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THE THEORIES UNDERPINNING CORPORATE INSOLVENCY LAW: AN ANALYSIS

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Ruzita Azmi Adilah Abd Razak

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cering,
~Hotel
;ement
;ement
lCiples
oining
,angor.
related
cusing
c:an be

irestry, Acknowledgemen t iii

.cs and About the Authors iv
rrn the
ourism
Chapter 1
Introduction and Overview 1
- Zahira Mohd Ishan and Wong Foong Yee

Chapter 2
The Theories Underpinning Corporate Insolvency Law: An Analysis 5
- Ruzita Azmi and Adilah Abd Razak

Chapter 3
Transaction Cost Economics and the Choice of Governance Structure in the
Relationship between Capital Equipment Acquirer and Provider 16
- Azmawani Abd Rahman and Mazlan Hassan

Chapter 4
Born Global Firms and Rapid Internationalisation Process: Characteristics
and Challenges 30
- Noor Azlin Ismail

Chapter 5
The Whether, When and How of Market Entry: A Literature Review 40
- Ganesh Thanasegaran

Chapter 6
Role of SMEs in Foreign Retailers' Inter-Corporate Network: The Case of Malaysia 54
- Raja Nerina Raja Yusof

ix
 Chapter 7
Is Relationship Marketing Crucial in a Mature Market? Case of the
Malaysian Mobile Service Industry 65
- [amil Bojei and Mimi Liana Abu

Chapter 8
Environmental Management Practices in the Hotel Industry in Malaysia 87
- Kasimu Abdu Bakori, Zaiton Samdin and Hamimab Hassan

Chapter 9
The Effect of Online Marketing on Customer Satisfaction 94
- Yuhanis Abdul Aziz, Amir Muhamadi and Zaiton Samdin

Chapter 10
Changing the Perception of the Call Centre Industry ~ 106
- Hossein Nezakati and Rozita Sedek

Chapter 11
Understanding Malaysian SME Entrepreneurs' Perception of the Factors
Affecting Hypermarket Acceptance of Their Products 121
- Mohani Abdul, Haslinda Hashim, Azmawani Abd Rahman and Farah Ahmad Dusuki

Chapter 12
Enterprise System Adoption in Healthcare Organisations: An Actor
Network Theory Approach 136
- Manisah Othman and Nor Azlina Kamarobim

II
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1,
INTRODUCTION
n
n Corporation's insolvency impinges on an extensive diversity of interests. Such wide repercussion
n
can be seen in the loss, which the creditors and other stakeholders suffer as a consequence of a
n
corporation becoming insolvent. Employees also suffer because they are made redundant and
left without a job. The suppliers and customers may become insolvent and the government
will lose out on taxes. Therefore, when a corporation becomes insolvent, questions are asked
regarding the action to be taken and the purpose of that action. Questions include these:
Should insolvency law be purely used to maximise returns to creditors as well as to protect
their rights or should it primarily be providing assistance to the insolvent company so that the
company or its business or both could be rescued? Should the law be more concerned about
the protection of the creditors' interest compared to the interests of the employees, customers
and community, and vice versa? Should the law be more concerned about the fair ,balance
between the right of creditors, debtors and those parties affected by corporate insolvency?
Should the range of interests of parties affected by corporate insolvency be traded off against
each other?

To answer all these questions it is necessary to deal with the proper role and scope of corporate
insolvency law. This can be done by addressing the theoretical foundation of law governing
corporate insolvency. Although there is a divergence between some theories and the current
position of the law, yet an analysis on these theories will shed light on the key objectives and
principles of insolvency law.

Corporate insolvency theories are mostly developed by scholars in the United States and United
Kingdom in their pursuit to find the objective of corporate insolvency law. To uncover the real
purpose of corporate insolvency law by reviewing corporate insolvency law theories, the authors
collected information through secondary data analysis (McConville & Wing, 2007). Sources of
the data are textbooks and articles from law journals and law reviews.

