The Insolvency Act 1986 is a UK law that sets out the rules and procedures for dealing with insolvency, which is the state of being unable to pay debts as they fall due.
The Act applies to individuals, partnerships, and companies, and it provides a framework for dealing with bankruptcy, winding up, and voluntary arrangements.
One of the main purposes of the Insolvency Act 1986 is to ensure that the assets of an insolvent individual or company are distributed fairly among their creditors. The Act also aims to protect the interests of employees and other stakeholders, such as shareholders and customers.
It provides for the appointment of insolvency practitioners, who are responsible for administering the insolvency process and ensuring that the assets of the insolvent individual or company are properly accounted for and distributed.
The Act also sets out the rights and duties of directors and other officers of a company in relation to insolvency, and it provides for the disqualification of directors who have misbehaved during the insolvency process
Company Administration under the Insolvency Act
Company Administration is a procedure under the Insolvency Act 1986 that allows a company experiencing financial difficulties to be placed under the control of an administrator. The administrator is appointed by the court or by the company’s directors, and their role is to manage the company’s affairs, business, and property with the aim of rescuing the company as a going concern or achieving a better result for the company’s creditors than would be likely if the company were wound up immediately.
The appointment of an administrator has the effect of suspending most legal proceedings against the company, including winding-up petitions and enforcement action by creditors. This allows the company to continue trading without the threat of legal action, giving the administrator time to try to turnaround the company’s fortunes. The administrator has wide-ranging powers to manage the company’s affairs, including the power to sell assets, enter into contracts, and borrow money on behalf of the company.
The administrator must act in the best interests of the company’s creditors as a whole, and they must report regularly to the court on the progress of the administration. If the administrator is unable to rescue the company as a going concern, they may recommend that the company be wound up or that a voluntary arrangement be entered into. The Insolvency Act 1986 sets out the procedures for appointing and dismissing an administrator, and it provides for the remuneration of the administrator and their expenses.
Receivership
The Insolvency Act 1986 introduced the legal process of receivership, which allows a creditor who holds a floating charge over a company’s assets to appoint a receiver to manage and sell those assets in order to repay the creditor. A floating charge is a type of security interest that allows a creditor to take control of a company’s assets if the company defaults on its debt obligations. The receiver is appointed by the creditor and is responsible for managing the company’s assets, selling them if necessary, and using the proceeds to repay the creditor.
Receivership is a more limited form of insolvency than bankruptcy or winding up, as it only applies to the assets that are subject to the floating charge and does not involve the dissolution of the company. The receiver must act in the best interests of the creditor and must report regularly on the progress of the receivership. The Insolvency Act 1986 sets out the rules and procedures for appointing and dismissing a receiver, and it provides for the remuneration of the receiver and their expenses
Insolvency process
The Insolvency Act 1986 outlines the various types of liquidation, which is the process of winding up a company’s affairs and distributing its assets among its creditors. There are two main types of liquidation: voluntary and compulsory.
Voluntary liquidation is initiated by the company itself, either through a resolution of the company’s shareholders or by a deed of arrangement between the company and its creditors. Voluntary liquidation can be either solvent, meaning that the company is able to pay its debts in full, or insolvent, meaning that the company is unable to pay its debts as they fall due. In a solvent voluntary liquidation, the company’s assets are distributed among its creditors in accordance with their priorities as set out in the Act. In an insolvent voluntary liquidation, the company’s assets are distributed among its creditors in accordance with their entitlements as determined by the Act.
Compulsory liquidation is initiated by a creditor or by the court, and it is generally used in cases where the company is unable to pay its debts as they fall due. The creditor or the court may apply to wind up the company if the company has failed to pay a debt that is due, if the company is unable to pay its debts as they fall due, or if the company has acted unfairly towards its creditors. In a compulsory liquidation, the company’s assets are sold and the proceeds are distributed among the company’s creditors in accordance with their entitlements as determined by the Act. The Insolvency Act 1986 sets out the procedures for winding up a company, including the appointment of a liquidator and the rights and duties of directors and other officers of the company in relation to liquidation
Fraudulent and Wrongful Trading
The Insolvency Act 1986 introduced the concept of wrongful trading, which is a type of misconduct that can be committed by directors of a company that is experiencing financial difficulties. Fraudulent trading is a similar concept that had already existed under Company Law, but it is a more serious offense that carries criminal penalties.
Wrongful trading occurs when a director of a company allows the company to continue trading when they knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation. The director must have had this knowledge at the time they allowed the company to continue trading, and they must not have taken all reasonable steps to minimize the potential loss to the company’s creditors.
If a director is found to have engaged in wrongful trading, they may be held personally liable for the company’s debts and may be disqualified from acting as a director in the future. The Insolvency Act 1986 sets out the rules and procedures for determining whether a director has engaged in wrongful trading and for seeking compensation from the director. It also provides for the disqualification of directors who have engaged in wrongful trading.
Creditors Paid in Priority
The Insolvency Act 1986 and the Insolvency Rules 2016 provide a statutory scheme for how an insolvency practitioner, such as a liquidator or an administrator, should deal with creditor claims in the course of an insolvency proceeding. The insolvency practitioner is responsible for collecting and verifying the claims of the company’s creditors, determining the priority of those claims, and distributing the company’s assets among the creditors in accordance with their entitlements as set out in the Act and the Rules.
The insolvency practitioner must provide creditors with an opportunity to prove their claims, and they must consider any objections to the claims that are raised by the creditors. The insolvency practitioner must also prepare a statement of the company’s affairs, which must be filed with the court and made available to the creditors. The statement must set out the company’s assets, liabilities, and financial position, and it must provide an explanation of the company’s failure. The insolvency practitioner must also prepare a report on the conduct of the company’s affairs, which must be filed with the court and made available to the creditors.
The Insolvency Act 1986 and the Insolvency Rules 2016 set out the procedures for dealing with creditor claims, including the time limits for lodging claims, the procedures for proving claims, and the rules for determining the priority of claims. They also provide for the remuneration of the insolvency practitioner and their expenses.
Read more: Company Directors Disqualification Act 1986 (CDDA 1986)
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.