Credit insurers also provide information of relevance here. A creditor can subscribe to the services of a credit insurer and obtain, on a web-based pay- as-you-go basis, a credit opinion on a trading partner – actual or potential. This opinion will be based on a number of factors including an analysis of payment records. Such a service is inexpensive: an opinion on a UK firm is likely to cost under £10. What the opinion will not do, however, is give a precise disclosure of payment record as opposed to a cumulative opinion based on the whole basket of measures. The danger here is that a poor paying record might be disguised by stronger performance on other fronts.

Cultural change in larger companies has, as noted, also been canvassed as a way to counteract late payments. The problem here, however, is that many large companies may see late-paying as a badge of their strength in the marketplace. (Around one in ten companies have admitted that they would pay their customers late even if their own bills were settled promptly.)114 Senior corporate staff may, quite understandably, see their main obligation to be the maximising of shareholder value and they may estimate that a policy of late-paying will serve such objectives.115 They may, indeed, reject arguments that prompt payment is in their own corporate interest because it makes for better business relationships, it enhances reputations, it creates goodwill and encourages better after-sales service. This is a point to be borne in mind in considering the potential of ‘naming and shaming’ disclosure controls. It implies that such controls may have a primary value in alerting small firms to late payers rather than in shaming larger firms into behaving more honourably.

To summarise, there are good reasons for thinking that the 1998 Act will impact only modestly on late payments. It may be excessively naïve to believe that large corporations can successfully be shamed into paying invoices promptly. Nor can small firms be expected to enforce their rights to prompt payment against powerful companies with never a thought for comebacks.

Conclusions: failures and corporate insolvency law

In concluding on the internal and external causes of corporate failure, it should not be assumed that single causes or single patterns of causes are

114Better Payment Practice Group Survey, October 2004 (www.payontime.co.uk/news/10. html).

115For a sustained portrait of the corporation as amoral calculator see J. Bakan, The Corporation: The Pathological Pursuit of Profit and Power (Constable, London, 2004).

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to be encountered when numbers of failures are analysed. Collapses generally result from the operation of a number of causes, and involve both external pressures and various internal failings. Argenti has suggested that three prevalent types of corporate failure are encountered in the business world.116 These types or ‘trajectories’ of failure are those associated with small companies, the ‘high rollers’ and the large companies. For small companies the typical failure involves never rising above a poor level of performance and surviving only for a short period.117 In such companies the proprietor often possesses great determination and knowledge of a trade but lacks basic financial and business skills and is managerially incapable of leading the firm through troubled times. Where the company is new, moreover, it is vulnerable to recessions, high interest rates and other pressures because it has had little time to establish accumulated profits or secure contracts with customers and suppliers.118 High rollers make up only a small percentage of companies and tend to be led by colourful, flamboyant characters who are attractive to investors. As with small firms that fail, however, the leaders of high rolling firms tend to lack managerial skills. There is a propensity to allow enthusiasm to produce over-trading which, when manifest, leads the firm’s bankers to refuse advances and precipitates failure.

With large companies that collapse, the management teams involved are usually professional but the long-established companies that encounter trouble tend to lose touch with their markets or grow slow and

116 Argenti, Corporate Collapse, ch. 8. In 1844 the Select Committee on Joint Stock Companies divided ‘bubble companies’ into three categories: those founded on unsound calculations and which could not succeed; those so ill-constituted as to render mismanagement probable; and those faulty or fraudulent in their object: see Farrar’s Company Law (4th edn, Butterworths, London, 1998) p. 622; Campbell and Underdown, Corporate Insolvency, pp. 23–5.

117See R. Cressy, Why Do Most Firms Die Young? (Kluwer, Netherlands, 2005). The SPI Eighth Survey suggested that 28 per cent of insolvent companies fail between the ages of five and ten years; 22 per cent between three and four years; 19 per cent between one and two years and 5 per cent after less than one year (SPI Eighth Survey, p. 8). The R3 Ninth Survey revealed an increase in the age of failed businesses, with 18 per cent aged two years or less and 43 per cent less than four years old (figures for the previous survey were 24 per cent and 46 per cent respectively). The first year failure rate had dropped from 5 per cent to 3 per cent between the Eighth and Ninth Surveys. See also Guthrie, ‘How the Old Corporate Tortoise Wins the Race’. New companies exploiting new products seem to be particularly prone to failure: see Pratten, Company Failure, p. 3.

