[2] Since the Cork Report of 1982,[3] 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.

A "floating charge", which is not permitted in many countries and remains controversial in the UK, can sweep up all future assets, but the holder is subordinated in statute to a limited sum of employees' wage and pension claims, and around 20 per cent for other unsecured creditors.

[4] In practice, these duties are seldom found to be broken, and the most typical outcome is that an insolvent company's assets are sold as a going concern to a new buyer, which can often include the former management: but free from creditors' claims and potentially with many job losses.

Enforcement rates by insolvency practitioners remain low, but in theory an administrator or liquidator can apply for transactions at an undervalue to be cancelled, or unfair preferences to some creditors be revoked.

An early 18th century scandal broke after the friend of a Tory MP died in debtors' prison, and in February 1729 a Gaols Committee reported on the pestilent conditions.

The novelist Charles Dickens, whose own father had been imprisoned at Marshalsea while he was a child, pilloried the complexity and injustice through his books, especially David Copperfield (1850), Hard Times (1854) and Little Dorrit (1857).

The difficulties for individuals to be discharged from debt in bankruptcy proceedings and the awfulness of debtors' prison made the introduction of modern companies legislation, and general availability of limited liability, all the more urgent.

The 1855 Act limited investors' liability to the amount they had invested, so if someone bought shares in a company that ran up massive debts in insolvency, the shareholder could not be asked for more than he had already paid in.

[32] 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.

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.

[39] 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.

This old equitable rule was a form of common law consumer protection, which held that if a person contracted for a mortgage, they must always have the right to pay off the debt and get full title to their property back.

In Re Kayford Ltd a mail order business, fearing bankruptcy and not wanting pre-payments by its customers to be taken by other creditors, acted on its solicitors' advice and placed their money in a separate bank account.

For instance, directors might propose that each creditor accepts 80 per cent of the money owed to each, and to spread repayments out over five years, in return for a commitment to restructure the business' affairs under a new marketing strategy.

Under chapter 11 of the US Bankruptcy Code this kind of debt restructuring is usual, and the so-called "cram down" procedure allows a court to approve a plan over the wishes of creditors if they will receive a value equivalent to what they are owed.

Under Schedule B1, paragraph 3 sets the primary objective of the administrator as "rescuing the company as a going concern", or if not usually selling the business, and if this is not possible realising the property to distribute to creditors.

The directors or the company may also appoint an administrator out of court,[107] but must give five days' notice to any floating charge holder,[108] who may at any point intervene and install his own preferred candidate.

"[112] In Re Harris Simons Construction Ltd Hoffmann J held that 'likely to achieve the purpose of administration' meant a test lower than balance of probabilities, and more like whether there was a 'real prospect' of success or a 'good arguable case' for it.

[149] In Re Peveril Gold Mines Ltd[150] Lord Lindley MR held that a company could not obstruct a member's right to bring a petition by requiring that two directors consented or the shareholder had over 20 per cent of share capital.

In Re Gray's Inn Construction Co Ltd[169] Buckley LJ held that courts would habitually approve all contracts that were plainly beneficial to a company entered into in good faith in the ordinary course of business.

However, in Re Gray's Inn because a host of transactions honoured by the company's bank, in an overdrawn account, between the presentation and the winding up petition were being granted, this meant unprofitable trading.

‘For the avoiding of feigned, covinous and fraudulent feoffments, gifts, grants, alienations, bonds, suits, judgments and executions, as well of lands and in tenements, as of goods and chattels, more commonly used and practised in these days than hath been seen or heard of heretofore; which feoffments, gifts, grants etc have been and are devised and contrived of malice, fraud, covin, collusion or guile to the end, purpose and intent to delay, hinder or defraud creditors and others of their just and lawful actions, suits, debts, etc; not only to the let or hindrance of the due course and execution of law and justice, but also to the overthrow of all true and plain dealing, bargaining and chevisance between man and man, without the which no commonwealth or civil society can be maintained or continued.’ The third action, which has operated since the Fraudulent Conveyances Act 1571, is that transactions entered into by a bankrupt are voidable if they would result in assets otherwise available to creditors becoming unduly depleted or particular creditors becoming unjustly enriched.

In Re Anglo-Austrian Printing & Publishing Union[191] this meant that a liquidator who had successfully sued directors for £7000 had to give up the funds to a group of debenture holders, who had not yet been paid in full, so there is no discretion to apply the assets in favour of unsecured creditors.

A potential benefit is that because the causes of action are vested in the company, they may be assigned to third parties, who may prefer to take the risk and reward of pursuing litigation over the liquidator or administrator.

Before a company formally enters an insolvency procedure, three main rules regulate directors' behaviour to discourage running up unnecessary debts at creditors' expense.

[222] The authors posited (adapting visibly a methodology from A Theory of Justice (1971) by John Rawls) that if one wished to determine what the best bankruptcy rules were, it could be discovered by imagining that hypothetically all creditors, secured and unsecured, could sit down and reach an agreement about how assets would be distributed.

Jackson and Baird further argue that hypothetical creditors would also choose pari passu distribution, but also it is "a key assumption that consensually negotiated security interests have aggregate efficiencies".

[228] The Baird and Jackson view essentially amounts to "single-value economic rationality, an excuse to impose a distributional scheme without justifying it, and, incidentally, a way to work in a damn good deal for secured creditors.

"[234] This largely reflected the previous common law position, which rejected debt collection as being the sole aim, and viewed insolvency to be a matter of public interest.