8. Personal Insolvency

Question 1

What 2 types of business can individual bankruptcy occur in?

Answer 1

(1) Sole trader
(2) Partnership

Question 2

What does bankruptcy mean?

Answer 2

Individual CANNOT pay debts as they fall due

Question 3

What are the 3 ways an individual can be shown to be bankrupt (i.e. cannot pay debts as they fall due)?

Answer 3

KEY - £5k (+ 3 weeks)

(1) Statutory demand for a liquidated and unsecured sum of at least £5k + remains unsatisfied after 3 weeks / no application to ‘set aside’

(2) Statutory demand for a liquidated and unsecured FUTRUE sum of at least £5k + no reasonable prospect of paying after 3 weeks / no application to ‘set aside’

(3) Attempts to enforce a ‘judgment debt’ of at least £5k and NOT satisfied

Question 4

On bankruptcy, what happens to the debtor’s assets?

Answer 4

Pass to a ‘trustee in bankruptcy’ (official receiver)

Question 5

Who can bring a bankruptcy action?

Answer 5

BOTH creditor & debtor

Question 6

A bankruptcy action can be brought by both a Creditor and a Debtor. How does each one bring this action?

Answer 6

(1) Creditor - petition to court
(2) Debtor - online application

Question 7

For a creditor to bring a bankruptcy to court, what 3 conditions of the ‘sum’ owed must be met?

Answer 7

(a) Unsecured
(b) Liquidated
(c) Sum of min £5k

Question 8

Following either a successful application by a Creditor or Debtor what will the court issue as the next stage of the bankruptcy proceedings?

Answer 8

Bankruptcy Order

Question 9

(a) What is the effect of a ‘Bankruptcy Order’ on the Debtor’s property / assets?
(b) What are the 2 exceptions to the rule in (a)?

Answer 9

(a) Property vests in the trustee (Official Receiver)

(b)
(1) Reasonable domestic need (e.g. clothes)
(2) Tools of trade

Question 10

In order to sell the ‘home’ of the debtor in Bankruptcy:
(1) Will a court order be needed?
(2) What main 3 factors will the court consider when deciding whether to grant a sale order?

Answer 10

(1) YES IF another person has a legal /equitable interest?
(2)
(a) Interests of creditors
(b) Conduct and needs of current / former spouse
(c) Needs of children

Question 11

After how many years is it likely that a sale order for the ‘home’ of debtor will be issued by the court and why?

Answer 11

1 year
Why? - after 1 year, creditors’ interests outweigh others unless ‘exceptional’ circumstances

Question 12

What is the overreaching aim of the Official Receiver in bankruptcy?

Answer 12

Maximise the amount available in the Debtor’s estate to pay as many creditor’s as possible

Question 13

An Official Receiver should investigate the Debtor’s ‘past transactions’. What are

Answer 13

(1) Disclaiming onerous property
(2) Transactions at an undervalue
(3) Preference transactions
(4) Transactions defrauding creditors

Question 14

An Official Receiver will often disclaim ‘onerous property’ belonging to the Debtor. What is the most common example of this?

Answer 14

Lease

Question 15

If an Official Receiver disclaims ‘onerous property’ belonging to the debtor (e.g. a lease), what can a person who suffers as a result of this (e.g. landlord) claim as?

Answer 15

Unsecured creditor

Question 16

What is a ‘transaction at an undervalue’ in bankruptcy?

Answer 16

A gift, or sale of a property where the consideration received is significantly less than the value of the property.

Question 17

In a ‘‘transaction at an undervalue’, what are the 4 groups who are ‘Associates’?

Answer 17

(1) Relative
(2) Spouse + Relative
(3) Business partner / Employees
(4) Company where the Debtor has ONE THIRD of voting rights

Question 18

In ‘transaction at an undervalue’ in BANKRUPCY, from how long can transactions be set aside for?

Answer 18

5 years before the DATE OF PRESENTATION OF PETITION

Question 19

For ‘transaction at an undervalue’ with a ‘Non-Associate’ insolvency at the time / due to the transaction
(a) In what years before the date of presentation of the petition is it presumed?
(b) in what years must it be proven

Answer 19

0 - 2 y - insolvency presumed
3 - 5 y - insolvency needs to be proven

Question 20

In a ‘transaction at an undervalue’ with an ‘Associate’ is insolvency at time / due to transaction, need to be proven?

Answer 20

No - it is presumed

Question 21

What are the 2 elements that make up a ‘Preference Transaction’ in bankruptcy?

