The Measures of Insolvency Law

Author(s): Vanessa Finch

Source: Oxford Journal of Legal Studies , Summer, 1997, Vol. 17, No. 2 (Summer, 1997),
pp. 227-251
Published by: Oxford University Press

Stable URL: https://www.jstor.org/stable/764590

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 The Measures of Insolvency Law
VANESSA FINCH*

Insolvency is an area of law of increasing importance not merel

but because it impinges on a host of other sectors such as the em
environmental, pension and banking law fields. It is essential, th
development of insolvency law proceeds with a sense of pu
sense of direction, this area of law is liable to be marked by
reasoning and failures of policy and related legal sectors will
Is it possible to outline the purposes of insolvency law and
and objectives by which insolvency law can be judged? Is th
aims and objectives crowd so densely as to obscure the light?
seeks out the justifications for insolvency law and processes
it is hoped, will enhance the clarity with which insolvency issue
and will explain the roles of a variety of posited rationales fo
For present purposes attention will be confined to the cor
area and personal bankruptcy issues left to future considera
precise terms the province of corporate insolvency law might b
concerning the proper aims, objectives and scope of such law bu
matter, this area of law is taken to have as its central conce
the winding up of insolvent companies; receivership; volunt
administration orders; and provisions dealing with malpract
porate failure.
A starting point in looking to the objectives of modern English corporate
insolvency law is the statement of aims contained in the Cork Committee Report
of 1982.1 Section 1 looks at the contribution of this statement, and also assesses
the limitations of such a formulation. Section 2 reviews a number of competing
visions of the insolvency process that are to be found in the legal literature and
Section 3 offers an approach that allows and explains trade-offs between com-
peting and legitimate objectives for corporate insolvency processes.

1 The Contribution of Cork

When the Cork Committee2 came to review the state of insolvency law it
encountered a confusion of provisions. A major cause of the unsatisfactory legal
* Law Department, London School of Economics & Political Science. I would like to thank Judith Freedman,
Julia Black, Robert Baldwin, Alison Clarke, the OJLS referee and Pam Hodges for their assistance.
1 The Report of the Review Comminee on Insolvency Law and Practice (Cmnd 8558) (1982).
2 Ibid.

? Oxford University Press 1997 Oxford Journal of Legal Studies Vol 17, No 2

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 228 Oxford Journal of Legal Studies VOL. 17
position was the separate development of rules governing indivi
and corporate insolvency.? From the nineteenth century succe
Acts-as early as the Joint Stock Companies Winding Up Act 1
develop a completely separate and self-contained body of law
dissolution of companies. Both the technical state of the law an
were in disarray. A pragmatic tradition manifested itself in piecem
of the law; reactive solutions were adopted rather than coherent
principles; and legal provisions were scattered throughout a pluralit
statutory instruments and judicial decisions. By the mid-twenti
rules, moreover, had long ceased to furnish solutions to the pr
experienced by those involved in corporate decline. The processe
were marred by instances of liquidator malpractice and the law was
disrepute as 'Phoenix' companies, virtually identical to rece
operations, were used to shed corporate debts with a cynicism t
concern. Developments in other countries, moreover, brought in
restricted focus of an English corporate insolvency law that provid
reorganization only within narrow confines.4
The need for a corporate insolvency law fostering public conf
urgency and a further prompting of change came with the UK's ac
EEC in 1972. The prospect of a Draft EEC Bankruptcy Conven
to a first Committee, chaired by Mr (later Sir) Kenneth Cork
called for a complete review of insolvency law.5 Nine years late
was produced by The Review Committee on Insolvency Law and
chaired by Sir Kenneth Cork. The Cork Committee produced a
a good modern insolvency law'.' It is necessary, however, to draw fr
of areas of the Cork Report in order to produce a combine
objectives relevant to corporate insolvency.8 Drawing thus an
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
late stage;
(c) to prevent conflicts between individual creditors;
(d) to realize the assets of the insolvent which should properly be taken to
satisfy debts with the minimum of delay and expense;

3 See Fletcher, The Law of Insolvency 2nd ed (London, 1996) ch 1; 'Genesis of Modem Insolvency Law-an
Odyssey of Law Reform' (1989) JBL 365. Throughout my analysis references to 'insolvency law' indicate corporate
insolvency law and not personal bankruptcy.
4 E.g. through receiverships and schemes of arrangement (CA 1985, ss 425-7). See Cork, above n 1, ch 9, paras
400-30, 495-7. See Farrar, 'Company Insolvency and the Cork Recommendations' (4) Co Law 20.
s Report of the Cork Advisory Committee, Cmnd 6602 (1976). See further Fletcher, 'Genesis of Modem Insolvency
Law', above n 3.
6 Above n 1. The Review Committee was appointed in January 1977. For comments on the Cork Report see
Farrar, above n 4; Fletcher, 'The Reform of Insolvency Law' (1983) JBL 94-104, 200-17.
7 Para 198.
8 See paras 191-8; 203-4; 232; 235; 238-9.

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 SUMMER 1997 The Measures of Insolvency Law 229

(e) to distribute the proceeds of realizations amongst creditors

equitably returning a surplus to the debtor;9
(f) to ensure that the processes of realization and distribution are ad
honestly and competently;
(g) to ascertain the causes of the insolvent's failure and if cond
criticism or punishment to decide what measures if any require to
establish an investigative process sufficiently full and competent
undesirable conduct by creditors and debtors, encourage settlem
uphold business standards and commercial morality and sustain c
in insolvency law by effectively uncovering assets concealed fro
ascertaining the validity of creditors' claims and exposing the ci
attending failure;'0
(h) to recognize and safeguard the interests not merely of insolvents
creditors but of society and other groups in society who are aff
insolvency, for instance not only the interests of directors, share
employees but also of suppliers, those whose livelihood depends on the
and the community"
(i) to preserve viable commercial enterprises capable of contribut
to national economic life;12
(j) to offer a framework of insolvency law commanding respect and
yet sufficiently flexible to cope with change and which also is:
(i) seen to produce practical solutions to commercial and financi
(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
proceedings.

Cork's statement of aims was largely endorsed in the subsequent Government

White Paper." It is noteworthy, however, that the DTI's objectives for insolvency
legislation, as stated in that 1984 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 recognize difficulties at an
early stage and before the prejudicing of creditor interests. The White Paper,
moreover, differs in emphasis from Cork in so far as its statement of objectives
focuses on the interests of creditors and express mention is not made of broader,
non-creditor concerns."

' On the importance of fairness to creditors given the mandatory, collective nature of proceedings, see also para
232.
'" Set para 198 (h) and amplification in paras 235 and 238.
" See para 198 (i) and amplification in paras 203-4.
12 See para 198 (i) and amplification in para 204.
'" A RLtised Framework for Insolvency Law (Cmnd 9175) (1984).
'" Ibid, para 2.

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 230 Oxford Journal of Legal Studies VOL. 17
Subsequent legislation15 gave substantial but not complete
recommendations and notably reflected two major strands of
insolvency law reform policy-namely those of providing a regulat
to prevent commercial malpractice or the abuse of insolvency
selves,'6 and of providing a formal legal procedure for busines
Does Cork's expression of aims offer a sustainable and usef
objectives for a modem insolvency law? It has not been beyond
the Justice Report of 1994"8 offered qualified praise:

... the Cork principles remain as valid as ever. Our concern with
insufficient attention may have been given to the formulation of a l
fundamental or core principles to which others should in reality be t
or subservient. There is a risk that if the principles are enunciated in
in such broad terms the true essence of the insolvency process m
insufficient attention given to the proper priority of judicial, profes
commercial concerns.,9

The point to be taken is that a statement of multiple and concu

some of which are incompatible in varying degrees, is of very lim
in guiding judges or others who are seeking elucidation on the dir
insolvency law and processes should be developed. The solution
is the establishment of priorities between core and other principl
however, to envisage other conceivable means of imposing directio
by offering a statement of a single, dominant, purpose for insolv
Different visions of insolvency, indeed, point to different a
questions. Whether any such visions advance beyond the point
is a matter to be returned to in Section 3. First, however, it
review those visions or approaches.

