The Wrongful Trading Provisions
This chapter considers the impact of insolvency on the obligations of the debtor's managers by examining the wrongful trading provisions in section 214 of the Insolvency Act 1986. It employs the tools of agency theory and the ACM to analyze the need for these provisions, their structure, role, and effect. It asks whether a scheme of fair co-operation about insolvency issues would include a section 214-type duty, and if so, why. The analysis reveals that the duty would not be equally relevant for all types of companies, and that the influence of the market for managerial labour ensures most section 214 actions are likely to be brought against directors of closely-held companies, and against shadow directors. The analysis utilizes the insight that section 214 plays a role similar to that of security itself. An important aim of the chapter is to challenge the Law and Economics proposition that to re-distribute the rights of parties in a corporate liquidation creates socially wasteful incentives. After arguing that section 214 is redistributive in the relevant manner, the incentives created by those provisions for the managers of both healthy and distressed companies are examined. It is suggested that these incentives are generally socially efficient. In the result, the provisions would be acceptable to all those affected by them, regarded as equals.
Keywords: motivation costs, coordination costs, agency costs, managerial labour market, closely-held companies, shadow directors, parent companies, subsidiary companies, claim dilution, asset substitution
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