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Creditor Protection Notes

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Creditor Protection The capital rules provide limited protection for creditors on some views. There are other measures outside the capital rules through which also try to protect creditors. There is a general shift towards ex-post facto regulation to protect creditors. This was an approach also preferred by the Cork report. I agree that ex-post facto rules are the best way forward. They allow the flexibility for companies to develop effectively but provide punishments and try to sort the situation if it goes wrong or if there is improper behaviour. The ex-post rules are particularly aimed at small over managed companies, and the particular problems that this type of company poses with the director and shareholder being the same any breach of directors duty is more likely to remain undetected for longer. The Cork Report asserted that sanctions on directors are necessary to prevent abuse of the limited liability. This would be consistent with focusing the rules on small owner managed private companies; there can be no doubt that these pose the greatest likelihood for limited liability abuse. There are generally two types of regulations: Private recovery rules These enable liquidators to seek a remedy against a wrongdoing director in respect of particular actions; this is solely for the benefit of the creditors. Public interest regulations These are not particularly for the benefit of creditors; they are more focussed on putting protection in place in the public interest so as to prevent bad behaviour of directors generally, e.g. disqualification from being a director. There are various statutory protections for creditors; they are of varying degrees of effectiveness.

Wrongful trading: Insolvency Act 1986 s.214 A director commits an offence of wrongful trading if the company is insolvent but the director continues to trade despite the fact that he knows or ought to know that there was no reasonable prospect of avoiding insolvency. (Insolvency Act 1986 s.214) The wrongful trading rule is intended to prevent directors from being reckless. It only applies which have gone into liquidation (this is the most serious form of insolvency). It can be difficult to work out what a director knew or ought to have known, but the courts seem to take a generous approach. Re Hawkes Hill


Mr Justice Lewiston: the determination of what the directors knew or ought to have concluded with regards to the company's prospects of insolvency should not depend on a snapshot at any given time. It depends on rational expectations of what the

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