2 Visions of Corporate Insolvency Law

A. Creditor Wealth Maximization and the Creditors' Bargain

A number of US commentators, inspired by the law and economic

have argued that the proper function of insolvency law can be
a single objective: to maximize the collective return to creditors.2'

'5 Insolvency Acts 1985 and 1986; Company Directors' Disqualification Act 1986. See furth
above n 3; Farrar, above n 4; Anderson, 'Corporate Insolvency After 1986 Act' (20) Brac
16 See eg CDDA 1986 ss2-12; IA 1986 s214; IA 1986, ss238-41; IA 1986 ss230(2)
Practitioners (Recognised Professional Bodies) Order 1986 (SI 1986 No 1764).
17 See IA 1986 ss 8-27 (Administration).
18s Insolvency Law: an Agenda for Reform, Justice, (London) 1994.
19 Ibid, paras 3.7-3.8.
20 See, eg Jackson, The Logic and Limits of Bankruptcy Law (1986); Baird, 'The Unea
Reorganisations' 15 J Legal Stud 127 (1986); Jackson & Scott, 'On the Nature of Bank
Bankruptcy Sharing and the Creditors' Bargain' 75 Va L Rev 155 (1989).
21 See eg Jackson, ibid; Baird & Jackson, 'Corporate Reorganisations and the Treatment o
Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy' 51

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 SUMMER 1997 The Measures of Insolvency Law 231
to Jackson,22 insolvency law is best seen as a 'collectivized debt collect
and as a response to the 'common pool' problem created when di
owners' assert rights against a common pool of assets. Jackson, more
stated that insolvency law should be seen as a system designed to m
agreement one would expect creditors to arrive at were they able to
such an agreement ex-ante from behind a Rawlsian 'veil of ignoran
'creditors' bargain' theory is argued to justify the compulsory, collectivis
of insolvency law on the grounds that were company creditors fre
forms of enforcement of their claims on insolvency they would agree to
arrangements rather than procedures of individual action or partial co
Jackson sees the collectivist, compulsory system as attractive to cr
reducing strategic costs, increasing the aggregate pool of assets
ministratively efficient. It follows from the above argument that the pr
of non-creditor interests of other victims of corporate decline such as em
managers and members of the community, is not the role of insolve
Keeping firms in operation is thus not seen as an independent goal of
law.
In the creditor wealth maximization approach all policies and rules are designed
to ensure that the return to creditors as a group is maximized. Insolvency law
is thus concerned to maximize the value of a given pool of assets, not with how
the law should allocate entitlements to the pool. Accordingly effect should only
be given to existing pre-insolvency rights and new rights should not be created.
Variation of existing rights is only justified when those rights interfere with group
advantages associated with creditors acting in concert.
The creditor wealth maximization vision has been subject to extensive cri-
ticisms, some of which have been phrased in the strongest terms.25 Major
concerns have focused, firstly, on insolvency being seen as a debt collection
process for the benefit of creditors. This, it has been said,26 fails to recognize
the legitimate interests of many who are not defined as contract creditors-for
instance managers, suppliers, employees, their dependents and the community
at large."7 To see insolvency as in essence a sale of assets for creditors (what
might be termed a 'car-boot sale' image), moreover, fails both to treat insolvency
as a problem of business failure and to place value on assisting firms to stay in
business. Thus, it has been argued that to explain why the law might give firms
breathing space or re-organize them in order to preserve jobs requires resort to

22 See Jackson, Logic and Limits of Bankruptcy Law above n 20, chs 1 and 2.
23 See Jackson, ibid, 17. For further discussion see below 234-5.
24 See Jackson, ibid at 25.
25 See eg Carlson--'Thomas Jackson has written an unremittingly dreadful book' in 'Philosophy in Bankruptcy
(Book Review)' 85 Mich L Rev 1341 (1987). See also Countryman, 'The Concept of a Voidable Preference in
Bankruptcy' 38 Vand L Rev 713, 823-5, 827 (1985); Westbrook, 'A Functional Analysis of Executory Contracts'
74 Minn L Rev 227, 251 n 114, 337 (1989); Sullivan, Warren & Westbrook, As We Forgive Our Debtors: Bankruptcy
and Consumer Credit in America (1989) 256.
26 See Korobkin, 'Contractarianism and the Normative Foundations of Bankruptcy Law' 71 Texas L Rev 541,
at 555 (1993); Warren, 'Bankruptcy Policy' 54 U GChi L Rev 775, 787-8 (1987).
27 See Gross, 'Taking Community Interests into Account in Bankruptcy: An Essay' 72 Wash ULQ 1031 (1994).

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 232 Oxford Journal of Legal Studies VOL. 17
other values in addition to economic ones. The economic a
emplified by Jackson, is, therefore, alleged to demonstrate o
economic value is incapable of recognizing non-economic value
political, social and personal considerations.28
The idea, moreover, that a troubled company constitutes a mere
can also be criticized. Such a firm can be seen not purely as a
an organic enterprise with a degree of residual capability: 'Unlike
a corporation whether in or out of bankruptcy, has potential.
continue as an enterprise: as an enterprise, it can change its
perhaps more importantly, whether the corporation continues and
it personality affects people in ways that are not only econom
law, indeed, has for some time on both sides of the Atlantic recog
rehabilitation of the firm is a legitimate factor to take on boa
decision-making.30
Does it make sense, in any event, to point to a common po
which creditors have a claim before insolvency? Unless credi
arguably is extended on the basis that repayments will be ma
and not from a sale of fixed assets. Income, moreover, can be s
to be produced by the assets themselves but, in the case of an
'an organisational set-up consisting of owners, management, e
functioning network of relations with the outside world, parti
tomers, suppliers and, under modem conditions, with variou
agencies'."3
It is, indeed, insolvency law itself that creates an estate or pool of assets and
this undermines any assertion that insolvency processes should maximize the
value of a pre-existing pool of assets and should not disturb pre-insolvency
entitlements.
The idea that insolvency law can be justified in a contractarian fashion with
reference to a creditors' bargain has also come under heavy fire.3 The creditors'
bargain restricts participation to contract creditors. In this sense the veil of
ignorance used by Jackson is transparent since the agreeing parties know their
status in insolvency. It is not surprising that in an ex ante position such creditors

28 See Korobkin, 'Rehabilitating Values: A Jurisprudence of Bankruptcy' 91 Colum L Rev 717, 762 (1991).
Certain economic approaches may, of course, favour a particular corporate reorganization and job preservation
arrangement because this maximizes social wealth-though in other circumstances there may, on this basis, be
arguments for allowing jobs to move into new, more efficient and profitable contexts. (Jackson, in contrast, seeks
to maximize reditor wealth.) On wealth maximization as an ethical basis see generally Posner, 'Utilitarianism,
Economics and Legal Theory' 8 J Leg Stud 1163 (1971), but cf Dworkin, 'Is Wealth a Value?' 17 J Leg Stud 191
(1980); A Matter of Principle (Oxford, 1986) chs 12, 13.
29 Korobkin, ibid at 745. See also Warren, above n 26, at 798.
30 See Korobkin, above n 28 at 749 and 751. On the UK, see Hill, 'Company Voluntary Arrangements' (1990)
6 Ins L & P 47; Cork, above n 2, paras 29-33 (re administration); Rajak, 'Company Rescue' (1993) 4 Ins L & P
111; Insolvency Service, Company VoluntatryArrangements andAdministration Orders: A Consultaie Document (1993)
and Revised Pwoposals for a New Company Voluntary Arrangement Procedure (1995).
31 See Flessner, 'Philosophies of Business Bankruptcy Law: An International Overview' in Ziegel (ed) Cumrnt
Developments in International and Comparative Corporate Insolvency Law (1994).
32 See Carlson, above n 25 at 1355: 'even less than a hollow tautology'.

