Insolvency Made Clear: A Guide for Debtors

Introduction And Aim Of This Book
A further 17,000 companies went insolvent in 2019. Of these, 12,000 were voluntary
liquidations (see Chapter 12); 3,000 were compulsory (see Chapter 13);
and 2,000 were administrations (Chapter 12) 1 . The most common sector for the
companies is construction, followed by wholesale and retail trade. This book
tries to help directors of companies going insolvent; and advise individuals who
are facing ‘directors’ disqualification orders’ as a result (see Chapter 14).
Principles of insolvency law
Describing some basic principles behind insolvency law will put the rules and
arguments which follow in this book into their proper context.
The purpose of bankruptcy is to transfer management of the bankrupt’s assets
to an independent professional, known as a ‘Trustee in Bankruptcy’. The Trustee
can then organise the sale of these assets, gather information about who the
creditors are, and distribute the proceeds according to the scheme set out in the
Insolvency Act 1986. The Trustee can also recover assets by reviewing transactions
made by the bankrupt before bankruptcy. A Trustee can undo the transactions
which unfairly harm the creditors, or favour one creditor over the others.
Finally, the Trustee can investigate the circumstances of the bankruptcy and
the conduct of the bankrupt. If necessary, the Trustee can refer any possible
criminal offences to the Insolvency Service for prosecution or for an order that
certain restrictions continue to protect any future creditors.
The focus of bankruptcy is the ‘class’ of creditors, i.e. the creditors of a bankrupt
as a whole. This has several important implications:
1. Firstly, the creditor who brings (‘presents’) the petition is not given any
special treatment. If something is in the interests of the creditors as a whole
but not in the interests of the petitioning creditor, the court’s instinct will
be to protect the class.
2. The court will treat all creditors equally, within the statutory scheme. In
particular, all the ‘unsecured’ creditors will be treated the same way. They
will each receive a distribution in the bankruptcy which is proportionate
to their debt. For example, if one creditor is owed £10,000 and another is
owed £5,000, and the Trustee only has £1,500 to distribute, then the proceeds
will be split 2:1, and each creditor will receive 10p for every pound
owed. ‘Secured’ creditors are entitled to the proceeds of sale of a particular
asset – for example, a bank who provides a mortgage over a house will be
repaid from the proceeds once the house is sold. ‘Unsecured’ creditors are
owed money without the benefit of receiving the proceeds of the sale of any
1
There were also a small number of receiverships which this book does not discuss.
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