page_title: United Kingdom insolvency law
section_title: Companies and credit
hierarchical_section_title: United Kingdom insolvency law / Corporate insolvency / Companies and credit
caption_attribution_description: English: A two segment stitched image of Canary Wharf as viewed from the south-west. From left to right are the Reuters Building, 1 Canada Square, Citigroup Centre and Canary Wharf tube station below.
context_page_description: United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
  UK law grants the greatest protection to banks or other parties that contract for a security interest.
context_section_description: Companies are legal persons, created by registering a constitution and paying a fee, at Companies House. Like a natural person, a company can incur legal duties and can hold rights. During its life, a company must have a board of directors, which usually hires employees. These people represent the company, and act on its behalf. They can use and deal with property, make contracts, settle trusts, or maybe through some misfortune commission torts. A company regularly becomes indebted through all of these events. Three main kinds of debts in commerce are, first, those arising through a specific debt instrument issued on a market (e.g. a corporate bond or credit note), second, through loan credit advanced to a company on terms for repayment (e.g. a bank loan or mortgage) and, third, sale credit (e.g. when a company receives goods or services but has not yet paid for them. However, the principle of separate legal personality means that in general, the company is the first "person" to have the liabilities. The agents of a company (directors and employees) are not usually liable for obligations, unless specifically assumed. Most companies also have limited liability for investors. Under the Insolvency Act 1986 section 74(2)(d) this means shareholders cannot be generally sued for obligations a company creates. This principle generally holds wherever the debt arises because of a commercial contract. The House of Lords confirmed the "corporate veil" will not be "lifted" in Salomon v A Salomon & Co Ltd. Here, a bootmaker was not liable for his company's debts even though he was effectively the only person who ran the business and owned the shares. In cases where a debt arises upon a tort against a non-commercial creditor, limited liability ceases to be an issue, because a duty of care can be owed regardless. This was held to be the case in Chandler v Cape plc, where a former employee of an insolvent subsidiary company successfully sued the (solvent) parent company for personal injury. When the company has no money left, and nobody else can be sued, the creditors may take over the company's management. Creditors usually appoint an insolvency practitioner to carry out an administration procedure (to rescue the company and pay creditors) or else enter liquidation (to sell off the assets and pay creditors). A moratorium takes effect to prevent any individual creditor enforcing a claim against the company. so only the insolvency practitioner, under the supervision of the court, can make distributions to creditors.
  The causes of corporate failure, at least in the market segment of the economy, all begin of the creation of credit and debt. Occasionally excessive debts are run up through outright embezzlement of the company's assets or fraud by the people who run the business. Negligent mismanagement, which is found to breach the duty of care, is also sometimes found. More frequently, companies go insolvent because of late payments. Another business on which the company relied for credit or supplies could also be in financial distress, and a string of failures could be part of a broader macroeconomic depression. Periodically, insolvencies occur because technology changes which outdates lines of business. Most frequently, however, businesses are forced into insolvency simply because they are out-competed. In an economy organised around market competition, and where competition presupposes losers or contemplates excess, insolvencies necessarily happen. The variety of causes for corporate failure means that the law requires different responses to the particular issues, and this is reflected in the legal meaning of insolvency.
caption: The credit ratings industry is dominated by Fitch, Moody's and S&P, with London headquarters in Canary Wharf. Companies pay the rating agencies to rate them, because this provides access to cheaper loans.
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