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SUMMER 1997 The Measures of Insolvency Law 233
would agree to maximize the value of assets available for distribution
selves." Jackson, moreoever, focuses exclusively on voluntary and b
creditors, while assuming a perfect market and leaves out of account othe
of creditor, for whom there is no market at all.
The circular nature of the bargain has been emphasized by critics. C
in the bargain are assumed to be de-historicized and equal. The credito
model has accordingly been said to explain the rule of creditor equalit
presupposing what it sets out to prove.34 In real life, in contrast, creditor
in their knowledge, skill, leverage and costs of litigating. The assump
powerful creditors (eg secured creditors) would agree to collectivize th
to the pool alongside their weaker brethren is highly questionable.
likely that what parties will agree to will inevitably mirror the disparities
authority and practical leverage that shape their perspectives." Jackson's s
to this problem is to suggest that secured creditors should receive from t
no less than they would be entitled to outside insolvency. This is the
Animal Farm and is inconsistent with the homogeneity of creditors o
posited. To assume, moreover, that all creditors have purely economic
is also questionable. Thus, for instance, employee creditors who face displa
costs separate from their claims for back wages might not agree to
equality because they consider such costs should be reflected in a higher p
for their back wages claims. They might additionally consider that th
on assets morally outrank those of secured creditors and for this re
insist on priority for wage claims.36
A further major weakness of the creditor wealth maximization visi
alleged lack of honesty on distributional issues." The collectivism adv
Jackson is treated as neutral but it begs distributional questions. By p
merely to enforce pre-insolvency rights Jackson presupposes the defensib
the state-determined collection scheme without further argument-by
cess distributive elements are worked into his theory via the back d
inappropriateness of transplanting the system of state allocation of rights
clearer on noting the very different functions of the respective bodi
Whereas state entitlements, pre-insolvency, are designed with an eye to o
contractual relationships, it is arguably the very purpose of a (federal) ins
system to apportion the losses of a debtor's default when a variety o
impinges on decisions as to where losses should fall. If, indeed, it is p
insolvency law to look beyond pre-insolvency rights, this again strik

33 See Korobkin, above n 26, at 555. See also Gross, above n 27, at 1044.
34 See Carlson, above n 25 at 1348-9; Korobkin, above n 28, at 736-7.
35 See Korobkin, above n 26, at 552.
3' See Carlson, above n 25 at 1353. It might be argued from an economic perspective that emplo
expected to compensate for employment insecurities by demanding that these be reflected in higher
Inequalities of employerfemployee bargaining positions and information levels are factors, inter alia,
make such expectations unrealistic: see eg Ogus, Regulation* Legal Form and Economic Thcory (O
38-41; Breyer, Regulation and Its Reform (1982); Stone, 'Policing Employment Contracts Within t
Contracts Firm' 43 U of Tornto LJ 353, (1993).
7 See Warren, above n 26, esp 790, 802, 808.

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 234 Oxford Journal of Legal Studies VOL. 17
heart of the creditors' bargain thesis. It can be said in the fi
insolvency does and should recognize the interests of parties
legal rights in the pre-insolvency scenario38 not least because par
legal rights never bear the complete costs of a business failu
may suffer in an insolvency but those without formal legal r
prejudiced-not only, as already noted, employees who will lose job
who will lose customers, but also tax authorities whose prospe
may be diminished and neighbouring traders whose business
be devalued. A danger of the creditor wealth maximization vis
adequately to value the continuation of business relationships tha
formalized in contracts and may, indeed, omit from consider
suffer the greatest hardships in the context of financial distress
A second point concerns those parties with various pre-insolven
The argument that insolvency law should only give effect to the
rights can be countered by asserting that a core and proper func
law is to pursue different distributional objectives than are im
of pre-insolvency rights--that insolvency law does so by ado
rule on equality-pari passu-and by then making considered ex
rule. It is insolvency law's application to the turbulence of fi
distinct from the calm waters that mark pre-insolvency cont
said to justify the intrusion of a number of value judgements con
priorities of various liabilities and the order in which groups of
be discharged.40

B. A Broad-Based Contractarian Approach

A vision of insolvency law that attempts to overcome the restric
wealth maximization is a broader contractarianism. The version discussed here
is the Rawlsian scheme of Donald Korobkin.4" Whereas Jackson seeks to justify
insolvency law with reference to the rules that contract creditors would agree to
from behind the veil of ignorance, Korobkin places behind the veil not merely
contract creditors but representatives of all those persons who are potentially
affected by a company's decline, including employees, managers, owners, tort
claimants, members of the community etc. These people choose the principles
of insolvency law from behind a strict veil-ignorant of their legal status, position
within the company or other factors that might lead them to advance personal
interests. They would, however, foresee that the financial distress of companies
would affect a wide variety of individuals and groups occupying various positions

38 See Warren, 'Bankruptcy Policymaking in an Imperfect World' 92 Mich L Rev 336, at 356 (1993).
39 See Korobkin, above n 26, at 581.
40 See Warren, above n 26, at 778, above n 38, at 353-4. On preferential status generally see Cork, above n 1,
chs 32, 33; Milman, 'Priority Rights on Corporate Insolvency' in Clarke (ed) Current Issues in Insolvency Lar,
(Stevens, 1991); Cantlie, 'Preferred Priority in Bankruptcy' in Ziegel (ed), Cunrrnt Devedopments in International
and Comparative Corporate Insolvency Law (1994).
41 Above n 26. See Rawls, A Theory of Justice (Oxford, 1972).

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 SUMMER 1997 The Measures of Insolvency Law 235

and differing in their ability to affect the actions and decisions of th

in distress.
Korobkin argues that the parties in such a position of choice w
two principles to govern insolvencies.42 First, a 'principle of inc
would provide that all parties affected by financial distress would
press their demands. Second, a principle of 'rational planning' wou
whether and to what extent persons would be able to enforce lega
exert leverage. It would seek to promote the greatest part of the most
aims (the 'maximization of aims') and would involve formulati
rational, long-term plan as a means of realizing the 'good' for th
enterprise. It would require an outcome that would 'maximumly satisf
but, in reflection of Rawls' difference principle, would mandate th
the worst-off positions in the context of financial distress should
over those occupying better-off positions. For such purposes pers
off positions would be those relatively powerless to promote their aim
the most to lose on the frustration of those aims.
Korobkin argues that application of his contractarian approach would produce
laws corresponding in fundamental ways to the kind of insolvency system
encountered in the US. His approach, like that of Rawls,43 however, is open to
question on a number of fronts. Firstly, the particular choices of principle made
from behind the veil of ignorance depend on a particular concept ofthe person--it
is not possible to strip the individual completely yet conclude that he or she
would choose, for instance, the difference principle." Risk-averse and risk-
neutral individuals might produce very different principles of justice. It is not
clear why an individual behind the veil might not prefer a regime marked by
low cost credit and low protection for vulnerable parties to one with high costs
of credit and high levels of protection outcome.
This introduces a second difficulty as encountered in Rawls-the extent to
which diminutions in justice may be traded off against gains on other fronts,
such as in wealth. Advocates of creditor wealth maximization might object to
Korobkin's scheme on the grounds that principles of insolvency law designed
by a veiled and highly inclusive group are liable to be so protective of so many
interests, and as a result so uncertain, that the effects on the cost of credit
would be catastrophic. Korobkin's answer would be that such effects would be
anticipated by those behind the veil. The device of the veil, however, does not
in itself explain trade-offs between fairness or justice and wealth creation-such
matters are governed by the concept of human nature built into the system
rather than the veil. If such trade-offs are ruled out it can be objected that the
protection offered by a just rule is of very limited value if individuals lack the

41 Ibid. 575-89.
4 On Rawls see eg Daniels (ed) Reading Rawls (Oxford, 1975); Nozick, Anarchy, State and Utopia (Oxford,
1974) 183-231.
4 In F. H. Bradley's words 'a theoretical attempt to isolate what cannot be isolated', quoted in Loughlin, Public
Law and Political Theory (Oxford, 1992) 96. See also Sandel, Liberalism and the Limits ofJustice (Cambridge, 1982)
93-4.

