Academic journal article Melbourne University Law Review

Creditors' Rights of Recovery: Economic Theory, Corporate Jurisprudence and the Role of Fairness

Academic journal article Melbourne University Law Review

Creditors' Rights of Recovery: Economic Theory, Corporate Jurisprudence and the Role of Fairness

Article excerpt

[This article investigates' the role played by substantive fairness in the determination of corporate law principles as they relate to particularly vulnerable creditor cohorts'. The meaning and relevance of fairness is discussed, and the article examines economic theory both to show which creditors may not be adequately protected ex ante, as well as to evaluate measures of economic efficiency as a determinant of the law. Established legal doctrines are also considered to assess their impact on these vulnerable creditor groups. Commentary on fairness is examined, before concluding that the law needs to take into account economics, traditional corporate jurisprudence and aspects of fairness relating to creditors' vulnerability and expectations. To ensure fairness to directors, their fault should also be considered before liability is imposed on them.]

CONTENTS

I   Introduction
II  The Meaning and Relevance of Fairness
III Economic Theory in Corporate Law
IV  Corporate Law Doctrines 13
V   Reconciling Economic Theory, Legal Doctrine and Fairness
VI  Conclusion

I INTRODUCTION

The relationships between corporations and corporate stakeholders are governed in a variety of ways--contractually, by common law and by statute. Each of these is underpinned by established legal doctrines, such as the limited liability of shareholders, the separate legal entity of the company and the organic theory of the company, and these in turn are shaped by practical economics in the form of the shareholder wealth maximisation objective.

However, there is no explicit or implicit recognition in corporate law of the issue of whether the outcome of these rules, as opposed to the process by which they are achieved, is fair. This leads to a series of questions--what does fairness in a corporate context mean; should corporate law be fair; and ought fairness to be relevant along with traditional legal doctrines and considerations of economic theory?

The lack of explicit recognition of fairness may be explained by the difficulties in characterising substantive fairness. Given that academic commentators struggle to identify its requirements, it is hardly surprising that courts and legislatures overlook the matter. Perhaps it is simply assumed that the law is 'just' and 'fair', or is at least attempting justice and fairness--but cases, legislation and its explanatory memoranda rarely allude to substantive fairness as an objective of the law.

It should be noted that both the Corporations and Markets Advisory Committee ('CAMAC') (1) and the Parliamentary Joint Committee on Corporations and Financial Services have recently initiated inquiries into 'corporate social responsibility'. (2) Relevant to both inquiries is the question of whether company directors should be permitted or mandated to consider the interests of parties other than shareholders when making decisions. The basis for such consideration is the power of companies to affect the interests of these non-shareholder constituencies, particularly those that are vulnerable to any abuse of that power. While the economic dimension is one consideration, there is also a question of fairness.

It will be argued here that the law should be fair, and that fairness should be considered by judges and legislators in developing corporate law rules. An examination of the deficiencies of economic theory and legal doctrine supports the search for a further basis for deciding the direction of corporate law. This article suggests that this additional basis should be fairness.

While consideration of economic theories is useful in understanding market mechanisms, and the established legal doctrines are fundamental to incorporation, neither are sufficient to ensure that the outcome of corporate law is fair. This article will concentrate on creditors, a group that is particularly vulnerable to unfair treatment. While a company is a going concern and the creditors are being paid, the question of substantive fairness generally does not arise, but when the company is unable to pay its debts, those cohorts of creditors who lack the capacity to protect themselves contractually from the risk of non-payment--such as employees, small trade creditors and tort claimants--may be treated unfairly. …

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