Business - Personal Insolvency (15) Flashcards
What is personal insolvency?
Personal Insolvency: Personal insolvency occurs when an individual cannot pay their debts. They may be subject to a number of personal insolvency procedures.
(1) Insolvent Person: Individuals are insolvent if they cannot pay a current debt, or there is no reasonable prospect of paying an impending future debt (s267 IA).
(2) Insolvency Procedure: Individuals are subject to insolvency procedures both to pay off debts and provide them some respite from creditors. The most common is bankruptcy.
What test is applied for personal insolvency?
Insolvency Test: A person is insolvent if they cannot pay a current debt or have no reasonable prospect of paying a future debt. This can be determined in two ways (s268 IA).
(1) Statutory Demand: A creditor can serve a ‘statutory demand’ for a current or future debt of at least £5,000. The individual is insolvent if they cannot pay, or show no reasonable prospect of paying, within 3 weeks.
(2) Court Judgment: A creditor has obtained a court judgment of at least £5,000 against the individual, and has attempted to enforce it unsuccessfully.
What is bankruptcy?
Bankruptcy: Bankruptcy entails a Trustee-in-Bankruptcy taking control of most of the individual’s assets, and uses them to pay as many of their debts as possible. The individual becomes a ‘Bankrupt’ for the duration, usually 1 year.
How are bankruptcy proceedings commenced?
Commencing Bankruptcy: Bankruptcy can be imposed in two ways.
(1) Compulsory Bankruptcy: Creditors can petition the court to declare bankruptcy by proving the individual is insolvent and owes them money through one of the two insolvency tests. This is for a fixed sum (not unspecified).
>If a creditor is not owed £5,000, they can petition with other creditors with total debts of at least £5,000.
>Creditors pay a deposit to meet trustee and court fees.
Service: The petition is presented in the bankrupt’s local county court. An agent will personally serve this on the bankrupt. If the bankrupt is avoiding personal service, it can be served by other means.
(2) Voluntary Bankruptcy: Individuals can voluntarily apply for bankruptcy online. An Insolvency Service adjudicator will decide whether to make the order within 48 hours.
>Bankrupt must evidence insolvency within 28 days, up to 42 by extension if further information required.
What restrictions are there on the bankrupt?
Restrictions on Bankrupt: During bankruptcy, the bankrupt will be subject to restrictions.
(1) Business Restrictions: Bankrupts are restricted in their working capacity.
Trading Name: Bankrupts cannot operate under new trading names without disclosure.
Partners: Bankrupts cannot act as partners (subject to bespoke agreement).
Directors: Bankrupts are disqualified from directorship.
Solicitors: Bankrupts cannot act as solicitors without leave of the SRA (same in other professions).
(2) Borrowing Restrictions: Bankrupts cannot obtain more than £500 in credit in either a business or personal capacity without disclosing their bankruptcy. It is a criminal offence.
(3) Debt Enforcement: During bankruptcy, debt claims cannot be continued or commenced against the individual.
What is a trustee in bankruptcy?
Trustee in Bankruptcy: A Trustee in Bankruptcy is appointed to manage the bankrupt’s assets. This is typically an ‘Official Receiver’, an officer of the court, but may be a private practitioner if funds allow.
(1) Statement of Affairs: The Trustee will ask the bankrupt to assess their financial position and disclose all recent transactions. This will form the basis of an investigation.
(2) Asset Management: The Trustee is required to seize and protect the value of vesting property, and dispose of perishable or depreciating assets. They can also challenge improper transactions. Their aim is to maximise debt repayments.
Seizing Assets
Seizing Assets: The Trustee is required to seize and realise the assets of the bankrupt. This applies to the majority of assets, other than necessary day-to-day items.
(1) Day-to-Day Items: Items of necessity (such as bedding) and ‘tools of the trade’ (such as work equipment) are retained by the bankrupt.
>The Trustee can replace high value items with cheap alternatives.
>The Trustee can seize items surplus to requirement (i.e. if the bankrupt has 2 ovens, seize 1).
(2) Residence: The bankrupt’s interest in their home passes to the Trustee. If a third-party has an interest in the home or the right to occupy it, then the Trustee cannot sell it without an order of the court (s335A).
Order for Sale: The court will consider the needs of creditors, spouses, and child occupants in making an order for sale. Occupiers’ interests are weighted more highly, but this flips after 1 year of bankruptcy.
Return to Bankrupt: Provided the house was not sold, subject to an order for sale, or subject to a contrary agreement, the residence will return to the bankrupt after 3 years (usually not the case).
(3) Salary: Bankrupts can volunteer, or be ordered, to direct a percentage of their salary to the Trustee. They are permitted to retain the sum required to meet reasonable personal and familial needs only.
Income Payment Agreement: Voluntary arrangement.
Income Payment Order: Court ordered arrangement.
Length: Arrangement will typically last for 3 years (longer than the bankruptcy itself).
How are transactions challenged?
Challenging Transactions: Trustees can challenge improper transactions to increase available funds. This will differ between connected and unconnected parties. Connected parties are close relatives and close business associates.
(1) Onerous Property Transaction: Trustee can disclaim/end a transaction or property with no realisable income or capital, such as an onerous lease. Affected parties recover their losses as an unsecured debt (s315).
(2) Transaction at an Undervalue: Trustee can void a transaction at an undervalue or gift made within 5 years of bankruptcy order (s339).
More Than 2 Years: If the transaction was made more than 2 years ago, the individual must have been insolvent at the time, or as a result (unless a connected party) (s435).