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 236 Oxford fournal of Legal Studies VOL 17
resources required to take advantage of that rule. The distinction, m
between principles of fairness or justice and principles governing the al
of other goods such as wealth is also problematic.45
It might be further objected that the contractarian approach fails to
how agreements can be reached behind the veil as to who in a potential inso
is most vulnerable and, thus, should enjoy priority of protection ove
occupying less threatened positions. Korobkin acknowledges the difficu
comparing positions in terms of vulnerability and these are indeed r
suggests that vulnerability be measured in terms of the product of the pot
loss to and the degree of influence exercised by an individual. There is no r
however, why such an approach would be accepted by all parties behi
veil-many may think that such benchmarking distorts the system in fa
those who already possess advantages and so have much to lose. A final diff
is whether agreement could be expected on the relative valuations of, say, r
to secure or continued employment, as opposed to particular sums of
owed by parties to others. As a guide to the practical development of insolv
law contractarianism may indeed be considerably flawed by its indeterm

C. The Communitarian Vision

In contrast with the emphasis on private rights contained within the creditor
wealth maximization approach, the communitarian countervision sees insolvency
processes as weighing the interests of a broad range of different constituents. It
accordingly countenances the redistribution of values so that on insolvency high
priority claimants may to some extent give way to others, including the community
at large, in sharing the value of an insolvent firm."6 A concern to protect
community interests may, furthermore, work in favour of insolvency laws that
compel companies and their creditors to bear the costs of financial failure (eg
environmental cleaning costs) rather than shift those to third parties or taxpayers.47
Communitarianism thus challenges the premises serving as the basis for the
traditional economic model, namely that individuals should be seen as selfish,
rational calculators. An important aspect of communitarianism is the centrality
that is given to distributional concerns.48 Redistribution is seen not as an
aberration from the protection of creditors' rights but as a core function of

45 See Craig, Public Law and Democracy (Oxford, 1990) 262-3.

46 See Warren, above, n 26 and 38; Gross, above n 27. See also Report of the Commission on the Bankrupt~y Laws
of the US, Pt 1, HR Doc No 137, 93d Cong, Ist Sess 85 (1973) discussing the 'overriding community goals and
values' of bankruptcy.
47 See eg Heidt, 'The Automatic Stay in Environmental Bankruptcies' 67 Am Bankr LJ 69 (1993); Klerman,
'Earth First? CERCLA Reimbursement Claims and Bankruptcy' 58 U Chic L Rev 795 (1991); Manolopoulos,
'Note--A Congressional Choice: The Question of Environmental Priority in Bankrupt Estates' 9 UCLA J Envdt
L & Poly 73 (1990). But, see Lavargna, 'Government-Sponsored Enterprises Are "Too Big to Fail": Balancing
Public and Private Interests' 44 Hastings LJ 991 (1993).
48 See Warren, above n 26. See also Warren & Westbrook, The Law of Debtors and Craditors: Text, Cascs and
Pmblems (1986) 3-7, 219-26.

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 SUMMER 1997 The Measures of Insolvency Law 237
insolvency law-'bankruptcy is simply a ... scheme designed to distri
costs amongst those at risk'.49
It follows from the concerns of communitarianism that insolvency l
look to the survival of organizations as well as to their orderly liqu
this respect the Cork Committee's50so statement of aims incorporates
communitarianism in stressing not merely that insolvency affects in
society beyond insolvents and their creditors, but that the insolvenc
should provide means to preserve viable commercial enterprises
contributing to the economic life of the country.5' To creditor wealth ma
the communitarian vision is objectionable in so far as it clouds insolv
by departing from creditor right enforcement and taking on issues (eg pr
for workers), which more properly should be dealt with by allocati
insolvency rights -for example rights to employment security, fair dismi
compensation on redundancy."2 In response communitarians might ur
that there is no reason why issues arising in insolvency should be gov
rules or agreements formulated without regard to insolvency and, sec
it is perfectly proper to advert to communitarian issues in both pre-i
and insolvency law.
The breadth of concerns encompassed within communitarianism giv
itself to problems of indeterminacy. Corporatist visions of the compan
objected to as having difficulty in defining the public good and as offerin
a mask behind which corporate managers exercise unrestrained s
economic power'." Similarly, communitarianism can be said to lack th
of focus necessary for the design of insolvency law because of the br
interest to which it refers. As Schermer has argued '... it is imp
delineate the community ... There are an infinite number of community i
at stake in each bankruptcy and their boundaries are limitless ... almos
from local employee to a distant supplier, can claim some remote lo
failure of a once viable local business'."54
The problem is not so much that community interests cannot be id
but that there are so many potential interests in every insolvency a
selection of interests worthy of legal protection is liable to give rise to co
tension. How, moreover, can selected interests be weighed? How migh
balance the community's interest in maintaining employment against
environmental damage? Doubts, furthermore, have been expressed a
feasibility of redistributing funds in an insolvency.55 Insolvency law
4Q Warren, above n 26 at 790.
5 Above n I and n 8.
5' Ibid para 198 (i) and (j).
52 Adler, 'A World Without Debt' 72 Wash ULQ 811 (1994) at 826. Compare Baird, 'Loss Distribu
Shopping and Bankruptcy: A Reply to Warren' 54 U Chi L Rev 815 (1987) with Warren, above n 2
53 Stokes, 'Company Law and Legal Theory' in Twining (ed) Legal Theory and Common Law (Blac
at 180.

54 Schermer, 'Response to Professor Gross: Taking the Interests of the Community into Account in Bankruptcy'
72 Wash ULQ 1049, at 1051 (1994).
55 Bowers, 'Rehabilitation, Redistribution or Dissipation: The Evidence of Choosing Among Bankruptcy
Hypotheses' 72 Wash ULQ 955, at 964 (1994).

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 238 Oxford Journal of Legal Studies VOL. 17
designed in order to dilute the legal rights of secured creditors and
associated wealth to other parties but (transaction costs permitt
secured lenders may well alter the terms and tariffs of their respe
as to contract around the legal alterations. There is some evid
studies that such circumvention has been encountered.56
A final objection to communitarianism urges that insolvency
necessarily well placed to decide what should and should not b
community problem, or what should be in the community's be
that this involves judges in politically fraught decision-making
policy ad hocery. In defence, however, communitarians might
judges inevitably and in all sectors of the law advert to public
interests, that an insolvency law solely for creditor protection
narrow and that if community interests impinge on judicial decisio
be dealt with openly and fully.

D. The Forum Vision

Rather than seeing the insolvency process in terms of substant
may be conceptualized in procedural terms-its essence bein
forum within which all interests affected by business failure, w
monetary or not, can be voiced.58 The enterprise is seen as co
merely the physical assets and stock of business but the focus o
concerns of all participants in the company's financial distress. The
in turn is seen as establishing space, it:
... creates conditions for an ongoing debate in which, by expressing
and incommensurable values, participants work towards defining an
fundamental aims of the enterprise. Through the medium of bankru
the enterprise realises its potential as a fully dimensional personality.s

Not only interested parties can engage in this discourse. To

significantly, allows extra-legal resources and expertise to be br
so as to construct the domain to be legally regulated. Thus accou
important part in defining the onset of insolvency and in advising
'Before corporate failure can be internalised within the legal system
to be represented and calculated as an economic event by means of
technologies of accountancy'."6 Such a vision may throw light o
role to be played by insolvency law but it necessarily falls short of o
on matters of substance. As, moreover, with other theories of legitim
providing means of representation" difficult issues remain concern
56 See citation in Bowers, ibid at 959.
57 Schermers, above n 54.
58 Flessner, above n 31.
59 Korobkin, above n 28, at 772.
6" Miller & Power, 'Calculating Corporate Failure' in Dezalay & Sugarman (eds) Professio
Professional Power: Lawyers, Accountants and the Social Construction of Markets (London: Ro
1 See Stewart, 'The Reformation of American Administrative Law' 99 Harv LR 1667 (19
Pateman, Participarion and Democratic Theory (Cambridge, 1970).

