Reckless trading: critical analysis and proposals for reform
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Date
2021
Authors
Breen, Roz
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Publisher
University College Cork
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Abstract
A company is an entirely separate person from its owners and controllers. Thus, if the company becomes insolvent, its directors are not responsible for its debts. The risks are instead externalised to the company’s creditors. The purpose is to encourage entrepreneurship and commercial risk-taking. This can, however, lead to reckless trading behaviours by directors to the detriment of creditors.
Finding the correct balance between supporting valid commercial risk-taking and entrepreneurship, on the one hand, and encouraging financial responsibility towards creditors on the other is thus a crucial issue in company law. Too much emphasis on the former can result in financial and economic crises. Too much emphasis on the latter can stultify and have a chilling effect on business activity. This is where the concept of reckless trading becomes of vital importance. Measures have been introduced in many jurisdictions. A reckless trading provision exists in Ireland in the form of section 610 Companies Act, 2014. The purpose of these measures is to impose personal liability for creditors losses on directors who, when the company was financially distressed, ran the business in an irresponsible manner, causing otherwise avoidable losses to creditors. This type of legislation, both in Ireland and elsewhere, has been largely unsuccessful. The provisions are infrequently invoked and when they are, the success rate is low.
The first central research question of this thesis is to investigate why this is so. These difficulties may arise from an internal source. It will be asserted that section 610 is confusingly and inadequately drafted. Suggested amendments to increase its invocation rate and effectiveness will be put forward. The problems may also derive from external factors. Reckless trading type behaviour may be infrequent. Moreover, high legal costs may deter liquidators and creditors from invoking the section especially as directors of failed companies may be financially constrained themselves. Once it has been determined why the provision is so infrequently invoked, the second central research question will be addressed. Considering the difficulties, perhaps a reckless trading provision is not required at all? The thesis will assert that the other rules and regimes examined due not act as suitable alternatives. Moreover, a reckless trading provision has theoretical support.
The final research question asks whether, in addition to legislative amendments, other solutions also exist which could be deployed in tandem with a revised section. The role of public enforcement will be examined. The thesis will assert that a criminalised reckless trading provision would be neither beneficial nor effective. However, the potency of the provision would be considerably improved via civil public enforcement. In particular, it will be argued that the Office of the Director of Corporate Enforcement should have an oversight and invocation role with regard to the provision. Importantly also, the ODCE should be granted the ability to impose a financial sanction in certain circumstances. The thesis thus produces workable solutions to improve the efficacy of the Irish reckless trading provision.
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Keywords
Directors , Business , Company law , Reckless trading , Risk taking
Citation
Breen, R. 2021. Reckless trading: critical analysis and proposals for reform. PhD Thesis, University College Cork.