Governance of Distressed Firms

Governance of Distressed Firms

Corporations, Globalisation and the Law series

David Milman

The concept of a distressed firm covers businesses that are struggling, but have not yet entered formal insolvency, as well as those businesses that are undergoing a formal insolvency process. With reference primarily to English law, this study encompasses both limited liability companies and limited liability partnerships with a focus on the regulation both of company directors and insolvency practitioners. It offers recommendations for improvements in governance mechanisms and notes that many of the governance shortfalls that occur can be related to the ease of access given to those who wish to trade with the benefit of limited liability.

Chapter 2: The relevance of corporate governance theory and related issues

David Milman

Subjects: law - academic, company and insolvency law, corporate law and governance


This chapter will feature a brief discussion of general corporate governance theories, but only insofar as they are relevant to our proposed study. There is a vast literature on corporate governance in general and, inevitably, there is a limited supply of fresh insights. But this chapter will highlight the relative lack of significant scholarly attention paid by legal writers and policymakers to the governance of companies in financial difficulty and also the paucity of academic input to the particular perspective of SMEs (which make up the overwhelming majority of firms). The ‘think small first’ mantra, which has been so influential in shaping recent substantive corporate law reform in the UK, as is evidenced by the focus placed upon it by the Company Law Review, should be applied with equal vigour to the SME constituency in the wider governance debate. As far as UK corporate law is concerned, this new philosophy has left its mark on the law relating to company accounts (see for example s. 380 and Part 15 of the 2006 Act) and has led to the removal of a requirement for a company secretary in private companies (s. 270 of Companies Act 2006). But if we move to the core provisions on company directors, there is little evidence of variation, and the same is true when we look at the regulation of corporate insolvency. In the latter regard we could note by way of exception the modified CVA procedure outlined in Schedule A1 of the Insolvency Act 1986, which does only apply to SMEs – but as this regime is hardly ever used, it is difficult to treat it as of any great importance, apart from the fact that it does signify a departure from the norm in the way that it offers differential options for SMEs.

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