Bankruptcy and Delegated Decision-Making

Question 1

All property owned by the debtor on the date of the bankruptcy order and any property the debtor subsequently acquires will pass to the trustee in bankruptcy except for:

Answer 1

1. The tools, books, vehicles, and other items of equipment necessary for the bankrupt’s personal use in their employment, business, or vocation.
2. The clothing, bedding, furniture, household equipment and provisions that are necessary to satisfy the basic domestic needs of the bankrupt and their family.
3. Property held by the bankrupt on trust for any other person.

Question 2

Any income or capital that the bankrupt acquires whilst they are bankrupt can be claimed by the TIB over and above what is needed for essential expenses. What is a key point to consider regarding this?

Answer 2

where there is a possible inheritance going to a bankrupt, as this will not go to the individual but to the TIB.

Question 3

Usually, when does bankruptcy discharge occur? What restrictions may apply?

Answer 3

After one year.

Details of what restrictions are in place would be within a bankruptcy restriction order (BRO) or bankruptcy restriction undertaking (BRU). The effects of these will only stop on the annulment or termination of the BRO or BRU. In the worst case, where the bankrupt has acted dishonestly a court may order a BRO of up to 15 years.

Question 4

Is a trustee in bankruptcy (TIB) able to access assets in trust?

Answer 4

Where a trust has been used to protect assets from creditors, then the TIB can petition the courts to have the trust set aside.

If a trust was set up 5 years before bankruptcy this is unlikely to viewed as a deprivation of assets by the courts.

If the bankrupt receives income from an IPP, then the income will go to the TIB.

If the bankrupt is a beneficiary of a discretionary trust then they do not own any of the assets in the trust, therefore the TIB cannot instruct the trustees to distribute any funds.

A Married woman’s property act trust, whether it was established to defraud creditors, cannot be accessed by a TIB

Question 5

Are pensions protected from bankruptcy?

Answer 5

Pensions are protected, unless the TIB can prove excessive contributions were paid to defraud creditors. In this case the contributions can be reclaimed.

if income is in payment then this can be used to repay creditors.

If pension is not in payment then the individual cannot be forced to take benefits.

Question 6

What is an individual voluntary arrangement or IVA.

Answer 6

The aim is to secure a low-cost settlement, but if the debtor does not meet obligations under the IVA, the creditors may still need to apply for bankruptcy.

Question 7

What are the advantages of an IVA

Answer 7

1. Debtor is closely involved in the process.
2. Restrictions of bankruptcy are avoided.
3. Debtor avoids the stigma and disqualification that follow bankruptcy.
4. The overall costs are usually less than bankruptcy.

Question 8

What is a Deeds of arrangement

Answer 8

Deeds of arrangement are also known as informal arrangements, family arrangements or debt management plans.

If an individual knows that they can’t pay all their debts, they could consider writing to their individual creditors to see if they can reach some informal compromise.

They are however not legally binding, so creditors can ignore it at any time and seek to collect the full debt.

Question 9

What is a debt relief order?

Answer 9

Debt relief orders (DROs) provide debt relief that is subject to some restrictions.

An order will usually last for 12 months, and during this time creditors can’t take any action to recover money. So, it gives the debtor a window where they can focus on sorting out their finances without fear of further processes taking place.

At the end of the period, and if their circumstances haven’t changed, then the insolvent individual will be freed from the debts included in the order.

Question 10

conditions for a debt relief order?

Answer 10

*Be unable to pay their debts
*Owe no more than £30,000
*Not own assets with a total value of more than £2,000
*Have disposable income of not more than £75 a month after deducting tax, NICs and normal household expenses.
*Be domiciled in England or Wales, now or in the last 3 years
*Not have been subject to another DRO within the last 6 years
*Not be involved in another formal insolvency procedure at the time they apply

Question 11

What is a general power of attorney?

Answer 11

General Power of Attorney is used in situations where a person chooses to give rights to another person to deal with property, or other things, for a certain period of time.

It is valid for as long as the donor is mentally capable of making their own decisions. Otherwise, it is revoked.

