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SQE1 - Business Bella > Business WS7 - Personal insolvency > Flashcards

Business WS7 - 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 reasonably prospect that the individual will be able to pay

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2
Q

What are the 3 ways that personal insolvency can be proved?

A

The three ways a creditor

  1. A statutory demand has been served for a liquidated and unsecured sum of at least £5,000 or more and 21 days to see whether the debt pays or applies to court to aside the statutory demand
  2. By serving a statutory demand on the debtor in respect of a future liability to pay a debt of £5000 or more, and waiting 21 days 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. By obtaing a court judgment for a debt for £5000 or more and attempting execution of the judgement without success.
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3
Q

What is a liquidatred and unsecured sum?

A

An exact sum rather than one that needs to be calculated or assessed, that is not secured.

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4
Q

What are the options for the insolvent person?

A

1) The debtor doesn’t have to wait until a creditor petitions for their bankruptcy so they can always try talking to their creditors to come to an arrangement for paying debts - e.g. in installments
2) Apply for their own brankruptcy - show they are taking control of the situation themselves
3) Enter into an Involuntary Voluntary Agreement
4) Apply for a debt relief order

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5
Q

What is bankruptcy?

A
  • A judicial process whereby most of the bankrupt’s assets pass to a trustee in bankruptcy and the bankrupt becomes subject to restrictions - e.g. cannot spend during the bankruptcy and afterwards.
  • Majority of bankrupt people usually are discharged free of restrictions after one year.
  • Even though they have not paid of all their debts in full
  • Student loans are not part of this process, must be paid in full even after the bankrupt has been discharged

Strict order set out by legislation

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6
Q

What is a trustee in bankruptcy?

A
  • A qualified insolvency practitioner takes control of most of the bankrupt person assets and sells them to pay off debts
  • They under a duty to maximise the funds that will be available to the creditors and to distribute the bankrupt’s property.
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7
Q

What period after a bankruptcy is the bankrupt person deemed discharged from the debts?

A

Automatically one year.

Exceptions:
1. a bankruptcy restriction order (BRO)
2. bankruptcy restriction undertaking (BRU)
3. Bankrupt is uncooperative or dishonest

  • Property was vested in the trustee is not returned to the bankrupt, apart from the matrimonal home in some cases;
  • Trustee may not have realised all of the bankrupt’s assets by this point
  • former bankrupt must still assist the trustee with this even once the bankruptcy order has been discharged
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8
Q

Exception to the discharge rule of 1 year

What is the effect of a bankruptcy restriction order and undertakings?

A
  • Additional restrictions for particularly culpable bankrupts for any period between 2 and 15 years.
  • Culpable = have caused their own bankruptcy by being dishonest, negligent or reckless
  • Aim is to protect the public from the financially reckless.
  • Cannot act as a company director, insolvency practioner, MPR for the legnth of the undertaking
  • Cannot obtain credit over a certain amount = £5000 without disclosing BRO

BRO = issued by the court
BRU = by agreement

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9
Q

What are the 3 ways a debtor can be placed into bankruptcy?

A

1. Debtor’s petition - bankrupt person declares themselves bankrupt
* unable to pay its debts
* statement of affairs - evidencing this

2. Creditor’s petition
* unable to pay its debts - evidenced (i) by statutory demand of an unsecured creditor (£5,000 or more) that has not been satisfied within 3 weeks of service (ii) judgement debtor
* statement of affairs - evidencing this

  1. Supervisor or creditor can apply if a debtor has breached insolvency voluntary agreement
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10
Q

What is the bankruptcy procedure?

A

1) A petition brought by a creditor
2) A debtor’s application

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11
Q

What is a creditor’s petition?

A

A creditor is entitled to present a bankruptcy petition at court if they are owed
* £5000 or more
* Liquidated, fixed sum (can’t be unspecified damages which court needs to assess)

A creditor must show
* Debtor is unable to pay their debt or has little prospect of being able to pay debt (e.g. haven’t paid £5000 or more and its been over 3 weeks, and they do not have enough money in their bank account)

Process:
* The court fee, deposit to cover the costs of the trustee in bankruptcy must be paid
* Petition must be filed at the debtor’s local county court with bankruptcy jursidiction and served on the debtor.
* Personal service of the petition.

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12
Q

If owed less than £5000 can they petition to the court?

