United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts.Insolvency Act 1986 s 122(1)(f) Since the Cork Report of 1982,Report of the Review Committee on Insolvency Law and Practice (1982) Cmnd 8558 the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the (SI 1986/1925, replaced in England and Wales from 6 April 2017 by the Insolvency Rules (England and Wales) 2016 (SI 2016/1024) – see below), the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
UK law grants the greatest protection to banks or other parties that contract for a security interest. If a security is "fixed" over a particular asset, this gives priority in being paid over other creditors, including employees and most small businesses that have traded with the insolvent company. A "floating charge", which is not permitted in many countries and remains controversial in the UK, can sweep up all future assets, but the holder is subordinated in statute to a limited sum of employees' wage and pension claims, and around 20 per cent for other unsecured creditors. Security interests have to be publicly registered, on the theory that transparency will assist commercial creditors in understanding a company's financial position before they contract. However the law still allows "title retention clauses" and "Quistclose trusts" which function just like security but do not have to be registered. Secured creditors generally dominate insolvency procedures, because a floating charge holder can select the administrator of its choice. In law, administrators are meant to prioritise rescuing a company, and owe a duty to all creditors.IA 1986 Sch B1, para 3 In practice, these duties are seldom found to be broken, and the most typical outcome is that an insolvent company's assets are sold as a going concern to a new buyer, which can often include the former management: but free from creditors' claims and potentially with many job losses. Other possible procedures include a "voluntary arrangement", if three-quarters of creditors can voluntarily agree to give the company a debt haircut, receivership in a limited number of enterprise types, and liquidation where a company's assets are finally sold off. Enforcement rates by insolvency practitioners remain low, but in theory an administrator or liquidator can apply for transactions at an undervalue to be cancelled, or unfair preferences to some creditors be revoked. Directors can be sued for breach of duty, or disqualified, including negligently trading a company when it could not have avoided insolvency.Companies Act 2006, ss 170–177, CDDA 1986 s 6 and IA 1986 s 212–214 Insolvency law's basic principles still remain significantly contested, and its rules show a compromise of conflicting views.
History
The modern history of corporate insolvency law in the UK began with the first companies legislation in 1844.See the Joint Stock Companies Act 1844 and the Joint Stock Companies Winding-Up Act 1844. However, many principles of insolvency are rooted in bankruptcy laws that trace back to ancient times. Regulation of bankruptcy was a necessary part of every legal system, and is found in the Code of Hammurabi (18th century BC), the Twelve Tables of the Roman Republic (450 BC), the Talmud (200 AD), and the Corpus Juris Civilis (534 AD).See Codex Hammurabi §§115–118; Talmud, Kethuboth, x. 4, 93a.; Corpus Juris Civilis, Institutes, Book ii, I 9, I. Ancient laws used a variety of methods for distributing losses among creditors, and satisfaction of debts usually came from a debtor's own body. A debtor might be imprisoned, enslaved or killed or all three. In England, Magna Carta (1215) clause 9 set out rules that people's land would not be seized if they had chattels or money to repay debts.Magna Carta 1215 cl 9, "Neither we nor our bailiffs shall seize any land or rent for any debt, so long as the chattels of the debtor are sufficient to repay the debt; nor shall the sureties of the debtor be distrained so long as the principal debtor is able to satisfy the debt; and if the principal debtor shall fail to pay the debt, having nothing wherewith to pay it, then the sureties shall answer for the debt; and let them have the lands and rents of the debtor, if they desire them, until they are indemnified for the debt which they have paid for him, unless the principal debtor can show proof that he is discharged thereof as against the said sureties" The Bankruptcy Act 1542 introduced the modern principle of (i.e. proportional) distribution of losses among creditors. However, the 1542 Act still reflected the ancient notion that people who could not pay their debts were criminals, and required debtors to be imprisoned.See generally, I Treiman, "Escaping the Creditor in the Middle Ages" (1927), 43 Law Quarterly Review 230, 233 The Fraudulent Conveyances Act 1571 ensured that any transactions by the debtor with "intent to delay, hinder or defraud creditors and others of their just and lawful actions" would be "clearly and utterly void".
The view of bankrupts as subject to the total will of creditors, well represented by Shylock demanding his "pound of flesh" in Shakespeare's The Merchant of Venice, began to wane around the 17th century. In the Bankruptcy Act 1705,3 Anne, c.17, passed in fact on 19 March 1706 the Lord Chancellor was given power to discharge bankrupts from having to repay all debts, once disclosure of all assets and various procedures had been fulfilled. Nevertheless, debtors' prison was a common end. Prisoners were frequently required to pay fees to the prison guards, making them further indebted; they could be bound in manacles and chains; and the sanitary conditions were foul. An early 18th century scandal broke after the friend of a Tory MP died in debtors' prison, and in February 1729 a Gaols Committee reported on the pestilent conditions. Nevertheless, the basic legislative scheme and moral sentiment remained the same. In 1769, William Blackstone's Commentaries on the Laws of England remarked it was not justifiable for any person other than a trader to "encumber himself with debts of any considerable value".(1769) vol II no 5, 473 At the end of the century, Lord Kenyon in Fowler v Padget reasserted the old sentiment that "Bankruptcy is considered a crime and a bankrupt in the old laws is called an offender."(1798) 101 ER 1103; 7 Term rep 509
Since the South Sea Company and stock market disaster in 1720, limited liability corporations had been formally prohibited by law. This meant people who traded for a living ran severe risks to their life and health if their business turned bad, and they could not repay their debts. However, with the Industrial Revolution the view that companies were inefficient and dangerous,e.g. Adam Smith, The Wealth of Nations (1776) Book V, Ch 1, para. 107 was changing. Corporations became more and more common as ventures for building canals, water companies, and railways. The incorporators needed, however, to petition Parliament for a Local Act. In practice, the privilege of an investor to limit their liability upon insolvency was not accessible to the general business public. Moreover, the astonishing depravity of conditions in debtors' prison made insolvency law reform one of the most intensively debated issues on the 19th century legislative agenda. Nearly 100 bills were introduced to Parliament between 1831 and 1914.M. Lester, Victorian Insolvency (Clarendon 1995)
The long reform process began with the Insolvent Debtors (England) Act 1813. This established a specialist Court for the Relief of Insolvent Debtors. If their assets did not exceed £20, they might secure release from prison.
For people who traded for a living, the Bankruptcy Act 1825 (6 Geo. 4. c. 16) allowed the indebted to bring proceedings to have their debts discharged, without permission from the creditors.
The Gaols Act 1823 saw priests sent in, and put the debtors' prison jailors on the state's payroll, so they did not claim fees from inmates.
Under the Prisons Act 1835 five inspectors of prisons were employed.
The (5 & 6 Vict. c. 116) allowed non-traders to begin bankruptcy proceedings for relief from debts. Any person who was not a trader, or was a trader but owed less than £300, could obtain a protection order from the Court of Bankruptcy or a district court of bankruptcy halting all proceedings against him on condition that he vested all his property in an official assignee.
However, conditions remained an object of social disapprobation. The novelist Charles Dickens, whose own father had been imprisoned at Marshalsea while he was a child, pilloried the complexity and injustice through his books, especially David Copperfield (1850), Hard Times (1854) and Little Dorrit (1857). Around this very time reform began.