Wrongful Trading — A New European Model for Creditor Protection?

Abstract

The European Commission’s May 2003 Action Plan ‘Modernising Company Law and Enhancing Corporate Governance in the European Union — A Plan to Move Forward’ includes a proposal for new legislation on wrongful trading with a view to strengthening the personal accountability of directors in the case of a company’s failure. The proposal builds on expert opinions that the existing law on wrongful trading in Great Britain is better capable of activating an early managerial response to a financial crisis than the German Insolvenzverschleppungshaftung (liability for delaying insolvency). This article challenges the alleged superiority of wrongful trading over Insolvenzverschleppungshaftung. It provides a detailed analysis of the case law under section 214 of the British Insolvency Act, which does not support the fundamental assumption underpinning the European endeavour, namely, that wrongful trading routinely imposes duties on the directors ahead of the onset of insolvency. Furthermore, the protection afforded to creditors under British law is less extensive than under German law as regards the amount of compensation for the creditors and, correspondingly, the financial risk incurred by the directors. Finally, the article looks at the special treatment of new creditors (Neuglaubiger) under German law, which has the advantage of giving creditors a strong incentive to pursue delinquent directors.