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How Insolvency Works

What is an IP?

An Insolvency Practitioner (IP) is someone who is licensed and authorised to act in relation to an insolvent individual, partnership or company. If you are insolvent it means you cannot pay your debts when they become due.

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) (the Insolvency Practitioners Association (IPA); the Institute of Chartered Accountants in England and Wales (ICAEW); the Institute of Chartered Accounts in Scotland (ICAS); and Chartered Accountants Ireland (CAI)) undertake monitoring to check that the work is being carried out according to the law.

At the IPA we monitor our licence holders to make sure they continue to be fit to carry out insolvency work. The IPA is also an Anti–Money Laundering (AML) Professional Body Supervisor (PBS), meaning that the IPA is responsible for monitoring our members’ compliance with money laundering regulations when carrying out their insolvency and advisory work.


What Does an IP’s Job Involve?

IPs are appointed to sort out difficult situations. In some cases, their main task is to try to rescue a business. This is known as administration.  

If administration it is not possible, the IP aims to:

  • sell the assets of the person or company who owes money to help them pay off their debts;
  • collect money due to the person or company;
  • agree creditors’ claims; and
  • distribute 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, IPs will not agree the claims until they are sure that funds will be available.

In some cases, the IP will give advice to an individual in debt immediately before a formal insolvency process begins.

An IPA licensed IP 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).

Bankruptcy

Bankruptcy is formal personal insolvency option and involves proceedings following a petition to the court. The petition can be made 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 (for example, the 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 Company Voluntary Arrangement (CVA) or individuals through an Individual Voluntary Arrangement (IVA).

Useful resources:

https://www.gov.uk/guidance/how-insolvency-practitioners-are-authorised-in-great-britain#history