Insolvency Solicitors: Bankruptcy and Insolvency

What is insolvency?

Insolvency refers to the financial state of a person or entity when they are unable to meet their financial obligations. This can include paying debts as they become due.

Insolvency is primarily governed by two main pieces of legislation in England and Wales. These are the Insolvency Act 1986 and the Enterprise Act 2002. These laws outline procedures for dealing with individuals and companies facing financial difficulties.

Types of insolvency

Individual Insolvency:

There are three main types of personal insolvency procedures: bankruptcy, Individual Voluntary Arrangements (IVAs), and Debt Relief Orders (DROs).

Bankruptcy:

Bankruptcy is a legal status that declares an individual unable to repay their debts. During bankruptcy, assets may be sold to pay off creditors. The remaining debts are usually discharged after a designated period. A person will be declared bankrupt using a Bankruptcy Order from the court.

Corporate Insolvency:

For companies, there are various procedures, including administration, liquidation, and company voluntary arrangements (CVAs).

Administration:

A company in financial distress can be placed under the control of an insolvency practitioner. This is usually carried out to facilitate restructuring and avoid liquidation.

Liquidation:

Involves selling a company’s assets to pay off creditors. There are two types:

• Creditors Voluntary Liquidation – initiated by the company’s directors or members
• Compulsory Liquidation – initiated by creditors through a court order.

A winding-up petition may be used by creditors or other parties to request the court to force a company into compulsory liquidation.

 

The role of Insolvency Practitioners

Insolvency practitioners (IPs) are licensed professionals who specialise in handling insolvency cases. They play a crucial role in administering insolvency procedures. They also ensure that the interests of creditors and other stakeholders are considered.

The role of the Official Receiver

The Official Receiver is a government official responsible for overseeing individual and company insolvencies. They may act as a trustee in bankruptcy or as a liquidator in certain cases.

The role of Insolvency Solicitors

An insolvency solicitor plays a crucial role in guiding individuals or businesses through the legal complexities of insolvency processes. Their primary responsibilities include:

Legal Advice and Representation:

Specialist insolvency solicitors provide legal advice to individuals, directors, creditors, or other stakeholders involved in insolvency proceedings.

They also assist by representing clients in negotiations, court proceedings, and meetings related to insolvency matters.

Insolvency Procedures:

An experienced insolvency solicitor will advise on the most appropriate insolvency procedure based on the client’s circumstances. These can include bankruptcy, individual voluntary arrangements (IVAs), company voluntary arrangements (CVAs), administration, or liquidation.

Winding-Up Petitions:

Insolvency lawyers may also assist creditors in the preparation and filing of winding-up petitions. These are often made against companies that are unable to meet their financial obligations. They can also assist businesses who have received a winding up petition.

Debt Recovery:

Solicitors are known for helping creditors pursue legal actions to recover outstanding debts from individuals or businesses.

Director’s Duties:

Specialist solicitors may also advise company directors on their legal responsibilities and potential liabilities during financial distress or insolvency situations. They can help parties make claims against directors in some circumstances.

Negotiations and Agreements:

The role of insolvency solicitors can also include negotiating with creditors to reach agreements. This may include debt restructuring plans to avoid formal insolvency proceedings where possible.

Court Proceedings:

Solicitors can represent clients in court proceedings related to insolvency matters, including hearings for winding-up petitions, bankruptcy orders, or approval of insolvency proposals.

Liquidation and Administration:

They further assist in the appointment of liquidators or administrators. They ensure compliance with legal requirements during the winding-up or administration process.

Creditors’ Meetings:

Solicitors can help by attending and advising clients at creditors’ meetings. This is where decisions regarding the distribution of assets or approval of proposed arrangements are made.

Legal Compliance:

Insolvency solicitors ensure that clients comply with relevant insolvency laws and regulations, and guiding them through legal requirements associated with the chosen insolvency procedure.

Asset Disposal:

Insolvency solicitors advise on the legal aspects of selling or disposing of assets during the liquidation process to maximise returns for creditors.

Insolvency disputes

Insolvency disputes can arise in various contexts and involve conflicts between different parties affected by the financial distress of an individual or a company. Outlined below are some common types of insolvency disputes and the issues they may encompass:

Creditor Disputes:

Debt Validity:

Creditors may dispute the validity of debts owed to them by the insolvent party. This could involve challenges to the amount claimed, the legitimacy of the debt, or issues related to the timing of the debt.

Priority of Claims:

Creditors often compete for a share of the available assets. Disputes may arise regarding the priority of different types of claims. These may include secured vs. unsecured claims or claims with preferential status.

Challenges to Security Interests:

Creditors holding security interests may face challenges to the validity or enforceability of their security. This is often the case if there are allegations of preferential treatment.

Director and Officer Disputes:

Breach of Duties:

Insolvency practitioners or creditors may allege that company directors or officers breached their fiduciary duties. This can include by engaging in wrongful trading, fraudulent trading, or other misconduct that contributed to the insolvency.

Director Disqualification:

Regulatory authorities may seek to disqualify directors from holding directorships in the future. This can be based on their conduct during the insolvency.

Avoidance Actions:

Preferences:

Insolvency practitioners may challenge transactions made by the insolvent party that gave preferential treatment to certain creditors. They may seek to unwind these transactions and redistribute assets fairly.

Transactions at Undervalue:

Similar to preferences, transactions at undervalue involve the sale of assets for less than their market value. These transactions may be challenged to recover assets for the benefit of creditors. This type of action has recently been shown in the case of Brewer v Iqbal.

Shareholder Disputes:

Allegations of Mismanagement:

Shareholders or former shareholders may claim mismanagement or oppression by directors. This is especially the case if they believe their interests were unfairly prejudiced by the insolvency process.

Disputes Over Asset Distribution:

Shareholders may dispute the proposed distribution of assets. This is often the case when they believe they are entitled to a greater share.

Fraudulent Conveyance:

Asset Transfers to Defraud Creditors:

Solicitors may challenge transfers of assets made with the intent to defraud creditors. They will seek to set aside such transactions.

Voidable Transactions:

Transactions by Insolvent Companies:

Certain transactions entered into by an insolvent company may be deemed voidable. A solicitor may seek to set them aside to benefit the creditors.

Parties can resolve insolvency disputes through negotiations, alternative dispute resolution mechanisms, or, if necessary, litigation.

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