What is the Insolvency Act 1986?
The Insolvency Act 1986 is the primary and most important source of law dealing with both personal and company insolvency.
Key parts of the Insolvency Act which apply to business insolvency include :-
- director obligations and potential liabilities for wrongdoing
- the legal test for insolvency
- insolvency processes.
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.
Company Administration under the Insolvency Act
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.
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.
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.
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.