Riz Mokal

Bio: Riz Mokal is an academic researcher from University College London. The author has contributed to research in topics: Insolvency & Creditor. The author has an hindex of 10, co-authored 48 publications receiving 348 citations. Previous affiliations of Riz Mokal include Brooklyn Law School.

An Agency Cost Analysis of the Wrongful Trading Provisions: Redistribution, Perverse Incentives, and the Creditors' Bargain

Abstract: This paper argues that the UK's wrongful trading provisions, enshrined in section 214 of the Insolvency Act 1986, are meant to ensure that hopelessly troubled companies enter the insolvency forum at the optimal time. This forum enables -- and forces -- those interested in the company's undertaking to forego aggressive and value-destroying individual action. Put differently, one of the functions of the collective insolvency regime is to minimise the co-ordination costs of the creditors of a firm threatened with insolvency. Section 214 is a tool enabling the regime to take over when these costs would be most acute. The existence of the collective regime might itself create motivation costs by producing incentives for parties who would lose out under it to try to prevent the company becoming subject to it. Directors would act for themselves and on behalf of shareholders to keep the firm out of the insolvency forum. The central insight offered into section 214 here is that the section assists in overcoming the co-ordination costs of creditors by controlling creditor/manager agency costs on the eve of insolvent liquidation.The analysis in this paper operates on two levels. First, this paper shows that the wrongful trading provisions would be voluntarily accepted by all the relevant parties given the chance to bargain ex ante. Here, all the parties anticipate the incentives of managers to misbehave towards creditors when their firm is on the brink of insolvent liquidation. A provision like section 214 bonds managers to creditors when the firm is terminally distressed, and thus signals the credit and labour markets not to penalise shareholders and managers. On the other hand, where a market solution is available -- as it is in the shape of the discipline imposed by the market for managerial labour, and the existence of security -- the section 214 bond takes the back seat. On this basis, this paper suggests that wrongful trading claims would generally be brought against shareholder-managers of closely-held companies, and shadow directors, and examines "impressionistic" evidence which is not inconsistent with this hypothesis. It is shown that on this analysis, the English Court of Appeal's well-known decision in Re Oasis, directing section 214 recoveries away from secured creditors, is perfectly reasonable.On another level, the well-established Law and Economics proposition -- that to redistribute in insolvency leads to perverse incentives -- is challenged. It is argued that the wrongful trading provisions are redistributive. They strip away the benefit of limited liability from the insolvent company's directors, making their assets vulnerable to a claim by the liquidator on behalf of the company's unsecured creditors. This takes place only within the specialised insolvency forum, and only because the distinct insolvency regime creates new rights and liabilities which are incapable of existing while the company is still solvent. Three types of perverse incentive which might potentially lead to unnecessary motivation costs are described. The analysis suggests that, far from creating perverse incentives, section 214 in fact encourages directors of troubled and healthy companies alike to operate with some much-needed regard for the company's unsecured creditors.

The Authentic Consent Model: contractarianism, Creditors’ Bargain, and corporate liquidation

Abstract: An important purpose of this paper is to build a new model for the analysis and justification of insolvency law. So the first task undertaken here is to demonstrate why prior attempts at doing so might be considered inadequate. Focussing on the paradigmatic role of the automatic stay on unsecured claims in corporate liquidation, the analysis here starts with the Creditors' Bargain, the best-known of these attempts. It is argued that the Bargain model has neither descriptive nor moral force. The model relies on a confused and ultimately meaningless notion of consent. It seeks to appeal to the antecedent self-interest of creditors to suggest they would choose certain principles to decide how their debtor's assets should be dealt with in the latter's insolvency. But it suggests no privileged point of time from which the choice is to be made. Since the self-interest of creditors depends on how effective they would be (vis-a-vis other creditors) in each transaction in collecting what is owed to them in any insolvency regime not marked by the automatic stay, certain types of creditor would benefit but others would be worse off in any given transaction because of the stay. Further, the interest of each creditor would be different depending on when it is calculated. The Bargain model therefore fails to explain why all creditors equally would accept the automatic stay as a generally applicable rule. What is more, the Bargain is built on the simple preferences creditors would express, based on their individual self-interest. But it provides no reason why preferences expressed at one instant in time ought permanently to be imposed on creditors by being enshrined in the law, when contrary preferences would be expressed by the same parties, based again on self-interest, at other times. The model thus provides no justification for the coercion inherent in insolvency law. And finally, the model allows the parties to be as different from each other during the bargaining process as they are in real life. This means stronger parties would be able to oppress weaker ones. Thus, the rules selected by the model are likely to be exploitative rather than just. The paper then constructs an alternative contractarian model (the Authentic Consent Model, or ACM) to analyse and justify the principles of corporate insolvency law. This model builds on the assumption that all those affected by insolvency law are to be regarded as equals, with the consequence that their interests must be accorded equal care and concern in the choice of insolvency law principles. The notion of Dramatic Ignorance is introduced to accomplish this result. It is argued that, given the features of the Model, principles approved by the ACM can be regarded as being those that the relevant parties themselves would choose in exercise of their political autonomy, if given the chance to bargain with each other under the appropriate conditions. The automatic stay on the individualistic collection efforts of unsecured creditors, which defines the collective liquidation regime, is argued as passing the tests set by the ACM. Another important part of the argument in this paper is addressed to defining the proper ambit of insolvency law. This point is made through a contrast of the approach of the ACM, with that of others, most notably of Donald Korobkin. Korobkin's Rawlsian model for the analysis and justification of (US) bankruptcy law seeks to address problems which, it is argued, are not unique to the context defined by corporate insolvency. This means his model would sometimes generate principles for inclusion in bankruptcy law which are inconsistent with the principles enshrined in other branches of the law, even though both sets of principles (bankruptcy and non-bankruptcy) deal with situations identical in all material respects. So some people might be treated differently from each other, depending not on any relevant difference in their situations, but simply because some of them did and others did not become subject to insolvency law. This violates the basic assumption of all reasonable legal systems, that people should be treated alike except when there is a good reason for treating them differently. The proposals of some other scholars in this area, including Elizabeth Warren, Karen Gross, and Venessa Finch, are also open to the same objection. To avoid this problem, the ACM requires a demonstration that a principle proposed as being suitable for inclusion in insolvency law deals only with some situation peculiar to (corporate) insolvency.