5
 THEORIES ON THE APPROPRIATE ROLE OF INSOLVENCY LAW thear
throe
Apparently, there has been little developed articulated theory in corporate insolvency law in the ansln
United Kingdom, what more in Malaysia. The reason for this was said to be the pragmatic way that J
in which the law in the United Kingdom had developed through the years (Goode, 2005). It to th.
was also claimed that the problem is caused by "the concentration of academics and practitioners
I I

I alike on statutory developments and case law, rather than seeking to divine any theoretical The J
framework" (Keay & Walton, 2008, p. 24). when
than
However, from 2002 onwards, there has been a strong growth of the literature on theories and assets
principles of insolvency law in the United Kingdom where more scholars have begun to involve a coIl
themselves with normative theories of insolvency law, including for instance, Finch (2002 and "race
2009), Goode (2005), Keay and Walton (2008) and Mokal (2001 and 2005). reaso:
going
In Malaysia, a Commonwealth country whose laws have their roots in English Common Law, to th.
the practical approach of the laws and the greater attention on statutory and case laws mean deb to
that scholars and practitioners give less attention to the foundation of the law. Therefore, it is (Mok
much harder to identify the theory underpinning the corporate insolvency law of Malaysia as volun
compared to the UK's. that ~
other,
Interestingly enough, the position in the United States is in stark contrast to the position in the
that 1
United Kingdom and Malaysia. There is a voluminous amount of scholarship proposing various
approaches to corporate insolvency law in the United States (Keay & Walton, 2008). Scholars in The c
the United States have devoted much time and effort to policy issues and theoretical constructs, insolv
and less to empirical research. The product of their efforts is a developed body of theories of shoul
corporate insolvency law. These theories can be classified under seven broad headings, namely There
creditor wealth maximisation and the creditors' bargain (CWM/CB), communitarian vision the p
(CV), multiple values (MY), broad-based contractarian approach, enterprise and forum vision, be afI
ethical vision and menu approach (Finch, 2009; Rasmussen, 1992). Thq:
probl
In the United Kingdom, two theories were developed. They are explicit values approach (EVA)
incur
and authentic consent model (ACM). Since space does not permit a detailed discussion of all
the above-mentioned theories, and the fact that there is no settled theory of insolvency law, TheC
the authors have selected only some of the theories for discussion. First, the CWM/CB theory to sol
will be analysed followed by the CV and MV theories. After that, the authors will review EVA. fashic
The discussion then resumes with an evaluation of the theories discussed by the American and comp
British scholars in order to identify the objective of corporate insolvency law. the w

The s
CREDITOR WEALTH MAXIMISATION AND THE to sol
CREDITORS' BARGAIN of co
For iJ
The earliest and most debated theories are creditor wealth rnaximisation and the creditors'
made
bargain (CWB and CB). These theories were made popular by Thomas H. Jackson, a Professor
firms
of Law at Stanford University through his lectures and writings in the 1980s. According to these
theories, the main objective of insolvency law is to maximise the collective return to creditors
through a compulsory collective system and to solve the "common pool" of assets problem
arising from diverse claims to limited assets (Baird & Jackson, 1984; Jackson, 1986). It follows
that rehabilitation of the corporate enterprise is not a legitimate goal of bankruptcy law except
to the extent that it is intended to maximise returns to the creditors.

The proponents of these theories view insolvency law as a collective debt-collection device
whereby the company creditors agree to a collective procedure to enforce their claims rather
than by individual action. By doing so, the conversion costs of transferring an insolvent debtor's
assets to its creditors can be put to the minimum (Baird & Jackson, 1984; Jackson, 1986). Such
a collective system will eliminate the "first in time, first in priority" rule, which is considered as a
"race to collect" between creditors. The collective system will increase creditors' returns for several
reasons. First, the debtors' assets seized by the creditors are more valuable if sold together as a
going concern than if they were disposed of piecemeal by individual claims. Second, compared
to the individual claims the creditors will no longer need to waste resources monitoring the
debtors' financial estate which will allow them to expect a more certain return on their loans
(Mokal, 2001). Hence, the model of "collective regime defined by the automatic stay would be
voluntarily selected by the creditors subject to its coercion" (Mokal, 2001: p. 5). It is a model
that assumes what real-world parties will agree to "if they could meet and negotiate with each
other, and if there were no transaction costs and the mandatory automatic stay merely enforces
that hypothetical bargain" (Mokal, 2001: p. 5).

