How Insolvency Works
What is an Insolvency Practitioner?
An Insolvency Practitioner (IP) is someone who is licensed and authorised to act in relation to an insolvent individual, partnership and/or company. If you are insolvent, it means you cannot pay your debts when they become due or your liabilities exceed your assets.
IPs must follow the law, and their work is monitored by regulators to make sure that they do. The Insolvency Service and the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) are the main regulators, and they along with the Recognised Professional Bodies (RPBs) and other Professional Body Supervisors (PBS) check that the work is being carried out according to the law.
IPs are appointed to help resolve difficult financial situations. Where this involves a business in financial distress, the IP’s main task may be to try to rescue the business and thereby save as many jobs as possible.
An IP’s work also usually involves:
- selling the assets of the person or company who owes money to help them pay off their debts;
- collecting money due to the person or company;
- agreeing creditors’ claims; and
- distributing the money collected after paying costs.
The IP’s work involves dealing with many competing interests, but usually their main duty is to look after the interests of creditors and the wider public interest. Although creditors can give details of their claims, an IP is unlikely to adjudicate the claims until they are sure that funds will be available.
In some cases, the IP may give advice to someone in debt before a formal insolvency process begins.
An IP who holds a full authorisation from the IPA is able to advise on, and undertake appointments in, all formal insolvency procedures, including liquidations, Company Voluntary Arrangements (CVAs), administration, receiverships, bankruptcy and Individual Voluntary Arrangements (IVAs). Alternatively, an IP may hold a partial authorisation, which entitles them to take appointments for either corporate or individual insolvencies only, rather than both types of legal person.
Bankruptcy
Bankruptcy is a formal personal insolvency option and may involve proceedings following a petition to the court. Bankruptcy can be instigated by the individual or someone they owe money to (a creditor)
Bankruptcy can impact on an individual’s property and other valuable belongings. Any funds realised from any sale are then shared among the creditors.
As a result of bankruptcy, someone who has been made bankrupt cannot act as a company director, and if they trade as an individual, they must trade in their own name so that people can search the register and know they are bankrupt.
An IP may act as the trustee in the bankruptcy.
Liquidation
Liquidation is a procedure where the assets (e.g. buildings, equipment and vehicles) of a company are collected by the IP (acting as a liquidator) and sold, and the money is used to pay creditors, in a specific order. The courts may make an order for liquidation (sometimes called ‘winding up’) or the directors of the company may decide to put the company into liquidation.
Administration
Administration is a procedure that allows an IP (acting as the administrator) to try to rescue a company or sell its assets to repay all the creditors as much as possible of what they are owed.
Voluntary Arrangements
Voluntary Arrangements are procedures that allow someone who owes money to enter into an arrangement with creditors to repay all, or a percentage of, the debts. The IP (acting as a Supervisor) makes sure the agreed terms of the arrangement are met.
Companies can enter into voluntary arrangements via a CVA and individuals through an IVA or a Protected Trust Deed (PTD). PTDs are available in Scotland only.
There are other forms of debt repayment or management solutions, but these do not always involve an Insolvency Practitioner.
Useful resources:
https://www.gov.uk/guidance/how-insolvency-practitioners-are-authorised-in-great-britain#history