Insolvency Procedures

Introduction

**Insolvency** is the inability of a company to pay its debts, or the inability of an individual to pay their debts. **Corporate insolvency law** aims to **rescue companies** from financial difficulty, to **control company directors**, and to **protect creditors**. **Personal insolvency law** aims to protect creditors and to encourage entrepreneurship by allowing individuals who are bankrupt but have behaved honestly to be **discharged from bankruptcy after one year**. Corporate and personal insolvency law is governed largely by the **Insolvency Act 1986 ('IA 1986')** and the **Insolvency Rules 2016**. This chapter covers the **options and procedures for corporate insolvency** (liquidation, administration, receivership, CVAs, the CIGA 2020 moratorium and restructuring plan), **bankruptcy**, the **claw-back of assets** for creditors, the **statutory order of priority** for distribution, and the **duties of directors on insolvency**.

Assessment focus

For the SQE1 FLK1 assessment, you must be able to recognise **when a company is insolvent** (the statutory-demand, unsatisfied-judgment, cash-flow and balance-sheet tests under ss 122 and 123 IA 1986), and to **advise a client** on the principal insolvency procedures and their consequences. You should be able to apply the **claw-back provisions** (preferences, transactions at an undervalue, avoidance of floating charges, transactions defrauding creditors and extortionate credit transactions), to set out the **order of priority** for distribution, and to advise directors on **wrongful trading** and the shift of duty to creditors. Questions are single best answer questions (SBAQs) set in **realistic client-based scenarios**; you will be expected to **apply** these rules to facts (for example, calculating a creditor's dividend, or deciding whether a director has a defence to wrongful trading). This is a closed-book assessment — learn the key time limits and thresholds from memory.

Study tips

1) Memorise the **insolvency tests**: statutory demand for a debt over **£750** unpaid for **three weeks**; unsatisfied judgment; **cash-flow** test (s 123(1)(e)); **balance-sheet** test (s 123(2)). 2) Distinguish **insolvency (a state of being)** from **liquidation (a process)**. 3) Learn the **three types of liquidation** — members' voluntary (solvent), creditors' voluntary (insolvent) and compulsory (court). 4) Master the **claw-back time limits**: preferences — **2 years** (connected) / **6 months** (unconnected); transactions at an undervalue — **2 years**; floating charges (s 245) — **2 years** (connected) / **12 months** (unconnected); transactions defrauding creditors — **no time limit**; extortionate credit — **3 years**. 5) Learn the **order of priority** for distribution in order, and the **wrongful trading** test and **s 214(3) defence** (took every step to minimise loss to creditors). 6) Remember the **desire to prefer** point in **Re MC Bacon Ltd [1990] BCLC 324** — mere intention is not enough; the company must positively wish to improve the creditor's position.