Director liability in insolvent companies : an analysis of the effectiveness of private and public enforcement mechanisms with special reference to improper trading liability and disqualification

Archer, Ben and Milman, David (2017) Director liability in insolvent companies : an analysis of the effectiveness of private and public enforcement mechanisms with special reference to improper trading liability and disqualification. PhD thesis, Lancaster University.

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Abstract

Encouraging entrepreneurship and trade by permitting free access to limited liability is a cornerstone emblem of UK enterprise policy. However, it comes at a price. The abuse of limited liability by dishonest, unscrupulous, incompetent, negligent, and occasionally deranged directors, who drive a company into insolvency – and the potential that it has to wreak financial havoc upon unsuspecting creditors – is all too well known. Yet, the state’s response to this abuse is not to limit access to limited liability. Instead, it has been, over a number of years, to create a wide-ranging regulatory regime in an effort to crack down on directorial misconduct. The mechanisms employed by the state for this purpose can crudely be split into two camps: ‘private’ and ‘public’ enforcement mechanisms. Those in the former category are powers of an insolvency officeholder under the Insolvency Act 1986, and have the primary effect of compensating creditors for misconduct that they have suffered at the hands of delinquent directors. This thesis turns its focus on wrongful and fraudulent trading. Public enforcement in this context means directors’ disqualification, pursuant to the Company Directors Disqualification Act 1986. The need for regulation, whether public and private, is shown to arise as a result of moral hazards created by this laissez-faire approach to accessing limited liability. The regulatory regime and limited liability are therefore inextricably linked. With that in mind, the thesis explores how effective these mechanisms are in preventing abuse. Effectiveness here is determined with reference to the original rationale and underpinning objectives of each respective mechanism. The thesis will however not confine itself to a doctrinal analysis of the mechanisms in pursuit of that aim. It will go further and introduce substantial empirical data, so as to understand their operation ‘on the ground’ insofar as is possible. It will be shown that each mechanism suffers its own significant difficulties which are inhibitive of their overall effectiveness. Ultimately the author will express the view that none of the mechanisms discussed appear to be working as intended. The thesis examines the recent reforms to this area following the Small Business, Enterprise and Employment Act 2015, but asserts that in reality they are likely to be of minimal significance. The final part of the thesis criticises the approach of the state in adopting an ex post facto system of regulation in the first place. It argues it to be misguided and inevitably resigned to at least partial failure because it does not deal with the underlying problem. The thesis therefore comes full circle in its conclusions by proposing for consideration a new, ex ante, alternative that deals with the issues at source: the curtailment of access to limited liability.

Item Type:
Thesis (PhD)
ID Code:
89293
Deposited By:
Deposited On:
18 Dec 2017 10:14
Refereed?:
No
Published?:
Published
Last Modified:
12 Jan 2024 00:00