The Analysis of the Cork Report - Essay Example

Insolvency Law Table of Contents Introduction 3 Cork Report 4 Importance of the Aim Selected 6 Critical Evaluation 8 Conclusion 13 References 14 Introduction With the changing modern day business context, companies have been forced to transform their business activities to fit in with the changing environment. Again, the level of competition has also enhanced rapidly over the years which has further yielded a scenario where they are forced to conduct business activities in a way that can ensure better results in comparison with the competitors to attain a sustainable position in the market. This aspect further helps in enhancing the reputation of the companies in front of the investors which encourage them to invest in the operations of businesses1. Contextually, in order to improve their image in front of the investors companies at times tend to adopt approaches which though considered negative in business but still they ensure better business performances. This aspect along with various other reasons like conflicts amid the management, a lack of proper communication in business, crisis in the business sector as well as improper controlling of the business activities further result in impacting the ability of business units to pay back the debt of their creditors and shareholders thereby affecting the performance and existence of the business up to a considerable extent2. This aspect in legal terms is considered as insolvency. In this particular context, the insolvency law regulates the companies who are not been able to pay their debt to the shareholders or creditors. It is directly implied to companies which are being formed under the Companies Act of 2006 in the UK. However, with the passage of time, the issue of insolvency has become more and more severe which further calls for the need of stern laws and principles3. Contextually, the Cork report will be vital to consider which has recommended certain principles to be implemented in the operations of companies that would be helpful in dealing with the issue of insolvency. This particular report will mainly highlight one of the recommended aims in paragraph 198 of the Cork report and depict its importance and need through critical analysis. Cork Report As described above, the Cork report was formed with the intention to recommend certain principles that could be implemented in the operations of business units to assure a more profitable business operation further reducing the probability of insolvency of the business. The report came up with certain aims for improvement in the modern day insolvency law which in turn led to the formation of the Insolvency Act of 19864. In the report formed by Kenneth Cork, there were certain principles which will be quite vital to have a discussion upon. Notably, the report of Cork stated two key principles one of which stated that the aspect of insolvency laws were mainly treated as an instrument by companies with regard to executing the process of debt recovery. As per the report, insolvency laws were also considered as a particular mode with which companies met the demand of the commercial morality through a set procedure along with disciplinary measures as well as certain strict approach assured for the bankrupts. Notably, one of the most crucial arguments of the Cork report was that there were a large number of companies which were left to die as they are not been able to recover as per the norms of the law. Contextually, Kenneth Cork advocated the need for a law that is able to influence a rescue culture or habit among the companies so that they could be able to emerge successful with regard to being able to restore business operations in a more profitable manner altogether. According to Cork, this particular aspect will be a potential benefit for the companies as well as for the creditors and the shareholders as the chances of getting back the debt from the company will be enhanced. The report of Cork also depicted that there is no scope for the any sort of floating charges in the contemporary law. This is because of the aspect that Cork believed that having floating charges in the insolvency law will be further unfavourably affecting the creditors of the company in the long run operations of the business5. In keeping with this particular review of the conditions of the companies under the insolvency laws, Cork recommended in his report that the professionals and practitioners in the domain of insolvency should be quite efficient in their conduct and the work they deliver further assuring utmost level of competency and integrity. The report also recommended on the aspect that creditors should be equipped with a greater power to choose their own liquidator for themselves. Apart from this, the recommendation part of the report also included the section where revised penalties and restraints against errant directors were also highly advocated. Post analysis of the condition of the insolvency and its impact on the business units, Cork emerged with a more systematic set of aims and objectives in his report. Among the various aims that have been highlighted in the report of Kenneth Cork, this study will consider and analyse an aim in paragraph 198 i.e. “to ensure that the processes of realisation and distribution are administered in an honest and competent manner” in a more comprehensive and detailed way6. Importance of the Aim Selected Notably, there are various aims and objectives that are being coined in the report of Cork with each one of them having its individual set of significance and importance in the domain of insolvency amid the companies. The aim that is selected for discussion for this particular study mainly depicts the importance of managers, supervisors or the directors of the companies to act in an honest and competent manner with regard to delivering the benefits for the shareholders or the creditors in an equal manner. It is believed that in the present day context, companies have the need to ensure maximum satisfaction for the stakeholders so that smooth operations could be ascertained. In this regard, the honesty and competency of the directors