Vol 1 (2004) - Issue 6

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Wrongful Trading: Prospects for a Harmonizing Text in the European Union

Introduction

... It would be well for society if the State recognized no debts, except for work done or goods supplied to be paid for on delivery. Everything in the shape of loans or advances without security, or goods supplied on credit, should be made at the lender’s or seller’s risk - should be really debts of honour, not recoverable by any legal process. It would, in every case, be a question of personal credit and trust. Character thoroughly established would be essential to obtain credit or a loan, and thus, both reckless trading and fraudulent bankruptcy would become impossible.

Alfred Russell Wallace’s views, many of which were garnered while observing the workings of the natural world and applied to the business environment, may seem sadly out of step with modern reality. It represents an idealized world founded on trust, belief and conscience. The reality of today is that the freedom to conduct business and the means to go about acquiring funds and supplies, which is believed to lie firmly within the province of contractual relations, and the need to protect those that may be vulnerable, such as shareholders and creditors, must be balanced. The integrity of the system must also be preserved, so that an element of trust is visible and that commerce generally can be carried out, with all fully cognisant and appreciative of the risks that may be involved as a function of entrepreneurship. It is to a principle of creditor protection that the European Union has appealed in seeking to enact a measure governing wrongful trading (also known in many jurisdictions as insolvent trading). It is the purpose of this article to look at the background to the proposals and consider some of the issues that will be raised by the need to find a text that will act as a harmonizing measure, given the very different regimes currently applied in the member states. It will also look at those consequent on the nature of European law itself and the history of harmonization initiatives within the European Union.

The European Union initiative – modernizing company (and insolvency) law

The European Union’s Group of High Level Company Law Experts (‘Group of Experts’) was formed in September 2001 in order to advise on a modern regulatory framework for company law. Essentially, this was an attempt at finding the means of achieving further progress in the company law harmonization programme, which many felt had stalled, entering the doldrums in the late 1990s, perhaps as a result of the slow progress of some of the measures it had proposed. The process was described by one commentator as being in a ‘state of uncertainty’ that did not bode well for its future. With the observable growth in worldwide corporate failures, in particular Enron and World.Com, the need to revitalize the project assumed a particular urgency. The remit of the Group of Experts was to initiate a discussion on the need for the modernization of company law in Europe. Their brief contained two key features: first, the need to address concerns raised by the European Parliament in 2000 relation to the negotiation of the Draft Thirteenth Company Law Directive dealing with take-over bids, secondly, to address the state of the company law harmonization programme with view to providing the European Commission with recommendations for a modern regulatory company law framework. A number of issues were canvassed as part of the consultation process that culminated in the Group of Experts issuing a report in late 2002.