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SQE 1 (mine) > Business 7: Personal insolvency > Flashcards

Business 7: Personal insolvency Flashcards

1
Q

When is an individual insolvent?

A
  1. A debt is payable now but the debtor does not currently have enough money to pay
  2. A debt is payable in the future and there is no reasonable prospect that the individual will be able to pay.
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2
Q

Ways a creditor can prove personal insolvency?

A
  1. Serve statutory demand for liquidated sum of £5,000 or more, and wait 3w to see if they pay or apply to court to set it aside
  2. Serve a statutory demand on debtor in respect of a future liability to pay a debtof £5,000 or more, and wait 3w to see whether the debtor either:
    a. shows a reasonable prospect of being able to pay the sum when it falls due; or
    b. applies to court to set aside the statutory demand.
  3. Obtain court judgment for a debt of £5,000 or more, and attempt execution of the judgment without success.
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3
Q

What are the options for an insolvent person?

A
  1. Bankruptcy
  2. Individual voluntary arrangement
  3. Negotiation with creditors
  4. Debt relief order (DRO)
  5. Debt Respite Scheme (‘Breathing Space’)
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4
Q

What is bankruptcy?

A

Process where a debtor’s assets pass to are controlled by a trustee in bankruptcy to repays many debts as possible to creditors.

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5
Q

2 ways of commencing bankruptcy proceedings?

A
  1. Creditor presents Petition in court
    2.Debtor’s online Application:
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6
Q

What creditors can present petition in court for bankruptcy?

A

○ Owed £5,000+ liquidated (fixed) sum
○ OR creditors owed less can join together if collectively owed £5k

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7
Q

What must a creditor show when petitioning for bankruptcy?

A

Debtor is unable to pay debts/has little prospect of being able to pay debt (presumed if use method above)

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8
Q

Where should a creditor present a bankruptcy petition?

A

debtor’s local county court hearing centre (if have jurisdiction)

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9
Q

What must a creditor petitioning for bankruptcy pay?

A

Deposit for costs and personal service of petition (agent hands to petitioner and gets witness statement confirming OR substituted service with court permission if the debtor avoids service

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10
Q

How does a debtor apply for bankruptcy?

A

Apply online with a fee and deposit for Official Receiver’s (OR) costs.

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11
Q

What happens once a debtor applies online for bankruptcy (+time limits)?

A

An adjudicator decides whether to make bankruptcy order:
○ Within 28 days
○ Extendable to 42 days for more information
○ ( Most orders are processed within 48 hours)

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12
Q

Who is an official reciever for bankruptcy?

A

*Employed by insolvency service and is an officer of the court
*Creditors may appoint private trustee if bankrupt has sufficient funds

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13
Q

What is the role of the trustee in bankruptcy?

A

*bankrupt’s estate vests in them automatically from the moment the bankruptcy order is made
*Must realize and sell assets for creditor repayment.
*Will ask for statement of affairs detailing financial position/recent transactions
*Investigates bankrupts affairs and set aside/challenge prior financial transactions
*Safeguards property and dispose of property that’s perishable/depreciates in value

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14
Q

What of a bankrupts property vests in the trustee in bankruptcy?

A

Most of it BUT can keep assets needed for day to day living eg:
*Items needed for work (tools of their trade)
*Everyday household items (clothing/furniture)
*BUT if high value, trustee can sell and replace with cheap alternative

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15
Q

Can a bankrupt keep their salary?

A

Yes but if more than sufficient to meet reasonable needs of them/family, trustee may ask to enter Income Payments Agreement (IPA) or Order (IPO)
=Pay some of salary to trustee to meet liabilities (lasts max 3y)

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16
Q

What happens to the home on bankruptcy?

A

*Trustee gains interest in the home.
*3y after bankruptcy order, home reverts back to bankrupt unless trustee has: sold it, Applied for court order for sale/possession, Entered agreement with bankrupt (e.g., payment in exchange for keeping the home).

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17
Q

What happens if someone else has legal/equitable interest/right of occupation in a bankrupts home?

