12. personal insolvency (IVAs, bankruptcy, individuals challenging voidable transactions) Flashcards
just as directors need to recognise when a company is in financial difficulty, what do individuals need to do?
individuals must recognise when a company is in financial difficulty
what are the 3 options for individuals following financial difficulty?
(1) do nothing;
(2) do a deal with some or all creditors; or
(3) seek the making of a
bankruptcy order by the court.
what is an IVA?
a debtor makes a proposal for dealing with their liabilities to creditors.
as with CVAs:
1. a debtor’s proposal for an IVA will usually involve the debtor paying only a part of the
contractual debt owed and/or having a longer period to pay than the contractual period (flexible)
2. usually requires the debtor to pay funds to the IVA supervisor out of their income, assets or both
3. the IVA Supervisor will then pay a dividend to creditors
4. if approved by the requisite % of creditors, the IVA binds the debtor and all creditors to the terms of the IVA
5. licensed insolvency practitioner must be appointed as Supervisor of the IVA
6. An IVA can last any length of time, but 3-5 years is common
setting up an IVA
- The debtor drafts a proposal for compromise of their liabilities and a statement of their affairs
(eg full details of assets and liabilities), usually with the assistance of an insolvency practitioner (Nominee) - Nominee submits a report to the court stating their opinion as to whether the debtor’s proposal has a reasonable prospect of being approved and implemented and whether creditors should be asked to vote on it.
- A debtor can apply to the court for an interim order. If the court grants the order, it brings about a moratorium (freezing existing or proposed bankruptcy and other proceedings and
legal process, including execution, landlord’s right of peaceable re-entry and/or distress for
rent) against the debtor. A court order is needed for a creditor to exercise any right or remedy
otherwise restricted by the moratorium. The interim order (and the moratorium) lasts 14 days,
which the court can extend. - for the proposal to become binding, it must be approved by creditors holding at least
75% in value of the total debt owed to the creditors voting on the proposal, but if that approval is given, it will not be effective if more than half the of the total value of creditors who are not associates (unconnected) of the debtor vote against it
who does an IVA bind if approved?
- the debtor
- all unsecured creditors
- secured creditor, if they consented
- preferential creditor, if they consented
who is responsible for the implementation of the IVA?
Supervisor (same person as Nominee)
what is a Supervisor’s role in an IVA?
The Supervisor can:
- apply to court for directions
- must report to the court periodically
- If the debtor fails to comply with the terms of the IVA: Supervisor usually has the right under the
terms of the IVA to petition for the debtor’s bankruptcy.
what happens at the end of the IVA if the debtor has complied with the terms?
the creditors will have to write off any balance of their pre-IVA debts against the debtor
what are some advantages of an IVA?
- It is an alternative to bankruptcy and avoids the stigma and restrictions associated with bankruptcy;
- It can bind all unsecured creditors; and
- A moratorium is available if an interim order is made.
what are some disadvantages of an IVA?
- It may last longer than a bankruptcy;
- It cannot bind a secured creditor or preferential creditor without that creditor’s consent; and
- It can be an expensive and time-consuming process and there is some uncertainty as to
whether creditors will approve it.
what is the equivalent of liquidation of a company for individuals?
bankruptcy
who can present a bankruptcy petition?
usually creditor
+
but sometimes debtor
what are the grounds for a debtor’s petition?
- debtor is unable to pay its debts
- accompanied by a statement of affairs setting out assets and liabilities
what are the grounds for a creditor’s petition?
-
at the time of presentation of the petition, the debt is
one the debtor appears unable to pay or has no reasonable prospect of paying - debt owed to the creditor is for an unsecured liquidated sum exceeding
£5,000 - debtor must be domiciled or present in England and Wales.
how is a debtor’s inability to pay their debts determined?
- A statutory demand that has neither been satisfied within 3 weeks from service of that
demand, nor set aside by the court;
OR
- An unsatisfied execution of a judgment or of another legal process.
If a court is satisfied that the grounds and requirements for a petition have been met, what should/can the court do?
the court has a discretion to make a bankruptcy order
on the making of a bankruptcy order, what happens?
- the Official Receiver will become the first trustee in bankruptcy (Trustee) unless the court orders otherwise.
- A majority of creditors can seek the appointment of another person as Trustee, but that person must be a licensed insolvency practitioner.
- If there are no or few assets in the bankruptcy estate, it will be difficult to persuade anyone other than the Official Receiver to act as Trustee as there will be insufficient funds to pay the Trustee’s fees and expenses.