Question 12

What is an enduring power of attorney?

Answer 12

EPAs were bought in to be able to be used on mental incapacity, so solving one of the issues with a general power of attorney. They are for dealing with financial matters only.

No new EPAs can be established, nor can existing one’s be amended, but any that are already written can still be used and, provided they have been registered with the Court of Protection, they can be used on mental incapacity.

They can be used without registration provided the donor still has mental capacity but must be registered before the donor loses this.

Question 13

Can a donor revoke an EPA?

Answer 13

If a donor wants to revoke an EPA that has already been registered, then they can do so, but only with permission from the Court of Protection. They would need to show that they had mental capacity to make such a decision and deal with their own financial affairs.

Question 14

What is an LPA

Answer 14

LPAs replaced EPAs in 2007. They came about following the Mental Capacity Act 2005.

An LPA gives an attorney the powers to act on the donor’s behalf if they lose mental capacity or don’t wish to act for themselves.

Question 15

What are the two components that an LPA can be split in to?

Answer 15

Health and welfare.

Property and financial.

Question 16

Who is an LPA registered with?

Answer 16

Office of the Public Guardian (OPG)

Question 17

Attorney powers can be granted in one of two ways:

Answer 17

Jointly and severally means that attorneys can make decisions on their own or with other attorneys.

Jointly means all attorneys must agree on any decisions.

Question 18

Conditions for the donor to draw up an LPA?

Answer 18

be 18 or over.
be of sound mind.
have the capacity to contract.

An LPA must be signed and dated by the donor, the attorney(s) and a witness. This witness must be independent of the family, which is for the protection of the donor.

Question 19

What is a named person?

Answer 19

This individual is selected by the donor and is notified when the LPA is registered with the OPG. They have the right to object to this registration if they feel the donor is being taken advantage of.

Question 20

What is a A certificate provider?

Answer 20

There is a ‘part B certificate’ form within an LPA document. This confirms that the donor understands the LPA and has not been put under any pressure to have it drawn up. Again, it is protection for the donor.

Question 21

What is a Deputyship Order

Answer 21

As we said, an individual must have capacity to set up an LPA.

If this is not the case, and an individual has no power in place when they lose capacity, then an application for a Deputyship Order must be sent to the Court of Protection.

This Order gives quite restricted powers to a Deputy, but at least someone can now take over the affairs of the individual without capacity. Something is better than nothing!

Question 22

What is covered under a health and welfare LPA?

Answer 22

*Daily Routine
*Medical care
*Moving into a care home
*Agreeing to or rejecting life-sustaining treatment

Can only be used when the donor is unable to make their own decisions once mental capacity is lost.

Question 23

What is covered under a property and financial LPA?

Answer 23

*Managing bank accounts
*Paying bills
*Collecting benefits or a pension
*Selling the donor’s home

Can be used as soon as it is registered with the donor’s permission.

so; can apply whilst the donor has mental capacity, or can be written so the attorney can only make decisions after mental capacity is lost.

Question 24

When can powers of an LPA be exercised?

Answer 24

The powers cannot be exercised until the document has been registered with the Office of the Public Guardian (OPG).

Question 25

Some of the specific duties that an attorney holds are:

Answer 25

*making decisions in the donor’s best interests
*respecting the donor’s human and civil rights
*only making decisions that are authorised by the LPA
*consulting with the donor prior to acting, wherever possible, and with others who may have an *interest in the donor’s affairs
*keeping their money separate from that the donor
*keeping the donor’s affairs confidential
*ensuring that there is no conflict of interest
*keeping proper records

Question 26

What are the conditions surrounding LPAs and gifting?

Answer 26

An LPA does not authorise an attorney to dispose of the donor’s property by making gifts.

Any gifts for IHT planning purposes, or where a trust is created, must get advance approval from the Court of Protection.

Question 27

What are the gift exemptions for LPAs.

Answer 27

There are limited exceptions to this, where the gifts are given:

1. on ‘customary’ occasions, for example birthdays, marriages, and other celebrations (such as Christmas) to persons who are related or connected to the donor
2. to any charity to whom the donor made or might have been expected to make gifts

Question 28

When is an LPA revoked?