A

*Trustee needs court order for eviction
*Court will consider all relevant circumstances, inc interests of creditors/spouse/children
*After 1y, creditors’ interests outweigh anyone living in house unless circumstances are exceptional.

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18
Q

What can a trustee in bankruptcy do to preserve and increase assets for creditors

A

(a) disclaim onerous property
(b) set aside transactions at an undervalue
(c) apply to set aside preferences
(d) apply to set aside transactions defrauding creditors
(e) avoid extortionate credit transactions

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19
Q

Who is a trustee in bankruptcy primary duty to?

A

Creditors=must have a view to increase assets available to them

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20
Q

Examples of ‘onerous property’ that can be disclaimed by trustee in bankruptcy

A

Unprofitable contracts
Land burdened by onerous cov
Lease with no capital value

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21
Q

What is the effect of a trustee in bankruptcy disclaiming onerous property?

A

○ all bankrupts rights/liabilities for prop end and trustee discharged from personal liability for prop
○ If someone suffers a loss bc of disclaimer, may become unsecured creditor in bankruptcy

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22
Q

What must be shown for a trustee in bankruptcy to set aside a transaction at an undervalue?

A

○ Only have to show bankrupt was insolvent at time of/as a result of transaction if it was made more than 2y before petition
○ Transaction with an associate-no matter when made, theres a rebuttable presumption bankrupt was insolvent at time of transaction

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23
Q

For setting aside transactions at an undervalue what period of time can trustees search?

A

5y

24
Q

Order for distribution of assets on bankruptcy

A
  1. Secured creditors (surplus to trustee, join unsecured for shortfall)
  2. Cost of bankruptcy
  3. Preferential debts (Employees 4mo salary max £800 +HMRC)
  4. Unsecured creditors.
  5. Postponed creditors, who are the bankrupt’s spouse or civil partner.

In each category, creditors rank and abate equally,

25
Q

When is a bankruptcy order discharged?

A

Automatically discharged after 1y (UNLESS suspended if bankrupt uncooperative/dishonest)

26
Q

Effect of discharge of bankruptcy order?

A

*Released from most of their prev debts EXCEPT student loans)
*But may still be subject to bankruptcy restriction order (BRO) or bankruptcy restriction undertaking (BRU)
If trustee not realised all assets, bankrupt must still assist with this

27
Q

When a bankruptcy order ends, is property vested in the trustee returned?

A

No EXCEPT matrimonial home in some cases

28
Q

What are business restrictions an bankrupts during bankruptcy?

A

Cannot:
*Be a director
*Manage/promote/form co without court permission
*trade under a different name from the name in bankruptcy order without disclosing to anyone they trade with that they are an undischarged bankrupt
* continue in partnership, unless PA varies the default position in the Partnership Act 1890, which is that the bankrupt will automatically cease to be a partner when they are made bankrupt.

29
Q

What are personal restrictions an bankrupts during bankruptcy?

A

◊ Crim offence to obtain more than £500 credit without disclosing bankruptcy to lender
◊ Cannot obtain credit card/have normal current acc (will probs have one without overdraft)
◊ Cannot practice as a solicitor (similar for other professions)

30
Q

What are restrictions on bankrupts ader bankruptcy?

A

If have a bankruptcy restriction order or undertaking

31
Q

What is the purpsoe of Bankruptcy restriction orders and undertakings?

A

protect public from bankrupts considered ‘culpable’ and whove caused their own bankruptcy by being dishonest, negligent or reckless.

32
Q

Who makes Bankruptcy restriction orders and undertakings?

A

court

33
Q

How long do BRO/BRU last?

A

2-15y

34
Q

What is the effect of a BRO/BRU?

A

*cant at as director, insolvency practitioner, MP
*cant obtain credit over £500 without disclosing BRO

35
Q

What is a Individual voluntary arrangement?

A

*simmilar to CVA
□ is a binding agreement between unsecured creditors, setting out how much each creditor will receive from the bankrupt in settlement of their debts

36
Q

Who may bring a Individual voluntary arrangement

A

Trustee
Debtor to avoid bankruptcy

37
Q

What is the procedure during an Individual voluntary arrangement?

