What Is The Purpose Of Insolvency Law?

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When a company becomes insolvent it means that they are unable to pay their debts as and when they fall due. This may be in the form of cash flow insolvency or balance sheet insolvency. When a company reaches a point of insolvency, it’s important that their processes are regulated in order to ensure that all parties involved in the business, including creditors and employees, are treated fairly. That’s where insolvency law comes in. 

What Is Insolvency Law?

UK insolvency law is in place to regulate companies in the UK who have become insolvent i.e are unable to pay their debts as they fall due. The aim is to regulate the insolvency process (such as liquidation) or rescue of an insolvent company in a way that minimises losses and is fair to the directors, employees, creditors and other stakeholders in the business. 

A lot of the law comes from the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016 which provides a platform for all matters relating to personal and corporate insolvency in the UK. It contains details on Company Voluntary Arrangements (CVA), administration, compulsory liquidation, bankruptcy, Individual Voluntary Arrangements (IVA) as well as Creditors Voluntary Liquidation (CVL) and Members Voluntary Liquidation (MVL)

Changes To UK Insolvency Law 

Over the years, there have been changes and adaptations to UK insolvency law. One of the most recent material changes came with the Corporate Insolvency And Governance Act 2020 that was introduced in response to the pandemic. The act brought in temporary legislative support for companies in order to help prevent businesses affected by the pandemic from entering corporate insolvency. These temporary measures have started to be phased out from October 1st 2021, however the government has emphasised that this will be tapered. 

Why Is Insolvency Law Important?

When a company becomes insolvent it’s important that all parties invested in the business are treated fairly. This includes employees, creditors, directors and all other stakeholders. That’s why it’s so important that there are regulations in place for businesses to adhere to, in order to ensure fair treatment of all parties. UK insolvency law is also in place to prevent and monitor cases of wrongful trading and other unlawful actions in regards to insolvent companies and individuals alike. 

As we saw with the introduction of the Corporate Insolvency And Governance Act in 2020, insolvency law may adapt  in line with changes in the economic climate. This is important in ensuring that the law is kept updated and can support and regulate businesses that are facing insolvency in the current climate. 

The Importance Of Seeking Professional Insolvency Advice 

If your company is facing insolvency, you should consult the advice of a licensed insolvency practitioner as early on as possible. This will provide you with more options for your business, such as a CVL, or in some cases, the opportunity to implement a business rescue plan. It’s also essential to make sure that you are following the correct procedures in line with UK insolvency law. Whatever route you choose to take as an insolvent company, an insolvency professional will be able to guide you through the process, ensuring that  your company is complying with current insolvency laws and regulations. 

If you’re concerned that your business is facing insolvency, don’t hesitate to get in touch with our experienced team of insolvency professionals at MyLiquidation. We’ll be able to talk you through your options and guide you through the legal processes required for liquidating or restructuring your company. 


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