Insolvency Law at United Kingdom
In the United Kingdom, insolvency law governs the legal processes that apply when individuals or businesses can no longer pay their debts. UK insolvency law is highly developed and is considered one of the most sophisticated and creditor-friendly systems in the world, balancing the interests of creditors, debtors, and the wider economy.
đ Key Legislation Governing Insolvency in the UK
Insolvency Act 1986
The primary statute governing both corporate and individual insolvency in the UK.
It sets out the rules for liquidation, administration, bankruptcy, and company voluntary arrangements.
Companies Act 2006
Provides the broader corporate governance framework, including duties of directors which are crucial during insolvency.
Enterprise Act 2002
Introduced reforms to prioritize company rescue and streamline administration processes.
Promoted the use of administration over liquidation.
Corporate Insolvency and Governance Act 2020
Introduced temporary measures in response to COVID-19 (e.g., suspension of wrongful trading rules) and permanent tools like the moratorium and restructuring plan to support viable companies in financial distress.
âď¸ Corporate Insolvency Procedures
Administration
A process aimed at rescuing a company or achieving a better outcome for creditors than liquidation.
An administrator is appointed to take control of the company and create a plan (e.g., restructure, sell business).
Moratorium on legal actions against the company applies.
Liquidation (Winding Up)
The company ceases operations, and its assets are sold to pay creditors.
Compulsory Liquidation â ordered by a court (usually at a creditorâs request).
Voluntary Liquidation
Creditorsâ Voluntary Liquidation (CVL): Initiated by directors when insolvent.
Membersâ Voluntary Liquidation (MVL): When solvent, but company chooses to close.
Company Voluntary Arrangement (CVA)
A legally binding agreement between a company and its creditors to pay all or part of its debts over time.
Requires 75% creditor approval.
Business can continue trading during this period.
Restructuring Plan (introduced in 2020)
Similar to a scheme of arrangement but more flexible.
Allows for âcross-class cram downâ â i.e., the court can approve the plan even if some creditor classes dissent, as long as others agree and it's fair.
Moratorium (2020 reform)
Offers companies 20 business days (extendable) of protection from creditor action while they explore rescue options.
Managed by a monitor (licensed insolvency practitioner), but company directors retain control.
đ¤ Individual Insolvency Procedures
Bankruptcy
A legal declaration of inability to repay debts, lasting typically 12 months.
Administered by a trustee who takes over the bankruptâs estate to repay creditors.
Individual Voluntary Arrangement (IVA)
A binding agreement to repay debts over time (usually 5-6 years).
Offers more flexibility and avoids the stigma of bankruptcy.
Debt Relief Order (DRO)
For individuals with low income, minimal assets, and under a set level of debt (currently ÂŁ30,000).
Less formal and costly than bankruptcy.
â ď¸ Duties of Directors in Insolvency
When a company is near insolvency, director duties shift from shareholders to creditors.
Directors must:
Avoid wrongful trading (continuing to trade when insolvent without reasonable prospect of avoiding insolvency).
Not prefer one creditor over another unfairly.
Cooperate fully with insolvency practitioners.
Breaches can lead to personal liability or director disqualification (up to 15 years).
đ Key Principles in UK Insolvency Law
Creditorsâ interests dominate once insolvency is apparent.
Focus on rescuing viable businesses (especially post-Enterprise Act 2002).
Encourage fair distribution of assets to creditors.
Transparency and accountability in handling debtor affairs.
Insolvency professionals must be licensed and follow strict regulatory frameworks.
đ Cross-Border Insolvency
Governed by the Cross-Border Insolvency Regulations 2006, based on the UNCITRAL Model Law.
Brexit ended automatic recognition of UK proceedings in the EU; recognition must now be sought case-by-case in EU states.
â Conclusion
The UKâs insolvency framework provides multiple flexible tools for managing financial distress. It emphasizes rescue over liquidation, especially for businesses with viable futures, while maintaining strong protections for creditors. With recent reforms, including the moratorium and restructuring plan, the system is evolving to meet modern economic challenges.
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