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Aims, objectives and benchmarks
Openness concerning the aims and objectives of corporate insolvency law is necessary if evaluations of proposals, or even existing regimes, are to be made. Without such transparency it is possible only to describe legal states of affairs or to make prescriptions on the basis of unstated premises. As will be argued in this chapter, however, it may not be possible to set down in convincing fashion a single rationale or end for corporate insolvency law. A number of objectives can be identified and these may have to be traded off against each other. It is, nevertheless, feasible to view legal developments with these objectives in mind and to argue about trade-offs once the natures of these objectives have been stipulated.
This chapter will suggest an approach that allows and explains such tradeoffs but it begins by reviewing a number of competing visions of the insolvency process that are to be found in the legal literature. A starting point in looking for the objectives of modern English corporate insolvency law is the statement of aims contained in the Cork Committee Report of 1982.1
Cork on principles
The Cork Committee produced a set of ‘aims of a good modern insolvency law’.2 It is necessary, however, to draw from a number of areas of the Cork Report in order to produce a combined statement of objectives relevant to corporate insolvency.3 Drawing thus, and paraphrasing, produces the following exposition of aims:
(a)to underpin the credit system and cope with its casualties;
(b)to diagnose and treat an imminent insolvency at an early, rather than a late, stage;
1Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982). This chapter builds on V. Finch, ‘The Measures of Insolvency Law’ (1997) 17 OJLS 227.
2Para. 198.
3See paras. 191–8, 203–4, 232, 235, 238–9. See also R. M. Goode, Principles of Corporate Insolvency Law (3rd edn, Sweet & Maxwell, London, 2005) ch. 3, where Goode sets out ten principles of corporate insolvency law as established by legislation and the general law.
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(c)to prevent conflicts between individual creditors;
(d)to realise the assets of the insolvent which should properly be taken to satisfy debts with the minimum of delay and expense;
(e)to distribute the proceeds of realisations amongst creditors fairly and equitably, returning any surplus to the debtor;4
(f)to ensure that the processes of realisation and distribution are administered honestly and competently;
(g)to ascertain the causes of the insolvent’s failure and, if conduct merits criticism or punishment, to decide what measures, if any, require to be taken; to establish an investigative process sufficiently full and competent to discourage undesirable conduct by creditors and debtors; to encourage settlement of debts; to uphold business standards and commercial morality; and to sustain confidence in insolvency law by effectively uncovering assets concealed from creditors, ascertaining the validity of creditors’ claims and exposing the circumstances attending failure;5
(h)to recognise and safeguard the interests not merely of insolvents and their creditors but of society and other groups in society who are affected by the insolvency, for instance not only the interests of directors, shareholders and employees but also those of suppliers,
those whose livelihoods depend on the enterprise and the community;6
(i)to preserve viable commercial enterprises capable of contributing
usefully to national economic life;7
(j)to offer a framework of insolvency law commanding respect and observance, yet sufficiently flexible to cope with change, and which is also:
(i)seen to produce practical solutions to commercial and financial problems,
(ii)simple and easily understood,
(iii)free from anomalies and inconsistencies,
(iv)capable of being administered efficiently and economically;
(k)to ensure due recognition and respect abroad for English insolvency proceedings.
4 On the importance of fairness to creditors given the mandatory, collective nature of proceedings, see also para. 232.
5See para. 198(h) and amplification in paras. 235 and 238.
6See para. 198(i) and amplification in paras. 203–4.
7See para. 198(j) and amplification in para. 204.
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Cork’s statement of aims was largely endorsed in the subsequent 1984 Government White Paper.8 It is noteworthy, however, that the DTI objectives for insolvency legislation, as stated in the White Paper, expanded on Cork by stressing the need to provide a statutory framework to encourage companies to pay careful attention to their financial circumstances so as to recognise difficulties at an early stage and before the prejudicing of creditor interests. The White Paper, moreover, differed in emphasis from Cork in so far as its statement of objectives focused on the interests of creditors and express mention was not made of broader, non-creditor concerns.9
Subsequent legislation10 gave substantial but not complete effect to Cork’s recommendations and, notably, reflected two major strands of Cork’s corporate insolvency law reform policy: namely those of providing a regulatory framework to prevent commercial malpractice or the abuse of insolvency procedures themselves,11 and of providing a formal legal procedure for business rescue.12 What that legislation (and subsequent legislation) did not do, however, was to lay down a formal statement of the purposes of insolvency law or a set of objectives.13
8A Revised Framework for Insolvency Law (Cmnd 9175, 1984). The 2005 United Nations Commission on International Trade Law (UNCITRAL), Legislative Guide on Insolvency Law (United Nations, New York, 2005) p. 14 suggests that an effective insolvency law should: (a) provide certainty in the market; (b) maximise value of assets; (c) balance liquidation and reorganisation; (d) ensure equitable treatment of similarly situated creditors; (e) provide for timely, efficient and impartial resolution of insolvency; (f) preserve the insolvency estate for distribution to creditors; (g) ensure transparency, predictability and good information flows; and (h) recognise existing creditors’ rights and establish clear rules on the ranking of claims.
9Revised Framework., para. 2. Contrast the UNCITRAL Legislative Guide on Insolvency Law, the advice of which aims at ‘achieving a balance between the need to address the debtor’s financial difficulty as quickly and efficiently as possible and the interests of the various parties concerned with that financial difficulty, principally creditors and other parties with a stake in the debtor’s business, as well as public policy concerns’.
10Insolvency Acts 1985 and 1986; Company Directors’ Disqualification Act 1986. See further I. F. Fletcher, ‘Genesis of Modern Insolvency Law: An Odyssey of Law Reform’ [1989] JBL 365; J. H. Farrar, ‘Company Insolvency and the Cork Recommendations’ (1983) 4 Co. Law. 20.
11See e.g. Company Directors’ Disqualification Act 1986 ss. 2–12; Insolvency Act 1986 ss. 214, 238–41, 230(2), 390–2; Insolvency Practitioners (Recognised Professional Bodies) Order 1986 (SI 1986/1764).
12See Insolvency Act 1986 ss. 8–27 (Administration). After the reforms of the Enterprise Act 2002, see now Insolvency Act 1986 Sch. B1.
13Insolvency legislation thus differs materially from typical regulatory statutes which tend to lay down objectives: see e.g. the Communications Act 2003; Utilities Act 2000; Water Act 2003; Environment Act 1995.