118See J. Hudson, ‘Characteristics of Liquidated Companies’ (Mimeo, University of Bath, 1982). Hudson’s study found that the most dangerous period for companies involved in creditors’ voluntary liquidations and compulsory liquidation lay between their second and ninth years.

inefficient.119 En route to failure, such companies tend to experience an initial downturn, a plateau and then a collapse. Large companies, however, will tend to possess greater resilience than small firms because they have larger reserves of assets that can be used to reorganise and they have greater negotiating power when approaching bankers and governments for assistance in attempting a turnaround.120

Can corporate insolvency law contribute to the avoidance of undesirable corporate failures and the unwanted consequences of failure? In some respects, the law can be seen as largely irrelevant. It can offer very little assistance where external factors such as global financial crises, new foreign competitors, catastrophic trade disputes or natural disasters drive companies out of business. In other regards, however, the nature of insolvency law can impinge on corporate failure or success. First, it can do so in relation to the costs that such laws impose on healthy and on troubled companies. If, for instance, uncertainties attend the security and priority systems established by law, credit costs will be unnecessarily high, international competitiveness will be prejudiced and companies will face undesirable financial turbulence and stresses. If transaction costs are higher than they should be (because firms have to spend large sums on advisers in order to organise their credit and priority arrangements) then, again, unwarranted pressure is placed on companies and this may in some cases produce failure.

Insolvency law can also impact on the main internal causes of failure that have been discussed above: deficiencies of financial control and management. The extent of this impact should not be exaggerated, however. Corporate managers cannot be assumed to be wholly rational and mechanical followers of legal rules.121 A host of legal processes and rules nevertheless provides a framework of incentives for company managers.

Deficiencies of financial control are discouraged by the law in so far as failure to keep adequate records may be grounds for disqualifying a person from holding office as a company director on the basis that there has been general misconduct in the affairs of the company or

119‘Simply put, a run of success can be dangerous. Outstanding companies often succumb to crises because their leaders were innovative years ago but continue to favour strategies and activities based on past success, which do not always translate well after changes in the business and consumer environment.’ Baum, ‘The Value of a Failing Grade’, p. 8.

120See ch. 7 below and the ‘London Approach’.

121For an argument that corporate insolvency law can make only a marginal contribution to the efficiency of corporate management see ‘The Fourth Annual Leonard Sainer Lecture – The Rt Hon. Lord Hoffmann’, reprinted in (1997) 18 Co. Law. 194. See also V. Finch, ‘Company Directors: Who Cares about Skill and Care?’ (1992) 55 MLR 179.

174 the context of corporate insolvency law

unfitness on the part of the director.122 The rules on directorial disqualification and the system of investigation123 may also affect corporate failures in another way. A number of individuals, if unregulated, are likely to operate numbers of companies in cynical anticipation of their failure and employ phoenix operations to enrich themselves at the cost of creditors. The success with which insolvency law controls such phoenix operations may affect the incidence of corporate failure.124

Managerial standards in companies may also be influenced by the regimes of monitoring that the law establishes and encourages.125 The provisions of insolvency law are relevant here in so far as these establish the regimes of security and priority that offer creditors specific sets of incentives to review the actions of corporate managers. Thus, for instance, the strong position in which current insolvency law places secured creditors gives creditors with fixed charges very few incentives to monitor corporate affairs beyond looking to see that the assets that are the subjects of their charges are not alienated or wasted.126 The amount of information that creditors may possess, and which allows them to monitor corporate behaviour, is again dictated in large part by insolvency law. When, for example, administrators are appointed by debenture holders, the information to be supplied to the administrator by company officers and the arrangements for reporting to creditors and creditors’ meetings are governed by the Insolvency Act.127

122See Company Directors’ Disqualification Act 1986 ss. 2–3, 6–9. On disqualification see ch. 16 below; A. Walters and M. Davis-White QC, Directors’ Disqualification and Bankruptcy Restrictions (Thomson/Sweet & Maxwell, London, 2005); V. Finch, ‘Disqualifying Directors: Issues of Rights, Privileges and Employment’ (1993) Ins. LJ 35; Finch, ‘Disqualification of Directors: A Plea for Competence’ (1990) 53 MLR 385.