or the top level management of the company are quite primary as they are ultimately responsible for managing the entire business activities. This aim of the report of Cork is deemed to be quite important especially in the contemporary scenario where the aspect of a lack of honesty and ethicality amid the top level management of the company leads to corporate collapse further impacting the interests of the people integrally associated with the business. Notably, insolvency of business units is a resultant product of misconduct or a lack of operational efficacy of companies in the long run. It is known that insolvency is a particular situation for companies where they are unable to pay the debts of the creditors as their liabilities surpass the value of their assets7. This situation mostly results owing to poor decision making as a lack of competency of the owner or directors with regard to the situation of the business and the market condition. This aspect might be in the form of poor product development without proper market survey and a lack of understanding about the nature and preferences of the customers. This aspect ultimately leads to reduced level of profitability along with an increase in debts that yields the situation of insolvency. The aim of the Cork report discussed above has certain relevancy with this particular scenario as it advocates the need for directors or top level management to be competent in realising and delivering the operations of the business. This again depicts the importance of the aim to be considered while framing the insolvency laws. Besides, the aspect of honesty is another serious concern that shapes the performance of the business units. Notably, companies have the need to be honest while promising the return for investors to the creditors as per the ability of the business to deliver. Companies at times make high promises to the creditors or the people to hold their attention and interest8. However, in case the business is not been able to perform as per its promises, it is deemed to fail to pay back the pre-expressed return to the creditors9. This also leads to insolvency up to a considerable extent. In this context too, the importance of honesty in the approach of the managers or the directors in realising and delivering results is significant. Critical Evaluation In accordance with the foregoing comprehension, it is realised that the Cork report includes certain specific principles that were made with regard to dealing with the issue of insolvency in the modern day business environment. The report was developed by Kenneth Cork in the process of his review of the UK insolvency law. There were several aims that were mentioned in the report of Cork with regard to ensuring a good practice in the domain of insolvency norm and strengthen the modern day insolvency law. However, this is only the aim of the report which is yet to be accomplished in the long run. Among the several aims presented in the report of Cork, this particular discussion will focus on the aim which intends “to ensure that the processes of realisation and distribution are administered in an honest and competent manner”. It is believed that the number of bankruptcy and solvency issues has emerged and increased quite rapidly over the years which further calls for the need for certain amendments in the insolvency law of the UK10. The report of Cork recommended professional regulation in the business domain which can further work positively towards eradicating the aspect of solvency amid the companies. The importance and the level of effectiveness of the aim selected from the Cork report for this particular study can also be comprehended from the cases of insolvency in the past. Notably, the insolvency laws mainly intend to protect the interest of the shareholders from the companies through limiting their undesirable approach in conducting their business. Moreover, it will also be crucial to mention that the Insolvency Act of 1986 has a major influence on the recommendations and analysis presented in the Cork report. Hence, evaluating the effectiveness of insolvency laws in eliminating insolvency situations in modern day business units will certainly depict the effectiveness of the aims presented by Kenneth Cork in his report on insolvency11. Observably, there are several landmark cases of insolvency of companies where the misconduct and dishonesty of the directors or management is quite apparent further relating to the aim selected for this particular study. Contextually, the Enron case is deemed to be one of the landmark cases of insolvency that originated from the dishonest approach of the top level management of the business. Prior to its bankruptcy, the company was one of the biggest and most profitable unites in the US as per the figure presented in the annual report. However, in the later scenario, it has been evaluated that most of the figures of the financial statement of the business were not accurate and were presented merely to depict the present financial scenario of the business to be stable and attract the attention and interest of the shareholders. Investigation in the entire case suggested that the better financial condition of the company was a result of systematic and creatively planned fraud of the accounting department of the company. Investigation also revealed that the top level management of the company was integrally associated with the entire situation as they were not competent enough to handle the issues and monitor the operational activities of the business in an efficient manner. Despite the presence of the insolvency laws and other accounting rules and regulations in the international level, the company declared bankruptcy in the year 2001 as it was not been able to pay back the debt of the shareholders. Taking this aspect into consideration, it can be affirmed that the aim of Kenneth Cork mentioned in his report with regard to honesty and competency of the directors to realise and distribute the benefits of business appropriately has not been accomplished effectively over the years. The Enron case shows that directors and other top level management officials of the company