Insolvency & administration
Insolvency law provides procedures for rescuing or winding up businesses and rules for unwinding transactions made in the run-up to failure. SQE1 tests the insolvency tests, the main corporate procedures, the order of priority and antecedent transaction claims.
What "Insolvency & administration" covers
- A company is insolvent if it cannot pay its debts as they fall due (cash-flow) or its liabilities exceed its assets (balance-sheet) under s.123 IA 1986.
- Liquidation may be a creditors' voluntary liquidation, a members' voluntary liquidation (solvent), or a compulsory winding up by the court (s.122 IA 1986).
- Administration under Schedule B1 aims, in order of priority, to rescue the company as a going concern, achieve a better result for creditors than winding up, or realise property for secured/preferential creditors (para 3).
- The statutory order of distribution is: fixed charge holders, liquidation/administration expenses, preferential creditors, the prescribed part, floating charge holders, unsecured creditors, interest, then shareholders.
- A liquidator or administrator may challenge a transaction at an undervalue (s.238), a preference (s.239, requiring a desire to prefer), an avoidable floating charge (s.245), and a transaction defrauding creditors (s.423).
- Relevant times run back from the onset of insolvency: two years for undervalues and connected-person preferences, six months for other preferences.
- Directors face personal liability for wrongful trading if they continued when they knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation (s.214), and for fraudulent trading (s.213).
Key cases & statutes
The authorities and provisions most likely to matter for this subtopic:
How it's tested in SQE1
SQE1 uses single best answer questions: a short factual scenario, one precise question, and five options of which only one is the best answer on the law applied to the facts. For insolvency & administration, expect to be asked what the correct legal position is, what a party may or must do, or which outcome follows — with more than one option looking arguable. Reading the facts carefully and eliminating the near-misses is the skill that earns the mark.
Where candidates lose marks
- Confusing wrongful trading (s.214, negligence-based, no dishonesty needed) with fraudulent trading (s.213, requires intent to defraud).
- Forgetting a preference under s.239 requires a subjective desire to prefer, which is presumed for connected persons.
- Mixing up the relevant time periods (two years versus six months) and applying the cash-flow test when the balance-sheet test is in issue.
Learn this subtopic in the course
A video lesson, notes and exam-style practice on insolvency & administration.
FAQ
Is insolvency & administration tested on SQE1?
Yes — insolvency & administration is part of the SQE1 Business Law and Practice syllabus (FLK1) and can appear in single best answer questions.
How is insolvency & administration examined in SQE1?
SQE1 tests it by application: you're given a realistic scenario and choose the single best answer from five options. The focus is on using the law correctly, not reciting it — knowing the leading authorities (s.122 IA 1986, s.123 IA 1986) helps.