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The ethics of bankruptcy

The fundamental ethical problem in bankruptcy is that insolvents

have promised to pay their debts but cannot keep their promise. The

Ethics of Bankruptcy examines the morality of bankruptcy. The

author explores ethical concerns raised by duty-based principles,

utilitarianism, forgiveness and distributive justice, as well as the

moral aspects of insolvents’ contractual, fiduciary, tortious and

criminal liability. He also assesses recent bankruptcy law reforms.

Bankruptcies severely hurt creditors and society, and for the

insolvents and their families the experience is painful and

stigmatising, yet philosophers have paid little attention to the moral

aspects of this violent social phenomenon. The Ethics of Bankruptcy

is the first comprehensive study that employs the tools of ethics to

examine the controversies surrounding insolvency, which makes

valuable and sometimes controversial reading in a decade recovering

from the recession.

Dr Jukka Kilpi has extensive experience in public administration

and banking and is an Associate of the Securities Institute of

Australia. He holds undergraduate and postgraduate degrees in

Philosophy from the University of Helsinki and a doctorate from

Monash University, Melbourne, Australia.

Professional Ethics

General editors:

Andrew Belsey, University of Wales, Cardiff and

Ruth Chadwick, Centre for Professional Ethics,

University of Central Lancashire

Professionalism is a subject of interest to academics, the general public and

would-be professional groups. Traditional ideas of professions and professional

conduct have been challenged by recent social, political and technological

changes. One result has been the development for almost every profession of an

ethical code of conduct which attempts to formalise its values and standards.

These codes of conduct raise a number of questions about the status of a

‘profession’ and the consequent moral implications for behaviour.

This series seeks to examine these questions both critically and constructively.

Individual volumes will consider issues relevant to particular professions,

including nursing, genetic counselling, journalism, business, the food industry

and law. Other volumes will address issues relevant to all professional groups

such as the function and value of a code of ethics and the demands of

confidentiality.

Also available in this series:

Ethical Issues in Journalism and the Media

edited by Andrew Belsey and Ruth Chadwick

Genetic Counselling

edited by Angus Clarke

Ethical Issues in Nursing

edited by Geoffrey Hunt

The Ground of Professional Ethics

Daryl Koehn

Ethical Issues in Social Work

edited by Richard Hugman and David Smith

Food Ethics

edited by Ben Mepham

The ethics of bankruptcy

Jukka Kilpi

London and New York

First published 1998

by Routledge

11 New Fetter Lane, London EC4P 4EE

This edition published in the Taylor & Francis e-Library, 2002.

Simultaneously published in the USA and Canada

by Routledge

29 West 35th Street, New York, NY 10001

© 1998 Crown Cap Oy

All rights reserved. No part of this book may be reprinted or reproduced or

utilised in any form or by any electronic, mechanical, or other means, now

known or hereafter invented, including photocopying and recording, or in any

information storage or retrieval system, without permission in writing from the

publishers.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

Kilpi, Jukka, 1954–

The ethics of bankruptcy/Jukka Kilpi.

p. cm.

Includes bibliographical references and index

1. Corporate debt-Moral and ethical aspects. 2. Bankruptcy-Moral and ethical

aspects. 3. Social responsibility of business.

I. Title.

HG4028.D3K47 1998 97–26890

174’.4–dc21 CIP

ISBN 0-415-17174-1 (hbk)

ISBN 0-415-17175-X (pbk)

ISBN 0-203-00241-5 Master e-book ISBN

ISBN 0-203-20570-7 (Glassbook Format)

For Anu, Sohvi and Lyydia

A man must be perfectly crazy who, where there is tolerable security, does not

employ all the stock which he commands, whether it be his own or borrowed

of other people

Adam Smith, The Wealth of Nations

Contents

Series Editors’ foreword xi

Acknowledgements xiii

Prologue 1

Part I The ethical trouble and its makers: a perennial

plague

1 The institution and the conflicts behind it 7

Institutional history 9

Debtor protection and/or creditor protection? 11

Creditors’ equality and collective proceedings 12

Part II Philosophical fundamentals of credit: should debts

be paid?

2 Natural law, consequentialism and contractualism:

theories of promising and their shortfalls 19

3 In search of the ultimate obligation: why a metaethical

affair? 27

4 Ethics founded on autonomy: a modest objectivist

foundationalist interpretation of Kant 38

Reviving the metaphysics of morals: a Kantian bridge

to deontological values 40

5 Autonomy and promissory obligations 51

Kant on promises 51

A theory of promissory autonomy 56

Should debts be paid? 63

viii Contents

Part III Ethical principles of insolvency: should debts always

be paid?

