Insolvency law

 

Insolvency law covers both:

  • Corporate insolvency
  • Personal insolvency

Personal insolvency is otherwise known as bankruptcy and refers to an individual person who cannot pay their debts. Corporate insolvency refers to a company that cannot pay its debts.

Bankruptcy

Insolvency law, relating to a bankrupt person, allows either a creditor or the debtor to make a petition for the debtor’s bankruptcy. Both petitions are available by virtue of the Insolvency Act 1986.

Otherwise it is possible for the debtor to enter into an Individual Voluntary Arrangement, or IVA, which allows the debtor to enter into an agreement with their creditors, supervised by an insolvency practitioner.

If a bankruptcy order is made by the court following a petition by either the debtor or the creditors the debtor will automatically be discharged from bankruptcy after one year.

During this time, the debtor will be subject to certain constraints, including being unable to obtain credit of more than a prescribed limit.

Administration of bankruptcy

Bankruptcy has many negative connotations associated with it but this should not necessarily be the case. In many circumstances bankruptcy can be the best option and often people who experience bankruptcy feel relieved afterwards.

Once a bankruptcy order has been made against you, either at your request or at the request of a creditor to whom you owe £750 or more, an Official Receiver will be appointed who will be responsible for administering your bankruptcy unless an insolvency practitioner is appointed.

Once the order has been made against you, your creditors will no longer pursue you to settle the debt. Repayment becomes the responsibility of the Trustee appointed by the court to administer your bankruptcy.

Insolvency

Insolvency law also covers corporate insolvency. Corporate insolvency law includes measures to attempt to rescue ailing companies.
Company Voluntary Arrangements (CVAs) and administration are both procedures introduced by the Insolvency Act 1986, the aim of which is to return a company to normal trading.

In the event these procedures cannot save a company, the aim is to maximise the return for creditors. If it is not appropriate to use a rescue mechanism, or a rescue mechanism has failed, a company will go into liquidation.

It is worth noting that a sole trader or a partnership becoming insolvent is different to when a company becomes insolvent.

  • When a sole trader or partnership becomes unable to pay its debts, the liability for the debt ultimately rests with the individual, or group of individuals, who are running the business. Insolvency for a company stays with the company because of ‘limited liability’
  • A company is a separate legal entity to the people who are running it and as a result, if a company is unable to pay its debts, liability for these debts does not pass to the directors. Only in cases in which a director has made a personal guarantee to creditors will they become responsible for the relevant debt

For more information, see our guidance pages on IVAs and CVAs.

Are you at risk of becoming bankrupt or insolvent? Early action is the key and using a specialist solicitor may be able to prevent the worst from occurring. Please call us on 0800 1777 162 or complete the web-form above.

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