6 - Floating Charges and Moral Hazard: Finding Fairness for Involuntary and Vulnerable Stakeholders

Summary

A. INTRODUCTION

B. CONTEXT AND METHODLOGY

(1) The impact of control and scope of the Scottish floating charge

(2) Current provisions mitigating the impact of the floating charge

(a) Super-priority/preferential creditors

(b) The ‘prescribed part’

(c) The effect of insolvency on employees and other vulnerable stakeholders

(3) Theoretical framework

(4) Presentation of the chapter

C. PERSPECTIVES ON DEBT, INSOLVENCY AND MORAL HAZARD

(1) The moral dimension of debt

(2) Financial regulation and economic efficiency

(3) Justifying priority for secured debt and floating charges

D. JUSTIFYING EMPLOYEE PREFERENCE OVER FLOATING CHARGES

(1) Employment regulation and the free market

(2) Employees in insolvency: contradiction of pre-insolvency priority entitlements

E. ARE FLOATING CHARGES FAIR TO VULNERABLE STAKEHOLDERS?

A. INTRODUCTION

Insolvency and bankruptcy are words that tend to conjure disappointment, fear and blame in most corners of the globe, with the notable exception of the US, which has the aura of rewarding risk-taking entrepreneurs by frequent do-overs. The same cannot be said for most of the rest of the world, particularly within the UK, which until quite recently has ever been hesitant to introduce insolvency or restructuring procedures that allow the debtor company's management to remain in control of the ailing firm. Along with these procedures, whether debtor in possession or otherwise, come adjustments to the rights and entitlements of creditors and other stakeholders associated with the company in financial distress. This includes, whether directly or indirectly, an impact on employees who are essentially involuntary creditors to an insolvency process entered by their corporate employer, along with other vulnerable and involuntary creditors such as franchisees and tort (or delict) claimants. Although there are a number of firebreaks that provide a buffer for employees under such circumstances in most countries, the underlying paradigm of the insolvency process resembles a re-commoditisation of labour as one of a number of stakeholders who become categorised in terms of preference, priority and payment as creditors, reducing employees to the value of what they are owed for their labour.

While insolvency and restructuring have a significant impact on a debtor company's employees, there are also devices that may indirectly interfere with the full complement of employee rights, whether statutory or contractual.