On the making of a bankruptcy order, what is the bankrupt individual prohibited from doing?
prohibited activities include:
- acting as a director
- being involved in the management of a company
- obtaining credit of over £500 without disclosing the bankruptcy
- giving gifts
- practicing in certain professions
- owning property
except for their reasonable domestic needs
when does the bankrupt’s estate (comprising all assets and rights of the bankrupt) vest in the Trustee?
- immediately and automatically
- by operation of law
- upon the making of the bankruptcy order
which assets are included in the assets which vest in the Trustee?
ALL assets, INCLUDING those that fall into the estate AFTER the bankruptcy order is made
what powers does the Trustee have in relation to the bankrupt’s assets?
- sell assets
- deal with assets
- carry on the bankrupt’s business
- grant security over the assets
- ## disclaim ‘onerous property or contracts’ (eg leases)
what is the process once the Trustee has collected in the assets?
- The Trustee will collect in the assets of the estate including those assets which may be available to
swell the estate as a result of challenging certain prior undervalue or preferences transactions. - The Trustee will sell the assets of the estate and must distribute the money in the estate in accordance with a statutory order of priority for bankruptcies.
what must creditors do if they want to claim a dividend from the bankrupt’s estate?
must prove their claims to the Trustee with evidence
what must Trustees do when proposing to pay a dividend to creditors?
- the Trustee must give notice to the creditors who
have proved their debts, stating the amount of the sale proceeds received from a sale of the
assets in the estate - any deductions that have been made from these proceeds; and
- the amount of any dividend that they can expect to receive.
statutory order of priority for bankruptcy
- Secured creditors
- Expenses of the bankruptcy order
- Preferential creditors (Tier 1 and Tier 2)
- Ordinary unsecured creditors
- Statutory interest
- Spouse
- Surplus to bankrupt
what consequences will a bankrupt face if they fail to comply with their obligations to a trustee?
(a) give to a trustee such information as to his affairs;
(b) attend on the trustee at such times, and
(c) do all such other things,
as the trustee may for the purposes of carrying out his functions reasonably require.
it is a criminal offence and could result in:
- up to 2 years’ imprisonment and unlimited fines
- their automatic discharge potentially being suspended (by application of the Official Receiver or Trustee)
when is a bankrupt generally discharged from bankruptcy?
after a max of 1 year
what does Bankruptcy discharge mean?
the bankrupt is released from most of the bankruptcy debts and
the bankruptcy related restrictions eg acting as a director, obtaining credit, etc mentioned earlier
in this chapter.
in what circumstances might the bankrupt be discharged in less than a year?
if the Official Receiver or Trustee files a notice stating that:
- the bankruptcy does not require investigation; or
- that they have
concluded any such investigation within the one-year period
when can a Bankruptcy Restriction Order (BRO) be applied for?
before or after the bankruptcy order is made
who can apply for a Bankruptcy Restriction Order (BRO)?
- Secretary of State
- Official Receiver acting on the Secretary of State’s direction
in what circumstances will the Secretary of State / Official Receiver apply to court for a Bankruptcy Restriction Order (BRO)?
includes:
- failure to keep
records
- entering into preferences
- entering into TUV
- fraud
- incurring a debt
without reasonable expectation of being able to pay it
when should a BRO generally be made?
Generally, must be
made within a year of the start of the bankruptcy.
for how long does a BRO operate?
for a period of between 2 and 15 years
what restrictions are placed on a bankrupt under a BRO, unless they disclose they are subject to a BRO?
- may not act as a director
- may not obtain credit of more than £500
Breach of a BRO is a criminal offence punishable by what?
fine and/or imprisonment.
what is an alternative to a BRO (initiated by the bankrupt itself)?
a bankrupt can offer the Secretary of State a
bankruptcy restriction undertaking (BRU) instead of being subject to court process
If a bankruptcy order is in place, a Trustee has the power to challenge which voidable transactions?
- TUV
- preferences
- TDC
why would a Trustee seek to challenge voidable transactions?
to make more assets available to creditors
w hat does a Trustee need to balance when seeking to challenge voidable transactions?
costs and risks of litigation
versus
the chances of success in making recoveries for the bankruptcy estate.
what is insolvency for the purposes of bankruptcy?
cash flow insolvency
OR
balance sheet insolvency
what is an associate for the purposes of bankruptcy?
summary of TUV in bankruptcy
summary of preferences in bankruptcy
summary of TDC in bankruptcy
