Bankruptcy and Insolvency in the UK: What You Need to Know

Bankruptcy form and past due bills on a table

In the UK, bankruptcy and insolvency are legal procedures designed to assist individuals and businesses who cannot pay their debts. While bankruptcy typically applies to individuals, insolvency is a broader term often used in the context of businesses. Both processes are designed to help parties manage financial distress and, in some cases, offer them a chance for a fresh start.

Bankruptcy for Individuals

In the UK, bankruptcy is a formal process available to individuals who cannot pay their debts. Under the Insolvency Act 1986, a person can be declared bankrupt by filing their own bankruptcy petition or by a creditor’s petition if they are owed more than £5,000. In either case, a court hearing will determine whether bankruptcy is appropriate.

Once an individual is declared bankrupt, a trustee is appointed to manage their assets. This trustee is responsible for selling assets to repay creditors. Typically, this trustee will be an Official Receiver or a licensed insolvency practitioner.

Individuals facing bankruptcy must comply with certain restrictions. They cannot act as a company director without permission from the court, and they must disclose their bankruptcy status when borrowing more than £500. Additionally, they must provide a full list of assets and liabilities to the official receiver.

Insolvency for Companies

In contrast to bankruptcy, insolvency refers to a situation where a company cannot pay its debts. Insolvency can happen in one of two forms:

  • Cash-flow insolvency:The company cannot pay its debts when they fall due
  • Balance sheet insolvency:The company’s liabilities exceed its assets.

If a company is insolvent, it may enter into a process such as liquidation, administration, or a company voluntary arrangement (CVA). Liquidation involves selling the company’s assets to pay off creditors, while administration allows the company to continue trading while a plan is put in place to repay debts. A CVA is an agreement between the company and its creditors to pay back debts over time, avoiding liquidation.

In the case of company insolvency, directors must act in the best interests of the creditors, and failure to do so could lead to personal liability for debts or even disqualification as a director.

The Consequences of Bankruptcy and Insolvency

The consequences of bankruptcy and insolvency can be significant. For individuals, a bankruptcy order can have long-lasting effects on their financial standing. Bankruptcies are publicly recorded and listed on the Individual Insolvency Register, which is accessible to anyone who wishes to search it. Bankruptcy details may remain visible on the register for up to three months after the discharge, and they will always be included in The Gazette, an official publication.

For companies, insolvency may result in the liquidation of assets, loss of business, and potential job cuts. However, depending on the circumstances, some companies may have the opportunity to continue operating through administration or a CVA.

Bankruptcy Restrictions

One of the important aspects of bankruptcy is the potential for restrictions that can extend beyond the bankruptcy itself. For example, individuals may face a Bankruptcy Restriction Order (BRO), preventing them from borrowing large sums of money or acting as a company director for a specified period (usually between two and fifteen years). These restrictions are designed to prevent individuals from abusing the bankruptcy process or engaging in misconduct.

Insolvency Service and Support

In the UK, the Insolvency Service is the government agency responsible for managing both bankruptcy and insolvency procedures. They provide support and guidance to individuals and businesses facing financial difficulties. The Insolvency Service also maintains the Individual Insolvency Register, where details of bankruptcies and insolvencies are listed.

For businesses facing insolvency, the service offers advice on the best course of action, whether through liquidation, administration, or a voluntary arrangement. Companies and individuals must seek professional advice early to explore all available options.

Final Thoughts

Bankruptcy and insolvency are serious legal processes, but they provide a way for individuals and businesses to move past financial challenges. While bankruptcy typically applies to individuals and insolvency to companies, both processes are designed to provide a fresh start, either by discharging some or all debts or reorganising financial obligations.