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Why are directors afraid of help?

Ghio, Emilie; Thomson, Donald


Emilie Ghio

Donald Thomson


Corporate insolvency laws and procedures have changed significantly over the last decades in the UK, especially since the publication of the Cork Report in 1982. The report noted the limitations of existing procedures towards the rescue of companies and posited that the aims of a good modern insolvency law are 'to diagnose and treat an imminent insolvency at an early stage rather than a later stage [and] to provide means for the preservation of viable commercial enterprises.'

Therefore, one of the aims of the report was to foster the development of the rescue culture, rooted in the idea that calculated risk should be promoted and that a system should be in place to lessen the adverse effects that failure may have on affected parties. Sicne the Cork Report, the philosophy of responding to corporate crises ex post has been replaced by an increased focus on the way that corporate actors manage insolvency ex ante. Since the 1990s in particular, corporate insolvency law and processes have changed in a way that places greater emphasis on early actions; actors have increasingly been encouraged to see corporate failure as a matter to be anticipated and prevented, rather than dealt with after is has occurred.

However, while this position has been endorsed by the judiciary, bankers, and politicians, the use of rescue procedures has remained quite low. One of the reasons put forward to explain such low take-up is the ubiquity of stigma, argued to act as an obstacle to the successful materialisation of the rescue culture: due to the stigma associated with insolvency, corporate debtors are hesitant to initiate insolvency processes. This reluctance arguably exhausts potential rescue avenues, forcing firms into liquidation.

For a phenomenon which is argued to hamper the development of the rescue culture, a policy priority in the UK for the last four decades, the study of levels and impact of insolvency stigma has certainly been neglected in legal scholarship and policy debates. Therefore, there is a limited amount of empirical material on insovlency and stigma providing in-depth analyses of this phenomenon. Rather, one mostly finds brief, perfunctory remarks on the existence of the phenomenon, which is taken for granted.

This paper presents the findings of a study carried out in Scotland through a series of semi-structured interviews of micros, small, and medium enteprises owners and directors. The data gathered during the interviews mitigates the generally held belief that stigma is an obstacle to the rescue culture. The data suggest that the behaviour of corporate managers is not attributable solely to the insolvency stigma, which seems to play a moderate role in insolvency decisions. Rather, inexperience and incomprehension of insolvency (concept, law, and procedures) play a greater role.

Journal Article Type Article
Acceptance Date Nov 1, 2022
Deposit Date Nov 18, 2022
Journal Chicago-Kent Law Review
Print ISSN 0009-3599
Peer Reviewed Peer Reviewed
Public URL

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