The core emphasis of these two theories is that insolvency law must respect the existing pre-
insolvency creditors' rights. It follows from this argument that the distribution to the creditors
should be made in accordance with those rights, and new rights should not be formed.
Therefore, based on the CWM and CB theories insolvency law should concern itself only with
the protection of the creditors' interests and not the interests of other parties who can also
be affected by the failure of the corporate enterprise (Baird & Jackson, 1984; Jackson, 1986).
The proponents of the theories do not agree with the idea that state law should react to social
problems caused by corporate failure by keeping the corporation going since the rescue may
incur cost and also unjustifiably place the burden on the firm's secured creditors.
J

The CWM and CB theories view the idea that insolvency policy should concern itself with trying
to solve social ills and therefore must rescue the corporation as a mistaken approach. Moreover,
fashioning remedies for all the damage brought by business collapse is difficult and beyond the
competence of the bankruptcy court. In fact, it has been argued that it is difficult to measure
the wide-ranging effects of corporate failure (Baird & Jackson, 1984).

The supporters of these theories have also argued that it is not the business of insolvency law
to solve problems caused by corporate failure (Baird & Jackson, 1984). Rather the impact
of corporate failure on other individuals should be dealt with via other branches of law.
For instance, when there is a need to deal with the employees' interest, reference shall be
made to the employment law (Baird, 1986). They have also argued that keeping marginal
firms alive may do more harm than good as it may force the investors to keep assets in a
 ala¥sia

relatively unsuccessful business instead of investing in a different and more productive one IOJU

(Baird, 1986). coni

tof
The CWM and CB theories hold that a bankruptcy proceeding should not be the place to put expe
into practice a policy that society does not enforce outside of bankruptcy and unrelated to the
preservation of assets for the firm's creditor/investor group. The
tape
iden
COMMUNITARIAN VISION resol
If the CWM and CB theories focused on private rights, the communitarian vision (CV)'s iden
she;
emphasis is on a variety of constituent interests, especially the public interest. This vision does
not just take on board the creditors' interests but the interests of other stakeholders such as emp
employees, suppliers, government, customers and the local community (Keay & Walton, 2008).
Mea
Communitarianism regards individuals as being interdependent on each other and that it is
ban~
incumbent on them to act in the best interests of their communities, even if doing so prejudices
Asa
their own individual freedom (Gross, 1994). This approach permits the insolvency procedures
of b:
to rehabilitate commercial enterprises where this would have a better result for the community,
bank
such as protecting the employees' jobs, even at the expense of others (Finch, 2009). Change of
and
pre-insolvency rights on insolvency is allowed under the CV theory (McKenzie-Skene, 1999).
law
finan
MULTIPLE VALUES proC(
polit:
The multiple values (MY) theory is made popular by the American scholars, Warren (1987) of di
in her article "Bankruptcy Policy" and Korobkin (1991) in his article "Rehabilitating Values: A insol
Jurisprudence of Bankruptcy" . What they have done was to challenge Jackson and Baird's economic are n
account and to define bankruptcy law's distinct function as a mechanism to collectivise debt (Kofl
collection and thereby maxi mise economic returns to creditors as a group. In a sharp contrast to
CWM and CB theories that offer a single economic rationale, the MY, also known as an eclectic Find
approach, proposes that bankruptcy issues reflect various and complex empirical and normative theor
concerns that cannot be reduced to a single theoretical construct (Korobkin, 1991). declii
pf tr}
According to Warren (1987: p. 811); what she offers is a "dirty, complex, interconnected view amor
of bankruptcy from which I can neither predict outcomes nor even necessarily fully articulate all of fu·
the factors relevant to a policy decision". It is her belief that her view is more realistic and more provi
likely to yield useful analysis (Warren, 1987). She also suggested a policy that focuses on the credit
values to be protected in a bankruptcy distribution scheme and on the effective implementation tnves
of these values in assisting the decision-making process even if it does not dictate specific answers
(Korobkin, 1991). Appa
ratior
The MY approach highlights the critical question of distributional objectives of bankruptcy there
which cannot be considered without inquiries into many issues, including "who may be hurt decisi
by a business failure, how they may be hurt, whether the hurt can be avoided, at what cost it way 1
\11 be avoided, who is helped by the business failure, whether aid to those helped offsets the
choo:
injury to those hurt, who can efficiently evaluate the risks of business failure, who may have
contributed to the business failure, how they may have contributed, whether the contribution
to failure serves other useful goals, who can best bear the costs of business failure, and who is
expected to bear the costs of business failure" (Warren, 1987: p. 811).