Corporate Insolvency Law: Theory and Application

Abstract: © Rizwaan Jameel Mokal, 2005. All rights reserved. This book analyses corporate insolvency law as a coherent whole, stemming from common fundamental principles and amenable to being justified or criticized on that basis. The book explains why consistency of principle must be sought, and how it might be found in the relevant statutory and case law. It then draws on political and legal philosophy to construct an egalitarian theory for the analysis of corporate insolvency law based on the premise that all the parties affected by this law are to be treated as equals. The book argues that this theory can reconcile the dictates of fairness with the demands of economic efficiency. The theory is employed to analyze some of the most important aspects of insolvency law. Why should the individualistic method of enforcing claims against solvent companies give way to a collective method during insolvency? Why are there different formal mechanisms for dealing with troubled companies? What role does the pari passu principle play in the distribution of an insolvent company's assets? The controversial issues of whether and when secured creditors should be accorded priority over others receives detailed consideration. The functional role of the floating charge and its relationship with receivership are also analyzed in this context. The many questions relating to the operation of the new administration procedure introduced by the Enterprise Act 2002 are considered in the light of principle. The book also analyzes the role of the wrongful trading provisions. It examines, finally, why insolvency law objects to certain transactions at an undervalue and those having a preferential effect.

The Authentic Consent Model: Contractarianism, Creditors' Bargain, and Corporate Liquidation

Abstract: An important purpose of this paper is to build a new model for the analysis and justification of insolvency law. So the first task undertaken here is to demonstrate why prior attempts at doing so might be considered inadequate. Focussing on the paradigmatic role of the automatic stay on unsecured claims in corporate liquidation, the analysis here starts with the Creditors' Bargain, the best-known of these attempts. It is argued that the Bargain model has neither descriptive nor moral force. The model relies on a confused and ultimately meaningless notion of consent. It seeks to appeal to the antecedent self-interest of creditors to suggest they would choose certain principles to decide how their debtor's assets should be dealt with in the latter's insolvency. But it suggests no privileged point of time from which the choice is to be made. Since the self-interest of creditors depends on how effective they would be (vis-a-vis other creditors) in each transaction in collecting what is owed to them in any insolvency regime not marked by the automatic stay, certain types of creditor would benefit but others would be worse off in any given transaction because of the stay. Further, the interest of each creditor would be different depending on when it is calculated. The Bargain model therefore fails to explain why all creditors equally would accept the automatic stay as a generally applicable rule. What is more, the Bargain is built on the simple preferences creditors would express, based on their individual self-interest. But it provides no reason why preferences expressed at one instant in time ought permanently to be imposed on creditors by being enshrined in the law, when contrary preferences would be expressed by the same parties, based again on self-interest, at other times. The model thus provides no justification for the coercion inherent in insolvency law. And finally, the model allows the parties to be as different from each other during the bargaining process as they are in real life. This means stronger parties would be able to oppress weaker ones. Thus, the rules selected by the model are likely to be exploitative rather than just. The paper then constructs an alternative contractarian model (the Authentic Consent Model, or ACM) to analyse and justify the principles of corporate insolvency law. This model builds on the assumption that all those affected by insolvency law are to be regarded as equals, with the consequence that their interests must be accorded equal care and concern in the choice of insolvency law principles. The notion of Dramatic Ignorance is introduced to accomplish this result. It is argued that, given the features of the Model, principles approved by the ACM can be regarded as being those that the relevant parties themselves would choose in exercise of their political autonomy, if given the chance to bargain with each other under the appropriate conditions. The automatic stay on the individualistic collection efforts of unsecured creditors, which defines the collective liquidation regime, is argued as passing the tests set by the ACM. Another important part of the argument in this paper is addressed to defining the proper ambit of insolvency law. This point is made through a contrast of the approach of the ACM, with that of others, most notably of Donald Korobkin. Korobkin's Rawlsian model for the analysis and justification of (US) bankruptcy law seeks to address problems which, it is argued, are not unique to the context defined by corporate insolvency. This means his model would sometimes generate principles for inclusion in bankruptcy law which are inconsistent with the principles enshrined in other branches of the law, even though both sets of principles (bankruptcy and non-bankruptcy) deal with situations identical in all material respects. So some people might be treated differently from each other, depending not on any relevant difference in their situations, but simply because some of them did and others did not become subject to insolvency law. This violates the basic assumption of all reasonable legal systems, that people should be treated alike except when there is a good reason for treating them differently. The proposals of some other scholars in this area, including Elizabeth Warren, Karen Gross, and Venessa Finch, are also open to the same objection. To avoid this problem, the ACM requires a demonstration that a principle proposed as being suitable for inclusion in insolvency law deals only with some situation peculiar to (corporate) insolvency.