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 SUMMER 1997 The Measures of Insolvency Law 239
of representation to be offered to different parties; the 'right' balanc
provisions for representation and efficiency in decision and policy-m
the extent to which representation should be reinforced with legal rig

E. The Ethical Vision

According to Philip Shuchman, insolvency laws fail to rest on an adequate

philosophical foundation in so far as the formal rules of insolvency disregard
issues of greatest moral concern.62 He argues that the situation of the debtor,
the moral worthiness of the debt and the size, situation and intent of the creditor
should be taken into account in laying the foundations for insolvency law.
Judgements in such matters would not be based upon intuitions but on utilitarian
principles. Thus the criteria to be employed would be 'present and prospective
need, desert and the moral and philanthropic worth, and the importance of the
underlying transaction ... in the context of bankruptcy it is assumed that inter-
personal comparisons of utility are significant and that social states can be
ordered according to the sum of utilities of individuals; further, that the choice
of any given arrangement ordinarily ought to be some sort of aggregation of
individual preferences'.63
Shuchman, therefore, argues that a distinction should be drawn between debts
that have arisen out of contracts that personally benefit the creditor and debts
flowing from involuntary acts or loans between friends. He would, accordingly,
have judges or administrators base decisions on such matters as priorities on
ethically relevant realities. He would resist blind acceptance of pre-petition
creditors being equal.
Whether it is realistic to expect to find ethical principles to underpin all
insolvency law can be questioned" as indeed might the possibility of any group
of individuals or judges coming to agree on the substance of such principles.65
The boundaries, moreover, of relevant ethical principles (and the border between
ethical principle and prejudice, distaste or disgust)66 cannot be established
uncontentiously. To rely upon the judiciary to evaluate the moral needs and
deserts of creditors and the moral worthiness of debts and to incorporate such
evaluations within insolvency law places a large degree of faith in their own
moral judgement (not to say the existence of an identifiable and agreed set of
moral predicates) and their determination and ability to develop a consistent
and coherent body of law on this basis. Such a system might also have considerable
and detrimental effects on the availability and cost of credit in so far as creditors'
bargains would be placed in the shadow of legal uncertainty. Creditor wealth
maximizers might, finally, add that questions of consistency between bodies of

?2 Shuchman, 'An Attempt at a "Philosophy of Bankruptcy"' 21 UCLA L Rev 403 (1973).

63 Ibid at. 447.
6 See Carlson, above n 25 at 1389.

65 See the exchange between Hart, Lat, Libery, and

(1965). Morality (1963) and Devlin, The Enformement of Morals
f6 See Dworkin, Taking Rights Seriously (London, 1977) ChlO.

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 240 Oxford Journal of Legal Studies VOL. 17
law arise and argue that if non-insolvency law generally declines
the virtuous (or disreputable) motives of those involved in
then insolvency law should do likewise."6

F. The Multiple Values/Eclectic Approach

In stark contrast to approaches offering a single, economic
emplified by the creditor wealth maximization vision, is the not
law serves a series of values that cannot be organized into nea
Warren offers what she calls a 'dirty, complex, elastic, interc
insolvency law from which neither outcomes can be predicted no
relevant to a policy decision can necessarily be fully articulat
economic account can explain insolvency law only as a devic
creditor wealth, not distribute fairly, a value-based account is sai
insolvency law's 'economic and non-economic dimensions an
fairness as a moral, political, personal and social value'.69
Multiple values/eclectic approaches as exemplified by Warre
see insolvency processes as attempting to achieve such ends a
consequences of financial failure amongst a wide range of act
priorities between creditors; protecting the interests of future c
opportunities for continuation, reorganization, rehabilitation; pr
adjustments; serving the interests of those who are not technical
who have an interest in continuation of the business (eg emp
prospect of re-employment, customers, suppliers, neighbouring p
and state tax authorities); protecting the investing public, jo
community interests. Such approaches incorporate communita
and take on board distributive rationales, placing value, for insta
ability to bear costs; the incentive effect on preinsolvency transa
to treat like creditors alike; and the aim of compelling shareh
lion's share of the costs of failure.
Further goals can be added by making reference to the Cork Committee's
own statement of aims-a clear example of the multiple value approach.70 Thus,
as already noted, Cork emphasized the role of insolvency law in reinforcing the
demands of commercial morality and encouraging debt settlement7' and also
stressed deterrent and distributive ends in urging that insolvency should seek to
ascertain the causes of failure and consider whether conduct merited punishment.

67 See Jackson, above n 20, chli.

" Warren, above n 26, at 811.
69 Korobkin, above n 28 at 781.
To Above n 1, para 198. For an overview of multiple aims and essential features of an insolvency system see
Flaschen and DeSieno, 'The Development of Insolvency Law as Part of the Transition from a Centrally Planned
to a Market Economy' 26 Int Lawoyer 667 (1992), at 668-71.
71 See also Triantio, 'Mitigating the Collective Action Problem of Debt Enforcement through Bankruptcy Law:
Bill C-22 and its Shadow' 20 Can Bus LJ 242 (1992), who argues that while bankruptcy law may be valuable to
resolve the collective action problem and to secure efficiency, an additional objective should be to promote efficient
'private workouts' in the shadow of bankruptcy law. (See also Baird's reply, 261-8.)

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 SUMMER 1997 The Measures of Insolvency Law 241

The multiple value approach, moreover, is broad enough to enc

forum vision. Thus, in putting forward his own value-based approa
as seen, posits the worth inter alia of insolvency law's providing a foru
representation of views:
under the value-based account, bankruptcy law has the distinct functio
conditions for a discourse in which values of participants may be rehabi
informed and coherent vision of what the estate as enterprise shall exist t

What is the case for a multiple value approach? Warren argues t

focusing on the values to be protected in an insolvency distributio
effective implementation of those values assists decision-makers ev
not dictate specific answers. It illuminates the critical, normative a
questions and involves inquiries into the range of relevant issues
may be hurt by a business failure; how they may be hurt; whether
be avoided and at what cost; who is helped by the failure; whether
helped off-sets the injury to those hurt; who can effectively evaluate
failure; who may have contributed to the failure and how; wheth
tribution to failure serves useful goals; who can best bear the costs of
who expected to bear those costs."
Such an approach is thus said to highlight the empirical assumptions
insolvency decisions to ask tough and specific questions by coming
the 'difficult and complex tapestry' of empirical presumptions and
concerns." It honestly acknowledges that judgements are made in
numbers of values in insolvency decision-making. Answers may not
but are said to be more fully reasoned than those resulting from si
approaches.7
Eclecticism, nevertheless, gives rise to not inconsiderable problems. In the
first instance little assistance is offered to decision-makers on the management
of tensions and contradictions between different values or on the way that trade-
offs between various ends should be effected. Questions, moreover, are easily
begged in choosing which values to invoke or emphasize.7" Nor do core principles
emerge to guide on such trade-offs or establish weighings-this, as noted, was
a concern that the 1994 Justice Report expressed with regard to the Cork
statement of aims.77
The open textured nature of eclecticism can be a problem in some multi-
value schemes. Unless particular values are identified with precision, appeals
can be made to an open-ended menu7" of purposes and it is difficult to decide
72 Korobkin, above n 28 at 781.
" Warren, above n 26, at 796.
74 Ibid at 797.
75 Korobkin, above n 28 at 787.
76 See Frug, 'The Ideology of Bureaucracy in American Law' 97 Haro L Rev 1277 (1984) at 1379.
77 Above 18 and 19.
78 For a view that insolvency law should offer a 'menu of options' and allow firms to choose the optimal rules
for their own, perhaps idiosyncratic requirements, see Rasmussen, 'Debtor's Choice: A Menu Approach to
Corporate Bankruptcy' 71 Ttx L Rev 51 (1992) and 'The Ex Ante Effects of Bankruptcy Reform on Investment
Incentives' 72 Wash ULQ 1159 (1994).

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 242 Oxford fournal of Legal Studies VOL. 17
when to rule out appeals on the basis that they invoke irrelevant values or
(Cork, it should be conceded, does offer a list, as we have seen). Eclec
runs the danger of seeing all arguments as valid and, as a result, guida
practical decision-making is lacking and confusion results. If an identificati
the objectives of insolvency law is desired so as to provide a framework
which judges and legislators can act, then the multiple value/eclectic, even
than the communitarian, approach is guilty of settling untrammelled discr
on such individuals and allowing them freely to choose from and comb
indeterminately long list of vaguely stated ingredients.

