7.11 Personal Insolvency Flashcards
What is meant by personal insolvency?
Individual insolvency: When the individual cannot pay their debts as and when they fall due.
What is the purpose of the bankruptcy process?
The bankruptcy process is aimed at helping debtors to be free from financial obligations that they are not able (and are not going to be able) to pay, while at the same time providing some return to creditors on the debt they are owed
- Granting relief to a debtor who cannot pay their creditors;
- Fairly distributing the debtor’s assets to their (unsecured) creditors so that they are paid at least a portion of what they are owed
What is the statutory test for personal insolvency?
1) A statutory demand has been served for a liquidated and unsecured sum of at least £5k or more, payable immediately, and after 3 weeks it remains unsatisfied (unpaid) / there is no application to set it aside.
2) A statutory demand has been served for a liquidated and unsecured FUTURE liability of at least £5k, and 3 weeks have passed without reasonable prospect of payment being shown or an application to set it aside.
3) Attempt has been made to enforce a judgment debt of at least £5k, but it remains unsatisfied (e.g baliffs or shefiffs have been sent in to recover cash or items to satisfy the debt but have been unsuccessful)
Who can petition for bankruptcy?
- The individual debtor.
- One or more creditors of an individual domiciled in England and Wales with an aggregate debt of £5,000 or over.
- The IVA supervisor or anyone connected to an IVA, if the IVA fails. (Insolvency Act s 264(1).)
How is bankruptcy initiated?
A judicial process whereby most of the bankrupt’s assets pass to a trustee in bankruptcy (TIB) and the bankrupt becomes subject to restrictions.
Once bankruptcy order is made:
- OR/TIB appointed and creditors’ meeting held.
- Bankrupt’s estate automatically vests in TIB: Insolvency Act s 306.
- TIB collects and realises the assets and distributes any proceeds to the creditors on the order or priority.
- Bankrupt discharged (usually automatically after a year).
What is the debtor’s application?
If a debtor is unable to pay their debts, an online application for bankruptcy may be made and will be decided upon by an adjudicator (an official acting for the Insolvency Service) - often used as a self-help measure to avoid pressure from creditors
What is meant by setting aside a transaction?
An administrator, liquidator or trustee in bankruptcy challenging a transaction entered into by an insolvent entity prior to any formal insolvency process, to reclaim assets for creditors.
What is the purpose behind clawing back assets?
Trustee minimises liability and unwinds/undoes past transactions to increase the amount available in the bankrupt’s estate to pay as many creditors as possible. The trustee will investigate past transactions such as:
- Disclaiming onerous property
- Transactions at an undervalue
- Preferences
- Transactions defrauding creditors
- Extortionate credit transactions
What is the order of distribution of the bankrupt’s assets?
1) Secured Creditors - These are paid first, and they will often sell the charged asset(s) themselves. If the sum realised exceeds the secured debt, they must pay any surplus to the trustee. If there is a deficit, they may claim the balance as an unsecured creditor
2) Costs of Bankruptcy - Administrative costs / legal fees
3) Preferential Debts - Wages for work 4 months prior to bankruptcy (max £800), holiday pay, debts to HMRC
4) Unsecured Creditors
5) Interest on preferential and ordinary debts
6) Postponed Creditors - Spouse / civil partner of the bankrupt
What is an individual voluntary arrangement (IVA)?
Debtor appoints a nominee (e.g insolvency practitioner) to become supervisor of the IVA.
Debtor then produces a statement of affairs and applies to the court to obtain a moratorium (stay on further proceedings/enforcement - typically 14 days).
What is classified as the bankrupt’s property?
Title to the bankrupt’s property vests in (is transferred to) the trustee, with the EXCEPTION of tools of the trade (e.g tools and vehicles) and everyday items such as clothing and furniture. If these items are of high value, the trustee may insist that they are sold and substituted with cheaper items in order to increase funds available to creditors.
What happens to the bankrupt’s home?
The bankrupt’s interest in his home will pass to the trustee. If the bankrupt does not have sole legal and beneficial interest in the home, a court order will be required. The court will consider circumstances set out in s335A IA in deciding whether to order sale. These include the interests of creditors, spouses/civil partners and children. Rule: after 1 year, the creditors’ interests are paramount unless there are exceptional circumstances.
Reversion of ownership for bankrupt: 3 years after the bankruptcy order, ownership reverts to the bankrupt unless alternative arrangements have been made (e.g property has been sold).
What are the restrictions placed on bankrupts until discharge?
Restrictions on bankrupts until discharge:
→ Must disclose bankruptcy if obtaining credit of more than £500
→ Cannot act as a director
→ Must disclose their bankruptcy if trading under a different name
→ Cannot be a partner
→ Cannot be involved in company management, promotion or formation without leave of the court
→ They require leave of the SRA to practise as a solicitor
Discharge: Most bankrupts are automatically discharged after one year. However, bankruptcy restriction orders (BROs) or bankruptcy restriction undertakings (BRUs) may continue to apply. Liability to repay student loans will continue.
What are bankruptcy restriction orders (BROs) and bankruptcy restriction undertakings (BRUs)?
BROs and BRUs: Additional restrictions for particularly ‘culpable’ bankrupts for any period between 2 and 15 years. The aim is to protect the public from the financially reckless. BRUs are entered into by agreement, BROs are issued by the court.
What are the alternatives to bankruptcy?
Individual voluntary arrangement (IVA) and debt relief order (DRO)
What is a debt relief order?
Made via an online application. A DRO involves the write-off of debts and is only available where assets and liabilities are low. A debtor is usually discharged and free of debt after one year.
What is a debt respite scheme?
Started in May 2021 - provides ‘breathing space’ for up to 60 days (generally) or 30 days plus any treatment period (for a mental health crisis). It provides time during which no further action can be taken against the debtor
What is the process for an Individual Voluntary Arrangement (IVA)?
The steps should be taken in the following order:
- The proposal is put to creditors either by the debtor or the TIB.
- The nominee is appointed (an insolvency practitioner).
- The interim order is granted which prevents recovery action from other creditors.
- Creditors vote on the proposal and need 75% or more in value of debt, including at least 50% of creditors unconnected to the debtor, in order to get approval.
- Approval is granted (this binds all unsecured creditors).
- A supervisor is appointed (usually the person who was acting as the nominee).
- The supervisor implements the proposals.
What happens if an IVA fails?
The supervisor and/or any of the creditors may petition the court for a bankruptcy order on the grounds of the failed IVA.
What happens if an IVA succeeds?
If an IVA succeeds: the debtor will repay more of their debt than under bankruptcy but will avoid the potential stigma of bankruptcy and also some of the consequences, such as the termination of a sole trader business or partnership (Partnership Act 1890 s 33) or the automatic disqualification as a director/prohibition from acting in company management (CDD Act s 11).
