What does the Insolvency Act 1986 say about Creditors’ Voluntary Liquidation?

Explaining the Insolvency Act 1986 relating to a Creditors’ Voluntary Liquidation is a huge task. To make life easier for directors, we will focus on the key points. First, let’s look at the two core components.

What is the Insolvency Act 1986?

The Insolvency Act 1986 is an Act of Parliament which as its title suggests received Royal Assent (approval by the Queens commissioners acting on her behalf) in 1986. The Insolvency Act 1986 provides the statutory framework for every aspect of personal and corporate insolvency.

Insolvency applies to individuals or companies. To become insolvent an individual or company cannot pay its bills when due (Cash-flow test) and has liabilities; including contingent liabilities like redundancy payments for example; at a greater value than the assets (Balance sheet test)

To ensure the legal framework is fair to the creditors

In principle the purpose of the Creditor Voluntary Liquidation (Insolvency Act 1986) is to, ensure the legal framework is fair to the creditors, consumers and yes even directors of insolvent companies. There have been many changes within the ‘Act’ over the years improving the protection for creditors; controlling the fees and disbursements within the liquidation and increasing potential penalties for errant directors.

Also the ‘Insolvency Act’ provides a level playing field and a clear set of rules and guidelines for all involved. These rules are very important, especially where directors want to continue to trade often with the same business. SIP 16 is a perfect example of ensuring creditors are provided with protection in these circumstances.

It is worth understanding the spirit of the Act is not to punish directors who may have failed with one company. In fact, many directors go on to achieve great things with subsequent companies having learnt valuable lessons.   

To summarise, the Insolvency Act 1986 does the following for a Creditors’ Voluntary Liquidation:

  • Provides a statutory framework and level playing field for creditors, consumers and directors
  • Provides a legal framework allowing a director to close an insolvent company overwhelmed by debt
  • Allows directors with a failed company a second chance
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