Answer 28

The donor:
*chooses to revoke it
*is declared bankrupt (property and financial LPA) or dies

The attorney:
*loses mental capacity
*is declared bankrupt or dies

Question 29

Explain, in detail, the process that Phil should follow in order to set up a lasting power of attorney (LPA) for his mother.

Answer 29

• Complete the prescribed LPA form.
• Form must be signed by the donor/Phil’s mother.
• Signed by the attorney/Phil.
• Signed by a certificate provider.
• It must be witnessed by an independent person.
• Submit to the OPG for registration.
• Pay the fee
• There is a 3-week window where objections can be made to the LPA.
• It is then registered and can be used when and if it is needed.

Question 30

State the implications of Phil being appointed as the sole attorney of his mother’s LPA.

Answer 30

• If Phil were to die or become disqualified;
• mentally incapacitated/bankrupt;
• the LPA will lapse.

Question 31

Describe briefly the benefit of more than one person being appointed as an attorney who can act jointly and severally

Answer 31

• The LPA can continue even if one dies;
• or becomes disqualified;
• unable to act.

Question 32

Juliet created a property and financial affairs Lasting Power of Attorney (LPA) five years ago and appointed Zara and her brother, Isaac, to act as attorneys jointly and severally. Isaac has recently
been declared bankrupt.

Explain briefly the impact of Isaac’s bankruptcy on Juliet’s property and financial affairs Lasting Power of Attorney.

Answer 32

• Isaac is unable to act as an attorney as he is bankrupt.
• The Lasting Power of Attorney (LPA) would remain in place
• as the attorneys were appointed to act together or independently of one another
• which means Zara could continue to act as sole attorney for her mother.

Question 33

Zara is a mortgage adviser although she has not worked for the last two years whilst she has been caring for her mother, Juliet, who suffers from dementia and has lost mental capacity.

Juliet created a property and financial affairs Lasting Power of Attorney (LPA) five years ago and appointed Zara and her brother, Isaac, to act as attorneys jointly and severally. Isaac has recently
been declared bankrupt.

Explain briefly the process that would need to be followed to make decisions on Juliet’s health and welfare.

Answer 33

• As there is no health and welfare LPA in place,
• an application to the Court of Protection is required
• to appoint a deputy.
• Isaac can apply even though he is bankrupt.

Question 34

Explain the benefits of Vera establishing a full Lasting Power of Attorney whilst she is mentally capable.

Answer 34

• Vera would be able to choose her attorney(s).
• Vera can specify the powers her attorney(s) would have if she loses capacity.
• The LPA could apply to financial affairs and/or personal welfare
• Setting up an LPA avoids her family needing to apply to the Court of Protection to appoint a Deputy.
• which is costly
• and time consuming.
• It also avoids Vera’s assets becoming inaccessible until a Deputy is appointed.

Question 35

Steve settled £150,000 each into discretionary trusts between 2018 and 2020, intended for the benefit of his children and grandchildren. The trustees of the discretionary trusts are Steve and his three children. Tony, the eldest child, was declared bankrupt in December 2021.

Explain the impact of Tony’s bankruptcy on the discretionary trusts set up by Steve.

Answer 35

• Tony is a trustee and potential beneficiary of the trust.
• As they are discretionary trusts, he has no right to income or capital.
• Even though he is a trustee, the trust assets do not belong to him.
• Therefore, the trust assets cannot be accessed by the Trustee in Bankruptcy (TIB).
• He can continue to act as a trustee.
• However, the other trustees may decide to remove him
• if they no longer consider him suitable to act as a trustee.

Question 36

Ariana and Christos are trustees of the discretionary trust created in 2017 by Cora. Christos has been offered the opportunity of full-time work abroad for an initial six months from 1 March 2022, with an option to extend this for a further six months. He is unsure how this would affect his role as a trustee, as well as his own personal circumstances.

Describe how Christos could use a Power of Attorney to delegate his powers as a trustee whilst he is working abroad.