123See P. L. Davies, Gower and Davies’ Principles of Modern Company Law (8th edn, Thomson/Sweet & Maxwell, London, 2008) ch. 18; Finch, ‘Company Directors’, pp. 195–7.

124See Insolvency Act 1986 s. 216, the purpose of which is to contribute towards the eradication of the ‘phoenix syndrome’, whereby companies are successively allowed to run down to the point of winding up, only to rise phoenix-like from the ashes as a new company formed and managed by an almost identical group of persons and utilising a company name similar to that under which the former company was trading. See further Company Law Review Steering Group (CLRSG), Modern Company Law for a Competitive Economy: Completing the Structure (November 2000) ch. 13; CLRSG, Modern Company Law for a Competitive Economy: Final Report (July 2001) ch. 15.

125See generally Finch, ‘Company Directors’.

126See Stein, ‘Rescue Operations in Business Crises’, p. 394.

127Insolvency Act 1986 Sch. B1, paras. 47, 49–51. See ch. 9 below. The terms of debentures routinely give creditors rights to consultation and information on such matters as the value of assets subject to floating charges and borrowing levels: see ch. 3 above.

The regimes of personal liability for directors that are established at law may, again, create incentives to manage in a particular way. The rules on wrongful trading, for instance, and the possibilities of actions for misfeasance may provide deterrents to errant directors.128 In the case of misfeasance actions, these may be brought by shareholders or creditors against past or present company officers who breach any fiduciary or other duty owed to the company,129 and insolvency law’s priority regimes dictate shareholders’ and creditors’ own incentives to pursue directors. Shareholders are unlikely to act if they will not recover suffi- cient funds from a director to pay creditors in full before taking their own share, and unsecured creditors are unlikely to pursue actions unless the company’s available funds will pay the creditors in full before them.130

Insolvency law may also affect the levels of skill that corporate managers have to exhibit and this will have an effect on failure levels. The relatively low standard historically expected from directors’ duties of skill and care has now been augmented by the adoption (in the Companies Act 2006’s statutory statement) of a similar definition to that contained in section 214(4) of the Insolvency Act 1986.131 The deterrence element in the wrongful trading provisions themselves is provided by requirements of reasonable diligence and the courts’ capacity to order personal contributions to corporate assets where directors fail to show that they have taken proper care.132 Company law may, furthermore, choose to require a variety of different levels of competence, training and professionalism from directors and this is likely to bear on the propensity of a given company to fail.133

128Under Insolvency Act 1986 ss. 214 and 212. On the effectiveness of s. 214 as, inter alia, a deterrent, see ch. 16 below.

129See F. Oditah, ‘Misfeasance Proceedings against Company Directors’ [1992] LMCLQ

20 7; L . Doyle ( 199 4) 7 Insol vency In tel ligence 2 5 , 3 5 . Se e ch. 16 belo

130On funding and incentives for liquidators’ actions against directors see chs. 13 and 16 below.

131See CA 2006 s. 174(2): a director must display the care, skill and diligence that would be exercised by a reasonably diligent person with both (a) the general knowledge, skill and experience that can reasonably be expected of a person carrying out the same functions as the director in relation to that company and (b) the general knowledge, skill and experience that the director actually has. See also Finch, ‘Company Directors’; Norman v. Theodore Goddard [1991] BCLC 1028; Re D’Jan of London Ltd [1994] 1 BCLC 561; CLRSG, Modern Company Law for a Competitive Economy (March 2000) ch. 3, (November 2000) ch. 13, Final Report (July 2001) pp. 42–5. See further ch. 16 below.

132See Re Produce Marketing Consortium Ltd [1989] 5 BCC 569; D. Prentice, ‘Creditors’ Interest and Directors’ Duties’ (1990) 10 OJLS 265; Finch, ‘Company Directors’; see also ch. 16 below.

133On directorial levels of care and professionalism, see Finch, ‘Company Directors’ and ch. 16 below.