3 The Nature of Measuring

The above visions or approaches to insolvency emphasise different fa
corporate insolvency law's role. What fails to emerge from the review unde
however, is any complete view of the appropriate measures of insolven
Creditor wealth maximization was narrow in its exclusive concerns with creditors'
interests and pre-insolvency rights and in its conception of the insolvent company
as a pool of assets; the broad-based contractarian approach begged questions
concerning the nature of persons behind the veil of ignorance and failed to
explain trade-offs of fairness or justice versus efficiency or between different
kinds of interests worthy of protection. The communitarian vision escaped
the narrowness of creditor wealth maximization but encountered problems of
indeterminacy. The forum vision made much of procedural concerns but shed
little light on the substantive ends to be pursued by insolvency law or processes.
The ethical vision gave rise to difficulties concerning the possibility of locating
agreement as to ethical content and to establishing the boundaries of relevant
ethical concerns. How ethical aspects of decisions on insolvency interacted with
other, say legal, principles remained in doubt. Finally, the eclectic approach,
again, gave rise to problems of indeterminacy and of contradictions and tensions
between different ends.
To advance the search for measures in the light of such competing, yet
contestable, visions it is necessary to examine further the purpose of a quest for
benchmarks and in doing so to answer two questions. What precisely is being
measured? Is it possible to justify insolvency law or processes given present
approaches?
I will respond to these issues by examining a well-known treatment of jus-
tification in company law and suggesting that it can be built upon to develop
an approach that has relevance for the corporate insolvency arena.
A framework for analysing the fundamental rules of company law has been
offered by focusing on the question of how corporate managerial power is
legitimated-this issue is said to be a 'unifying theme of company law'.79 Mary
Stokes' argument, in brief, is as follows. If economic power, derived from private

79 Stokes, above nn 53 at 155; see also Frug, above n 76.

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 SUMMER 1997 The Measures of Insolvency Law 243
property, is to be legitimated within the framework of a liberal soc
necessary to show that there are restraints preventing it from becoming a
to liberty or a challenge to state power. Two strategies are contained w
fabric of the law to attempt this demonstration: first, it is posited
economic power at issue is not sufficiently concentrated to be a threat
such economic power is seen as subject to constraints imposed by the comp
market. Unfortunately both strands of argument are afflicted with de
The growth of the corporate enterprise has allowed concentrations of
power and the separation of ownership from control has produced m
powers that are unrestrained by the market (much economic power in
come to be exercised not within markets but within corporate bureau
Company law can be said to have offered a response to the pro
corporate managerial power by explaining why discretion was confe
corporate managers and by demonstrating that such discretionary p
subject to checks and controls. The justification for discretion was b
some on a contractual view of the company.8s Thus, the owners might leg
contract with managers to establish the latter as agents. The problem
a contractual conception to legitimate managerial power was that th
conflicted with the case law theory of the company as a body distin
separate from its shareholders. As companies grew, moreover, the artificia
a contractarian analysis became apparent. A 'natural entity' view of
poration was seen by others to be more appropriate.81 This saw the co
a living organism with the managers as the brain and the shareholders
suppliers of capital. The natural entity view gave rise to a furthe
justifying the vesting of discretionary power in managers-it was the
and competence of managers that legitimated their discretion. The bo
of such expertise and appropriate deference to it were nevertheless dif
delineate.
As for legitimation through checks on arbitrariness, the traditional legal
model offered two mechanisms-accountability to shareholders through internal
company controls and directorial duties to act in the best interest of shareholders.
(The latter duties legitimated discretions by compelling directors to aim at profit
maximization.)
Both mechanisms proved flawed. In large public companies the dispersion of
shareholding undermined shareholder control and managers, in reality, wielded
power free from shareholder constraint. Fiduciary duties failed to constrain
80 On the contractual view see Parkinson, Corporate Power and Responsibility: Issues in the Theory of Company
Law (Oxford, 1993) 26-32 and 'The Contractual Theory of the Company and the Protection of Non- Shareholder
Interests', in Corporate and Commeirial Law: Modern Developments (Lloyd's of London Press, 1996); Bratton, 'The
"Nexus of Contracts Corporation": A Critical Appraisal' 74 Cornell L Rev 408 (1989) at 415-23; Jensen &
Meckling, 'Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure' (1976) J Financial
Economics 305; Easterbrook & Fischell, 'The Corporate Contract' 89 Colum L Rev 1416 (1989); Fama, 'Agency
Problems and the theory of the Firm' 88 J Political Econ 288 (1980); Symposium, 'Contractual Freedoms in
Corporate Law' 89 Col L Rev 1385 (1988); Butler, 'The Contractual Theory of the Corporation' 22 Geo Mason
UL Rev 99 (1988).
81 See Stokes above n 53 at 164. See also further discussion in Mayson, French & Ryan Company Law, 13th
edn, ch 5.

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 244 Oxford Journal of Legal Studies VOL. 17
directors because the Courts allowed the latter wide discretion
interests of shareholders. Judicial deference to managerial ex
moreover, legitimate managerial power because it was impossib
between decisions meriting deference on the basis of expert
owing more to the pursuit of personal or non-corporate ends.
holding, again, produced a lack of control over managers because of low
information levels and low incentives to enforce duties against directors."2 In
short, the law's quest to legitimate the power of corporate management failed.
In response to this failure two strategies might be advocated within the
traditional approach: either managers could be made more responsible to the
market or new legal steps taken to ensure management in the interest of
shareholders. Both of these strategies would constitute tinkering. It would be
better, argued Stokes, to recognize the misguided nature of attempts to control
through markets or the ordering of power in the company and to adopt a new
perspective on legitimating managerial power."8 This new approach would accept
the separation of ownership and control and break free from the contractual
conception of the company. It might build on a corporatist model of the company
and see its interests not merely as those of shareholders but as involving both
public and private dimensions; see directors as expert public servants balancing
a variety of claims by various groups in the community and doing so with
reference to public policy not private cupidity; and see the company as an organic
body unifying the interests of participants in harmonious purpose. Managerial
power would be legitimated as giving expression to the common purposes of
shareholders, creditors, employees and the community.
The corporatist vision might give rise to concerns that corporate managers
would enjoy unrestrained discretions in resolving interests and defining public
benefits. In response to such worries, a democratic ideal might be introduced
into corporate life to legitimate corporate power-this ideal would demand that
all those substantively affected by decisions should be involved in making those
decisions.
Stokes' argument, in short, is thus that current strategies for legitimating
managerial power should be seen as unnecessarily tied to traditional contractual
views of the company and as inadequate-that the values involved in the
corporatist and democratic ideals of the company should be embraced in re-
thinking rationales for legitimation.
The importance of the outlined argument lies in its critique of the assumptions
that underpin traditionalist approaches to the legitimation of managerial power
and in its stressing that the public dimension of corporate power demands
measures reflecting community and democratic rather than simply private values.
Against Stokes it can be countered, however, that reservations about narrow
contractarianism and endorsement of the communitarian/democratic approach
do not necessarily mean that arguments for legitimation based on contractarian
82 See Finch, 'Company Directors: Who Cares About Skill and Care' (1992) 55 MLR 179.
83 Stokes, n 53, 173-7.

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 SUMMER 1997 The Measures of Insolvency Law 245

assumptions lack all validity. Here the question is whether traditionalist ar

for legitimation are 'fundamentally misguided'84 in the sense that they ar
deceptions or whether they are criticizable as telling only part of t
The communitarian/democratic vision may be completely at odds with the
contractarian vision but it may be that legitimating arguments from both camps
may cumulate-that adding a communitarian perspective means that corporate
managerial power is capable of legitimation to some degree with reference both
to controls exercised over managers by the market and controls operating through
representative arrangements corresponding to the democratic ideal. Legitimating
arguments such as those based on expertise and accountability can thus be seen
as having cumulative force in spite of being flawed in various ways-indeed
arguments derived from the communitarian/democratic vision are themselves
not problem-free. (How much representation of which interests is appropriate?
How should such representation best be achieved?)
To consider a series of legitimating arguments and point serially to the
limitations of each one and to conclude that legitimation cannot result may be
to misportray legitimation as a chain of arguments as strong as its weakest link
rather than as a rope able to exert force according to the collective power of its
(albeit imperfect) strands.85
A further problem may arise if legitimation is seen exclusively as restraint-as
all about the limitation of discretionary powers. Subjection to control and
accountability may be necessary for legitimation but these factors may themselves
be insufficient to guarantee it--those attributing legitimacy may also demand
that the system enables and encourages the protection of substantive outcomes
effectively and they may also recognize the legitimacy of genuinely expert
management.86
What lessons can be learned by those seeking measures and benchmarks for
insolvency law? Indeed, wherabouts in the insolvency sphere is the power
requiring legitimation? Company law was said to be about the legitimation of
corporate managerial power in the hands of directors. Insolvency is more complex
because it is the tendency of English insolvency law to take power out of the
hands of management and place it, according to various circumstances, with
different parties such as creditors, insolvency practitioners"8 and the Courts
themselves. It is thus the broad insolvency process in all its dimensions and with
its variety of actors that requires legitimation.

