Page 2: Insolvency
Individuals and Insolvency
The term 'bankrupt' usually refers to an individual whom the courts can declare bankrupt because he/she cannot pay his/her debts. They may be business owners but the majority of those who make themselves bankrupt are individuals who are not involved in a business.
The term bankrupt comes from the Italian for broken bench, Banca rotta. The term that we now apply to debtors derives from the practice in Lombardy of breaking the bench of an insolvent merchant. The Lombardy merchants traded from designated benches in the market and if one failed to honour his debts, he suffered the very public humiliation of having his bench broken.
In the past, being declared 'bankrupt' carried a degree of shame. Today, insolvency law encourages enterprise by offering a fresh start for individuals/businesses where bankruptcy arose through no fault of their own, for example, as a result of ill health. However, this is not a one-way process. Bankrupts whose conduct has been irresponsible, reckless or illegal are subject to a tough Bankruptcy Restrictions Order regime, which protects the public and the commercial community.
Bankruptcy means that there is an orderly and fair distribution of assets between the creditors and that the individual's circumstances are investigated to ensure there has been no misconduct.
Individual Voluntary Arrangement (IVA)
Some individuals are in the position that their business or financial affairs can be rescued, if so, they can propose to repay their creditors over a fixed period but they may not be able to pay them in full.
If the creditors are willing to accept say 50p in the pound on what they are owed, then they can approve the proposal and this forms an IVA. If the individual fails to keep up the required payments, they may be made bankrupt.
Companies and insolvency (ltds, plcs and some partnerships)
There are several insolvency options for companies. Like individuals, there are two broad types, one for trying to rescue the business and another for the orderly distribution of assets.
Rescuing the business can be achieved through Administration (a formal insolvency procedure) or by the company entering a Company Voluntary Arrangement (CVA), which is similar to an IVA. Where the business cannot be rescued it will enter liquidation and its affairs will be 'wound up' (closed down).
Whether the company is being rescued or wound up an independent professional (an insolvency practitioner or the official receiver) will examine its affairs to ensure there has been no misconduct by those who controlled the company, its directors.