Insolvency and bankruptcy can be confusing for many people. After all, these are typically not subjects of choice for most people unless it becomes at least a possibility in their own circumstances.
However, if you are experiencing significant financial problems in your personal or business life, it can be reassuring to understand the key differences between the bankruptcy and insolvency processes.
What Is Insolvency?
Insolvency is where:
- an individual or a business is unable to pay its debts when they fall due and/or
- their total liabilities and debts are greater than the value of their assets available.
Insolvency includes various processes including liquidation, voluntary arrangements and debt relief orders.
Corporate Insolvency
Corporate insolvency is where a company is insolvent. In those circumstances, there are strict laws limiting how the company can continue to run its affairs, and how its directors can conduct themselves.
The legal framework for the company insolvency process is tightly governed by the Insolvency Act 1986 – largely to protect the public interest.
What Is Bankruptcy?
Bankruptcy is a type of insolvency where an individual is declared bankrupt by the court.
An individual can also, if they choose, declare themselves bankrupt (for which there is a fee, currently £680).
Alternatively, a creditor, if the individual owes at least £5,000, can apply to have the individual declared bankrupt. A creditor could take this step in an effort to have their debt repaid.
What Processes Are Involved?
Commercial Insolvency – This involves the liquidation of a company after a winding up order is made. Liquidation can be through compulsory liquidation on a creditor’s application to court or a creditors’ voluntary liquidation (CVL) following a majority shareholder vote.
The liquidator may then collect in and sell the company assets, distributing the net proceeds to its creditors according to a strict order of priority. Secured creditors are paid first, with suppliers and customers and shareholders being the last to be paid.
Sometimes, the liquidator may recognise that there is a chance the business could be saved, and that a sale of assets and closing down operations could be averted. The liquidator may decide to take control of the company in the hope of rescuing it, and potentially entering into a Company Voluntary Arrangement (CVA) to pay off creditors while continuing to trade.
Bankruptcy - When the court makes a bankruptcy order, an official receiver (from the Insolvency Service) will usually handle at least the initial stages of the process.
The individual will be expected to disclose to the official receiver, honestly and accurately, the relevant information relating to their assets and income, debts and their creditors.
Their assets will be collected in and sold in order to pay creditors. However, there are limitations, e.g. reasonable domestic items and work-related assets cannot be sold off.
Until the bankruptcy ends, the bankrupt will also be restricted in what they can do. For example they will need the court’s approval before they can be involved in setting up a business or acting as a director of a company.
Key Takeaway
It is important to recognise that the rules for both personal bankruptcy and corporate insolvency are complex. Taking specialist advice on your particular circumstances is therefore vital.
We act for businesses, directors and individuals who are in serious financial hardship or are insolvent. We also advise suppliers, customers and creditors where a company is in financial distress.
If you think we may be able to assist, please do not hesitate to reach out to Reuben Grimshaw or Samuel Pedley within our specialist Commercial Litigation team for urgent support. You can call the firm via 01562 820181 or get in touch by email to samuel.pedley@mfgsolicitors.com / reuben.grimshaw@mfgsolicitors.com.