What Is The Insolvency Act 1986?

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The Insolvency Act 1986 is a key piece of legislation that governs the procedures and regulations surrounding insolvency in the UK. However, despite the importance and prominence of this legislation throughout both the rescue and liquidation of insolvent businesses, many company directors and stakeholders are left wondering exactly what the Insolvency Act 1986 is. 

In short, the Insolvency Act 1986 provides a structured framework for dealing with insolvent businesses and entities, ensuring that these instances are dealt with efficiently, legally, and with fairness in terms of the distribution of assets among creditors. The act aims to strike a balance between the interests of debtors, creditors and other stakeholders while promoting a range of suitable rescue options for financially troubled businesses. 

Because the Insolvency Act 1986 is legally binding legislation, it is essential that all licensed insolvency practitioners follow the rules and consolidation it sets out. Having an understanding of the contents is also in the best interests of individuals involved in an insolvent business as it is essential that they act within the bounds of the legislation.

What Is Consolidated In The Insolvency Act 1986?

As highlighted in the introduction of the Insolvency Act 1986, it consolidates the following:

“Enactments relating to company insolvency and winding up (including the winding up of companies that are not insolvent, and of unregistered companies); enactments relating to the insolvency and bankruptcy of individuals; and other enactments bearing on those two subject matters, including the functions and qualification of insolvency practitioners, the public administration of insolvency, the penalisation and redress of malpractice and wrongdoing, and the avoidance of certain transactions at an undervalue.”

The procedures outlined beyond this introduction are extensive and should you wish to understand the Insolvency Act 1986 in relation to an imminent liquidation process, you should always consult a licensed insolvency practitioner. However, to help you gain an initial overview of the legislation, know that the following provisions are covered:

Types Of Insolvency

Outlined in the Insolvency Act 1986 are the various procedures that can be used to handle insolvency, including liquidation, administration and Company Voluntary Arrangements. The former is typically used to wind up an insolvent company when it cannot pay its debts whereas administration and Company Voluntary Arrangements are strategies used in the hope of rescuing a business and avoiding formal insolvency proceedings.

The Role Of Insolvency Practitioners

The Insolvency Act 1986 also lays out the rules on who must be involved during insolvency proceedings. A licensed insolvency practitioner must oversee the liquidation and administration of a company, ensuring compliance with legal requirements including organising the fair distribution of assets during liquidation or negotiating with creditors to facilitate a sale during administration. 

Creditor Rights

Creditor rights are also covered in the Insolvency Act 1986. The Act legally establishes a hierarchy of claims that may be made by creditors against an insolvent company. Secured creditors take priority over unsecured creditors when debts are recovered from company assets. 

The act also addresses the issue of possible prejudice against creditors such as preferential treatment and transactions at undervalue. These provisions are in place to prevent fraudulent activities, protect the interests of creditors, and ensure the appropriate levels of director conduct. 

Rules For Company Directors

The Insolvency Act 1986 also details what could happen to directors of an insolvent business. In cases of misconduct or negligence leading to insolvency, authorities can disqualify directors from holding similar positions in the future. 

Why Is The Insolvency Act 1986 Important For Businesses?

The Insolvency Act 1986 is hugely important to businesses as it has a significant impact on the way in which they can navigate financial distress. The Act itself provides a legal framework for restructuring and recovery and therefore gives businesses a multitude of options for survival rather than immediate liquidation. 

The Insolvency Act 1986 also holds businesses accountable for their actions and their debts and ensures that individual wrongdoing is appropriately penalised in instances of insolvency. This gives peace of mind to creditors who may be affected when a business cannot pay its debts and ensures they have the right to recover their dues. 

Though businesses should always remain aware of the consolidations made in the Insolvency Act 1986, it is particularly relevant should you begin to spot signs of trouble or be unable to pay your debts. It is in the best interests of both the business and its creditors to avoid compulsory liquidation via a winding-up petition so make sure that you contact a licensed insolvency practitioner as soon as possible to discuss your position and receive suitable advice.

The licensed insolvency practitioners here at My Liquidation are authorised to act under the Insolvency Act 1986 and have years of experience helping businesses understand their next steps, whether that be rescue measures or swift but legal closure through Creditors Voluntary Liquidation. Get in touch today for confidential advice.

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