Lloyd's Maritime and Commercial Law Quarterly
WRONGFUL TRADING
By Fidelis Oditah*
The background
One of the primary concerns of company law is the protection of creditors against abusive use of the privilege of limited liability by corporate directors and managers. This problem of abuse, which is more acute in private and small proprietary companies,1 is the result of the legal conceptual framework of a company. Upon incorporation, a limited liability company is a separate legal entity distinct from its incorporators; it can hold property; it can sue and be sued in its own name; it enjoys perpetual succession until it is wound up; more importantly, the members and officers are free from personal liability. Whether every company should continue to enjoy these attributes, as fixed and inexorable consequences of incorporation, is debatable. One thing, however, is clear: this somewhat limited conception of a company as a vehicle through which capital may be raised and invested in commerce is outmoded. As Tricker2 put it:
[t]his classical concept of the corporation is neat, simple, enshrined in company law and rooted in nineteenth century ideology. Unfortunately it bears about as much resemblance to the reality of the modern corporation as a hang-glider does to Concorde.
Although, no doubt, the statement is slightly exaggerated, few would disagree that company law is in need of urgent rethinking. The present conceptual framework for the regulation of companies does not reflect the realities of the modern corporation. In small private companies the fact that shareholders and directors are very often the same person, not only upsets the assumption of divergence between ownership and management (upon which distinction much of the legal controls of companies rest), but also leads to the sometimes amusing situation that company law protects the owner-manager against himself. This is unsatisfactory, particularly as it affects creditor protection. Although it is arguable that developed company law was gravitating towards recognition of a duty owed by corporate directors to creditors,3 the enactment of a new duty not to engage in wrongful trading is a welcome additional arsenal in the fight against abusive use of the privilege of limited liability by corporate directors.
Section 214 of the Insolvency Act 1986 creates what the sidenote calls “wrongful
* Fellow of Merton College, Travers Smith Braithwaite Lecturer in Corporate Finance Law, University of Oxford.
1. Salomon v. Salomon & Co. [1897] A.C.22 was the first important case to expose the inherent weakness in the limited conception of companies in English law.
2. R.I.Tricker, Corporate Governance (Gower Publishing Co. Ltd., 1984), 13. See also Tom Hadden, Company Law and Capitalism (Weidenfeld & Nicholson, 2nd edn. (1977)), pp. 425 et seq.
3. This possibility is discussed in Corporate Briefing, March 1988, pp. 124 et seq.
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