A
  1. Debtor appoints nominee to act with them (insolvency practitioner)
  2. Debtor preps statement of affairs (+Nominee considers)
  3. Apply to court for moratorium (Usually in force for 14d)
  4. Nominee preps report stating whether debtors made realistic proposals +if theyll support D
  5. Creditors decision making process (proposals approved if 75% creditors in value where at least 50% arent associated agree)
  6. if approved, nominee implements proposals
38
Q

Who will a creditors decision within an IVA bind?

A

Every ordinary unsecured creditor entitled to attend and vote, regardless of if they attended

39
Q

What happens if a debtor doesn’t comply with an IVA or creditors accepted proposals are based on false/misleasing info?

A

supervisor/creditors party to the IVA, can petition for bankruptcy

40
Q

Can supervisors in an IVA apply to the court to set aside these transactions?

A

No, only trustees can?

41
Q

Advantages of IVA for debtor?

A

◊ Avoid stigma of bankruptcy/public examination in court
◊ Avoid disqualifications

42
Q

Advantages/disadvantageof IVA for creditor?

A

◊ Low cost
◊ Greater returns
◊ BUT consider if bankrupt can be trusted to honour IVA

43
Q

What is the Straightforward Consumer IVA Protocol

A
  • Followed in relation to credit card debts
    *approved by British Bankers Association but is voluntary
    *ims to balance need for consumer to be free of debt with the creditors need to recoup as much as possible.
    *contains standard terms, including fees for insolvency practitioners and levels of return for creditors
44
Q

What is the nature of negotiation with creditors as an option for an insolvent person?

A

Informal
Wouldn’t stop another creditor issuing bankruptcy petition

45
Q

Where do you apply for a debt relief order (DRO)?

A

online

46
Q

When would you apply for a Debt relief order (DRO)?

A

□ Only if assets and liabilities low in value

47
Q

When is a DRO not available?

A

if debtor:
(a) has total unsecured liabilities over £20,000;
(b) has total gross assets exceeding £1,000;
(c) has a car worth £1,000 or more (unless its adapted for debtors disability);
(d) has disposable income over £50 per month, after normal household expenditure;
(e) has been subject to a DRO in the preceding six years
(f) is subject to another, formal insolvency procedure

48
Q

Effect of a DRO

A

*Debtor protected from enforcement action from most creditors same way as bankruptcy
*Mostly will be debt free at end
*Must cooperate with official reciever and provide info they request

49
Q

During a DRO is the debtor expected to pay creditors if financial situation improves?

A

Yes

50
Q

How long does a DRO last?

A

12mo (unless extended bc of non-cooperation by debtor)

51
Q

What restrictions does a DRO place on the individual?

A

Same as bankrupt
*may last up to 15y if dishonest/culpable
*This extra period obtained by OR applying for debt relief restrictions order against debtor

52
Q

What are the 2 tyes of debt respite scheme and who can use each?

A
  1. Standard breathing space (for anyone)
  2. Mental health crisis breathing space (if receiving mental health crisis treatment)
53
Q

What is the effect of Standard breathing space?

A

Gives moratorium for up to 60d
(includes pausing most enforcement action and contact from creditors and freezing most interest and charges on their debts)

54
Q

How long does Mental health crisis breathing space last?

A

as long as treatment lasts +30d

55
Q

How do you obtain Debt Respite Scheme (‘Breathing Space’) and what are the conditions to obtain it?

A

Apply to debt advice provider authorised by FCA
Advisor must be satisfied that the debor:
◊ cant pay some/all of debts as it falls due
◊ Not an undischarged bankrupt
◊ Not in an IVA
◊ Not subject to debt relief order
◊ Not had another breathing space in last 12mo
◊ debt is a qualifying debt (nearly all debts are)

56
Q

What do debt advice providers to do see who has had breathing space?

A

debt advice providers will use an electronic service provided by the Insolvency Service to contact creditors and maintain a database of debtors who are in a breathing space

SQE 1 (mine) (30 decks)

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