Is insolvency stigmatised?

• Published date: 01 December 2023
• Author: Emilie Ghio,Donald Thomson
• Date: 01 December 2023
• DOI: http://doi.org/10.1002/iir.1518

RESEARCH ARTICLE

Is insolvency stigmatised?

Emilie Ghio

1

| Donald Thomson

2

1

University of Edinburgh, School of Law, Edinburgh, UK

2

University of Dundee, Law School, Dundee, UK

Correspondence

Emilie Ghio, University of Edinburgh,

School of Law, Old College, South Bridge,

Edinburgh, EH8 9YL, UK.

Email: emilie.ghio@ed.ac.uk

Abstract

It is a commonly held belief that there exists a sense

of stigma around insolvency, which explains the low

uptake of rescue procedures in the United Kingdom

and around the world. We assess the accuracy of this

claim through two qualitative studies. The first is

conducted through interviews with corporate direc-

tors in the United Kingdom. The second study is a

comparative literature review in selected jurisdic-

tions. The literature review reveals a prominent

stigma narrative in policy and legal texts, whereas

the interview data reveal only moderate levels of

stigma. Rather, they indicate that a lack of knowl-

edge and understanding of insolvency (concept, law

and procedures) may be a more powerful factor in

explaining why corporate directors do not file for res-

cue procedures.

1|INTRODUCTION

Does insolvency attract stigma? And if so, to what degree? Answering these questions is central

to understanding company, or director, responses to corporate insolvency, particularly in the

The authors would like to thank the following contributors who have helped us gather data on the uptake of the rescue

culture in their jurisdictions as well as some information on the prevalence of stigma in the literary and policy

narrative: Dr Adrien Bézert; Mr Gert-Jan Boon; Professor André Boraine; Dr Catherine Brown; Mrs Amanda Bull;

Dr Francesca Burigo; Professor Juanitta Calitz; Professor Laura N. Coordes; Professor Jason Harris; Professor Stephan

Madaus; Dr Nicoleta Nastasie; Mr Vasile Rotaru; Dr Eugenio Vaccari.

Received: 24 February 2023 Revised: 15 August 2023 Accepted: 16 August 2023

DOI: 10.1002/iir.1518

© 2023 INSOL International and John Wiley & Sons Ltd.

Int Insolv Rev. 2023;32:397–419. wileyonlinelibrary.com/journal/iir 397

early stages of distress, where ailing becomes failing. A large body of literature (reviewed in

Section 3) argues that there exists a strong sense of stigma surrounding insolvency that contrib-

utes to the low uptake of rescue procedures.

1

The prevailing explanation is that:

the stigma surrounding going out of business […] prevents many from looking

for help at the time it would provide the greatest chance of turning a business

around.

2

However, stigma is notoriously difficult to qualify or quantify. The literature, so far, has

mostly relied on the assumption that ‘bankruptcy stigma is ubiquitous’and therefore, ‘[its]

determinative role […] should not be questioned’.

3

So, how important is the stigma around

insolvency?

To answer this question, we combine two qualitative studies based on different method-

ologies. The first study is an extensive review of the literature in selected jurisdictions; the

second is an empirical collection of qualitative data obtained through interviews with corpo-

rate directors.

Our findings can be briefly summarised as follows:

1. We identify a prominent literary narrative around the stigma associated with insolvency. In

the majority of jurisdictions surveyed, this narrative is apparent across policy debate, legisla-

tive discussion and academic literature.

2. However, we find that in the corporate reality, amongst company directors, the sense of

stigma around insolvency is not as strong as the literary narrative may suggest. Rather, our

empirical study reveals that, amongst directors of micro, small and medium enterprises

(MSMEs), the perception of stigma associated with insolvency is no more than moderate.

Most importantly, we identify an acute lack of knowledge of insolvency amongst corporate

managers.

Section 2unveils the background and rationale for the studies. Section 3presents our com-

parative literature review and Section 4outlines our empirical data collection study. In

Section 5, results and findings are discussed. Section 6sets the background against which this

study takes place, and concluding remarks may be found in Section 7.

1

For example, Robert Sutton and Anita Callahan, ‘The stigma of bankruptcy: spoiled organizational image and its

management’(1987) 39 Academy of Management Journal 405, 405 (‘We propose that Chapter 11 is a discrediting label

that causes key organizational audiences to have negative reactions towards a firm’.); Lisa McIntyre, ‘A sociological

perspective on bankruptcy’(1989) 65 Indiana Law Journal 123, 130 (‘the power of stigma to affect people's choice to

declare bankruptcy’.); Tibor Tajti, ‘Bankruptcy stigma and the second chance policy: the impact of bankruptcy stigma

on business restructurings in China, Europe and the United States’(2018) 6 China-EU Law Journal 1, 29 (‘in […]

countries having set the rescue culture as first priority [,] [t]he stigma, however, is present everywhere as an interfering

significant factor’.); Chris Umfreville, ‘A review of the corporate insolvency framework: a new moratorium to help

business rescue?’Company Law Newsletter (June 2016), 1 (‘In practice, however, the stigma associated with a formal

insolvency process together with the burdensome process for entering administration stymied this intention [the

creation of a rescue culture]’).

2

Institute of Chartered Accountants of England and Wales, ‘It's time to admit British business has a problem’

(7 September 2017), 1.

3

Tajti (above note 1), 4; 12.

398 GHIO and THOMSON