What is the Insolvency Act 1986?

The Insolvency Act 1986 is the statute that tells you what happens when a UK company, or an individual, cannot pay its debts. It consolidated nearly a century of scattered law, the Bankruptcy Act 1914, the Companies Act 1948 winding-up provisions, the reforms proposed by the Cork Report of 1982, into a single working framework.

If you are a director whose company is drifting toward insolvency, almost every consequence you are worried about has its source in this Act: wrongful trading liability, compulsory winding-up, the moratorium in administration, the avoidance of transactions at undervalue, the ranking of creditors in the distribution waterfall.

Understanding which part of the Act applies to your situation is what determines which options you still have.

This guide walks through the sections that matter most in practice. It is a map, not a textbook. Where a section has generated a separate body of case law, section 214 wrongful trading, section 123 the insolvency test, section 127 void dispositions, you will find links through to our detailed guides.

The aim is to let you navigate the Act with a working understanding of what each part is for, who it protects, and where the personal-liability triggers sit.

How the Insolvency Act 1986 Is Structured

The Act has three main parts a director needs to locate:

• The First Group of Parts (Parts I–VII) covers company insolvency: company voluntary arrangements, administration, receivership, the three forms of liquidation, and the general provisions applicable to every corporate process.
• The Second Group of Parts (Parts VIII–XI) covers individual insolvency: individual voluntary arrangements, bankruptcy, and the equivalent provisions for individuals.
• The Third Group of Parts (Parts XII–XIX) contains the cross-cutting provisions: preferential debts, malpractice offences, insolvency practitioners’ regulation, and miscellaneous and supplementary provisions.

Two major amendments have reshaped the Act since it was passed. The Enterprise Act 2002 overhauled administration, abolished administrative receivership for most new floating charges, removed the Crown’s preferential status (reinstated in part for HMRC in 2020), and introduced the prescribed part for unsecured creditors.

The Corporate Insolvency and Governance Act 2020 added the Part A1 moratorium, the restructuring plan under Part 26A of the Companies Act 2006, and a suite of pandemic-era temporary measures, most of which have now expired. If your company’s charges predate the Enterprise Act, your bank may still hold an administrative-receivership right; you should check that with your adviser.

The Corporate Insolvency Procedures in the Insolvency Act 1986

The Act sets out five substantive corporate processes. As a director choosing between them, you are choosing between different trade-offs on control, continuity, and creditor protection. Our licensed IPs walk through those trade-offs with every director we advise before any process is initiated.

• Company Voluntary Arrangement, Part I (sections 1–7B). A proposal to creditors to compromise unsecured debts on agreed terms, approved by 75% in value. Directors stay in control. Used where the business is viable but the historic debt is not. See our guide to the CVA.
• Part A1 Moratorium, Part A1 (inserted 2020). A 20-business-day standalone moratorium, extendable, protecting the company from creditor action while a rescue plan is developed. Managed by a “monitor” (a licensed IP), directors remain in day-to-day control.
• Administration, Schedule B1. Replaced the old sections 8–27 regime via the Enterprise Act 2002. Statutory purpose: rescue the company as a going concern; or achieve a better result for creditors than winding-up; or realise property for distribution. Directors lose control to the administrator. Moratorium against enforcement is powerful and automatic.
• Receivership, Part III (sections 28–72H). Administrative receivership under pre-2003 floating charges still exists but is rarely used for new charges. Fixed-charge receivers (LPA receivers) over specific secured property remain common in property-lending contexts.
• Liquidation, Part IV (sections 73–219). Three routes: members’ voluntary liquidation (MVL) for solvent companies winding up; creditors’ voluntary liquidation (CVL) for insolvent companies where directors initiate; compulsory liquidation by court order following a winding-up petition under section 122. All three end with the company dissolved and the residual assets distributed.

The Insolvency Test: Section 123

Section 123 is the hinge of the whole Act. It sets out when a company is “unable to pay its debts”, the trigger for most of the Act’s subsequent machinery. Four tests sit inside it:

• Section 123(1)(a), a creditor owed more than £750 serves a statutory demand and 21 days pass without payment, security, or compromise.
• Section 123(1)(b)–(d), unsatisfied execution of a judgment debt (England & Wales, Scotland, and Northern Ireland variants).
• Section 123(1)(e), cash-flow test. The company cannot pay its debts as they fall due.
• Section 123(2), balance-sheet test. The company’s liabilities (including contingent and prospective) exceed its assets. The leading authority is BNY Corporate Trustee Services v Eurosail [2013], which held that the test requires the court to be satisfied on the balance of probabilities that the company has reached “the point of no return”.

If you are wondering whether your company is insolvent, this is where to start. Our detailed insolvency test guide walks through each limb with worked examples. We also run through these limbs directly with directors on the first call, because knowing which test your company fails shapes what we recommend.

