Corporate insolvency and employment protection: a theoretical perspective

When a company faced with financial difficulties finally enters formal insolvency, several creditor interests are affected. However, the relationship between employees and their employer is more threatened as companies faced with insolvency usually consider cutting labour costs as a mode of restructuring. Other stakeholder interests and mutual expectations such as continuity of employment may be severely altered or cease to exist completely where the company is either liquidated or sold as a going concern. This may prompt various parties with interests in that company to pursue and recover their interests against the debtor company. However, secured creditors such as banks with privately agreed contractual arrangements may choose to pursue their interests by exercising those contractual rights, usually to the detriment of general unsecured creditors like employees. This raises questions as to whose interest should insolvency law seek to protect on corporate insolvency? In other words, what the legitimate aim or goal of insolvency is or ought to be on corporate insolvency. This article will analyse two insolvency specific theories namely; the Creditors’ Bargain Theory (CBT) and the Team Production Theory of Corporate Reorganizations (TPT) and two general theories namely; Marxist Legal Theory and Dworkin’s Interpretative Theory of Law, to examine their normative position on the treatment of employees on corporate insolvency and the impact they would impose on the drive to rescue insolvent but viable businesses. The two general theories (Marxist Legal Theory and Dworkin’s Interpretative Theory) will be analysed in light of insolvencies to establish whether their normative perspectives may inform law and policy justifications on corporate insolvency in a non–specific insolvency perspective. The article will conclude by analysing what the legitimate goal of insolvency law ought to be if a balanced approach to stakeholder interest consideration is to be reached.

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