The distributional premise of bankruptcy is implemented through a difficult and complex

tapestry of empirical presumptions interwoven with normative concerns that Warren tried to
identify. She concluded her theory by stressing that she does not offer a single rule that will
resolve all disputes and call attention to the difficult distributional issues in bankruptcy. She also
identified factors that influence the way those distributional issues are settled. More importantly,
she advocated a process of framing and refining questions, considering both their normative and
empirical elements, to give content to the bankruptcy debate.

Meanwhile, Korobkin (1991: p. 721), strongly suggested that the economic account of
bankruptcy is deeply flawed, and its view of what makes bankruptcy law "distinct" is misguided.
As an alternative to the economic account, he offered a competing normative explanation
of bankruptcy law, which he called the "value-based account". This theory seeks to explain
bankruptcy law in all its aspects, both recognising what really makes bankruptcy law distinct
and justifying bankruptcy law as a rich and complex system. In Korobkin's· view, bankruptcy
law provides a forum in which competing and various interests and values accompanying
financial distress may be expressed and sometimes recognised. Over time, the bankruptcy
process transforms these competing interests into a renewed vision of the corporation as a moral,
political, social and economic actor. Bankruptcy law also creates conditions for a special kind
of discourse, one that is fundamentally rehabilitative in character. The MV theory asserts that
insolvency law should consider the distributional impact of corporate collapse on those who
are not technically creditors and who have no formal legal rights to the assets of the business
(Korobkin, 1991).

Finch (2009: pp. 40-41) commented that undoubtedly Warren and Korobkin in their MV
theories take a wider approach than Jackson's theory of CB; they see the implications of corporate
decline as broader than just creditors' interests. They regard the insolvency process as a mode
of trying to achieve various results including apportioning the consequences of financial failure
among a wide range of actors, establishing priorities between creditors, protecting the interests
of future claimants, offering opportunities for continuation, reorganisation and rehabilitation,
providing time for adjustments and serving the interests of those who are not technically
creditors but who have an interest in the continuation of the business as well as protecting the
investing public, jobs and community interests (Korobkin, 1991; Warren, 1987).

Apparently, the MV theory incorporates communitarian vision and subscribes to distributive

rationales. As a result, it is more popular and practical compare to the CB theory. Nevertheless,
there are some substantial problems with this theory. First, MV gives limited assistance to
decision makers in managing the tensions and disagreement between different .values or the
way trade-offs between various ends should be decided, Second, there is always controversy in
choosing which values to call upon or concentrate. There is also no core principle that emerges
to guide decisions to trade off the interest of different groups affected by the insolvency process founc
or to establish weightings of these interests (Finch, 2009; Frug, 1984). rules

EXPLICIT VALUES APPROACH AN

Finch (2002) introduced the explicit value approach (EVA) as an alternative to the existing The (
theories on the justification of insolvency processes and decisions. Finch (2009) evaluated the and t
theories delivered by the American scholars and concluded that what fails to show from such
all P'
discussion is any inclusive view of the proper measures of insolvency law. Finch (2009) opined becai
that in order to enhance the search for measures in the light of such divergent visions, it is the c
necessary to analyse further the purpose of insolvency law. credh
orth
Finch (2009) suggested that the insolvency process touches on the interest of the public
because the decisions on the survival or demise of the corporation do affect source of revenue This
and the public at large. In addition, it is accepted that the insolvency process also remarkably such
affects private rights such as pre-insolvency property rights. Sometimes the insolvency process partie
may also cause the securities to be frozen and an individual's attempts to impose other legal the 1,
rights restricted. Considering the private and public impacts of insolvency there must be hards
legal justification for the process. Finch (2009) explicitly highlighted a number of rationales CB a
or grounds for justifying insolvency processes, namely efficiency, accountability, fairness and to be
expertise implications. overh