A

Yes - joint petition
* May join either creditors and petition together, provided the total amount owned to all the petition is above £5000

E.g.
Eric owes Tix £700 and Vikki £4500 (debts are unsecured) Can they petition for Eric’s bankruptcy?

They can present a joint petition for the combined sum as it is £5k or more, but they will need to prove inability to pay.

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13
Q

What is the personal service of a creditors petition?

Think substituted service

A
  • Instead of posting the petition, the creditor must engage the services of an agent who will hand the petition of the debtor and providing a witness statement confirming that they have done so.
  • If the debtor is avoiding the agent, the creditor will seek to obtain a court order for substituted service which means that another method of service, e.g. just posting it through the debtor’s letterbox will be sufficient service
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14
Q

What is the debtor’s application?

A

1) Person that is bankrupt makes their own appliction for their own bankruptcy
2) They apply online
3) An adjudicator - who is an employee of the insolvency service, will decide whether to make a bankruptcy order.
4) Ground for the application is that the debtor is unable to pay their debts
5) Debtor will need to pay deposit in respect of official receiver administration fees.

Self help measure to avoid pressure from creditors where a creditor’s petition is inevitable.

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15
Q

When is a bankruptcy order usually made by the adjudicator following a debtor’s online application?

A
  • Can make a bankrupcy order
  • Refuse to make one as the debtor has not proven that they are unable to pay debts

Within 28 days of the application

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16
Q

Adjudicator bankrupcty order

Can the 28 days be extended?

A

Yes if they require more infromation from the debtor - extended to 42 days.

In practice, the order is made usually within 48 hours.

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17
Q

What happens once a bankruptcy order has been made?

A

1) Official reciver (officer of the court) takes control of most of the bankrupt’s assets and acts as a trustee in bankruptcy
2) The bankrupt’s must produce a statement of affairs setting out their financial position, to assist the trustee
3) OR may then make further investigations into the debtor’s financial affairs and take steps to protect the debtor’s property and will dispose of or sell any property which is perishable or decreasing in value (e.g. if a sole trader operates a catering business and is storing food)

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18
Q

What duties and powers does the trustee in bankruptcy have in terms of the debtors assets?

A

Duties
* Duty to creditors

Powers (wide)
* Can realise and sell assets to use the proceeds to pay the creditors
* May investigate and investigate certain transactions to maximise the available funds to creditors
* Investigate bankrupt’s affairs

They can choose to:
* disclaim onerous property
* apply to set aside transactions at an undervalue
* apply to set aside preferences
* apply to set aside transactions defrauding creditors
* avoid extortionate credit transactions

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19
Q

Can a creditor appoint a private trustee in bankruptcy?

A

Yes, if the bankrupt has enough assets to fund the private trustee’s fees.
* Whether the trustee in bankruptcy is the official receiver or a private trustee in bankruptcy, the bankrupt’s assets vest in them automatically from the time the order is made.

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20
Q

What happens once the trustee in bankrtupcy has sold all the assets and paid creditors?

A

They will apply to be released.

21
Q

What happens to the bankrupt’s property?

A
  • Title to the bankrupt’s property vests (transferred) to the trustee

Exception
* day to day living assets - e.g. clothing, furniture
* e.g. items for work, tools for trade
NOTE: items of high value, e.g. if you have a boujee kettle can be sold and replaced with a cheaper alternative

22
Q

Is the bankrupt entitled to receive their salary during bankruptcy?

A

Yes, but if their salary is more than what is sufficient to meet the reasonable needs of the bankrupt and their family..

Trustee can ask the bankrupt to enter into an income payments agreement (IPA)
* Requires the bankrupt to pay some of their salary to the trustees to meet their liabilities
* If they cannot agree on the sum to be paid - trustee can apply to court for an income payments order (IPO) and court will determine the amount payable
* IPA and IPO both enforceable - usualy last for a max of 3 years from the date of arrangement or order is made - therefore usually longer than the debtor’s discharge from bankruptcy in most cases

23
Q

What happens to the bankrupt’s home during bankruptcy?

A

If they are a home owner, interest in that home passes to the trustee

If someone else has a
* legal or equitable interest
* a right of occupation
* Bankrupt cannot be evicted straight away and trustee needs a court order to sell the house.

