Conclusions

ability to service industry.295 It has been to map out the legal framework of borrowing and to consider whether this is, in structural terms, conducive to the economically efficient meeting of healthy and troubled companies’ needs.

A number of general conclusions can be drawn at this stage. First, it is clear that, at least in some contexts, there may be significant dangers of economically inefficient transfers of insolvency wealth from unsecured creditors to secured creditors or to those availing themselves of quasisecurity devices. The nature of any efficiency loss will, as noted, depend on a number of context-specific factors: for instance, the number of different kinds of creditors that supply financing to a firm; the levels of risks being run by the company; the types of transaction being engaged in; the levels of transaction costs involved; and the nature of the competition in the various credit markets to which the company can turn. Where such transfers of insolvency wealth occur, they may prejudice healthy companies’ needs (corporate decisions on financial risks may, for example, be taken with distorted weightings being given to the interests of different creditors). Transfers of this kind may also affect the needs of troubled companies in so far as decisions as to the lives or deaths of troubled companies – decisions which affect different creditor groups in different ways – may also be made with unbalanced views of the interests of different creditor classes. Not only that, but corporate managers may possess incentives to subsidise their company’s secured loans by taking their unsecured credit from those unsecured creditors who are least well informed about risks, least able to adjust loan terms, least protected in insolvency and least likely to be capable of absorbing financial shocks.

It may also be concluded that certain courses of action have the potential to reduce economically inefficient insolvency wealth transfers. Procedures could be adopted so as to allow unsecured creditors to become more fully informed about the risks they are running. The value of informational steps should not, however, be exaggerated. They do not assist unsecured creditors who are involuntary or cannot adjust because of lack of resources, paucity of time or expertise, competitive pressures or other reasons. This does not mean, however, that there is no case for assisting those who can be put in a position to adjust and for

295For an outspoken view see Hutton, The State We’re In. See also the White Paper, Our Competitive Future: Building the Knowledge Driven Economy (Cm 4176, December 19 98) , pa ra 2. 21; Cruickshank, C om petition in. UK Banking

142 the context of corporate insolvency law

adopting measures such as the registration of quasi-securities. Similarly, measures designed to increase information flows and transparency in credit arrangements will reduce economically inefficient wealth transfers but may also assist creditors in their monitoring of debtors and the encouragement of efficiency in decision-making. This will be of value to healthy as well as troubled companies.

As for involuntary, unsecured creditors who cannot adjust, other steps might be taken to reduce wealth transfers away from such a group. ‘Prescribed part’ rules as found in section 176A of the Insolvency Act 1986 are blunt instruments (they benefit all unsecured creditors) but they are known quantities which allow attendant risks to be calculated and which are unlikely to reduce the availability of secured credit. The ‘prescribed part’ regime may accordingly not impede trading materially but will provide funds of assistance in capturing insolvency assets and may reduce insolvency-driven inefficiencies. A step that might be taken is to introduce compulsory insurance against tort liabilities. This could reduce economically inefficient subsidies from a particular group of involuntary, non-adjusting unsecured creditors.

The above review also suggests that the collectivity of financing arrangements and the array of legal devices encountered in England is likely, in its present form, to impose unnecessary costs on both healthy and troubled companies. Where the financial markets supply a wide range of devices for obtaining finance and credit this might be thought to be consistent with the needs of healthy companies. Companies presented with such wide choices are thus able to select the types of, say, credit which will prove least costly to them given their size, profile, sector, financial plans, transaction patterns and so on. It is one thing, however, to provide a range of clearly identifiable modes of acquiring funds and another to present companies with a patchwork of legal devices that is so confused that they may have difficulty in identifying the kinds of borrowing relationships that they are considering or even have entered into. Where the legal gateways to borrowing are unnecessarily confused and uncertain, unnecessary transaction costs are again produced for both healthy and troubled companies.

We have seen, moreover, that just as confusion attends the legal categories of borrowing, it also permeates the system of priorities, so that the benefits of clear ranking are undermined by the capacity of ‘creditors’ to employ such quasi-security devices as retention of title clauses and thereby to bypass priority mechanisms. The costs of credit will inevitably rise as such uncertainties increase risks.

Addressing the confusions that are found in the range of credit arrangements demands that attention be given to the legal frameworks that establish the different credit devices. It also demands that thought be given to the application of these frameworks on the ground and the possibility of devising credit arrangements that not only are set up with clear legal frameworks but are operated in the business world in an efficient, fair, accountable and transparent manner. During the rest of this book such matters will be a central concern.