Director Duties and Personal Liability Under the Insolvency Act 1986

The Act is what puts real teeth on directors’ duties. Four sections are the ones you need to know, and if your company is under financial pressure, you should understand all four before your next board decision:

• Section 213, fraudulent trading. Civil liability where the business has been carried on with intent to defraud creditors. The test is high (dishonesty required) but the consequence is uncapped personal contribution.
• Section 214, wrongful trading. The director’s nightmare section. Civil liability where, before the commencement of winding-up, the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and did not take every step to minimise loss to creditors. Personal contribution to the estate, measured by the increase in net deficiency caused. This is the provision that drives “do I keep trading?” decisions in practice.
• Section 212, misfeasance. Summary procedure against officers who have misapplied property or breached fiduciary duty. Not a separate wrong; a quicker route to hold directors to account.
• Section 216–217, reuse of company name. Five-year restriction on a director of an insolvent company from acting for a company with a similar name, with personal liability for debts of the successor company. A trap for directors who try to “phoenix” without following the statutory exception procedure.

You also sit inside the broader Companies Act 2006 duty regime and the BTI v Sequana [2022] Supreme Court framework, which confirmed that once insolvency is likely, directors must have regard to creditor interests. The Insolvency Act sections bite only on insolvency, but the duty shift starts earlier. Our guide to director personal liability walks through the overlap.

Challenging Transactions: The Avoidance Provisions

Once a company is in liquidation or administration, the IP can unwind certain transactions that occurred before the insolvency. These are the avoidance provisions and they routinely catch directors who did not realise what they were signing away:

• Section 238, transactions at undervalue. Two-year lookback. Gifts, or transactions for significantly less than the asset was worth. Selling the van to a director’s spouse at book value when market was higher, a classic.
• Section 239, preferences. Six-month lookback (two years for connected parties). Paying one unsecured creditor ahead of others where you were influenced by a desire to produce that preferential outcome. Paying the director’s parents back their loan while leaving the tax man unpaid is the textbook case.
• Section 244, extortionate credit transactions. Rarely invoked but available.
• Section 245, avoidance of floating charges. Floating charges granted within 12 months before insolvency (two years for connected) for past value, not fresh money, can be set aside.
• Section 127, post-petition dispositions. Once a winding-up petition is presented, any disposition of the company’s property is void unless validated by the court. This is why banks freeze accounts the moment a petition is advertised.

An avoidance claim does not require dishonesty; for preferences it requires an influence test that is highly fact-sensitive, and for transactions at undervalue it requires an objective value comparison.

Directors who sail close to the wind on these typically do so without legal advice. A ten-minute conversation before the transaction usually costs less than the five-figure clawback claim afterwards. If you are about to pay down a loan from a connected party, or transfer an asset at below market value, take advice first.

The Order of Distribution in the Insolvency Act 1986

Section 175 and Schedule 6 set out the priority waterfall, who gets paid before whom from the liquidation estate:

1. Fixed-charge holders, to the extent of their security.
2. Expenses of the liquidation, including the IP’s fees, legal costs of the estate.
3. Ordinary preferential debts (Category 1), employee wages up to £800 per person for the four months pre-insolvency, holiday pay, pension contributions.
4. Secondary preferential debts (Category 2), HMRC for VAT, PAYE, CIS, employee NICs (reinstated by Finance Act 2020 from 1 December 2020). This is the “Crown preference” return.
5. Prescribed part, a portion of floating-charge realisations ring-fenced for unsecured creditors (currently capped at £800,000 for floating charges created on or after 6 April 2020).
6. Floating-charge holders, to the extent of their security.
7. Unsecured creditors, trade suppliers, unpaid tax outside the Category 2 reinstatement, HMRC for Corporation Tax.
8. Shareholders, only if there is a surplus after all debts, rare in insolvent liquidation.

The 2020 reinstatement of HMRC’s secondary preferential status changed the economics of lending materially. Floating-charge lenders now rank behind HMRC for VAT, PAYE, and CIS, and pricing of secured lending reflects it.

In our practice, this is one of the most commonly misunderstood aspects of the distribution waterfall, particularly for directors who assumed their bank’s floating charge would sweep up the bulk of any realisation.

Individual Insolvency: Parts VIII to XI

Personal insolvency sits in the Second Group of Parts. Two processes a director commonly encounters:

• Individual Voluntary Arrangement, Part VIII. Personal equivalent of the CVA. Compromises unsecured personal debt over (usually) five years. Used by directors whose PGs have been called. See our IVA guide.
• Bankruptcy, Parts IX–XI. The personal equivalent of liquidation. Assets vest in a trustee, debts discharged after 12 months (usually), serious consequences for directorship and regulated professions.

Your Next Step on the Insolvency Act 1986

If you are asking which section of the Insolvency Act 1986 bites on your situation, you are already at the stage where a licensed IP conversation will pay for itself many times over. The Act is designed so the earlier you engage with it, the more options stay open.

Leave it late, past a statutory demand, past a winding-up petition, past a freezing order, and the Act’s machinery starts working against you rather than with you. The window for rescue closes faster than most directors expect.

Call us free on 0800 074 6757 for a confidential review. Our licensed IPs can run through whether your company meets the section 123 test, whether a section 214 wrongful trading exposure is crystallising, and what the avoidance-provision risk looks like on your recent transactions.

We will also show you which of the Part I, A1, Schedule B1, or Part IV procedures is the right route for your company. Nothing is charged until you instruct.

FAQs: The Insolvency Act 1986