If they do not have the above
* court order will not be required to sell the property

24
Q

What will the court consider when considering the sale of the bankrupt’s home?

A
  • Will weigh up all of the relevant circumstances, including interests of the creditors
  • Conducts and needs of the current or former spouse/civil partner
  • Needs of any children

After 1 year of the bankruptcy order, under s335A
* The creditor’s interest will outweigh those of anyone else living in the house, unless the circumstances are exceptional and the trustee is therefore likely to be able to otabin an order for sale

25
Q

What happens to the bankrupt’s home 3 years after the bankruptcy order?

A

The ownership of the home transfers back to the bankrupt unless the trustee have:
* Sold the property
* Applied for an order for sale or possession or a charging order over the house
* Entered into an agreement with the bankrupt regarding the home - e.g. that they may keep their interest in the house in exchange for payment

26
Q

Trustee duties - s315 IA

What is meant by disclaiming onerous property to reduce liability?

A

Onerous property =
any property that is essentially a liability or drain to the resources, rather than an asset

Examples
1) A lease with no premium or capital value (or realisable sale value) whereby liability to pay rent wil build over time to increase the liability to pay the creditors
2) Unprofitable contracts - e.g. making a loss
3) Polluted Land - would cost more to return it to its usable condition than its worth

Disclaiming=
* Liabilities will come to an end and the trustee is discharged from personal responsibility for the property

  • If anyone suffers a loss as a result of the disclaimer (e.g. the money they would have earned on an onerous contract) they may prove as an unsecured creditor in the bankruptcy and make a formal claim to be a creditor of the bankrupt.
  • Unsecured creditors can also push the trustee into making a decision to disclaim e.g. so that the LL can re-let the property in a good market for example. They can do this within 28 days after which it will not longer be possible for the trustee to do so
27
Q

Trustee duties - transactions at an undervalue s339 IA

What is a transaction at an undervalue?

Note - this is different to the one in corporate insolvency.

A

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

Trustee may investigate
* Go back up to 5 years from the date of the presentation for the petition (relevant date)
* Does not have to show that banrkupt was insolvent at the time of the transaction or as a result of the transaction unless the transaction was in the first 2 years from the relevant date and there are no additional pre-conditions.

Does have to show insolvency as a result of the transaction
* If the transaction took place more than 2 years prior to the relevant date

28
Q

What happens if the transaction at undervalue was with an associate?

A

Associate =
* Relatives - bro, sis, uncle, aunt, nephew, niece ancestor or lineal descendant e.g. parents, grandparents, children
* Spouse or civil partner and their relatives - e.g. xhaxhi leka, prenga
* Spouse or civil partner of relatives or of a spouse/civil partner’s relatives e.g. xhaxhi noci, teta klodi
* Business asssociate - e.g. lali

  • Even if the transaction was more than 2 years prior to the presentation of the bankruptcy petition, there is a rebuttable presumption that the bankrupt was insolvent at the time of the transaction
29
Q

Lesley, a sole trader, owned a second home worth £400k. She was concerned that if her business became insolvent, she would lose the property, so she transferred it to her daughter, Destiny, for E200k. Four years later, a bankruptcy petition was presented against Lesley and a bankruptcy order was made. Is this a potential undervalue transaction?

A

Lesley was insolvent at the time, or because of the transaction, the Sale may be set aside, and the property may be reclaimed. Insolvency will be presumed, as Destiny is Lesley’s associate, and the burden is on Lesley and Destiny to rebut this. The impact of reclaiming the property will be to increase the pool of funds that may be available to pay creditors

30
Q

What are preferences?

A
  • A preference is an arrangement that places a creditor, surety or guarantor in a better position than they otherwise would have been in the event of an individual’s bankruptcy (e.g. repaying them as a priority or giving them security over other creditors)
  • Debtor intended to do this
  • Rebuttable presumption of intention to prefer if the preference is in favour of an associate.

Trustee can challenge any potential preference
* Within the 6 months prior to the presentation of the bankruptcy petition
* Within 2 years prior presentation of the petition if the preference is in favour of an associate

For all preferences
* Must be shown that bakrupt was insolvent at the time it became insolvent
* Or became insolvent due to entering the transaction

31
Q

What is the key difference between a transaction at undevalue and preference?