6 Going broke, breaking promises 67

Forgiveness 67

Impossibility 68

Legalism 69

Utilitarianism 70

7 Deontological ethics and insolvency 73

Distributive justice 73

Autonomy and discharge 75

When is autonomy under threat? 78

8 What kind of discharge? 83

Piecemeal or one-off? 83

Non-contractual debts 88

Part IV In defence of dunning: a counterattack

9 Propping up civil liability: contract, breach of trust

and tort 93

Legal and moral absolutism 93

Wasting other people’s money 94

Breach of trust 97

Tort 99

10 Punishment 102

Retributivism 103

Utilitarianism 105

Fraud 107

Recklessness 109

Negligence 113

Bad judgements and doing one’s best 114

Commercial risk calls for commercial judgement 117

Deterrence 119

Debtor’s character and skills 120

Benefits from deterrence 123

Part V Applying the principles: a current affair

11 Bankruptcy law reform: an ethical perspective 129

Law reform inquiries in the United Kingdom and

Contents ix

Australia 129

Conditional discharge 131

Retrospective incrimination 132

Disabilities 133

The consistency of creditors’ submissions 135

Cross-border insolvency 137

12 Gearing up, crashing loud: should high-flyers be

punished for insolvency? 141

Retribution for solvent high-flying 141

Returns from penalties 144

Insolvent extravagance 147

Ethics and self-interest 151

Debt and distributive justice 153

Parsimony vs leverage 154

Part VI The corporate veil: chador or gauze?

13 Corporate moral personhood 163

Milton Friedman: no corporate personhood 163

Peter French: full-fledged corporate personhood 164

Thomas Donaldson and Kenneth Goodpaster: stakeholder

theory 167

Patricia Werhane: secondary agency 170

A new philosophy of the corporation 172

14 Moral responsibility for corporate debts 177

A moral pattern for the corporate veil 177

The corporation’s moral responsibility for debt 182

Corporate governance: directors’, managers’ and

shareholders’ moral responsibility 187

Our moral duty to pay the corporate creditors 190

Epilogue 192

Notes 197

Bibliography 208

Index 214

Series Editors’ foreword

Professional Ethics is now acknowledged as a field of study in its

own right. Much of its recent development has resulted from

rethinking traditional medical ethics in the light of new moral

problems arising out of advances in medical science and technology.

Applied philosophers, ethicists and lawyers have devoted

considerable energy to exploring the dilemmas emerging from

modern health-care practices and their effects on the practitioner￾patient relationship.

But the point can be generalized. Even in health care, ethical

dilemmas are not confined to medical practitioners. And beyond

health care, other groups are beginning to think critically about the

kind of service they offer, and about the nature of the relationship

between provider and recipient. In many areas of life social, political

and technological changes have challenged traditional ideas of

practice.

One visible sign of these developments has been the proliferation

of codes of ethics or of professional conduct. The drafting of such a

code provides an opportunity for professionals to examine the nature

and goals of their work, and offers information to others about what

can be expected from them. If a code has a disciplinary function, it

may even offer protection to members of the public.

But is the existence of such a code itself a criterion of a

profession? What exactly is a profession? Can a group acquire

professional status, and if so, how? Does the label ‘professional’

have implications, from a moral point of view, for acceptable

behaviour, and if so, how far do such implications extend?

The Professional Ethics book series, edited from the Centre for

Applied Ethics in Cardiff and from the Centre for Professional Ethics

in Preston, seeks to examine ethical issues in the professions and

xii Series Editor’s foreword

related areas both critically and constructively. Individual volumes

examine issues relevant to particular professions, including those

which have hitherto received little attention, such as journalism,

social work and genetic counselling. Other volumes address themes

relevant to all professional groups, such as the nature of a profession,

the function and value of codes of ethics, and the demands of

confidentiality.

The subject matter of this volume, bankruptcy, raises issues

common to a number of fields. The topics covered include not only

bankruptcy itself, clearly of importance in business ethics, but also

punishment and corporate responsibility among others. Its wider

concerns include the morality of promises, contracts and debts, and

the ethical theories underlying these aspects of professional and

public life.

Acknowledgements

I had the privilege to carry out this study at Monash University

working closely with C.L.Ten. His learnedness combines with

humane appreciation of different strands of thought, and I am ever

grateful for his gentle but subtle advice.

I would also like to thank Michael Smith for his help. His critical

remarks guided me to a better comprehension of the metaethical

position I advocate in this work. Rae Langton provided me with

valuable suggestions in regard to the sections on Kant.

Jeff Goldsworthy, Heta Häyry and Matti Häyry expended their

time on an early draft of the book. I am indebted to them for their

commentary, criticism and encouragement, which were significant

for the proceed of my research. Julian Lamont deserves thanks for

the many intriguing debates we had on philosophy and philosophers.

Thanks also to Dan Vine for philosophical discussions and for

checking my language, and to all the members of the Philosophy

Department at Monash University for a scholarly stimulating

atmosphere. I greatly appreciate the marvellous job Kate Chadwick

did in proofreading the final version of the study.

My research has received economic support from Monash

University, Academy of Finland, and Foundation for Economic

Education. I wish to express my gratitude for their generosity. The

final version of the manuscript was written when I held a fellowship

in the Department of Practical Philosophy at the University of

Helsinki.

Anu, Sohvi and Lyydia were the unfailing source of joy and

inspiration that kept my spirits up over the years which led to the

completion of this work. I dedicate this book to them.

Parts of Chapter 12 have appeared in ‘Gearing up, crashing loud.

Should we punish high-flyers for insolvency?’, in Journal of

xiv Acknowledgements

Business Ethics, 15 (12), 1996, and parts of Chapter 13 will appear in

Taking the Liberal Challenge Seriously, edited by S.Hellsten et al.

(forthcoming 1997), Ashgate Publishing Ltd.