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. Since the Cork Report of 1982, 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 Insolvency Rules 1986 (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. 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. 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. 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). 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. 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. 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".