12. personal insolvency (IVAs, bankruptcy, individuals challenging voidable transactions)

Question 1

just as directors need to recognise when a company is in financial difficulty, what do individuals need to do?

Answer 1

individuals must recognise when a company is in financial difficulty

Question 2

what are the 3 options for individuals following financial difficulty?

Answer 2

(1) do nothing;

(2) do a deal with some or all creditors; or

(3) seek the making of a
bankruptcy order by the court.

Question 3

what is an IVA?

Answer 3

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

Question 4

setting up an IVA

Answer 4

1. 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)
2. 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.
3. 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.
4. 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

Question 5

who does an IVA bind if approved?

Answer 5

• the debtor
• all unsecured creditors
• secured creditor, if they consented
• preferential creditor, if they consented

Question 6

who is responsible for the implementation of the IVA?

Answer 6

Supervisor (same person as Nominee)

Question 7

what is a Supervisor’s role in an IVA?

Answer 7

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.

Question 8

what happens at the end of the IVA if the debtor has complied with the terms?

Answer 8

the creditors will have to write off any balance of their pre-IVA debts against the debtor

Question 9

what are some advantages of an IVA?

Answer 9

• 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.

Question 10

what are some disadvantages of an IVA?

Answer 10

• 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.

Question 11

what is the equivalent of liquidation of a company for individuals?

Answer 11

bankruptcy

Question 12

who can present a bankruptcy petition?

Answer 12

usually creditor
+
but sometimes debtor

Question 13

what are the grounds for a debtor’s petition?

Answer 13

• debtor is unable to pay its debts
• accompanied by a statement of affairs setting out assets and liabilities

Question 14

what are the grounds for a creditor’s petition?

Answer 14

• 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.

Question 15

how is a debtor’s inability to pay their debts determined?

Answer 15

1. 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.

Question 16

If a court is satisfied that the grounds and requirements for a petition have been met, what should/can the court do?

Answer 16

the court has a discretion to make a bankruptcy order

Question 17

on the making of a bankruptcy order, what happens?

Answer 17

• 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.

Question 18

On the making of a bankruptcy order, what is the bankrupt individual prohibited from doing?

Answer 18

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

Question 19

when does the bankrupt’s estate (comprising all assets and rights of the bankrupt) vest in the Trustee?

Answer 19

• immediately and automatically
• by operation of law
• upon the making of the bankruptcy order

Question 20

which assets are included in the assets which vest in the Trustee?

Answer 20

ALL assets, INCLUDING those that fall into the estate AFTER the bankruptcy order is made

Question 21

what powers does the Trustee have in relation to the bankrupt’s assets?

Answer 21

• sell assets
• deal with assets
• carry on the bankrupt’s business
• grant security over the assets
• ## disclaim ‘onerous property or contracts’ (eg leases)

Question 22

what is the process once the Trustee has collected in the assets?

Answer 22

1. 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.
2. 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.

Question 23

what must creditors do if they want to claim a dividend from the bankrupt’s estate?

Answer 23

must prove their claims to the Trustee with evidence

Question 24

what must Trustees do when proposing to pay a dividend to creditors?

Answer 24

• 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.

Question 25

statutory order of priority for bankruptcy

Answer 25

1. Secured creditors
2. Expenses of the bankruptcy order
3. Preferential creditors (Tier 1 and Tier 2)
4. Ordinary unsecured creditors
5. Statutory interest
6. Spouse
7. Surplus to bankrupt

Question 26

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.

Answer 26

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)

Question 27

when is a bankrupt generally discharged from bankruptcy?

Answer 27

after a max of 1 year

Question 28

what does Bankruptcy discharge mean?

Answer 28

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.

Question 29

in what circumstances might the bankrupt be discharged in less than a year?

Answer 29

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

Question 30

when can a Bankruptcy Restriction Order (BRO) be applied for?

Answer 30

before or after the bankruptcy order is made

Question 31

who can apply for a Bankruptcy Restriction Order (BRO)?

Answer 31

• Secretary of State
• Official Receiver acting on the Secretary of State’s direction

Question 32

in what circumstances will the Secretary of State / Official Receiver apply to court for a Bankruptcy Restriction Order (BRO)?

Answer 32

includes:
- failure to keep
records
- entering into preferences
- entering into TUV
- fraud
- incurring a debt
without reasonable expectation of being able to pay it

Question 33

when should a BRO generally be made?

Answer 33

Generally, must be
made within a year of the start of the bankruptcy.

Question 34

for how long does a BRO operate?

Answer 34

for a period of between 2 and 15 years

Question 35

what restrictions are placed on a bankrupt under a BRO, unless they disclose they are subject to a BRO?

Answer 35

• may not act as a director
• may not obtain credit of more than £500

Question 36

Breach of a BRO is a criminal offence punishable by what?

Answer 36

fine and/or imprisonment.

Question 37

what is an alternative to a BRO (initiated by the bankrupt itself)?

Answer 37

a bankrupt can offer the Secretary of State a
bankruptcy restriction undertaking (BRU) instead of being subject to court process

Question 38

If a bankruptcy order is in place, a Trustee has the power to challenge which voidable transactions?

Answer 38

• TUV
• preferences
• TDC

Question 39

why would a Trustee seek to challenge voidable transactions?

Answer 39

to make more assets available to creditors

Question 40

w hat does a Trustee need to balance when seeking to challenge voidable transactions?

Answer 40

costs and risks of litigation

versus

the chances of success in making recoveries for the bankruptcy estate.

Question 41

what is insolvency for the purposes of bankruptcy?

Answer 41

cash flow insolvency

OR

balance sheet insolvency

Question 42

what is an associate for the purposes of bankruptcy?

Question 43

summary of TUV in bankruptcy

Answer 43

Question 44

summary of preferences in bankruptcy

Answer 44

Question 45

summary of TDC in bankruptcy

Answer 45