The law and economics of lockdown mitigation: Bankruptcy errors in the United Kingdom

Abstract

AbstractThe United Kingdom Government has undertaken unprecedented economic activity to support UK business during the COVID‐19 pandemic. This article applies the law and economics of corporate bankruptcy to these provisions. In particular, it examines whether legal responses to the pandemic encourage Type I bankruptcy errors (where a company that could be saved enters a terminal insolvency process) or Type II bankruptcy errors (where a company that could not be saved avoids a terminal insolvency process). Whilst more could undoubtedly have been done, it seems that the UK Government's actions to avoid Type I errors arising from the pandemic may have caused Type II errors. More pertinently, it is almost impossible for the UK Government to lift these protections in a neutral way – if all are uniformly lifted too soon, then this will result in Type I errors; if all are uniformly lifted too late, then this will result in Type II errors. It is impossible and undesirable to decide when to lift protections on a case‐by‐case basis, and any attempt to selectively lift protections results in the UK Government deciding which sectors have advantages post‐COVID‐19 and which do not. Accordingly, in setting and lifting legal protections, the UK Government finds itself a key market actor in deciding the post‐COVID‐19 shape of the UK market.