Lender Liability and Fault for Deepening Insolvency: A Comparative Analysis

Abstract

The issue of how companies in a financially difficult position are to be financed is an important but delicate one. The approach to insolvency will undoubtedly require the directors to consider whether an extension to existing finance or new finance is an option. This consideration is fraught with danger, given that many of the responses directors might take, including asset disposals, payment of the most pressing demands, enhancing existing or granting further security in favor of creditors as well as entering into further funding obligations that may invite creditors to impose higher/greater than usual terms as a measure of the heightened risk of lending at the insolvency threshold, may well attract the use of transactional avoidance measures known to most insolvency systems. As an added peril, to continue trading while within sight of the moment of formal insolvency may also attract the application of wrongful or insolvent trading rules, also a feature of many developed legal systems. General misfeasance, of which the above may be particular illustrations, may also attract liability. The justification for the rules dealing with the avoidance of transactions, wrongful trading and misfeasance (more generally) is that continued trading and transacting may have a disadvantageous impact on the position of creditors overall. Thus, directors are to be encouraged to seek help at the earliest opportunity, by engaging turnaround, pre-insolvency and insolvency measures, whichever may be appropriate. Thus, they can avoid exposure to liability and the chances of litigation being brought by an insolvency office-holder keen to ensure that the estate is restored to the position it ought to have been in had these transactions not taken place. It is the intention in this article to look at two contrasting approaches to creditor liability, that in France, where a generalized principle exists, albeit attenuated by insolvency law reforms in the mid-2000s, and that in the United Kingdom, where contractual freedom and a robust lending culture have given less room for the development of creditor liability rules except in very limited and carefully crafted instances.