(3) Transaction at a Preference: Trustee can void a transaction which intended to place a party in a better position than they should have been upon bankruptcy (s340).
Connection: Within 2 years of bankruptcy, provided the individual was insolvent, or became insolvent as a result (rebuttably presumed).
Non-Connection: Within 6 months of bankruptcy, provided the individual was insolvent, or became insolvent as a result (not presumed).
(4) Transaction Defrauding Creditor: Trustee can void a transaction made fraudulent, if the transaction cannot be reclaimed as an undervalue (s423).
(5) Extortionate Credit Transaction: Trustee can void a transaction involving grossly exorbitant payments or grossly contravening principles of fair dealing made within 3 years of bankruptcy (s343). Difficult to evidence.
What is the order of debt payment?
Order of Debt Payment: Debts must be repaid according to the statutory order.
(1) Secured Creditor: Secured creditors realise their secured assets. Surplus is returned to the Trustee, and deficit sought as an unsecured debt.
(2) Expenses: The expenses of the bankruptcy process are then paid.
(3) Preferential Creditor: Preferential creditors are paid third.
Primary: Employees can claim the last 4 months of wages and accrued holiday up to £800.
Secondary: HMRC can then claim outstanding PAYE, NI, and VAT.
(4) Unsecured Creditor: Ordinary unsecured creditors are paid fourth (ranked and abating equally).
(5) Postponed Creditor: Postponed creditors, such as a spouse, are paid last (if funds remain).
How does bankrupcy end?
End of Bankruptcy: Bankruptcy automatically ends after 1 year, subject to extension.
(1) Effect: Bankrupt is released from bankruptcy, and the majority of their remaining debts are written off.
Ongoing Obligations: Bankrupt may still be subject to ongoing arrangements, such as their residence and certain ongoing ‘restrictions’.
Student Loans: Student loans are not discharged.
(2) Extension: Bankruptcy may be extended (known as suspended discharge) if the bankrupt is found to have been uncooperative or dishonest. However, it is more likely they will be discharged and then subject to ‘restrictions’.
What are post bankruptcy restrictions?
Post-Bankruptcy Restrictions: Bankrupts may be subject to voluntary or compulsory restrictions on discharge. These last from 2-15 years, and restrict individuals from acting as directors, insolvency practitioners, and Members of Parliament.
(1) Bankruptcy Restriction Order: Court ordered restrictions designed to protect the public from ‘culpable bankrupts’ (seen as dishonest, negligent or reckless).
(2) Bankruptcy Restriction Undertaking: Voluntary arrangement with the same effect as above.
What are other arrangements that can be used if an individual becomes insolvent?
Other Arrangements: Individuals may be subject to other insolvency procedures instead of or in addition to bankruptcy.
Informal Creditor Arrangement
Individual Voluntary Arrangement
Debt Relief Order
Debt Respite Scheme
What is an informal creditor arrangement?
Informal Creditor Arrangement: Individual enters informal arrangement with creditors. This does not prevent others from filing bankruptcy petitions.
What is an individual voluntary arrangement?
Individual Voluntary Arrangement: Individual (or trustee-in-bankruptcy) enters binding arrangement with unsecured creditors (similar to CVA). This is less public, and usually less expensive.
(1) Arrangement: Individual consults an insolvency practitioner, who formulates an arrangement based on a statement of financial affairs. The practitioner determines whether the individual has realistic proposals, and creates a report highlighting whether they support putting the arrangement to vote.
(2) Vote: If put to them, the unsecured creditors will vote on the potential arrangement. A successful vote requires: a) 75% of creditors in value; and b) 50% of non-associate creditors in value. The practitioner decides on ‘associates’.
(3) Effect: All ordinary unsecured creditors are bound (preferential and secured creditors can be bound by agreement). The proposals are then implemented. This may include a 14 day moratorium by application.
What is a debt relief order?
Debt Relief Order: Individuals can apply for a ‘Debt Relief Order’ online, subject to exclusion.
(1) Exclusion: Individuals cannot seek a debt relief order if:
Unsecured Debts: Their unsecured debts exceed £30,000.
Gross Assets: Their gross assets exceed £2,000.
Car: Their car exceeds £2,000 (unless adapted for a disability).
Disposable Income: Disposable income exceeds £75 a month (after household expenditure).
Previous Order: Individual has used a DRO in the last 6 years.
Alternative Procedure: Individual is already subject to an alternative procedure.
Owned Home: They own their own home.
(2) Effect: Individual is protected from debt claims being commenced or continued for 12 months, subject to extension. Debts will also be wiped off after the end of order (same as bankruptcy).
(3) Restrictions: Individuals may be required to enter the same restrictions as under bankruptcy, known as ‘Debt Relief Restriction Order’ or ‘Debt Relief Restriction Undertaking’.
What is a debt respite scheme?
Debt Respite Scheme: Individuals may apply to a Debt Respite Scheme through the program Breathing Space.
(1) Application: Individual must apply to a Debt Advice Provider approved by the FCA. Respite is granted if the provider is satisfied that the debtor’s ‘qualifying debts’ cannot be paid when they fall due (most debts qualify).
(2) Respite Scheme: There are two respite schemes.
Standard: All individuals can apply for the standard scheme. This provides a 60 day moratorium against debt claims, and freezes interest and charges on existing debts.
Mental Health: Individuals receiving mental health crisis treatment benefit from the same effects for the length of treatment plus 30 days, subject to no maximum.
(3) Exclusion: Undischarged bankrupts, and those subject to Individual Voluntary Arrangements or Debt Relief Orders cannot apply. The scheme cannot be used more than once every 12 months.