A

Transaction at undervalue - creditor
Preference - creditor or guarantor

32
Q

s423

What are transactions defrauding creditors?

A

Undervalue transaction where there is an intention to put assets beyond the reach of someone or prejudice their interests in relation to a potential cliam.

  • No time limit in these cirucmstances
  • Often used where the relevant time for undervalue transaction has expired - harder to prove than a simple undervalue, due to intention required
33
Q

s343 IA

What is extortionate credit transaction?

A
  • Bankrupt has obtained any credit in 3 years prior to bankruptcy and the terms of the credit are ‘extortionate’
  • Trustee can apply to set aside or vary the terms of credit
  • E.g. some people in financial difficulties take out loans on very unfavourable terms
  • It is difficult to show that the interest rate is ‘grossly exorbitant’

Extortionate means ‘grossly exorbitant’ payment or have ‘grossly contravened…fair dealing’

34
Q

What is the order for the distribution of assets?

A
  • Secured creditors can sell their charged assets, take what they are owed, pay any surplus to the trustee
  • If the sale of the charged asset doesn’t realise enough money to pay the secured creditors the entire amount owed to them, the secured creditor(s) will join the unsecured creditor in relation to the outstanding part of the debt
  • Once the tustee has finished realising the bankrupt’s assets and challenging any of the transactions (e.g. undervalue, etc) the assets will be distributed in the following order
  1. Costs of bankruptcy (expenses incurred as a result of bankruptcy, professional charges and disbursements)
  2. Preferential debts
  3. Ordinary unsecured creditors
  4. Postponed creditors, who are the bankrupt’s spouse or civil partner

Within each category, the creditors will rank and abate equally, meaning that they will share
the money available. Each creditor will receive the same percentage of the debt owed
to them.

35
Q

What are preferential debts?

A

These rank above the debts of ordinary unsecured creditors.

2 categories:
1) Primary preferential debts
* wages for work carried out in the four months proceeding the bankruptcy order (up to a maximum of £800)
* accrued holiday pay
2) Secondary preferential debts
* Sums owed to HMRC for PAYE and VAT

36
Q

What is the business restrictons placed on banrkupts?

Bankrupts are subject to the following restrictions until their discharged from bankruptcy and may face criminal liability in the event of breach.

A

Business restrictions
Can keep items they need for work (tools of their trade) and vehicle for work
Criminal offence
* obtain credit of more than £500 without disclosing their bankruptcy
* Can make it extremely difficult for the bankrupt to carry on the business

Bankrupt cannot
* act as a director of a company
* be involved in management, promotion or formation of a company unless the court grants permission
* trade under a different name from which the bankruptcy order was made, without disclosing to anyone they trade with that they are undischarged bankrupt
* continue in partnership, unless partnership agreement varies the default position in the PA 1980, that bankrupt will automatically cease to be a partner when they are made bankrupt.

37
Q

What are the personal restrictions placed on bankrupts?

A
  • Undischarged bankrupts cannot obtain a credit of more than £500 without informing the lender that they are undischarged bankrupt
  • Cannot obtain a credit card
  • Cannot have a normal current account - bank will allow them to have one without an overdraft
  • Bankrupts cannot practise as a solicitor without the leave of the SRA, and similar restrictions for other professions
38
Q

What are the alternatives to bankruptcy?

A

Before the creditor possibly a winding up petition

1) Individual voluntary arrangement
2) Debt relief order

39
Q

What is an IVA?

A
  • A binding agreement between debtor and unsecured creditors setting out how much each creditor will receive from the bankrupt in settlement of debts
  • Debtor’s trustee may seek an IVA during bankruptcy or debtor may seek it personally to avoid the bankruptcy procedure.
  • They will need the professional help of an insolvency practioner who will effectively suggest proposals and approve the process
  • Once IVA is approved they are renamed as the supervisor of the arrangement
  • Avoids stigma of bankruptcy
40
Q

What is the IVA procedure?