have at times been not competent and honest with regard to realisation and distribution of the business operations where the interests of the people or the investors could be safeguarded12. This also depicts that the aim of Cork report had not been accomplished. Another important and renowned case of bankruptcy comprises the case of Lehman Brothers which was among the biggest cases of insolvency in the history. Notably, the company was one of the renowned names in the financial sector of the US. The causes for the collapse of the company have been one of the major topics of discussion in the international domain. The reports of the investigation suggest that the management of the company was integrally involved in misconducts in the domain of accounting with frequent use of accounting gimmicks to present a better financial condition of the company in front of the investors. This further shows that the top level management of the company was quite dishonest in their approach of conducting the business which further led to the insolvency of the business. Furthermore, poor decision making in the investment of the business had also worked against the existence of the company in the long run. The decision of the company to be involved in subprime lending where the probability of getting the amount back was quite minimal further resulted in huge financial loss for the company13. This in turn shows a lack of competency in the decision making of the management of the company. In these cases as well, the impacts of the insolvency laws were quite marginal which further shows that the concerned aim mentioned in the Cork report was not successfully accomplished. In this similar regard, in the case of Arbuthnot Leasing International Ltd v Havelet Leasing Ltd (No 2) which is an infamous case of insolvency law of the UK depicts dishonest activities of management while executing business transactions. Notably, in this particular case, the plaintiff intended to keep the assets of the business out of reach of the creditors which in turn shows a dishonest and misconduct approach enforceable under the law. This aspect again shows that the aim of the Cork report was not fulfilled by the directors of companies i.e. to act in an honest manner through assuring equal distribution of the business benefits amid the stakeholders14. However, the other side of the coin depicts certain aspects which show the accomplishment of the aim of Cook report stated in the previous section of the study. In this purview, the insolvency law case of Re Grays Inn Construction Co Ltd will be crucial to discuss. Notably, in this particular case, the court orders that after winding up of a company, the assets of the business should be equally distributed among the unsecured creditors. This aspect depicts that post insolvency of the business, the directors were bound to equally distribute the benefits to the investors or the creditors as per the insolvency law framed on the basis of the report of Kenneth Cork15. Besides, it is also believed that the Cork report has had favourable influence on the insolvency law and acts as a major remedy for the defendants in insolvency cases. The report of Cork clearly emphasises the issues of equal distribution and realisation of benefits of business in a competent and honest manner. With this particular aim selected for the study, Kenneth Cork not only considered the interest and the overall benefits of the companies who deal with the scenario of insolvency but it also works towards highlighting the interest of the employees who can lose their job owing to the insolvency of the company and the interest of the suppliers who tend to lose their customers in the form of the company. It also assures to provide rescue culture scenario where companies will be able to eliminate the aspect of insolvency and deal with tough times16. Altogether, it can be noted that the prevalence of the recommendation of the Cork report is quite high in the insolvency law and its aim is integrally present within the regulations of the law. However, it can be said that in the present day context, the aims mentioned in the Cork report (along with the one selected for this study) is less realistic and attainable. This can be better comprehended from the selected aim of honesty and competency in the realisation and distribution of the business benefits to the creditors. It is worth mentioning that in most of the cases of insolvency, the aspect of dishonesty is one of the primary elements. Again, it has also been noted that a lack of competency in proper decision making also costs companies significantly further leading to insolvency. This aspect shows that ensuring utmost honesty amid the directors with regard to their operations is quite challenging and unrealistic indeed. Conclusion From the overall analysis of the study, it can be comprehended that insolvency or bankruptcy of the business units is quite common in the present day context owing to the changing nature of the markets that affects the operations of companies adversely along with the misconduct of the business units itself that lead to undesirable results. The insolvency law of the UK and in certain parts of the world intends to limit the approach of the companies where they could be forced to operate in a legal and ethical manner. However, growing instances in terms of corporate collapses and insolvencies put a question mark on the effectiveness of the laws. In order to strengthen the norms of the insolvency laws, several recommendations have been made by famous insolvency expert Kenneth Cork who proposed certain aims to be fulfilled as per the Insolvency Act. Among the several aims that have been presented by Kenneth Cork, this study has discussed about the aim where he desired to see more honesty and competency in the approach of directors in distributing and realising benefits of business. However, in accordance with the rising issues of misconduct and dishonesty amid the top level management of business units leading to corporate bankruptcy, the accomplishment of the aims of Kenneth Cork is deemed to be quite uncertain. 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