84 Ibid 174.
85 It might be argued that the strands analogy breaks down where individual strands oppose rather than lie
parallel (eg employee versus creditor interests). The point, however, is that values may be placed on items in spite
of such tensions. Employee and creditor interests are thus valued in spite of the trade-offs which often have to be
made between them.

Law86and
OnAdministration
restraint ,versus(1984)enabling
chs I andmodels of influence
2. On legitimation ('red light
in general v green The
see Beetham, light' approaches)
Legitimation of see
PowerHarlow & Rawlings,
(London, 1991); Frug, above n 76; Baldwin & McCrudden, Regulation and Public Law (1987) ch 3.
87 For example as administrative receivers, administrators and liquidators. Contrast the US concept of 'debtor
in possession' in ch 1 I--see Westbrook, 'A comparison of bankruptcy reorganisation in the US with administration
procedure in the UK' (1990) 6 Ins L & P 86; Bank of England Occasional Paper, Company Reorganisation-A
Comparison of Practice in the US and the UK (1983).

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 246 Oxford Journal of Legal Studies VOL. 17
A second issue concerns the basis for requiring legitimation
assumed that since corporate managerial power in a going con
legitimation, insolvency regimes and powers automatically requi
Insolvency processes do, however, impinge strongly upon the p
so far as decisions are made about the lives or deaths of enterp
decisions affect livelihoods and communities. Insolvency proc
dramatic import for private rights in so far as, for instance, p
property rights and securities can be frozen and individual eff
other legal rights constrained. On both public and private int
accordingly, the powers involved in insolvency processes can b
for strong justification. This, in turn, means that justificatio
aspects which can be democratically secured (as is appropriate i
public interest is involved) and also which can be based in respec
rights (since private interests are at issue)."8 The attribution of leg
accordingly be seen against a vision of the insolvency process
enough to encompass legitimating arguments that are based on
approaches as well as expressive of concerns that creditors interests
How tensions and trade-offs between different legitimating ra
resolved remains, of course, an issue to be returned to below.
To argue thus, it may be responded, is all very well where insolve
have both public and private dimensions, but in relation to so
insolvency there are real disputes as to whether arrangements s
an integral part of the insolvency process and not just as a matter
collection or contracting. (Administrative receivership and types
arrangements such as ipso facto clauses in contract give rise to
Private contracting, indeed, can be seen as shading into the provinc
law so that clear boundaries do not exist.
Such a lack of clear boundaries should not, however, be seen as fatal to
the enterprise of measuring insolvency processes. Persons of different political
persuasions might be expected to disagree as to the aspects of insolvency processes
that require legitimation by democratically secured rather than private rights
based arguments. The point is that if legitimation is seen in terms of rationales
that reflect both democratic (public) and private rights roots, clarity will be given
to evaluations and the extent to which, for example, present arrangements in an
area depend on contractarian justifications will be manifest. To explore modes
of measuring or legitimating insolvency law is not to suppose homogeneity of
political philosophies.

88 Actors in insolvency processes may, of course, carry out some functions that are oriented towards private
interests and some that look to public considerations--thus liquidators both collect and realize assets for distribution
to creditors and report directorial 'unfitness' to the Disqualification Unit of the Insolvency Service as part of the
disqualification process--see further Wheeler, 'Directors' Disqualification: Insolvency Practitioners and the
Decision-making Process' (1995) (15) Legal Studies 283.
89 For example hire purchase agreements made to terminate on the insolvency of the hirer-see further Prentice,
'Contracts and Corporate Insolvency Proceedings', paper given at SPTL Seminar on Insolvency Proceedings,
Oxford, September 1995. For US treatment of agreements designed to operate only on bankruptcy see Bankruptcy
Code 1978 (as amended) s 365 (a) (1) and (b) (1).

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 SUMMER 1997 The Measures of Insolvency Law 247
As for the array of rationales that can be used to legitimate powers im
upon public interests and private rights, these have been identified
Frug and others"9 and, moreover, are limited in number. As Frug has com
'We have adopted only a limited number of ways to reassure ourselv
the exercise ofpowers. The rationales can be described as, firstly, formali
justifies with reference to the efficient implementation of a statutor
holders' mandate; secondly, expertise-based-which sees managers as w
trust due to their expertise and professionalism; thirdly, control-ba
looks to the restrictions imposed on discretions by courts, markets a
and, fourthly, pluralist-which adverts to the degree of amenability o
to representations from the public about how corporate affairs shou
ducted.12
The justifications of insolvency processes can similarly be seen as dependent
not merely on the adequacy of control and accountability schemes and the
representation of interests, but also on the effectiveness of processes in both
procedural and substantive aspects, and the degree of expertise exercised by
relevant parties.
A final message to be drawn from a discussion of corporate power and its
legitimation is that individual justificatory arguments may prove contentious and
possess limitations (for example, the proper boundaries for expertise cannot be
set without argument) but they may nevertheless possess force and may be
combined with other arguments.
To argue thus, it should be clear, is at odds with Frug's well-known attack on
the traditional bases for legitimating corporate or bureaucratic power. Frug
identifies the four models of legitimation already noted but argues that these fail
to legitimate corporate power and stresses that combining them together 'only
shifts the problem of making a subjective/objective distinction away from any
particular model and locates it, instead, in the boundaries between different
models'." For Frug each model fails to provide an objective justification for
corporate/bureaucratic power, one free from contention. Linking the different
models 'allows people to believe that although the device they are considering
at any particular moment is empty, one of the others surely is better [and] helps
theorists convince themselves (and us) that the internal difficulties of each
particular story of bureaucratic legitimacy are unimportant'."4
The limitation of Frug's argument, however, lies in his fundamental idea of
justification-in the notion that, without a basis in some objectivity, legitimating
arguments lack force. If, as I have already contended, legitimation can be argued
for cumulatively so that the justificatory rope has force in spite of its flawed

9" See above n 53 and 76. See also Sutton (ed), The Legitimate Corporation (Blackwell, 1993).
91 Frug, n 76 at 1281. The description of rationales that follows in the text paraphrases and re-organizes Frug
in so far as judicial review is joined with market and other forms of control.
92 See also Baldwin & McCrudden above n 86, ch 3 who, in the public law context, employ the headings:
legislative mandate, accountability, due process, expertise and efficiency.
93 Frug above n 76 at 1378.
94 Ibid 1379.

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 248 Oxford Journal of Legal Studies VOL. 17
strands, there is far less of a problem in combining rationales
The exercise of power can thus be seen as capable of being rend
not on the grounds that it is 'objective in some way'95 but because
by a thread of different arguments based on a limited number
rationales that are invoked on a collective basis.
Measuring the legitimacy of an insolvency process, decision or law, it should
be made clear, differs from merely expressing a political opinion on the topic.
Persons of opposing political persuasions might differ radically in their views on
dealing with a troubled enterprise. One might favour immediate closure, payment
of creditors and reliance on re-investment to create jobs. Another might stress
the importance of allowing time for reorganization because of the high premium
he or she places on continuity of employment and avoidance of the external
costs that closure might occasion. An exchange of such political views would
not, however, amount to a discussion of the legitimacy of the proposed move.
To debate legitimacy involves a stepping back and reference, not to personal
preferences, but to criteria enjoying broad acceptance as relevant. An analysis
of legitimacy accordingly would take on board the propensity of a move to
serve creditor interests as well as its communitarian effects and its efficiency,
accountability, fairness and expertise implications.
What, though, of the difficulty, noted above, of tensions and trade-offs between
different legitimating rationales? Surely some such rationales will pull in opposite
directions? How, moreover, will the above justificatory principles influence
concrete decisions facing insolvency law-for example whether English insolvency
law might introduce some variant of debtor in possession?
The answer to these questions is that clarity concerning the measures of
insolvency law brings clarity concerning the values that can be invoked in
justifying such laws. It does not produce cut and dried answers on whether
particular trade-offs between, for instance, protections for secured creditors and
for employees are desirable or not. The rightness of wrongness of particular
trade-offs can only be argued for by giving weightings or priorities to the
protection of different interests. Such weightings and priorities pre-suppose
substantive visions of the just society and, accordingly, persons of different
political persuasions might be expected to differ on the 'right' balancing of
different interests in insolvency.
The approach to legitimation offered here may produce no cut and dried
answers on substantive issues (to demand such answers would be to ask for
conversion to a political vision). The approach, nevertheless, does have force in
identifying the rationales that have currency in debates on insolvency law. It,
moreover, has value in making clear the need for and nature of trade-offs. Thus,
in discussing whether a variant of debtor in possession ought to be introduced
into English insolvency law, an assessment would be made of the support that
such a measure would merit under the various legitimating headings noted

9s Ibid 1380.

