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Bankruptcy and insolvency

Introduction

The Insolvency Service has information on bankruptcy and insolvency. The principal legislation around bankruptcy and insolvency is the Insolvency Act 1986.

Sole traders and individuals in (non-limited liability) partnership

Because of the potential criminal and civil sanctions which apply if a trader continues trading when unable to pay his debts, there is in effect a duty on the trader in this position to apply to the court for his own babkruptcy or initiate one of the alternative procedures to bankruptcy, such as (for small debts) a debt reilef order or a voluntary arrangment..

Companies and other entities with limited liability

If a company contiunues to trade and incur debts when the directors know or should know that there is no reasonable prospect of paying creditors (known as 'wrongful trading'), the directors may be ordered to make a personal contribution to the company's assets; see Director's civil liability. For this and other reasons, there is effectively a duty upon the directors of a company and certain other entities with limited liability to:

(i) appoint an iunsolvency practitioner to act as proposed liquidator and to convene meetings of the members of the company and of creditors to resolve upon the winding up (i.e. liquidation) of the company; or

(ii) initiate one of the procedures which are an alternative to wing up, such as a company voluntary arrangment or an administration.

What’s new on this topic [see What’s new page or archive for full item]:

20/05/2020: Bill introduced to relieve business insolvency and corporate governance issues

The government has introduced the Corporate Insolvency and Governance Bill in Parliament. MPs in the House of Commons will next consider all stages of the Bill on Wednesday 3 June 2020. The Bill consists of 6 insolvency measures (some quite radical) and 2 corporate governance measures.

The policy objective is to maximise the chances of survival for businesses adversely affected by the COVID-19 pandemic. Many otherwise economically viable businesses are experiencing significant trading difficulties. In addition, the Government-enforced social distancing measures and reduced resources are making it hard for many businesses to continue to trade and meet their legal duties.

Insolvency measures

*             a new self-standing moratorium to give companies breathing space from their creditors while they seek a rescue;

*             prohibit termination clauses that engage on insolvency, preventing suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process;

*             a new restructuring plan that will bind creditors to it enabling the insolvency regime to flex to meet the demands of the emergency;

*             temporary removal of the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency;

*             temporary prohibition on creditors filing statutory demands and winding up petitions for coronavirus related debts.

The corporate governance measures will introduce temporary easements and flexibility to businesses where they are coping with reduced resources and restrictions.

The Government has published Corporate Insolvency and Governance Bill 2020: factsheets

[Page created: 06/06/2020]

 

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