Insolvency is legally defined as:
A company is insolvent (unable to pay its debts) if it either does not have enough assets to cover its debts (ie the value of assets is less than the amount of its liabilities), or if it is unable to pay its debts as they fall due.
An individual is insolvent if he or she is unable to discharge his or her debts as they fall due.
Once a company or individual has become insolvent, several courses of action are open, sometimes resulting in a return to solvency.
Once insolvency is recognised, the insolvent company or individual must seek to ensure that there is no reduction in assets and ensures that all creditors are treated fairly and equally, in proportion to their claims. In addition, in most company insolvency procedures, the insolvency practitioner must report to the Department for Business Innovation & Skills (“BIS”) on the conduct of directors.
An insolvent company goes into administration, administrative receivership or liquidation, whereas an individual becomes bankrupt, or enters obtains a debt relief order. Insolvent individuals and companies alike can enter voluntary arrangements. These procedures are further commented on in sections III and IV below.
Whilst insolvency procedures and terminology are similar in England, Wales and Northern Ireland, they differ in Scotland. Please note that the following notes include no reference to the procedures in Scotland.
The objective of any insolvency procedure is to maximise returns to creditors. The mechanism used to achieve that goal will depend on circumstances and the availability of assets, but in many cases an insolvency practitioner will attempt to rescue the business if this will provide a better return for the creditors.
The process of corporate insolvency may be initiated by one of several parties:
• The directors and/or shareholders are able to initiate several forms of insolvency process if they believe the company is (or is about to become) insolvent. They may appoint an administrator or apply for an administration order, or they may liquidate a company by means of a creditors’ voluntary liquidation. Alternatively a charge holder (usually a bank) may, on request, appoint an administrator or an administrative receiver. (It is generally not possible to appoint an administrative receiver where the charge was created after 15 September 2003);
• Creditors may apply for the company to be liquidated via the Court, a compulsory liquidation;
• A debenture holder holding a charge or mortgage over the assets of a company may appoint an administrator or an administrative receiver if it considers that repayment of a loan or its security is threatened and if the borrower has breached the loan covenants. (Again, an administrative receiver cannot generally be appointed where the charge was created after 15 September 2003);
• The Secretary of State for BIS may petition the Court for the winding up (compulsory liquidation) of a company if he believes it is acting against the public interest.
As far as individuals are concerned, wither the debtor or one of his creditors can begin the insolvency process by presenting a petition for bankruptcy to the Court.
Alternatively, with the assistance of a licensed insolvency practitioner, the debtor may prepare a proposal for an individual voluntary arrangement.
On 6 April 2009 Debt Relief Orders were introduced, designed to be for those for whom bankruptcy or an individual voluntary arrangement is unavailable or perhaps unaffordable.
Whether or not you lose your house depends on your own personal circumstances and the value of your home after repayment of the mortgage and any other charges.
The Insolvency Service gives detailed advice on this matter at the following link:
As time has passed the stigma associated with bankruptcy has reduced. It is only if you are a member of certain professions or work in jobs where there is a stipulation that you cannot be bankrupt that there is anything to be concerned about.
For the most part the only person in your immediate circle who will know about your bankruptcy is yourself.
For a detailed explanation of bankruptcy and the impact it will have on you follow this link ot the Insolvency Service website http://www.bis.gov.uk/insolvency/personal-insolvency
- Company voluntary arrangements
- Creditors voluntary liquidation
- Members voluntary liquidation
- Financial restructuring
- Individual voluntary arrangements
- Informal arrangements