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 SUMMER 1997 The Measures of Insolvency Law 249
above. Although the issue of trade-offs would remain, final politic
would be made with a transparency that would be lacking were r
made to the array of rationales described here.
Assessing the legitimacy of insolvency processes or decisions is n
the same thing as assessing the legitimacy of an insolvency law or
noted, one benchmark for processes or decisions is the extent to which
mandate is efficiently implemented. Where a clear mandate exists
provides a very compelling yardstick for measuring an insolvenc
or process-and some aspects of insolvency processes do involve agents in
implementing quite clear, almost mechanical, tasks as set down in statutes-for
example the liquidator's statutory duty in voluntary winding up to distribute
pari passu.6 To the extent that such clear mandates are lacking-and it is not
always possible to divine a clear prescription as opposed to conferring a discretion,
or a list of factors to be taken into account or proper purposes for action97--there
is all the more need to legitimate with reference to the accountability, fairness
and expertise justifications.
Would it not be circular, however, to evaluate an insolvency law by asking
(inter alia) whether it implements a statutory mandate? If a judicial application
of a statute is at issue then circularity is avoided since it makes sense to ask if,
in a particular instance, a judge's ruling involves a high degree of discretion or
derives legitimacy from its clear implementation of Parliament's will as expressed
in a statute (again there may or may not be a clear expression of the mandate
available). What of an actual or proposed statutory provision-does reference to
the implementation of a statutory mandate involve circularity? This may not
necessarily be the case. Where there is a clear policy or practice laid down then
it may be claimed that Parliament's will is being effected and there is a high
degree of legitimacy involved. If, however, the provision at issue merely confers
discretion (while, perhaps, laying down factors for consideration) it can be
contended that there is not so much an expression of Parliament's voice as a
delegation on the substantive issue. The legitimacy of any decision or act taken
in implementation of such a provision would accordingly fall to be judged with
reference to a series of rationales since the mandate justification only renders the
others irrelevant where there is absolute clarity of the mandate.
Does this mean that an insolvency law is worthy of support provided that it
has proper statutory form? Again this is not necessarily the case. It means that
a very high level of democratic legitimacy is assured to a statutory insolvency
provision provided that the statutory mandate is absolutely clear (a rare event).
Where it is not possible to lay down a statutory provision that dictates a result
with clarity, the other benchmarks come into play and reference can be made

96 See IA 1986, s107.

97 See for example the discretion conferred by IA 1986 s8 (3) which lays down proper purposes for making an
administration order. On strong versus weak discretions see Dworkin, Taking Rights Seriously (London, 1977) 31-9,
68-71. On discretion in fact finding see Galligan, Discretionary Powers (Oxford, 1986) 34-7.

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 250 Oxford Journal of Legal Studies VOL. 17
to accountability, fairness and expertise considerations in evaluati
and its anticipated effects.
The implication of this argument, it might be contended, is tha
decrees something (anything) on insolvency with a clear voice the
challengeable. The response is that it is difficult to deny the dem
of our democracy's most authoritative voice but that critici
expression is still possible in a manner-though this involves s
preferences or approaches against those of Parliament. In the
instances, where Parliament does not dictate a result but lea
discretions open (or indeed in debating proposed legislation)
be made with reference to the array of legitimating rationa
example, of a proposed insolvency provision, whether it wil
supportable according to accountability, fairness and experti
mandate rationales. Such evaluations may be made of and by the various
actors involved in the insolvency processes-for example, judges, administrators,
nominees under voluntary arrangements and liquidators.98

Conclusion

In looking for the measures of insolvency law a series of different visions of

insolvency is encountered and, although these visions may be flawed, they can
be seen as incorporating a number of important legitimating rationales for
insolvency processes. There is more to measuring such processes, it has been
noted, than stipulating a series of substantive outcomes (eg preserving viable
enterprises), procedural concerns are relevant also. Measuring thus looks to the
whole breadth of insolvency processes and the cumulative force of arguments
deriving from a variety of visions-making reference for instance to efficiency in
producing outcomes; accountability; representativeness and fairness in processes;
and expertise in decision-making.
How does this advance matters beyond the substantive and procedural aims
set down, for instance, by Cork?99 First, the approach arrived at here offers an
explanation of what is involved in assessing insolvency processes and, in addition,
throws light on the different kinds of legitimating argument that are contained
within such lists of aims as Cork offers. Second, it might be complained that
the present approach is as lacking in precise benchmarks as the eclectic or
communitarian visions but it has been possible to identify a number of different
rationales for justifying insolvency processes, namely: efficiency, accountability,
fairness and expertise. Trade-offs between different rationales do remain a
problem but, unless single rationale explanations are accepted (and for reasons
discussed these seem excessively narrow), the absence of easy answers has to be

98 Liquidators may implement statutory mandates mechanically in distributing assets pari passu, but discretion
is involved in their 'policing' functions (eg whether to initiate inter alia ss 214, 238 or 239 IA 1986 actions) and
in their reporting 'unfit' directorial conduct to the Disqualification Unit, see Wheeler, above n 88, 300-1.
99 Above nn I and 8.

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SUMMER 1997 The Measures of Insolvency Law 251
accepted when dealing with processes whose essence is the balancing o
objectives.
What has been offered here has been an approach to measuring, one that
takes on board the public and private, the procedural and substantive, and
the contractarian and democratic dimensions of insolvency. As already noted,
acceptance that both the public and private dimensions of insolvency law are to
be reflected in legitimation involves an acceptance, in turn, that legitimation
may be derived from both the propensity of insolvency laws and decisions to
further communitarian interests and the potential of such laws and decisions to
protect pre-existing rights. It is thus not posited here that one particular vision
of insolvency offers all the answers, nor are all visions accepted as equally
valuable. It is suggested that a 'limited menu' of justifications has relevance in
assessing the legitimacy of insolvency processes. The menu is limited rather than
open-ended (as was a problem with eclectic and communitarian visions) in so
far as relevant legitimating arguments are confined under the four headings
noted, and arguments not falling under such headings would accordingly not be
treated as relevant for purposes of legitimation.
Does such an approach supply the 'fiundamental or core principles' that the
1994 Justice report advocated as guides to the 'true essence of the insolvency
process'? It does not offer a series of primary principles to which others can be
seen as subservient. The limited menu described here does, however, provide a
core in the sense of a framework offering guidance in the development of
insolvency rules and arrangements. It adds, for instance, to the arrangement of
objectives set down by the Cork Committee by placing those objectives within
a frame of concerns established according to the four particular rationales serving
to justify insolvency rules. Those rationales provide a context for Cork's objectives
rather than leave them as aims apparently plucked from the sky. The linking or
cumulation of rationales also reminds us that objectives, such as are set out by
Cork, do have to be weighed and-traded against each other.
A limited menu of rationales, furthermore, offers a check-list to be dealt with
by judges and decision-makers when dealing with insolvency issues. These actors
may thus be invited not to reason with reference to a single or dominant vision
of insolvency but to deal with points relevant to each of the four kinds of
justificatory argument noted. Trade-offs between different ends and justifications
will have to be argued for in particular contexts and cannot be pre-ordained
according to set rules. Such arguments should, however, be carried out openly
and it is this structured transparency that will be the best guarantee of insolvency
laws and processes that display a sense of direction.

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