Repayment of residual interests to preference, and then ordinary shareholders

 Fixed charge holders
    Insolvency practitioner fees and expenses, s 176ZA
    Preferential creditors, ss 40, 115, 175, 386 and Sch 6
    Ring fenced fund for unsecured creditors, s 176A and SI 2003/2097
    Floating charge holders
    Unsecured creditors, s 74(2)(f)
    Interest on debts proved in winding up, s 189
    Money due to a member under a contract to redeem or repurchase shares not completed before winding up, CA 2006 s 735
    Debts due to members under s 74(2)(f)
    Repayment of residual interests to preference, and then ordinary shareholders.

Sources: Insolvency Act 1986 and Companies Act 2006

See also: Pari passu, Seniority (financial), and Subordination (finance)

English law draws a distinction between a "debt", which is relevant for the cash flow test of insolvency under section 123(1)(e), and a "liability", which becomes relevant for the second "balance sheet" test of insolvency under section 123(2). A debt is a sum due, and its quantity is a monetary sum, easily ascertained by drawing up an account. By contrast a liability will need to be quantified, as for instance, with a claim for a breach of contract and unliquidated damages. The balance sheet test asks whether "the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities." This, whether total assets are less than liabilities, may also be taken into account for the purpose of the same rules as the cash flow test (a winding up order, administration, and voidable transactions). But it is also the only test used for the purpose of the wrongful trading rules, and director disqualification.[30] These rules impose potentially impose liability upon directors as a response to creditors being paid. This makes the balance sheet relevant, because if creditors are in fact all paid, the rationale for imposing liability on directors (assuming there is no fraud) drops away. Contingent and prospective liabilities refer to liability of a company that arise when an event takes place (e.g., defined as a contingency under a surety contract) or liabilities that may arise in future (e.g., probable claims by tort victims). The method for computing assets and liabilities depends on accountancy practice. These practices may legitimately vary. However, the law's general requirement is that accounting for assets and liabilities must represent a "true and fair view" of the company's finances.[31] The final approach to insolvency is found under the Employment Rights Act 1996 section 183(3), which gives employees a claim for unpaid wages from the National Insurance fund. Mainly for the purpose of certainty of an objectively observable event, for these claims to arise, a company must have entered winding up, a receiver or manager must be appointed, or a voluntary arrangement must have been approved. The main reason employees have access to the National Insurance fund is that they bear significant risk that their wages will not be paid, given their place in the statutory priority queue.
Priorities
See also: Pari passu, Seniority (financial), and Subordination (finance)

The Insolvency Act 1986 priority list

ahead, and whether paying those debts was likely. Creditors may, however, find it difficult to prove in the abstract that a company

The meaning of insolvency matters for the type of legal rule. In general terms insolvency has, since the earliest legislation, depended upon inability to pay debts.[24] The concept is embodied in the Insolvency Act 1986 section 122(1)(f) which states that a court may grant a petition for a company to be wound-up if "the company is unable to pay its debts". This general phrase is, however, given particular definitions depending on the rules for which insolvency is relevant. First, the "cash flow" test for insolvency represented under section 123(1)(e) is that a company is insolvent if "the company is unable to pay its debts as they fall due". This is the main test used for most rules. It guides a court in granting a winding-up order or appoints an administrator.[25] The cash flow test also guides a court in declaring transactions by a company to be avoided on the ground they were at an undervalue, were an unlawful preference or created a floating charge for insufficient consideration.[26] The cash flow test is said to be based on a "commercial view" of insolvency, as opposed to a rigid legalistic view. In Re Cheyne Finance plc,[27] involving a structured investment vehicle, Briggs J held that a court could take into account debts that would become payable in the near future, and perhaps further ahead, and whether paying those debts was likely. Creditors may, however, find it difficult to prove in the abstract that a company is unable to pay its debts as they fall due. Because of this, section 122(1)(a) contains a specific test for insolvency. If a company owes an undisputed debt to a creditor of more than £750, the creditor sends a written demand, but after three weeks the sum is not forthcoming, this is evidence that a company is insolvent. In Cornhill Insurance plc v Improvement Services Ltd[28] a small business was owed money, the debt undisputed, by Cornhil Insurance. The solicitors had repeatedly requested payment, but none had come. They presented a winding up petition in the Chancery Court for the company. Cornhill Insurance's solicitors rushed to get an injunction, arguing that there was no evidence at all that their multi-million business had any financial difficulties. Harman J refused to continue the injunction noting that, if the insurance company had "chosen" not to pay, a creditor was also entitled to choose to present a winding up petition when a debt is undisputed on substantial grounds.[29]

Under the Insolvency Act 1986 section 74(2)(d) this means shareholders cannot be generally sued for obligations a company creates

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.[16] 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.[17] 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.[18] 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.

See also: Insolvency and Bankruptcy

The causes of corporate failure, at least in the market segment of the economy, all begin of the creation of credit and debt.[19] Occasionally excessive debts are run up through outright embezzlement of the company's assets or fraud by the people who run the business.[20] Negligent mismanagement, which is found to breach the duty of care, is also sometimes found.[21] 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.[22] 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.[23] 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.
Meaning of insolvency
See also: Insolvency and Bankruptcy
Most insurance companies and banks would be insolvent if all policy and account holders required payments all at once. Instead, the main test of insolvency is whether a company can pay its debts as they fall due.

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