What is Insolvency Law?
Insolvency law is the legislation and statutory guidelines by which an insolvency professional shall act. There are multiple layers to this as follows:
- Primary Legislation
- Secondary Legislation
- Supplemental Legislation
- Statements of Insolvency Practice (SIPS)
- Technical guidance from the insolvency service
Insolvency law is rapidly changing and evolving, with major amendments to the secondary legislation last year and Brexit on the horizon. This is likely to remove layers of supplemental insolvency law.
When we are discussing the primary legislation, this refers to the Insolvency Act 1986. The Insolvency Act sets out what must be done in each type of insolvency appointment, setting out insolvency law to deal with processes:
- Creditors Voluntary Liquidation
- Members Voluntary Liquidation
- Compulsory Liquidation
- Individual Voluntary Arrangements
- Company Voluntary Arrangements
The insolvency act also sets out the definition and tests for insolvency. As my old tutor, Neil Taylor, would put it, 123 makes insolvency, due to the definition being found under Section 123.
- Cash flow test – “the company is unable to pay its debts as they fall due”.
- Balance sheet test – “the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities”
- Statutory demand – a written demand requiring a company to pay the sum due remains unpaid, after the period of 3 weeks has passed.
- Unsatisfied enforcement – a judgement or decree in favour of a creditors is returned unsatisfied.
Whilst the insolvency act covers the entirety of the UK, the secondary legislation is down the the devolved administrations. The current insolvency law in place is:
- Insolvency (England and Wales) Rules 2016
- Insolvency (Scotland) Rules 1986
- Insolvency Rules (Northern Ireland) 1991
While the primary insolvency law in the insolvency act details what must be done for each process, secondary insolvency law details how this must be done. With the modernisation of the England and Wales insolvency law, there are now significant deviations in the processes of those with the devolved administrations.
The supplement legislation to insolvency law are sections of other industry specific parts of law, which have special considerations. In addition, there are specific cross-border regulations applying to insolvencies spanning multiple countries. It is still unclear at this stage what impact Brexit will have on insolvency law, and whether changes will need to be incorporated into the insolvency act.
SIPs and technical guidance
Although not actual insolvency law, insolvency practitioners are expected to adhere to the standard of practice set out by regulators and the insolvency service. These are regularly updated to the changing marketplace. Insolvency practitioners will treat them to the same standard as insolvency law.
Insolvency Law conclusion
Insolvency law is a complex matter with various layers. If you have any doubts, you should ensure you are taking advice from a firm with licenced insolvency practitioners, or an insolvency solicitor. Always check the credibility of this and that you are not dealing with a third party referrer, who will take a fee for passing you on to an insolvency practitioner.