Lecture 9 – Introduction to Insolvency
Podcast 1
Recommended Reading
Grier N, Company Law (5th ed, W Green 2020), Chapter 15 & Chapter 16
Black G (ed), Business Law in Scotland (4th ed, W Green 2019), Chapter 19
Format of this lecture
In this lecture we will consider:
▪ The purpose of insolvency law
▪ The role of the insolvency practitioner
▪ The four insolvency regimes - in outline
The main statute is the Insolvency Act 1986.
The Purpose of Insolvency Law
▪ To rescue those companies that can be saved
Because there are shareholders who may be concerned with the interests of the company and
its future. There will certainly be stakeholders, employees, creditors and consumers who have
a vested interest in the continuation of the company.
▪ To protect the public from unscrupulous businesses
The situation where either the directors of the company are conducting wrongful trading or
fraudulent trading knowing that they are entering into contracts with creditors when the
company is not in a position to be able to pay those creditors what is owed to them. So
protecting the public from unscrupulous businesses has a knock-on effect, because if the
creditors cannot be paid, then their businesses may suffer, and so on and so forth.
▪ To be fair to all the creditors, and avoid competition among creditors to grab the assets of a
potentially failing company.
That also means that it is important that the failing company or the company that is at risk
does not give an unfair preference to its creditors, perhaps by granting charges in favour or
writing off debts, because that could constitute an unfair preference in a liquidation setting.
▪ To eliminate corruption from the process
, Insolvency Practitioners
▪ Anyone who acts as a liquidator, receiver or supervisor of a voluntary arrangement must be
a qualified insolvency practitioner – s.388 Insolvency Act 1986.
▪ Why is that a case? Well, the public and the companies concerned and the creditors, their
shareholders and their stakeholders, all wish to make sure that the insolvent company is run
by a qualified person.
▪ The person must be an individual, natural persons, and must be a member of a recognised
professional body (there are alternatives).
▪ The Insolvency Practitioner must not be bankrupt, or subject to a disqualification order under
the Company Directors Disqualification Act 1986, or have a guardian under the Adults with
Incapacity (Scotland) Act 2000.
Caution (pronounced ‘kayshun’ –bond up to £250,000 plus value)
The Four Insolvency Regimes
▪ Receivership
▪ Company Voluntary Arrangement - It's an oft used arrangement by companies to make sure
that there is some kind of realistic prospects of their ability to continue to trade.
▪ Administration – like a pre-liquidation process, so the company is not yet wound up, but it is
perhaps at the brink of being wound up or during the process of being reviewed for potential
winding up.
▪ Liquidation (winding up) – formal process set in motion to bring the company to an end.
Receivership - s.50-71 Insolvency Act 1986 (in outline)
▪ Receivership in Scotland is different from other parts of the UK.
▪ What is it? If a company that has borrowed money secured by a floating charge fails to repay,
the floating charge creditor (often a bank) could call up the loan and appoint a receiver.
▪ How does it work? Creditors are then paid in ranking order until floating charge repaid. Any
remaining assets go back to the company. A qualified Insolvency Practitioner is required to be
the receiver.
▪ However, receivership has been greatly restricted by the Enterprise Act 2002 –
administration or liquidation more likely and more used these days.