As the insolvency process involves parties of diverse interests there is a need for the decision Havi
makers to evaluate and measure the amount of the affected parties' interests that the law wish it pre
to protect. Therefore, Finch (2009) suggested that to give legitimacy to the trade-offs of each this t
party's interests, the decision makers must weigh and prioritise all the interests. Finch (2009) mode
emphasised that trade-offs therefore take on board different interests in a host of insolvency denie
procedures. Those processes must recognise the right and interests as well as the role played in credi
insolvency, by an array of parties which include creditors (secured and unsecured), employees, as a
company directors, shareholders, suppliers, customers and other commercial groups who are a set
dependents of the company.
..admi
Based on Finch's view it can be deduced that the EVA justifies the legitimacy of the insolvency Desp
process by ensuring that insolvency law accords protection to both private rights and public this J
interests. In other words, insolvency law must be formulated based on communitarian approaches realit
as well as the protection of creditors' interests (Finch, 2009). that,
secor
In conclusion, the EVA takes on board the preference to further communitarian interests and
to protect creditors' interests. It offers an identifiable list of justifications that has relevance The
in assessing the legitimacy of insolvency processes, namely efficiency, expertise, accountability mcor
and fairness. It differs from the CV and MV theories where the list is open-ended. The EVA ranki
makes clear about the need and nature of trade-offs between the values that have to be observed Secti:
throughout the insolvency process. Finch, however, admitted that the EVA does not offer a empl
series of primary principles to which others can be seen subservient. Nevertheless, it offers a
up p
foundation in the sense of providing guidance and direction in the development of insolvency
rules and procedures (Finch, 2009).

AN EVALUATION OF THE THEORIES OF INSOLVENCY LAW

The diversity of approaches to the role of insolvency law portrays the law from a single objective
and thus the law is unacceptably narrow to concern itself with multiple purposes and to address
all problems caused by corporate failure. The most controversial is the CWM/CB model
because it regards insolvency law and policy as merely concerned with maximising returns to
the creditors. The model looks upon the role of insolvency law as evolving around the issue of
creditors, including matters such as the protection of their interests and pre-insolvency rights,
or the distribution of company assets among such creditors.

This model does not consider the wider repercussions of corporate collapse on non-creditors
such as employees, suppliers, customers and commercial dependents of the company. Those
parties also suffer because of the insolvency. For instance, employees may lose their jobs and
the local community suffers hardship because of the closure of the company. None of this
hardship would arise but for the insolvency, thus supporting the argument that contrary to the
CB approach, these interests are indeed the proper province of insolvency law and it appears
to be erroneous if those above-mentioned parties' rights and interests are to be ignored and
overlooked by insolvency law.

Having said that, it is necessary to mention that the CB theory is valuable to insolvency law as
it promotes the concept of collectivism. Therefore, insolvency law that is formulated based on
this theory will require the creditors to take collective action to enforce their claims. Here, the
model considers mandatory automatic stays will accomplish the collective procedure. The law
denies individual action as it will dismantle the insolvent's assets, which could reduce returns to
creditors. By taking collective action, the creditors' value will be increased as the assets are sold
as a going concern. In the United Kingdom, the concept of "collectivity", which constitutes
a scheme that suspends multiple individual claims among creditors, is applied through an
administration scheme under the Insolvency Act 1986. J

Despite the benefit that this theory gives to the creditors, it is argued that there are flaws with
this model of law as it puts the interest of the creditors above the interest of other parties. In
reality, insolvency law has more interests to protect and rights to honour, interests and rights
that go beyond those of the creditors and the CB theory renders those rights and protection
secondary to those of the creditors.

