shouldn’t be ringfenced given its interactions with other areas. Thirdly, supporting Keay and Walton, reaching financial distress/insolvency poses unique problems for non-creditor, hence the law must address such concerns.[45] This draws parallels to communitarianism ideals which values all-around fairness.

A final drawback is the hypothetical creditor bargain which Jackson’s debt-collection framework hinges upon. Its theoretical nature does not translate well into real world context, undermining the argument’s validity.[46] Two criticisms are noted. Firstly, there is a naïve idealism in presumed collective agreement. In reality, creditors’ affiliated debts and bargaining powers transparent, thus equal treatment arrangements are unlikely. Secondly, to indulge hypotheticals, the “common pool” arrangement may arouse suspicions and mistrust, hence actually fuelling individualistic behaviour. Such criticisms are equally applicable to Korobkin’s Rawlsian broad-based contractarianism.

What is most evident throughout is no singular normative theory provides all the answers. Not only does this highlight respective fallibilities, critically this demonstrates a need to reorganise conceptualisations of corporate insolvency law. Supporting Paterson, this mitigates against pitting opposing theories and instead refocussing away from theoreticals in favour of core practical objectives.[47] A practically appropriate system servicing business itself lends strong legitimacy and normative justifications. Concurring with Finch and Milman, closing the divide between opposing theories is perhaps easier than first thought: ultimately, all parties desire a well-functioning system to the aid of the commercial sphere, and thus agree on foundations universal to democratic/developed legal systems.[48]

Conclusion

In conclusion, in response to the provided statement, the UK’s corporate insolvency framework incorporates debt-collection but ultimately looks more broadly to rescue culture aims. On normative evaluation, scholars cannot reliably say there is no place for debt-collection: indeed the opposite has been illustrated. However, Jackson’s contractarian vision places undue emphasis on economic values and efficiency, and a broader perspective is required. Communitarian approach embraces parties/values more holistically, but not without flaws. The most important objective of corporate insolvency law should not be pigeonholing into ideologies but to robustly meet the real world needs of the commercial sphere. Therefore, arguably the most compelling normative argument is corporate insolvency law should operate flexibly and practically, respecting universal democratic fairness norms.

Bibliography

Legislation

Companies Act 2006

Corporate Insolvency and Governance Act 2020

Enterprise Act 2002

Insolvency Act 1986

Articles

Finch, V., ‘The Measures of Insolvency Law’ (1997) 17 OJLS 227

Fletcher, I., ‘Genesis of Modern Insolvency Law: An Odyssey of Law Reform’ [1989] JLB 365

Jackson, T.H., “Bankruptcy, Non-Bankruptcy Entitlements and the Creditors’ Bargain” (1982) 91 Yale LJ 857

Jackson, T.H. and Scott, R., ‘On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors’ Bargain’ (1989) 75 Va L Rev 155

Korobkin, D., ‘Contractarianism and the Normative Foundations of Bankruptcy Law’ (1993) 71 Texas L Rev 541

Nsubuga, J.H., ‘Remedying the theoretical limitations in the traditionalist and the proceduralist perspectives on corporate insolvency’ (2018) 60(3) International Journal of Law and Management 824

Nyombi, C., ‘The objectives of corporate insolvency law’ (2018) 60(1) International Journal of Law and Management 2

Onakoya, A. and Ayooluwa, E., ‘Bankruptcy and Insolvency: An Exploration of Relevant Theories’ (2017) 7(3) International Journal of Economics and Financial Issues 706

Paterson, S., ‘Rethinking Corporate Bankruptcy Theory in the Twenty-First Century’ (2016) 36 OJLS 697

Stef, N., Jabeur, S.B., and Scherer, R., ‘Time to resolve insolvency and political elections’ (2022) 72 International Journal of Law and Economics 106

Warren, E., ‘Bankruptcy Policy’ (1987) 54 U Chicago L Rev 775

Books

Anderson, H., The Framework of Insolvency Law (OUP, 2017)

Brown, D., Corporate Rescue: Insolvency Law in Practice (J Wiley, 1996)

Finch, V. and Milman, D., Corporate Insolvency Law (3rd edition, CUP 2017)

Fletcher, I. and Crabb, L., The Law of Insolvency (5th edition, Sweet and Maxwell 2015)

Jackson, T.H., The Logic and Limits of Bankruptcy (HUP, 1986)

Keay, A. and Walton, P., Insolvency Law: Corporate and Personal (4th edition, LexisNexis 2017)

Milman, D. and Durrant, C., Corporate Insolvency: Law and Practice (3rd edition, Sweet and Maxwell 1999)

Mokal, R.J., Corporate Insolvency Law: Theory and Application (OUP, 2005)

Parkinson, M., Corporate Governance in Transition: Dealing with Financial Distress and Insolvency in UK Companies (Springer International Publishing, 2018)

Sealy, L., Company Law and Commercial Realities (OUP, 1984)

St Clair, J. and Young, J.D., The Law of Corporate Insolvency in Scotland (4th edition, W Green 2011)

Zwieten, K.V., Goode on Principles of Corpoate Insolvency Law (5th edition, Sweet and Maxwell 2019)

Book Contributions

Belcher, A., ‘The economic implications of attempting to rescue companies’ in Rajak, H., (ed), Insolvency Law: Theory and Practice (Sweet and Maxwell, 1993)

Gibb, A., ‘Insolvency’ in Black, G., (ed), Business Law in Scotland (4th edition, OUP 2019)

