Page 4: The Insolvency Service in action
The Insolvency Service supervises specialists who deal with bankruptcy and one form of company insolvency i.e. compulsory liquidation. They work from 33 Official Receiver's (OR) offices across England and Wales. During 2003, the OR dealt with over 30,000 new insolvency cases. Scotland has its own insolvency regime, which operates under Scottish law.
One of the aims of UK law covering insolvency is to help businesses that are in trouble to keep going. This is better than having them close down as it protects jobs. If a business is forced to stop trading it is much harder to restart it.
The Insolvency Service must distinguish between businesses and individuals that fail through bad luck and those that fail because of fraud or unethical practice.
Several different officials may be asked to take responsibility for a particular case of insolvency. Directors or creditors of a company finding itself in financial difficulty may appoint an insolvency practitioner as an Administrator. He/she then tries to rescue a company, or to protect certain types of creditors once a company is in serious financial difficulties. If the rescue attempt fails, however, the company may have to be 'wound up'. Another similar rescue procedure is a CVA.
The Insolvency Act gives an administrator powers to manage the business. The Administrator's major responsibility is to set out proposals for the rescue of a business. These are put to a meeting of creditors. If things go well, a new management team can be installed.
Where directors have acted unlawfully, however (e.g. by stealing company funds), the Administrator reports the matter to the Insolvency Service, which has a different role. Where appropriate it will report the facts to lawyers for consideration. Where allegations are serious enough, bodies such as the Serious Fraud Office, can investigate and prosecutions may follow.
There are several possible penalties for unethical behaviour. These include disqualification or banning directors from promoting, forming or managing a company for 2-15 years. In 2002-2003, for example, specialist staff working for the Insolvency Service identified a number of so-called 'Carousel' fraud cases. These involved attempts to defraud HM Customs and Excise by making false claims for VAT repayment. Eighteen company directors were disqualified for an average of 7 years. HM Customs and Excise also brought criminal prosecutions.
Individual sole traders and members of a partnership may become bankrupt as they cannot pay pressing debts. However, there are also alternatives, such as debt management plans and individual voluntary arrangements. Bankruptcy is a last resort. A court makes a bankruptcy order, only after a bankruptcy petition has been presented. It is usually presented by either:
- the debtor (debtor's petition)
- one or more creditors who are owed at least £750 and that amount is unsecured (creditor's petition).
The majority of bankrupts present their own petition.
Once a bankruptcy order has been made, a local OR will deal with it. Bankrupts are freed from the burden of debt; they can make a fresh start. Their assets are shared out fairly among the creditors and there are restrictions on what bankrupts can do - for example, they cannot obtain credit unless they disclose the fact that they are bankrupt.
Some bankrupts also find it difficult to open a bank account. The OR or an insolvency practitioner will act as a trustee in bankruptcy. From the date of the bankruptcy order, he/she will protect the assets of the bankrupt individual. The OR will also examine the financial affairs of the individual for the period before and during the bankruptcy. He/she will report any matters that suggest there has been a criminal offence and/or he/she will apply for a bankruptcy restriction order, which places a number of restrictions on the individual for between 2 and 15 years.
When a creditor presents a bankruptcy petition (against an individual) or a winding up petition (against a company) and the court makes an insolvency order the court will appoint the OR either as:
- receiver and manager (for an individual who has become bankrupt)
- liquidator (for a company).
This is to protect the insolvent's property.
The OR will take immediate steps to collect or secure any assets or property of the bankrupt or the company. To help this process, insolvency orders are advertised in an appropriate newspaper and in The London Gazette, which is published every working day.
The OR obtains information about the individuals or company's affairs, dealings and transactions, including its assets and liabilities. The OR reports this information to creditors (and shareholders, in cases where the company is wound-up). The OR will then act, either as a trustee (individuals) or liquidator (companies). Following this, assets can be sold off and the proceeds distributed to creditors. Sometimes, an insolvency practitioner will be appointed to act as trustee or liquidator and realise the insolvent's assets.
In addition, the OR will investigate the affairs of the bankrupt or company and look for evidence of possible malpractice. The OR has wide-ranging legal powers to acquire information and collect documents. These may uncover:
- a criminal offence
- a case for disqualifying some directors of liquidated companies
- a case for applying for a bankruptcy restrictions order (individuals).
The OR may then take the case to court. A court can then can take action against the guilty party.