Answer 21

(1) Arrangement puts the CREDITOR in a better position than they would otherwise have been on bankruptcy

(2) Debtor intended this

Question 22

How long does the Official Receiver have to challenge a ‘Preference Transaction’ in bankruptcy for:
(a) Associate
(b) Non-Associate

Answer 22

(a) 2 years
(b) 6 months
from DATE OF PRESENTATION OF PETITION

Question 23

In setting aside a ‘Preference Transaction’ in bankruptcy, is insolvency at time / due to the transaction presumed or needs to be proven for:
(a) Associate
(b) Non-Associate

Answer 23

(a) Presumed
(b) Proven

Question 24

What are the 2 elements of a ‘Transactions defrauding creditors’ in bankruptcy?

Answer 24

(1) Transaction at an undervalue
(2) Intention to put assets beyond the reach of the creditors

Question 25

How long does an Official Receiver have to set aside ‘Transactions defrauding creditors’?

Answer 25

No time limit

Question 26

(a) What is the typical reason an application to set aside a ‘transaction defrauding creditors’ would be used instead of a ‘transaction at an undervalue’
(b) What transaction ‘transaction defrauding creditors’ or ransaction at an undervalue’ is harder to succeed in?

Answer 26

(a) Time limit (5 years from date of presentation of petition) has run out
(b) ‘transaction defrauding creditors’ - need to demonstrate intention to put assets beyond the reach of the creditors

Question 27

What is the order of distribution in ‘bankruptcy’?

Answer 27

(1) Secured creditors (sell their assets and remaining £ paid to OR)
(2) Costs of bankruptcy (ORs costs / expenses)
(3) Preferential creditors
(4) Unsecured creditors
(5) Postponed creditors (spouse of debtor)

Question 28

There are two tiers of ‘preferential creditors’
(1) What are the 2 types of Tier 1 debt?
(2) What is the type of Tier 2 debt?

Answer 28

Tier 1 -
(1) Wages for work carried out 4 months before bankruptcy order up to MAX £800
(2) Accrued holiday pay

Tier 2 - owed to HMRC

Question 29

Secured creditors sell their assets first in the order of distribution in ‘bankruptcy’? If the amount realised is:
(1) More than owed
(2) Less than owed
what will the secure creditors do?

Answer 29

(1) Claim rest as ‘unsecured creditor’
(2) Pay excess to the Official Receiver / Trustee

Question 30

What are the 2 main restrictions on a ‘bankrupt’ person?

Answer 30

(1) Disclose bankruptcy if obtaining credit > £500
(2) CANNOT be director / partner

Question 31

What is the general rule on when a debtor will be discharged from bankruptcy?

Answer 31

(1) Automatically discharged after 1 year
(2) UNLESS court order suspending this

Question 32

If a debtor is ‘reckless’ what 2 additional orders can a debtor be subject to following the discharge of bankruptcy?

Answer 32

(1) Bankruptcy Restriction Order (BRO)
(2) Bankruptcy Restriction Undertaking (BRU)

Question 33

(1) What is the range of time a Bankruptcy Restriction Order (BRO) or Bankruptcy Restriction Undertaking (BRU)
(2) How is each one entered into?

Answer 33

(1) 2 to 15 years
(2)
BRO - issued by court
BRU - by agreement

Question 34

What are the 2 alternatives to bankruptcy?

Answer 34

(1) Individual Voluntary Arrangement (IVA)
(2) Debt Relief Order (DRO)

Question 35

What is an Individual Voluntary Arrangement (IVA)?

Answer 35

Binding agreement between Debtor and Unsecured Creditors

Question 36

What type of creditors does an Individual Voluntary Arrangement (IVA) bind?

Answer 36

Unsecured creditors ONLY

Question 37

What is advantage of a Individual Voluntary Arrangement (IVA) compared to bankruptcy for (a) Creditor and (b) Debtor?

Answer 37

Advantage:
- Creditor - lower cost
- Debtor - avoids bankruptcy (e.g. continue serve as Director)

Question 38

For an Individual Voluntary Arrangement (IVA) to be approved, it needs the agreement of…(1) and (2)?

Answer 38

(1) at least 75% of creditors in value
(2) at least 50% of those creditors CANNOT be ‘associates’ of debtor

Question 39

What is the effect of a ‘Debt Relief Order’?

Answer 39

Writes-off debts

Question 40

What are the 2 main limits on the granting of a Debt Relief Order (DRO)?

Answer 40

(1) Unsecured liabilities CANNOT exceed £30k
(2) Gross assets cannot exceed £2k