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corporate trouble. A number of key difficulties can be identified. Enforcement problems may render actions such as wrongful trading suits a blunted and inefficient tool. Similarly, when liquidators or creditors face high costs in gaining relevant information about company affairs, inefficiency results. Such high costs may result from an excessive reliance on the use of outside professionals in insolvency processes and sets of incentives (or uncertainties) that lead directors to depart too early from the company scene. Legal uncertainties, as seen in the wrongful trading law, create inefficiencies both by chilling desirable risk taking by directors and by reducing the ability of shareholders and creditors to assess and manage risks at lowest cost. If it is asked whether the current statutory scheme would have been arrived at by allowing participants to negotiate,380 one thing is clear. Participants in such a discussion would have wanted a regime in which directors, creditors and shareholders could assess and allocate risks in as clear a fashion as possible. That is the precondition for maximising returns. From both technical and economic efficiency perspectives what matters is certainty, what is undesirable is the chill wind of unknown risks.381 From this point of view the current formulation of the law on directors’ duties fails to deliver.

Finally, the broad limitations of individual liability rules have to be returned to. The deterrence of sub-optimal behaviour requires not merely that legal rules are rigorously applied but that sanctions involve a correspondence between the assets that a director puts at risk and the potential losses that directorial actions may place on creditors or shareholders. This condition is rarely satisfied and, accordingly, responses such as improved directorial training, intra-company controls and accountability regimes have to be looked to.

Fairness

Directors might complain that, in a number of respects, they are treated unfairly by the laws and processes discussed above. Disqualification under the CDDA may have very serious implications for individuals but, as has been seen above, the courts have failed to offer clear guidance on the position of the director. Some judges have applied a ‘rights’ approach to company direction. Others have seen direction of a

380See Telfer, ‘Risk and Insolvent Trading’, pp. 146–7; Cheffins, Company Law, pp. 540–4.

381See generally P. Halpern, M. Trebilcock and M. Turnbull, ‘An Economic Analysis of Limited Liability in Corporation Law’ (1980) 30 U Toronto LJ 117.

company incorporated with limited liability as a privilege. If the judiciary were to follow the logic of either of the above approaches in a consistent manner, directors might not be in a position to complain that it is unfair to subject them to a law that is incoherent and inconsistently applied. A single consistent judicial trend, however, is yet to emerge and decisions, as noted, often contain elements of both ‘rights’ and ‘privileges’ approaches.382

Before the Insolvency Act 2000, company directors might have complained that the disqualification process was so slow as to constitute an unfair regime. The Insolvency Service’s 2000 Report on Company Rescue and Business Reconstruction Mechanisms383 noted that:

There were strong arguments made that for many honest directors of failed companies, the length of time which it currently takes the Secretary of State … to bring on disqualification proceedings (or to reach a decision that proceedings will not be brought) acts as a considerable inhibition on any attempts they may wish to make to go back into business.384

The Review Group recommended that steps be taken to speed up the disqualification process and the Insolvency Act 2000 section 6 offered a response by developing the ‘fast-track’ procedure. As already noted, this procedure empowers the Secretary of State to accept consensual undertakings equivalent to disqualification orders without a full court hearing.385 Another potential complaint of unfairness, however, emerges with this process. The Institute of Directors, among others, has complained that a plea-bargaining culture may develop in which directors will be placed under undue economic pressure to accept disqualification rather than have their day in court.386 One commentator has argued that the new procedure ‘will do little to dissuade the rogue with deep pockets. The real danger is that directors with limited resources and no desire for

382See p. 730 above and, for example, Secretary of State for Trade and Industry v. Griffiths, Re Westmid Packaging Services Ltd (No. 3) [1998] BCC 836; Re Keypack Homecare Ltd (No. 2) [1990] BCC 117.

383Report by the Review Group (DTI, 2000). 384 Ibid., para. 104.

385The Secretary of State may, however, require a statement of grounds for the undertaking: see Re Blackspur Group plc (No. 3) [2002] 2 BCLC 263.

386See Walters, ‘New Regime’, pp. 92–3. See also M. Simmons and T. Smith, ‘The Human Rights Act 1998: The Practical Impact on Insolvency’ (2000) 16 IL&P 167 for suggestions (at p. 172) that it is a breach of Article 6 for the individual to face ‘such proceedings without proper legal representation’ and that if directors are unable to ‘contest the proceedings effectively due to financial considerations’ this too could amount to a breach of Article 6.

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litigation against the Secretary of State will be persuaded to agree a disqualification undertaking with little or no professional advice.’387

Moving away from disqualification to the other personal liabilities of directors, the latter may again complain of unfairness on the grounds that uncertainty infuses a host of liability provisions. In relation to wrongful trading, for instance, it has been suggested that the key finding – whether the director knew, or ought to have concluded, that there was ‘no reasonable prospect’ of avoiding insolvent liquidation – poses a question that is ‘inherently elusive’.388 A director can ‘only speculate whether injecting more capital, cajoling other directors to take corrective action, tightening up accounting procedures, pursuing plans to achieve a turnaround, consulting an insolvency practitioner, or putting the company into liquidation will be sufficient’.389

Such complaints of unfairness and demands for legal certainty are given added weight when it is remembered that, in times of corporate trouble, directors will very often be compelled to make decisions within short deadlines and under extreme pressure. The director’s difficulties are only added to by uncertainties in determining when a company is insolvent and which approach to accounting data should be used in making this calculation.390 English directors are not protected by a ‘business judgement rule’ as encountered in the USA and some commentators have questioned whether judges are qualified to strike the right balance in judging the performance of directors.391 A director has a duty to consider creditors’ interests at some stage in a company’s decline but whether this duty only operates when the company is insolvent or of ‘doubtful solvency’ rather than at some point earlier remains uncertain. The Companies Act 2006 left the judges to formulate the content of the

387 R. Tateossian, ‘The Future of Directors’ Disqualification’ (2000) Insolvency Bulletin 6 at 7. An editorial in the Financial Times (16 November 1999) suggested that prior to the Insolvency Act 2000 directors were faced with a Hobson’s choice: ‘either accept the ban, and be barred from business for at least two years; or run the risk of a long, extremely expensive court battle to try to clear your name’. Sir Richard Scott, the Vice Chancellor, argued to the Chancery Bar Association in 1999 that a solution might be to allocate costs under the ‘just and reasonable’ test of criminal cases, rather than the ‘loser pays all’ civil litigation formula: see (2000) 21 Co. Law. 90.

388D. Prentice, ‘Corporate Personality, Limited Liability and the Protection of Creditors’ in R. Grantham and C. Rickett (eds.), Corporate Personality in the Twentieth Century

(Hart, Oxford, 1998) p. 119.

389Cheffins, Company Law, pp. 542–3, quoted by Telfer, ‘Risk and Insolvent Trading’, pp. 139–40.

390See Katz and Mumford, Making Creditor Protection Effective, part 5; ch. 4 above.

391See Cheffins, Company Law, p. 543.