Tax morale : theory and empirical analysis of tax compliance

Abstract: Tax morale is puzzling in our society. Observations show that tax compliance cannot be satisfactorily explained by the level of enforcement. Other factors may well be relevant. This paper contains a short survey of important theoretical and empirical findings in the tax morale literature, focussing on personal income tax morale. The following three key topics are discussed: moral sentiments, fairness and the relationship between taxpayer and government. The survey stresses the relevance of incorporating tax morale for a better understanding of tax compliance.

Corporate Insolvency Law: Perspectives and Principles

Abstract: This new edition of Corporate Insolvency Law builds on the unique and influential analytical framework established in previous editions - which outlines the values to be served by insolvency law and the need for it to further corporate as well as broader social ends. Examining insolvency law in the fast-evolving commercial world, the third edition covers the host of new laws, policies and practices that have emerged in response to the fresh corporate and financial environments of the post-2008 crisis era. This third edition includes a new chapter on the growing issue of cross border insolvency and deals with a host of recent developments, notably; the consolidation of the rescue culture in the UK, the rise of the pre-packaged administration, and the substantial replacement of administrative receivership with administration. Suitable for advanced undergraduate and graduate students, professionals and academics, Corporate Insolvency Law offers an organised basis for rising to the challenges of an ever-shifting area of the law.

Liability of Corporate Groups and Networks

Abstract: What happens when a corporate subsidiary or network company is unable to pay personal injury victims in full? This book sets out to tackle the 'insolvent entity problem', especially as it arises in cases of mass wrongdoing such as those involving asbestos exposure and defective pharmaceuticals. After discussing the nature of corporate groups and networks from the perspectives of business history, organisation studies, and social theory, the book assesses a range of rules and proposed rules for extending liability for personal injuries beyond insolvent entities. New proposals are put forward for an exception to the rule of limited liability and for the development of a flexible new tort based on conspiracy that encompasses not only control-based relationships but also horizontal coordination between companies. The book concludes with a general discussion of lessons learned from debates about extended liability and provides guidelines for the development of new liability rules.

The recognition and treatment of title retention in the legal systems of the United Kingdom, Vietnam and related jurisdictions:a comparative study

Abstract: Title retention functionally serves as a security device for ensuring the payment of the purchase price in a sales contract, but not all jurisdictions recognize it as a security interest. The research aims to compare the recognition and treatment of title retention in Vietnam, England, France, the United States and Australia. It examines the issues arising in Vietnam concerning the existing law of title retention and the prospect of a reform that possibly involves the importation of the Article 9 model. The research is conducted using the doctrinal and comparative analysis methods with the aid of a critical outlook and a discussion on the legal transplant. It is found that English law insists on the formalism approach that does not accept title retention to the original goods as a security interest. It raises the unexpected impact on the Sale of Goods Act after the FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd and PST Energy 7 Shipping LLC v OW Bunker Malta Ltd rulings. Vietnamese law adopts the French law approach that treats title retention as a security interest, but it is merely a seller-based security interest that excludes the participation of other. Article 9 of the American Uniform Commercial Code and the Australian Person Property Securities Act are an appealing and increasingly-accepted model of the law on secured transactions. It introduces the concept of purchase-money security interest that includes the title retention arrangement. The functionalism, unitary approach and the notice filing system under the Article 9 offer a comprehensive treatment of a purchase-money security interest as the exception of the general security interest. The findings suggest that even though Article 9 is currently a good model in this area, the import of this model may encounter some resistance from the angle of legal culture and legal practice. From the Vietnamese perspective, it is possible to build the law of purchase-money security interest running parallel with other devices in the scheme of a Civil Code before considering adopting a unitary functionalism law of secured transactions.