Command Papers

Insolvency Law Review Committee, Report on the Review Committee of Insolvency Law and Practice (Cmnd 8558, 1982)

Websites

Graham, T., Independent Report: Graham Review into on Pre-pack Administration (gov.uk, June 2014) <https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration> accessed 25th March 2023

The Insolvency Service, Quarterly Company Insolvency Statistics: Oct – Dec 2022 (gov.uk, 8th February 2023) <https://www.gov.uk/government/statistics/company-insolvency-statistics-october-to-december-2022> accessed 29th March 2023

UNICTRAL, Legislative Guide on Insolvency Law (unictral.un.org, 2005) <https://uncitral.un.org/en/texts/insolvency/legislativeguides/insolvency_law> accessed 30th March 2023

[1] Ian Fletcher and Letitia Crabb, The Law of Insolvency (5th edition, Sweet and Maxwell 2015) 4 [2] Rizwaan J Mokal, Corporate Insolvency Law: Theory and Application (OUP, 2005) Ch1 [3] David Milman and Chris Durrant, Corporate Insolvency: Law and Practice (3rd edition, Sweet and Maxwell 1999) 25 [4] Thomas H Jackson, “Bankruptcy, Non-Bankruptcy Entitlements and the Creditors’ Bargain” (1982) 91 Yale LJ 857 [5] Thomas H Jackson, The Logic and Limits of Bankruptcy (HUP, 1986) Ch1 [6] Andrew Keay and Peter Walton, Insolvency Law: Corporate and Personal (4th edition, LexisNexis 2017) Ch3 [7] Adegbemi Onakoya and Eunice Ayooluwa, ‘Bankruptcy and Insolvency: An Exploration of Relevant Theories’ (2017) 7(3) International Journal of Economics and Financial Issues 706 [8] Insolvency Law Review Committee, Report on the Review Committee of Insolvency Law and Practice (Cmnd 8558, 1982) [9] Ibid para 198 [10] Ian Fletcher, ‘Genesis of Modern Insolvency Law: An Odyssey of Law Reform’ [1989] JLB 365 [11] Alice Belcher, ‘The economic implications of attempting to rescue companies’ in Harry Rajak (ed), Insolvency Law: Theory and Practice (Sweet and Maxwell, 1993) [12] Len Sealy, Company Law and Commercial Realities (OUP, 1984) 351 [13] Hamish Anderson, The Framework of Insolvency Law (OUP, 2017) 47 [14] Vanessa Finch and David Milman, Corporate Insolvency Law (3rd edition, CUP 2017) 10 [15] John St Clair and James Drummond Young, The Law of Corporate Insolvency in Scotland (4th edition, W Green 2011) Ch 1 [16] Alex Gibb, ‘Insolvency’ in Gillan Black (ed), Business Law in Scotland (4th edition, OUP 2019) [17] IA 1986 Pt IV ss143-4 [18] IA 1986 Pt IV s103 [19] David Brown, Corporate Rescue: Insolvency Law in Practice (J Wiley, 1996) 50 [20] IA 1986 Sch B1 para 3 [21] (n16) [22] Teresa Graham, Independent Report: Graham Review into on Pre-pack Administration (gov.uk, June 2014) <https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration> accessed 25th March 2023 [23] Marjan Parkinson, Corporate Governance in Transition: Dealing with Financial Distress and Insolvency in UK Companies (Springer International Publishing, 2018) [24] IA 1986 Pt I [25] Companies Act 2006 Pt 26A [26] Corporate Insolvency and Governance Act 2020 s1 [27] Kristen Van Zwieten, Goode on Principles of Corpoate Insolvency Law (5th edition, Sweet and Maxwell 2019) 25 [28] (n5) [29] Thomas H Jackson and Robert Scott, ‘On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditors’ Bargain’ (1989) 75 Va L Rev 155 [30] Ibid [31] The Insolvency Service, Quarterly Company Insolvency Statistics: Oct – Dec 2022 (gov.uk, 8th February 2023) <https://www.gov.uk/government/statistics/company-insolvency-statistics-october-to-december-2022> accessed 29th March 2023 [32] (n14) [33] UNICTRAL, Legislative Guide on Insolvency Law (unictral.un.org, 2005) <https://uncitral.un.org/en/texts/insolvency/legislativeguides/insolvency_law> accessed 30th March 2023 [34] Chrispas Nyombi, ‘The objectives of corporate insolvency law’ (2018) 60(1) International Journal of Law and Management 2 [35] (n6) 26 [36] Nicolae Stef, Sami Ben Jabeur and Robert Scherer, ‘Time to resolve insolvency and political elections’ (2022) 72 International Journal of Law and Economics 106 [37] Junior Hamiisi Nsubuga, ‘Remedying the theoretical limitations in the traditionalist and the proceduralist perspectives on corporate insolvency’ (2018) 60(3) International Journal of Law and Management 824 [38] Vanessa Finch, ‘The Measures of Insolvency Law’ (1997) 17 OJLS 227 [39] Elizabeth Warren, ‘Bankruptcy Policy’ (1987) 54 U Chicago L Rev 775 [40] (n2) Ch2 [41] Donald Korobkin, ‘Contractarianism and the Normative Foundations of Bankruptcy Law’ (1993) 71 Texas L Rev 541 [42] (n37) [43] (n14) Ch2 [44] (n4) [45] (n6) [46] (n27) [47] Sarah Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-First Century’ (2016) 36 OJLS 697 [48] (n14) Ch2