The CWB theory is in conflict with the trend in many insolvency laws that increasingly
incorporate in their rules provisions to cater for other claimants apart from creditors such as
ranking the claims of employees within the unsecured claims category in the insolvency process.
Section 292(3) of the Malaysian Companies Act 1965 for example, provides that claims of any
employee of the company for account of wages, salary or vacation are to be paid under winding
up proceedings or liquidation.
Apparently, the creditors can still maximise their returns even when the insolvency law takes or cone
on board the interest of other parties, such as the employees and public. This can be observed account
when insolvency law contains provisions for the rescue of an insolvent company. In the United
The Ev
Kingdom, the Administration and Company Voluntary Arrangement (CVA) are two insolvency
solutio!
procedures available under the UK's Insolvency Act 1986 that could increase the survival chances
and M'
of companies facing difficulties. In this case, the rescue activities are likely to turn around the
debtor,
company and such rescue may benefit creditors in the long run as well as potentially increasing
rights h
returns to creditors compared to what they would receive from the liquidation process. For
contrac
example, a company is worth more when it sells its business as a going concern than sells its
commu
assets in a piecemeal manner in winding up. Likewise, the creditors get larger returns when
local ar
the troubled company is able to compromise and delay the payment, rather than go into
liquidation.
The E\
being n
Unlike the CB theory, the CV and MY theories take a wider approach on the role of insolvency
princip
law and take into consideration a wider range of interests. These theories acknowledge that a
The me
company's insolvency affects not only the creditors but also other parties' interests, and the role
"comm
of insolvency law is not just to maxi mise returns and protect the creditors' interests. Insolvency
berweei
law modelled based on these theories can be found in countries such as South Africa, Australia,
lawmu
the United States and United Kingdom where their insolvency laws deviate from the principle
of creditors' bargain and acknowledge that a lot more can be done to protect the investors,
Unlike
employees and public, and also rescue the insolvent companies. However, the flaw of those
and de:
approaches lies in the number of parties who are entitled to claim for their rights, regardless of
efficien
how remote they might be, and there is no explicit justification for how those models are going
of conf
to fix the boundaries of those claims.
that tra
multip]
The cornmunitarian approach, as the name suggests, considers countless number of community
more 0
interests that are difficult to define. Yet, the MV and the CV theories suffer from a similar setback
numen
since both are related; they subscribe to the distributional role insolvency law should play and
rather
the wide range of interests the law should protect.
give w(
The MY and CV theories are comparable since they suggest that insolvency law should provide
the means for corporate survival or rescue. Such theoretical approach is in harmony with many
insolvency laws around the world. Corporate rescue mechanisms have been exercised as judicial
REV
management in South Africa, voluntary administration in Australia, CVA and administration IN tv
procedures in the United Kingdom and Chapter 11 procedure in the United States; all emphasise Schola
corporate rehabilitation as one of the roles of insolvency law. theorie
develo]
Despite the positive aspects of the MV and CV theories as previously mentioned, they are
founds
not free from criticism. It is said that these two theories create a wider class of interests within
that id
insolvency law that make the law inconclusive. This is exacerbated when there is no explicit
(Kama
explanation to solve the conflict between the different kinds of interest claimed as being
worthy of protection through the insolvency process. Another comment attacks the theories' The re
broad formulation of the purposes of the law, thus preventing the determination of the core the rol
principles of insolvency law. There is also criticism of the limited guide on how to justify, choose
 The Theories Underpinning Cor ow e lnsoJyeocy, L~ .

or concentrate on the various lists of values and interests that insolvency law should take into
account in the insolvency process.

The EVA provides an alternative theory to measure the insolvency law's role as well as to find
solutions for the tensions caused by the broad formulation of theories established by the CV
and MV concepts. The EVA recognises the contractual relationship between the creditors and
debtor companies, when the former lend their money, and acknowledges that those pre-existing
rights have to be protected. Meanwhile, it also recognises that there are representatives of non-
contractual relationships that are potentially affected by a corporate collapse, for instance, the
community's interests that are devastated by the discontinued operation of a company in the
local area.

The EVA model appears to support the idea of the role and objectives of insolvency law as
being multi-purpose, and these correspond specifically with the MV theory, which supports the
principle that insolvency law should do a lot more than merely serve the interests of creditors.
The model recognises that by taking into account the interests of both the creditors and those
"commercial dependents" of the company, it is foreseeable that there will be tensions/conflict
between such different values and interests. To avoid the conflict, this theory emphasises that the
law must be able to trade off between different values and interests in the insolvency process.