A

1) Once debtor has appointed a nominee to act with them
2) Debtor must prepare a statement of affairs of the nominee to consider and should then apply to the court for an interim order to obtain a moratorium
3) Interim order usually in force for 14 days - no other proceedings or enforcement action can be taken or continued against the debtor
4) Nominee prepares a report for the cour stating whether the debtor has put forward any realistic proposals and therefore whether they are prepared to support the calling of creditors of the decision-making process

Need to agree for the proposals for it to be approved
* 75% or more of the creditors in value
* of which at least 50% in value are not associates of the debtor

5) Chair of the meeting (Insolvency practioner) decides if a creditor is an associate of the debtor. Every ordinary unsecured creditor is entitlted to attend and vote is bound by the decision, even if they did not actually attend the meeting.
6) IVA is not binding on preferential or secured creditors unless they specifically agree to it
7) If the creditors approve the IVA, the nominee who as stated earlier, is from that point called a supervisor implements the proposals

41
Q

What happens if the debtor doesn’t follow the IVA (as implemented by the insolvency practioner)?

A

E.g. debtor doesn’t comply with the arrangement or creditors accepted the debtors proposals based on false, misleading information
* Supervisor or any creditors who are party to false or misleading information, or who are a party to the IVA can petition for the debtor’s bankruptcy
* Example = if debtor has made a transaction at undervalue, or preference just before entering into the IVA which has not been disclosed
* Supervisors cannot apply to set aside these transactions, only the court can which is why they will need to be bankrupt to get the court order.

42
Q

What are advantages for debtor in a IVA?

A
  • Avoid stigma
  • Avoid private public examination in court
  • Avoid disabilities and disqualifications to which a bankrupt is subject to
43
Q

What are the advantages for the creditor in an IVA?

A
  • Low cost compared to bankruptcy
  • Straight forward process and bankrupt will be offering greater returns than would be received in bankruptcy
  • Need to consider whether it can be trusted whether the bankrupt can be trusted to honour the IVA - if not the creditor may be able to petition the debtor’s bankruptcy at a later date
44
Q

What is the Protocol?

A
  • Many consumers with money problems will have numerous debts, including significant credit card debts
  • Credit card providers will usually follow the protocol in relation to these debts, although the Protocol approved by the British Bankers Association, is voluntary
  • Aims to balance the need for the consumer to be free of debt with creditor’s need to recoup as much as possible
  • Contains standard terms including fees for insolvency practitioners and levels of return for creditors
45
Q

What are debt relief orders?

A

Debtors can apply for a DRO online, if the assets and liabilities are low in value.

46
Q

When are debt relief orders not available?

A
  • Has total unsecured liabilities exceeding £50,000
  • has a total gross asset exceeding £2000
  • has a car worth £4000 or more, unless it has been adapted because the debtor has a disbability
  • has disposable income in excess of £75 per month, after deducting normal household expenditure
  • Is subject to another formal insolvency procedure
47
Q

What happens if a debt relief order is accepted?

A
  • The official receiver makes the order
  • Debtor will be protected from enforcement action by most of their creditors in the same way as bankruptcy and will in the vast majority of cases be free of debt at the end of the DRO period which is 12 months (unless it is extended because of non-cooperation by the debtor)
  • Debtor must cooperate with the official receiver and provide information they request and is expected to pay their creditors if their financial situation improves
  • During the time the debtor is subject to the DRO - same restrictions apply to them as to a bankrupt
  • These restrictions similarly can last up to 15 years if the debtor is dishonest or culpable and this extra period is obtained by the official receiver applying for a debt relief restrictions order against the debtor
48
Q

What is a debt respite scheme?

Breathing space

A
  • Breathing space moratorium and mental health crisis moratorium
  • Can give someone in problem debt the right to legal protection from creditor action
  • Pauses enforcement action
  • Freezes any late payment interest

2 types of breathing space
1) standard breathing space (available to any client with problem debt and gives legal protection from creditor action for up to 60 days)
2) Mental health crisis breathing space (only availible for a client who is receiving mental health crisis treatment, lasts as long as the mental health crisis treatment and an extra 30 days no matter how long the treatment lasts)

49
Q

How do you apply for the the debt respite scheme (breathing space)?

A

1) Debtor must apply to a debt advice provider authorised by the FCA
2) To grant the breathing space / moratorium - the debt adviser must be satisfied that the debtor cannot pay some or all of their debt as it falls due
3) Debtor cannot be a undischarged bankrupt and must not be in an IVA or subject to a debt relief order
4) Debtor must also not have already had another breathing space in previous 12 months
5) Debt must be qualifying debt (nearly all debts will be)
6) 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

SQE1 - Business Bella (15 decks)

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