Lloyd's Maritime and Commercial Law Quarterly
FINANCIALLY DISTRESSED COMPANIES, RESTRUCTURING AND CREDITORS’ INTERESTS: WHAT IS A DIRECTOR TO DO?
Andrew Keay *
It is a principle of UK law that, when companies are financially distressed to the point of being insolvent or close to it, the directors of such companies are required to take into account the interests of creditors. This is now codified in the Companies Act 2006, s.172(3). In recent times there has been concern emitted by some commentators that directors might be unfairly held liable under s.172(3) for losses to creditors if a restructuring of a financially distressed company that they instituted failed. This paper examines whether such concerns are realistic and explores how directors should act if they decide to restructure their company’s affairs.
I. INTRODUCTION
It is argued by some that creditors who provide credit to companies are not deserving of any special protection provided by law, because they are able to protect themselves by other means such as provisions in contracts, obtaining guarantees from shareholders and/or directors, the taking of security, or the inclusion of loan covenants.1 Yet others dissent and argue that creditors are deserving of some protection in some circumstances. Particular creditors, it is argued, such as trade creditors, lack adequate bargaining power to be able to secure reasonable terms that provide them with protection.2 Whatever one thinks of the view that creditors do not require special protection, over the years there have been several attempts to safeguard the interests of creditors and others from the actions of directors. Some of these measures have been well received, such as wrongful trading (certainly at the time of its inception at least), and others not so. Some of the measures
* Professor of Corporate and Commercial Law, Centre for Business Law and Practice, School of Law, University of Leeds, and Barrister, Kings Chambers and 9 Stone Buildings (Lincoln’s Inn). A previous version of this paper was presented at the Chancery Bar Association on 29 November 2018 at the Inner Temple.
1. See North American Catholic Educational Programming Foundation Inc v Gheewalla (2007) 930 A 2d 92, 100 (Del); S Rousseau, “The Duties of Directors of Financially Distressed Corporations: A Quebec Perspective of the Peoples Case” (2003) 39 CBLJ 368, 382; B Adler and M Kahan, “The Technology of Creditor Protection” (2013) 161 U of Pennsylvania L Rev 1773, 1775.
2. A Keay, “Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Over-Protection of Creditors” (2003) 66 MLR 665, 696–698.
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