The Insolvency Act of 1986 provides a framework to manage issues that arise from personal and corporate insolvency – the law extends to England and Wales, Scotland and Northern Ireland.

It is an extremely important legislation that must be adhered to by those working in insolvency and it influences what happens to businesses and individuals if they are unable to meet their debt obligations.

The Act has since been updated and simplified through further subsequent laws.

Why was the Insolvency Act introduced?

Prior to the Act being introduced, the approach was piecemeal and confused. There were various other laws such as the Bankruptcy Act of 1914 or the Companies Act of 1948, but a more all encompassing approach was needed. It was also felt that too many companies were failing unnecessarily – a key aim of the Act was to allow, if possible, companies to be rescued or if not, then to be closed more efficiently. Clearly set out protocols and the input of insolvency professionals would also mean more streamlined processes and better transparency, that would also lead to more prospects of recoveries for creditors.

Further, after the UK became part of the EU in 1973, it was required to adopt an approach that was more in keeping with continental insolvency laws.

The law included many of the recommendations of the Cork Report, which was produced in 1982. Sir Kenneth Cork was an accountant and insolvency expert and former Lord Mayor of London. He chaired a major review of the law, with the report commissioned in 1977 by the Labour government and this was produced in 1982. There then followed a White Paper produced in 1984, called A Revised Framework for Insolvency Law, which had a significant impact on the enactment of the 1986 Act.

The Act introduced many changes in terms of how cases of insolvency could be dealt with. These included the introduction of the Company Voluntary Arrangement, which is an agreement between a limited company and creditors to repay debts in a way which can be afforded. For individuals, it introduced the Individual Voluntary Arrangement, which operates on similar lines.

What is 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.

What is 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.

Winding up of Companies

This relates to the court process which is laid out in the Act, outlining under what circumstances it can happen. This can be voluntary or compulsory,

Firstly a form known as a winding up petition is presented to the court, which is often done 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.

This 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 as to 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.

Changes because of Covid-19

It should be noted that there are currently restrictions on winding up actions because of the uncertain economic environment and to prevent courts being overwhelmed with cases – this is via the Corporate Insolvency Act and Governance Act 2020.  The restrictions on issuing statutory demands and winding up petitions are currently set to last until 20 September 2021.