Answer 36

• He could appoint an attorney under a General Power of Attorney
• in accordance with S25 Trustee Act 1925
• to delegate some or all of his trustee functions
• for a maximum of 1 year.
• Notice must be served within 7 days of its execution
• to the appointor/other trustees
• with details of the reason for the delegation.

Question 37

Identify the circumstances under which the Power of Attorney described in part (f)(i) above would cease to be effective.

Answer 37

• On the death;
• mental incapacity;
• or bankruptcy of Christos.
• After one year
• or sooner if specified in the Power of Attorney.
• Christos can cancel it himself.

Question 38

Explain the implications for Christos, in his role as trustee, if his employment abroad is extended beyond the initial six-month period.

Answer 38

• Christos cannot delegate his powers for longer than 12 months.
• He can continue to act as a trustee
• unless he remains outside the UK for longer than 12 months
• in which case the other trustees could remove and replace him as a trustee
• under S36 Trustee Act 1925.

Question 39

A few years ago, Isaac executed a property and financial affairs Lasting Power of Attorney (LPA), appointing Carole and his son Samuel as his attorneys to act jointly and severally. Jon and Kay have concerns regarding Isaac’s mental capacity and are worried about Samuel’s suitability as an attorney.

Samuel has financial difficulties and has recently mentioned gifting some of Isaac’s own funds to himself. He views this as an advancement on his future inheritance.

State Samuel’s duties as Isaac’s attorney.

Answer 39

Making decisions in Isaac’s best interest.
* Only making decisions that are authorised by the LPA.
* Consult Isaac prior to taking action, wherever possible, and with others who may have an interest in Isaac’s affairs.
* Keeping their own money separate from that of Isaac’s.
* Keeping Isaac’s affairs confidential.
* Ensuring that there is no conflict of interest.

Question 40

Explain briefly the limitations to Samuel’s ability to make gifts under Isaac’s LPA.

Answer 40

• Only make gifts on customary occasions (birthdays, weddings, family events).
• To a charity Isaac has previously made gifts to.
• Size of gift must be reasonable in relation to the size of Isaac’s estate and circumstances.
• LPA may restrict gifts.
• He cannot make gifts for IHT purposes.
• If Samuel wants to make a gift that falls outside the restrictions in the law or in the Enduring Power of Attorney (EPA) or Lasting Power of Attorney (LPA), he must apply to the Court of Protection (COP) for approval.

Question 41

Explain briefly the consequences for Samuel if he gifts Isaac’s money to himself.

Answer 41

• Samuel would be in breach of his duties as Attorney.
• If Samuel does not perform his duties properly, he can be made to compensate Isaac for any losses.
• Mistreating/neglecting someone who lacks capacity is a criminal offence.
• The penalty for this is a fine
• and/or a prison sentence of up to 5 years.

Question 42

Max, a widower, dies in December 2023. He leaves his entire estate to his children Fred, aged 25, and Lois, aged 30. Fred is an architect running a small and successful practice.

Lois has been in financial difficulties since her floristry business failed; she had been unable to service her credit card debt of over £60,000 and, as a result, she was declared bankrupt in October
2023.

Describe the steps Lois must take on learning of her inheritance, considering her bankruptcy.

Answer 42

• Max’s date of death was after Lois was made bankrupt.
• She is yet to be discharged.
• Lois is obliged to notify the Trustee in Bankruptcy/Official Receiver about her entitlement under the terms of the Will within 28 days of receipt of the inheritance.

Question 43

Explain how the trustee in bankruptcy would deal with Lois’ new inheritance.

Answer 43

• The Trustee in Bankruptcy/Official Receiver will claim the monies she has inherited.
• This will be used towards her outstanding debts.
• If debts paid off in full as result, bankruptcy can be cancelled/annulled.
• Any excess will be passed to Lois.

Question 44

Penny has recently been diagnosed with early-onset dementia. She has no Power of Attorney in place and her family have consulted a solicitor about how they can manage her affairs when she
loses mental capacity.

Robin and Theo are concerned about how Penny’s condition will affect her ability to act as trustee of their grandmother’s Will Trust and how the trust will be taxed on her eventual death.

