Vulnerability theory and insolvency law

A stakeholder approach to insolvency and corporate rescue law is not new. However, this approach has often been limited to those stakeholders who have contractual connections to the corporate entity in financial distress, ignoring some of the most significantly affected and least protected stakeholders impacted by a company’s financial distress, e.g., involuntary creditors and employees. Martha Fineman’s vulnerability theory provides a new perspective that places the human at the heart of the law, which requires a full paradigm shift when it comes to our thinking around the aims and purposes of insolvency and corporate rescue and how fairness should be assessed and protected. This chapter explores the key concepts involved in such paradigm shift with a view to creating a new theoretical framework based in vulnerability theory within which fairness toward a variety of stakeholders can be tested and achieved in treatment, priorities, and distribution from within collective processes. This approach offers a much-needed adjustment to the theoretical underpinning of global insolvency systems to place the human at the centre of the matter and challenges the traditional views of corporate financial distress and the categorical and fragmented approach traditional processes tend to take for its resolution. Vulnerability stands as a challenge to the traditional law and economics approaches to resolving corporate financial distress and builds upon the communitarian and traditionalist approaches promoted by academics such as Elizabeth Warren and Donald Korobkin with a view to creating measurable tests that will recalibrate fairness towards all stakeholders from a basis of equity.