TYPES OF INSOLVENCY IN THE UK
The Insolvency Act 1986 is a piece of legislation in the United Kingdom that provides the legal framework for dealing with individuals and businesses that are in financial distress or insolvency. The Act covers all aspects of insolvency law, including bankruptcy, individual voluntary arrangements (IVAs), and company insolvency.
The Insolvency Act sets out the procedures for initiating and administering insolvency proceedings, including the appointment of insolvency practitioners, the liquidation of assets, the distribution of proceeds, and the discharge of debts. The Act also defines the rights and obligations of creditors, debtors, and insolvency practitioners in the insolvency process.
The Insolvency Act 1986 has been amended several times since its enactment, with the most significant changes introduced by the Enterprise Act 2002 and the Insolvency (England and Wales) Rules 2016. These amendments have modernized and streamlined the insolvency process, introduced new procedures for rescuing insolvent companies, and increased the powers and responsibilities of insolvency practitioners.
In the UK, the main types of corporate insolvency are as follows:
Liquidation: Liquidation is a process whereby a company’s assets are sold to pay off its debts. There are two types of liquidation:
• Creditors’ voluntary liquidation (CVL): This is initiated by the company’s directors when they believe the company is insolvent and cannot continue trading. The creditors then appoint an insolvency practitioner to oversee the liquidation process.
• Compulsory liquidation: This is initiated by a creditor or group of creditors who petition the court to wind up the company because it cannot pay its debts.
Administration: Administration is a process whereby an insolvency practitioner is appointed to take control of the company and try to save it from liquidation. The aim is to restructure the company’s operations and finances to make it viable again. There are two types of administration:
• Company voluntary arrangement (CVA): This is initiated by the company’s directors and involves negotiating a repayment plan with creditors.
• Administration order: This is initiated by the court or a secured creditor and involves the appointment of an administrator to manage the company’s affairs.
Receivership: In the UK, receivership is a type of insolvency procedure that is typically used when a company has defaulted on a secured loan or other debt. A receiver is appointed by the creditor who holds the security (such as a mortgage) over the company’s assets, and their role is to take control of those assets and sell them in order to repay the debt owed to the creditor.
Receivership is a relatively narrow form of insolvency compared to liquidation or administration, as it only involves the assets covered by the security. As a result, the receiver does not have the power to sell the company’s entire business, and other creditors may be left with unpaid debts.
The procedure for receivership is set out in the terms of the security agreement between the company and the creditor. The creditor can appoint a receiver without going through the court, although the receiver must provide notice to the company and any other interested parties.
Once appointed, the receiver takes over the management of the secured assets and has the power to sell them in order to repay the debt owed to the creditor. The receiver is also required to act in the best interests of all creditors, not just the appointing creditor, and must provide regular reports on their activities to the court and to the creditors.
Further information about insolvency:
