What is Insolvency Law and the Different Types of Legislation

The insolvency regime in the UK has been described as one of the best in the world by the World Bank Organisation. R3 (The UK’s insolvency and restructuring trade body) is taking every action to ensure that after Brexit, this retains this level of prestige and continues to return funds to creditors quicker and in larger sums than the alternatives. This is dealt with through the different layers of insolvency law, which sets out the processes for individual and company insolvency.


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

 

What is Insolvency Law

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.

Primary legislation

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:

 

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.

Secondary legislation

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:

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.

Supplemental legislation

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.

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