The UK’s insolvency regime is one of the best in the world according to the World Bank (ranked 13th in terms of resolving insolvency – data from June 2016).
The main source of English insolvency law is the Insolvency Act 1986, along with the Insolvency Rules 2016 which came into force on April 7, 2017, replacing the Insolvency Rules 1986 and their 28 subsequent amendments.
European legislation is another important source of insolvency law. The recast Insolvency Regulation 2015/848 entered into force on 26 June 2017 and seeks to harmonise the ways in which member states deal with insolvency proceedings.
Case law also plays a fundamental role in the interpretation of insolvency legislation.
There are five categories of insolvency procedure available for companies in England, Wales and Northern Ireland:
- Administration: Rescue procedure designed to hold a business together while plans are formed either to put in place a financial restructuring or to sell the business and assets to produce a better result for creditors than a liquidation.
- Company Voluntary Arrangement (CVA): Legally binding agreement between a company and its creditors, who will typically agree to a reduced or rescheduled debt arrangement which will allow the company to survive.
- Administrative Receivership: Enforcement right given to an individual secured creditor, usually by virtue of a debenture or similar security document executed in its favour by the company.
- Creditors’ Voluntary Liquidation (CVL): Liquidation begun by resolution of the shareholders, but under the effective control of the creditors, who can appoint a liquidator of their choice.
- Compulsory Liquidation: Liquidation ordered by the court, usually on the petition of a creditor, the company or a shareholder.
Solvent companies may use a procedure called Members’ Voluntary Liquidation (MVL) under the control of the shareholders, who appoint the liquidator, who must be a licensed Insolvency Practitioner. This may happen when the shareholders wish to unlock their capital or when a group is reorganised and subsidiaries need to be closed down.
When it comes to personal insolvency, there are three types of procedure available to individuals in England, Wales and Northern Ireland, depending on their circumstances:
- Bankruptcy: Administration of the affairs of an insolvent individual by a trustee in the interests of his creditors generally. The trustee’s function is to realise the assets and distribute them among the creditors in a prescribed order of priority.
- Individual Voluntary Arrangement (IVA): Less formal and more flexible procedure than bankruptcy. The agreement is overseen by a supervisor, and is binding on all creditors, whether they voted for it or not.
- Debt Relief Order (DRO): Insolvency solution for debtors with low liabilities (<£20,000), no real assets (<£1,000), and little or no disposable income (<£50 per month) with which to make contributions to creditors.