Mokal, R; (2000) An Agency Cost Analysis of the Wrongful Trading Provisions: Redistribution, Perverse Incentives and the Creditors' Bargain. Cambridge Law Journal , 59 (2) 335 - 369.

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Abstract

Previous work on the wrongful trading provisions of the Insolvency Act 1986 (s. 214) has been content with description, or with statutory construction. This paper employs the tools of agency theory and the creditors' bargain heuristic to analyse the need for these provisions, their structure, role, and effect. It examines why those interested in the company's undertaking would demand and accept a s. 214-type duty. The analysis reveals that the duty would not be equally relevant for all types of companies, and that the influence of the market for managerial labour ensures most s. 214 actions are likely to be brought against directors of closely-held companies, and against shadow directors. The analysis, by pointing out that security plays a role similar to s. 214 itself, also justifies a recent Court of Appeal decision which precludes secured creditors from any recoveries under that section. Finally, the incentives created by the provisions for the managers of both healthy and distressed companies are examined. It is suggested that these incentives are generally socially efficient.

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