Corporate Governance and Financial Distress: When Structures Have to Change

This paper indicates some implications of corporate financial distress for corporate governance. Formal measures, laid down in statute and commercial law, and informal steps established by financial practice, both respond to the threat of insolvency by limiting (and sometimes removing) corporate control of incumbent management. Both need to be considered together in order to appreciate their effects in practice. Shifts in control are associated with UK statutory insolvency procedures, and the paper reviews accounting-based rules intended to protect creditors. It is argued that cash forecasts are the only effective basis for such rules.