Explain the drawbacks of Penny losing mental capacity without a valid Power of Attorney in place.

Answer 44

• There would be no one with the legal rights to make decisions about Penny’s financial affairs
• or her health and welfare.
• Penny’s assets would be inaccessible
• until a deputyship order is in place/until a deputy is appointed.
• An application to the COP would be required
• which is costly
• and time consuming.
• Penny will have no say who is appointed to manage her affairs or make decisions on her behalf.
• The powers of the Deputy may be more limited than an attorney appointed under an LPA/EPA.

Question 45

If Andrew lost mental capacity without an LPA in place:

Outline the process that would need to be followed to enable his family to manage his financial affairs

Answer 45

• Application would need to be made to the Court of Protection (COP);
• via the office of the public guardian.
• A single order/court order will be granted/COP will make a judgment.
• If required hold a hearing in court/further investigation.
• Deputy appointed.
• Reviewed by the court on a regular basis.
• Deputy would usually need to provide a surety/security bond/insurance policy.
• Application and supervision fees will be payable. There may also be fees if a hearing is require.

Question 46

Explain the drawbacks to Andrew and his family of the approach outlined in your answer in part (i) above.

Answer 46

• Applying to the Courts is time-consuming.
• Expensive. This could include application costs, supervision fee, hearing fees, surety bond.
• Andrew will have had no say in who will be responsible for his affairs and making decisions on his behalf.
• Andrew’s assets will be inaccessible/no financial decisions can be made until the deputyship order is agreed;
• this means any costs during this time will need to be met by his family.
• A court-appointed deputy is subject to strict ongoing supervision.
• Decisions outside order will need permission of the court/can’t make substantial gifts outside normal pattern/IHT planning is limited.
• Powers will be limited.

Question 47

Outline the factors that must be taken into account before Bethany can apply for a debt relief order (DRO).

Answer 47

• The fact she cannot pay her debts.
• She owes less than £30,000.
• Does she own a vehicle worth £2,000 or more.
• Does she have savings/valuables less than £2,000.
• Whether she does not have enough money left at the end of each month to make the debt repayments.
• That she has lived or worked in England or Wales (within the last 3 years).
• Whether she has been subject to another debt relief order (DRO) within the last 6 years (if so, she cannot apply for a DRO).

Question 48

Explain briefly the advantages to Bethany of her entering into an Individual Voluntary Arrangement as an alternative to bankruptcy.

Answer 48

• She will be closely involved with the process.
• She avoids the restrictions of bankruptcy.
• She avoids the stigma of bankruptcy.
• Overall costs are usually less than a formal bankruptcy.
• An individual voluntary arrangement may not affect her rental tenancy agreement.
• Bankruptcy could result in her being evicted if she had rental arrears at the time of being declared bankrupt.

Question 49

When Ian became ill, he completed an Enduring Power of Attorney (EPA) which remains in place. Maggie is the sole Attorney, and the EPA has never been registered. Maggie and Ian are concerned about what will happen if Ian loses mental capacity.

Explain briefly how Maggie would be able to make decisions, including any limitations that may apply, in the event Ian loses mental capacity

Answer 49

• The EPA would need to be registered at the point that Ian becomes or is suspected to be becoming mentally incapable.
• Maggie would be able to act on behalf of Ian for his financial affairs only.
• She would need to apply to the COP to make decisions on his personal welfare/she does not have any authority to make decisions under the Enduring Power of Attorney (EPA).

Question 50

Outline the benefits and drawbacks to Ian of retaining the current Enduring Power of Attorney (EPA).

Answer 50

Benefits
* Both Maggie and Ian can act on financial affairs now/avoid delays of establishing
Lasting Power of Attorney (LPA)/can be used now with permission while Ian retains capacity.
* Saves the cost of setting up a new LPA/LPAs.

Drawbacks
* The EPA does not cover decisions about Ian’s health and welfare.
* An EPA cannot be registered prior to Ian becoming mentally incapable.
* During the registration period, the powers of the Attorney are temporarily suspended.