Insolvency Act 1986

The Insolvency Act 1986 provides the legal platform to deal with issues arising out of personal and corporate insolvency.

1. Why was it introduced? (Political/Sociological Context)

The framework of the system of insolvency prior to the Act was established during the second half of the nineteenth century and remained almost intact since then. Between the end of the Napoleonic Wars and the end of the nineteenth century there were more than fifty different acts of Parliament dealing with the issue of insolvency. In most cases, these were adopted as a response to economic crises or grave business scandals such as the South Sea Bubble at the beginning of the eighteenth century and the railway company and banking failures in the nineteenth century.

The specific problems that the different acts of Parliament prior to the Insolvency Act 1986 attempted to address, were for instance, the issues arising out of the existence of floating charges and retention of title clauses, the public concern with the harsh treatment of a large number of insolvent debtors whose affairs were not amenable to the bankruptcy laws at the time because they were not traders, the prospects of obtaining dividends in the liquidation of an insolvent company by unsecured creditors and the public dissatisfaction with the management of the bankrupts’ estates.

2. What was the aim of the Act? (Legal Context)

The Insolvency Act 1986 was adopted following the Cork Review Committee Report on Insolvency Law and Practice 1982.

The report found that there was no comprehensive statement of the law of insolvency in England and Wales. Instead, there was a patchwork of materials dealing with the subject, e.g. the Bankruptcy Act 1914, the Deeds of Arrangement Act 1914, the Companies Act 1948 and parts of the County Courts Act 1959. They were all supplemented by the principles of common law and equity.

Prior to the adoption of the Insolvency Act 1986, the attempts to tackle the issues associated with insolvency, followed a piecemeal approach, rather than interpreting insolvency law as a whole and dealing with the corporate debtor and the individual debtor at the same time. The Insolvency Act 1986 aimed to solve this problem.

The Insolvency Act 1986 was designed to deal with issues such as the underutilisation of the provisions for schemes of composition and arrangement once bankruptcy proceedings had started in the Bankruptcy Act 1914. The Act established a more flexible system of voluntary arrangements.

After the UK joined the EU in 1973, it was under an obligation to consider the draft of the Convention on Bankruptcy, Winding Up, Arrangements, Compositions and Similar Proceedings, which was prepared by the six original EU Member States. The Cork Report provided some recommendations on the amendment of the proposed convention. At the same time, it aimed to bring the UK insolvency law more in line with the continental insolvency law.

3. What main changes did it make to the law?

In Insolvency Act 1986 superseded the Insolvency Act 1985. S. 15 Insolvency Act 1985 introduced a less demanding standard of “wrongful trading” to reach non-fraudulent misconduct and supplement the “fraudulent trading” provision in s. 630 Companies Act 1985. By virtue of s. 213, the Insolvency Act 1986 reenacted the “fraudulent trading” provision from the companies law in the law of insolvency and in s. 214 introduced new “wrongful trading” provisions to the law of insolvency. S. 213 on “fraudulent trading” provides that if during the winding-up of a company, any business of the company has been carried out with the intention to defraud its creditors, on application of the liquidator, the court may declare any persons engaged in such business to be liable to make such contributions to the company’s assets as the court deems appropriate. S. 214 on “wrongful trading” imposes personal liability on any director who knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation. The Insolvency Act 1986 thus introduced a distinction between “fraudulent trading” where proof of dishonesty was needed, so that liability can be established, and “wrongful trading”, where evidence that the director failed to take measures to minimise the losses of the company’s creditors would suffice in order to establish liability.

S. 423 Insolvency Act 1986 made voidable any transaction at undervalue made for the purposes of defrauding creditors.

S. 458 Insolvency Act 1986 for the first time criminalises the conduct of any person who was knowingly party to the carrying on of business with the intent to defraud a creditor.

S. 426 Insolvency Act 1986 makes some important provisions on transnational insolvency by establishing an intra-UK system of reciprocal enforcement in respect of bankruptcy, winding up, receivership, administrative order and voluntary arrangement procedures. Under. s. 426(4) any UK court with jurisdiction over insolvency proceedings is under an obligation to assist courts with corresponding jurisdiction in any relevant country or territory.