What is the Insolvency Act 1986?

The Insolvency Act 1986 is an important piece of legislation that outlines the legal framework for dealing with financial distress and insolvency in the United Kingdom. A cornerstone of British insolvency law, it aims to provide clear procedures for the fair distribution of assets among creditors, while offering a lifeline to insolvent companies and individuals through mechanisms for restructuring and recovery.

This act defines the rights and obligations of all parties involved in the insolvency process, including debtors, creditors, and insolvency practitioners. From introducing company voluntary arrangements (CVAs) and administrations to detailing the bankruptcy proceedings for individuals, the Insolvency Act 1986 seeks to balance the interests of all stakeholders, ensuring that the impacts of insolvency are managed in an orderly and equitable manner.

If you need information or advice about how the Insolvency Act applies to your situation, or you need general insolvency advice or a Liquidator, please do get in contact. We are Licensed Insolvency Practitioners and experienced business advisors.

What is The Insolvency Act?

The Insolvency Act 1986 introduced a number of provisions and innovations into British insolvency law.

Each of these mechanisms plays a role in offering pathways for recovery and resolution to insolvent entities and individuals, balancing the needs of creditors with the realities faced by those in financial distress.

Company Administration

The process of administration was introduced by the Insolvency Act 1986 and its purpose is to provide a period of time to assess whether a business can be rescued and to facilitate this.

Further changes, as provided by the Enterprise Act 2002, allowed a less bureaucratic procedure that was quicker and cheaper to operate. The process is overseen by an administrator, a qualified individual or oversees the company’s affairs and property.

Receivership

The Act also brought in the legal process of receivership, which is where a receiver is appointed by a floating charge holder, who would typically be a bank or other lender.  They will liquidate assets so that the creditor can be repaid.

Insolvency process

The Act outlines the various types of liquidation, voluntary or compulsory.

For a compulsory liquidation, a winding up petition is presented to the court by a creditor such as HMRC. If a winding up petition is served against a business, it needs to seek expert advice urgently to see if mitigating action can be taken.

Once the petition is advertised in The Gazette, other creditors may become aware of it and join the action. Once the petition is ‘heard’ in court, the business may be placed into compulsory liquidation. Once this happens, directors cease running the business and employees are made redundant. 

Fraudulent and Wrongful Trading

Fraudulent trading had already existed under Company Law, but the Insolvency Act 1986 introduced the concept of wrongful trading.

The concept of wrongful tradfing helped establish clear differences between acting ‘fraudulently’, where there is an intention to defraud creditors and ‘wrongfully’ where directors have continued to run a business that they should have realised was insolvent.

As such, the Act created a distinction between the two offences, with fraudulent trading being more serious.

Breaches of the Insolvency Act can result in prosecution and include disqualification of directors (under the Company Directors Disqualification Act of 1986).

For the first time, the Insolvency Act 1986 criminalised the conduct of any individual who is knowingly party to the carrying on of business with the intent to defraud a creditor.

Creditors Paid in Priority

The Act and the Insolvency Rules 2016 also provide a statutory scheme for how the Insolvency Practitioner should deal with creditor claims.

Creditors are placed in a strict priority, with those at the top being paid, and proceeds are then distributed to those lower down, subject to their ranking.