What Can We Expect to Gain from Reforming the Insolvent Trading Remedy?
| DOI | http://doi.org/10.1111/1468-2230.12106 |
| Published date | 01 January 2015 |
| Author | Richard Williams |
| Date | 01 January 2015 |
What Can We Expect to Gain from Reforming the
Insolvent Trading Remedy?
Richard Williams*
This paper argues that reform of the wrongful trading remedy in section 214 of the Insolvency Act
1986 is unlikely to yield significant increases in civil recovery for creditors of insolvent companies.
The paper argues that the widely held view that procedural restrictions in the provision have
unduly limited the application of the remedy are without foundation and, likewise, that there is
little evidence that current modest levels of litigation under the provision demonstrate
underperformance in the sanction relative to the scale of the misconduct against which it is
directed. The paper draws on a wide range of analytical and empirical evidence to argue that the
scope for application of the sanction is inherently limited by factors independent of the particular
rules within the statutory remedy.
INTRODUCTION
The UK government has proposed significant reforms to the ‘wrongful trading’
remedy in section 214 of the Insolvency Act 1986 (IA 1986) in order to enhance
the amount of financial compensation recovered under the remedy from wrong-
doing directors.1The proposals have been advanced as part of a package of
measures that are intended to enhance ‘transparency and trust’ in UK businesses,
but which have a particular focus on expanding civil liability provisions to
combat director misconduct.2The section 214 remedy allows a court to impose
unlimited personal liability on a director of an insolvent company who is found
to have allowed his or her company to continue trading at a time when they
knew, or ought to have concluded, that the company could not avoid insolvent
liquidation.3The remedy was introduced in response to a call from the Cork
*Hogan Lovells University Lecturer in Corporate Law, Christ’s College, University of Cambridge. I
would like to thank Brian Cheffins and the MLR’s anonymous referees for very helpful comments on
this paper. The responsibly for any errors remains entirely my own.
1 Small Business, Enterprise and Employment HC Bill (2014–2015), cl 105 and 106; Department
for Business, Innovation and Skills, Transparency and Trust: Enhancing the Transparency of UK
Company Ownership and Increasing Trust in UK Businesses (July 2013) 11.1–11.12 at https://
www.gov.uk/government/uploads/system/uploads/attachment_data/file/212079/bis-13-959
-transparency-and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing
-trust-in-uk-business.pdf (last accessed 8 October 2014); Department for Business, Innovation and
Skills, Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing
Trust in UK Businesses: Government Response (April 2014) 66 at https://www.gov.uk/government/
uploads/system/uploads/attachment_data/file/304297/bis-14-672-transparency-and-trust
-consultation-response.pdf (last accessed 8 October 2014).
2 Reforms to the wrongful trading rule are accompanied, for example, by proposals to introduce
civil compensation in director disqualification proceedings (See Small Business Enterprise and
Employment HC Bill, ibid, cl 98; see also Transparency and Trust: Enhancing the Transparency of UK
Company Ownership and Increasing Trust in UK Businesses: Government Response,ibid, 66–67).
3 Insolvency Act 1986, s 214(2)(a)–(c).
bs_bs_banner
© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited. (2015) 78(1) MLR 55–84
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
Committee4for a ‘radical extension’5in civil liability for directors who increased
creditor losses through reckless or negligent trading at a time when their
company had little prospect of successful recovery.6
The section 214 remedy has long been viewed as a core creditor-regarding
rule in UK corporate law. Prentice, for example, described the provision as
‘unquestionably’ one of the most important developments in company law in the
last century7and the rule is frequently highlighted as an important creditor
protection device in the UK8and elsewhere.9However, the impact of the
section 214 remedy has been muted, with successive studies finding few exam-
ples of successful recovery under section 214 in the law reports.10
Evidence of limited litigation under section 214 has, however, done little to
dampen belief in the potential of the wrongful trading rule to be an effective
remedy. Blame for its poor performance has instead been attributed to restrictive
rules within section 214 itself.11 The fact, for example, that standing to make
applications under section 214 is confined to company liquidators12 has been
identified as a key cause of apparent ‘insufficiency of enforcement’13 of the
provision. Similarly, uncertainties surrounding the standard for liability for
wrongful trading (ie that a director is liable when he or she ‘knew or ought to
have concluded’ a company could not avoid insolvent liquidation14) as well as
difficulties in funding wrongful trading actions linked to the liquidation rule,15
and even the use of the term ‘wrongful trading’ in describing the section 214
remedy,16 have all been highlighted as factors that are likely to explain the
apparently limited impact of the provision.
4 See, Insolvency Law and Practice: Report of the Review Committee (Chairman, Sir Kenneth Cork)
Cmnd 8558 (1982) (Cork Report).
5ibid, 1782.
6ibid.
7 D. Prentice, ‘Creditors Interests and Directors’ Duties’ (1990) OJLS 265, 277. See also eg, P. L.
Davis and S. Worthington, Gower & Davies: Principles of Modern Company Law (London: Sweet &
Maxwell, 9th ed, 2012) 9–9 (Gower & Davies).
8 See eg, Gower & Davies ibid.
9 See eg, Communication from the Commission to the Council and the European Parliament: Modernising
Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward
Brussels 21.5.2003 COM (2003) 284 at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri
=COM:2003:0284:FIN:EN:PDF (last accessed 8 October 2014). See also Report of the High Level
Group of Company Law Experts on a Modern Regulatory Framework for Company Law Brussels 4
November 2002, para 4.4 at http://ec.europa.eu/internal_market/company/docs/modern/
report_en.pdf (last accessed 20 February 2012).
10 See eg, L. Sealy, ‘Personal Liability of Directors and Officers for Debts of Insolvent Corporations:
A Jurisdictional Perspective (England)’ in J. Ziegel (ed), Current Developments in International and
Comparative Corporate Insolvency Law (Oxford: OUP, 1994); R. J. Mokal, Corporate Insolvency Law
(Oxford: OUP 2005).
11 See eg, A. Keay, Company Directors Responsibilities to Creditors (London: Routledge-Cavendish,
1997) 125–128.
12 Insolvency Act 1986, s 214(1).
13 D. Prentice, ‘Corporate Personality, Limited Liability and the Protection of Creditors’ in R.
Grantham and C. Rickett (eds), Corporate Personality in the 20th Century (Oxford: Hart, 1998).
14 Insolvency Act 1986, s 214(2)(b). See eg, F. Oditah, ‘Wrongful Trading’ [1990] LMCLQ 205,
207–211.
15 See eg, Keay, n 11 above, 131–136; Prentice, n 13 above, 123–125; Mokal, n 10 above, 281–282.
16 Keay, ibid, 129–130.
Reforming the Insolvent Trading Remedy
© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited.
56 (2015) 78(1) MLR 55–84
To continue reading
Request your trial