Unlike other approaches, the EVA sets a benchmark to justify and assess the insolvency process
and decision; reference should be based on the array of rationales described by the model, namely
efficiency, expertise, accountability and fairness. Even though the trade-off could resolve the issue
of conflicts between different interests, it nonetheless exposes another issue, as the model admits
that trade-off itself remains a problem. This is because there is no simple solution to balance the
multiple objectives with different interests in insolvency, and giving priorities to them is even
more complicated. For example, different societies differ on how to balance and give priorities to
numerous interests in insolvency; some countries tend to give priority to rescuing the company
rather than protecting shareholder investment or maximising return to creditors, while others
give weight to increasing returns to creditors instead.

REVIEW OF THE CORPORATE INSOLVENCY THEORIES

IN MALAYSIA
Scholars and law practitioners in Malaysia have not given much attention to the normative
theories of insolvency law. Moreover, the pragmatic way in which the law in Malaysia has
developed through the years is the major reason for a weak theoretical discussion of the
foundation of insolvency law. Nevertheless, it should be noted that there are reports and studies
that identify the underlying principles or philosophy of corporate insolvency law in Malaysia
(Kamarul, 2006; Nathan, 2000).

The reports and studies on Malaysian insolvency law, although limited in quantity, describe
the role of Malaysian corporate insolvency law as being similar to its Australian and English
equivalents. They suggested that the role of the corporate insolvency law of Malaysia would
probably be better characterised as follows: (1) to ensure the preservation and ranking of REFE
secured creditors' rights and equal treatment of all other creditors where a company cannot be Baird. D
saved; (2) to provide rehabilitation where possible; and (3) to punish delinquent officers who Lav

have contributed to the insolvency. It is claimed that the purpose and principles of insolvency Baird. D
laws in many different Western legal systems have been described by reference to such criteria A (
Re\
as fairness, efficiency and impartiality (Tomasic & Whitford, 1997). The similarity of Malaysia's
Finch. V
corporate insolvency law to the English and Australian approaches can be found in Sections 291 Pre~
and 292 of the Companies Act (CA) 1965, which regulate the distribution of available funds
Finch. V
to secured and unsecured creditors. As far as corporate rehabilitation is concerned, one option,
Finch. V
which serves as a lifeline to Malaysian companies facing financial difficulties, is a Scheme of Pre:
Arrangement (SOA) pursuant to Section 176 of the CA 1965.
Frug. G.

In conclusion, even though Malaysia, unlike the United States and United Kingdom, lacks a Goode.

clearly articulated theory on corporate insolvency law, it seems fair to say that the role of the Gross. K
Qu
Malaysian insolvency law is not merely confined to maximising returns to creditors; it also
has some other distributional role to play, including to rehabilitate or rescue businesses facing Jacksor

financial difficulty. Kamaru

(p.

Keay. J
Lor
CONCLUSION
Korobkir
In searching for a convincing model and vision of insolvency law, the competing theories of the
McCon'
insolvency process put forward by American and UK scholars have been discussed. While the
McKenz
CB theory has advanced the "concept of collectivity" and mandatory automatic stays that would
eliminate the "first come, first serve" rule, which is considered to be a "race to collect among Moka!.
liqL
creditors", CB is highly criticised for being solely in favour of creditors and unsympathetic
MokaLI
towards the rehabilitation concept of a corporate debtors' business.
Nathan
retr
The remainder of the visions recognise that the role of insolvency law is not merely confined to
maximising returns to creditors; it has some other distributional roles, for instance to rehabilitate RasmuS!
51-
or rescue businesses in financial difficulty and to protect employment, public interests and other
Tomasic
victims' interests affected by the corporation insolvency. These views are consistent with the trend
developing around the world that the insolvency process should take on socio-economic and Warren.

wider considerations than absolute economic reason. The discussion on the numerous theoretical
approaches is significant; those theories may not be perfect but they incorporate a number of
significant legitimate justifications for insolvency laws and processes.

As far as Malaysia is concerned, there is yet to be a body of literature on the theories of corporate
insolvency. Suffice to say that for the time being, the law shall be developed in such a way
that protection of the interests of various parties (including the preservation of the life of the
corporation, that is, corporate rescue), becomes the legitimate objective of the law.
 The Theories Underpinning Corporate Insolvency Law: An bnalysis

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