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If it is accepted that one cause of corporate failure is the taking of unjustifiable risks by directors then insolvency law has relevance beyond the imposition of duties of care and personal liabilities for breach of these. Insolvency law affects the balance of risk bearing in the company. If, as suggested in chapter 3, unsecured creditor interests and risks are underrepresented in corporate affairs because of the present framework of insolvency law, it follows that corporate decisions are liable to undervalue such interests, that excessively risk-laden decisions will be taken and that an unjustifiable number of failures will occur. The expected costs to unsecured creditors will not be internalised by the company or fully recognised by corporate managers.

Corporate failure through excessively high gearing may again be influ- enced by the insolvency/corporate law regime. Thus, it might be argued that the law places many creditors in a position from which they are not able to judge with accuracy the financial position of a prospective borrower and the risks involved in a loan. Company law, for instance, does not at present demand that retentions of title be registered and lenders who are ignorant of a debt applicant’s true position may be inclined to grant credit in circumstances that would not have prompted a loan if relevant knowledge had been to hand. The overall effect of poor information may be that firms find it too easy to operate with high gearing. Excessive gearing will also tend to be accompanied by high levels of interest because creditors will demand high returns in order to reflect the high risks that poor information imposes on them. This combination of high gearing and high interest payment levels leads, in turn, to high prospects of corporate failure.

Finally, insolvency law affects levels of corporate failure because it creates the set of incentives that holds sway in the processes for ending corporate lives. Undesirable failures may be caused where certain parties possess incentives to call a halt to corporate activity at times when this is not in the general interest of involved parties. If, for example, the law on wrongful trading operates with a particular level of severity it will give directors of troubled companies a particular motivation to cease business operations at any given time in the process of corporate difficulties.134 An excessively severe wrongful trading law could thus lead to premature closures of companies which might have revived but have not been given a chance of

134But see A. Walters, ‘Enforcing Wrongful Trading: Substantive Problems and Practical Disincentives’ in B. Rider (ed.), The Corporate Dimension: An Exploration of Developing Areas of Company and Commercial Law: Published in Honour of Professor A. J. Boyle

(Jordans, Bristol, 1998) ch. 9 and discussion in ch. 16 below.

turnaround because the directors have been fearful of the consequences to them of trading on. Similarly, the regime of priorities gives certain creditors incentives to act where this is in their own interests but not those of others. Thus, one of the considerations behind the reforms effected by the Enterprise Act 2002 was that, under the former regime of administrative receivership, banks secured with floating charges could be inclined to appoint a receiver in circumstances where it would overwhelmingly serve the interests of unsecured creditors and shareholders to have an administrator appointed specifically to promote the survival of the company and its undertaking.135

Nor do all dangers stem from premature curtailments of corporate activity. When the company faces insolvency and when creditors’ interests would best be served by an orderly running down of the business, it may be the case that directors will be pulled in the direction of continued trading by their interest in preserving their employment and business standing. Wherever directors do continue to trade in these circumstances, there is a prospect that the company will descend into a more damaging failure than would otherwise have been the case and the additional loss will fall not on the directors but on the company’s creditors.136

Insolvency law also sets out timescales and procedures to be adopted when companies are in trouble. Levels of corporate failures can be affected by the use or non-use of cooling-off periods and moratoria, as encountered in the Chapter 11 procedures found in the USA.137 The variety of rehabilitation procedures offered by insolvency law can also affect the possibilities of failures and recoveries.

In many respects then, insolvency law, like company law, can affect a company’s chances of survival or failure in difficult times. Insolvency law can also impinge on overall levels of success or failure. It is important, accordingly, to bear in mind the reasons why companies do fail when the challenges facing insolvency law are considered. Attention should be paid, for instance, to those areas of greatest contribution to failure, of greatest imposition of transaction costs and greatest impediment to recovery programmes. What insolvency law (and indeed company law) should, as a general rule, seek to avoid is loading risks and stresses on those points in corporate life where companies are at their most vulnerable.

135 See chs. 8 and 9 below; DTI/Insolvency Service White Paper, Productivity and Enterprise: Insolvency – A Second Chance (Cm 5234, 2001) ch. 2.

136See P. L. Davies, ‘Legal Capital in Private Companies in Great Britain’ (1998) 8 Die Aktien Gesellschaft 346.

137See ch. 6 below.