Chapter 6- Termination and Insolvency - Individual insolvency Flashcards
What is important to know for SQE for this chapter?
The options available
Procedures concerning termination of a business and insolvency
How the assessts will be distributed
What are the options for termination and insolvency?
Bankruptcy
Individual voluntary arrangements (IVAS)
Debt relief orders (DRO) for individuals and liquidation (compulsory or voluntary)
Company voluntary arrangements (CVAs)
Administration and receivership for companies
What do you need to understand for the SQE?
The provisions relating to the clawback of assets by an insolvency practicioner for the benefit of creditors and the order of priority for distribution for creditors
What is the alternative for bankruptcy?
IVAs and DROs
How many types of liquidation processes there are?
Two - compulsory and voluntary
What is the alternative for liquidation?
CVA’s, administration and receivership
What means individual insolvency?
An individual in insolvent when he has an inability to pay their debts.
When can be an individual insolvent?
a debt is payable immediately or at certain time on the future
and the debtor appears either unable to pay it, or to have no reasonable prospect to pay it
What are the 3 ways to show inability to pay?
First - A statutory demand has been served for a liquidated and unsecured sum of at least 5k or more, payable immediately, and after 3 weeks remains unsatisfied (unpaid), there is no application to set it aside.
What is the second way to show inability to pay?
A statutory demand has been served for a liquidated and unsecured future liability of at least 5K, and 3 weeks have passed without reasonable prospect of payment being shown or an application to set it aside.
What is the 3rd way to show inability to pay?
Attempt has been made to enforce a judgment of debt of at least 5K, but it remains unpaid (bailiffs or sheriffs have been sent it to recover cash or items to satisfy the dept, but have been unsuccessful.
What is a statutory demand?
A formal written demand for payment
What is a liquidated and unsecured sum?
An exact sum, rather than one that needs to be calculated or assessed, that is not secured.
What is a judgment debt?
A debt that is deemed due to following a judgment of the court
What is bankruptcy?
Bankruptcy is a judicial process whereby most of the bankrupt’s assets pass to a trustee in bankruptcy and the bankrupt becomes subject to restrictions.
When are the bankruptcy restriction discharged?
After 1 year
What is a trustee in bankruptcy?
A qualified insolvency practicioner
What does a trustee in bankruptcy do?
Takes control of most of the bankrupt’s property
What is the duty of a trustee in bankruptcy?
They are under a duty to maximise the funds that will be available to the creditors and to distribute the bankrupt’s property.
How does a bankruptcy’s process start?
With a creditor’s petition and a debtors application if the debtor’s requires it
What is a creditor’s petition?
A creditor owed a liquidated and unsecured sum of 5K or more may present a bankruptcy petition if a debtor is unable to pay their debts.
How can a creditor prove that the debtor can not pay?
He will need to prove by following the 3 methods to show inability to pay debts.
What does the creditor must do if he has a secured sum owed to them?
They must relinquish their security to pursue the bankruptcy process.
When are joint petitions allowed?
When a creditor owed less than 5K
IS there a court fee and deposit to cover the cost of the trustee in the bankruptcy?
Yes
Where does need the petition to be filled?
Must be filled at the debtor’s local county court with bankruptcy jurisdiction, and then served on the debtor
What is the process with the debtor’s application?
If the debtor is unable to pay their debts, an online application for bankruptcy may be made.
Who will decide the debtor’s application?
Will be decided by an adjudicator ( an official acting for the Insolvency Service)
Is there an application fee and deposit for the bankruptcy application?
Yes
What fees needs to be paid in the bankruptcy?
A fee for the debtor application
The adjudicator
The deposit
When can a bankruptcy order must be made after the application started?
A bankruptcy order must be made within 28 days
What is a self-help measure for the debtor?
A debtor’s application
What happens after the bankruptcy order has been made?
The official receive (an officer of the court) takes control of most of the bankrupt’s assets as trustee in bankruptcy.
What does the bankrupt must do to assist the trustee?
Must produce a statement of affairs, setting out their financial position
What are the powers of the trustee after he takes control of the assets?
Can convert a bankruptcy assets into cash and sell them
May also investigate and unwind certain transactions to maximise the available funds to creditors
What happens to the bankrupt’s property title?
IS transferred to the trustee with the exception of tools of the trade and everyday item such as clothing and furniture.
What happens if the clothes and furniture are of high value ?
The trustee can insist that they are sold and substituted with cheaper items in order to increase funds to the creditors
What happens with the bankruptcy’s salary if it’s high?
Then, an income payment agreement may be agreed or an income payments order made.
For how long under the payments agreement must the bankrupter need to make contributions to funds to creditors?
Any period up to 3 years
What happens to the bankrupt’s home?
The bankrupt’s interest in his home will pass to the trustee.
When is there a need for a court order when it comes to the bankruptcy’s home?
When there is someone else who also has an interest or a right of occupation of the home, a court order will be required.
How is the court going to decide about the bamkrupt’s home?
Will consider circumstances in s 335A IA in deciding whether to sale.
IS the court taking into consideration the spouse and children?
Yes
What happens after the 3 years of bankruptcy order ?
Ownership reverts to the bankrupt, unless alternative arrangements have been made (if the property has been sold).
What are the past transactions the trustee might investigate?
disclaiming onerous property
transaction at undervalue
preferences
transaction defrauding creditors
extortionate credit transactions
What can the trustee do to reduce liability?
The trustee may disclaim onerous property
What is an onerous property?
Is any property of the bankrupt that is a liability/drain on resources, rather than an asset.
What is a common example of an onerous property?
Is a lease with no premium/or capital value where rent builds up over time to in crease the bankrupt’s liability to creditors
What means a disclaimer?
The disclaimer means liabilities will cease. (come to an end)
Who gets to suffer from such a disclaimer?
The landord of a lease - may claim as an unsecured credit for what is owed to them.
Can the landlord push the trustee into making a decision to disclaim?
Yes, they can
What is the procedure to ask the trustee to disclaim??
They must disclaim within 28 days , after it will no longer be possible for the trustee to do so.
What is a transaction at undervalue?
A gift or sale of a property where the consideration received is significantly less than the value of the property.
How far back can the investigation go for the trustee to set aside an undervalued transaction?
Can go back up to 5 years from the date f presentation of the petition.
What happens if the transaction was in the first 2 years from the presentation of the petition?
Then, there are no additional pre-conditions
What happens if the transaction at undervalue took place 2 year prior to the relevant date (petition date) ?
It must be proved that the bankrupt was either insolvent at the time or became insolvent because of the transaction
What happens if the undervalue is in favour of an associate?
There is a reputtable presumption that the bankrupt was insolvent at the time of the transaction
The definition of an associate
Individuals included in the definition are the following:
Relatives( brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant - eg parents, grandparents, children)
Spouse/ Civil partner and their relatives
Spouses/civil partners of relatives or of spouse/civil partner’s relatives
Business partners and employees/employers
A company controlled by a person alone or together with their associates (exercise at least one third of the voting power).
What are the past transaction called preferences?
Is an agreement that places a creditor or guarantor in a better position then they would otherwise have been in the event of an individual bankruptcy
What happens if the preference is in favour of the associate?
A desire to prefer the particular creditor must be shown
Can the trustee in bankruptcy go back and investigate and set aside preferences? How far ?
Yes, it can go back 6 months for any preferences, or up t 2 years, from the relevant date( the insolvency) if in favor of an associate.
What it must be shown for all preferences?
That the bankrupt was insolvent at the time or became insolvent because entering into the transaction
What is the key distinguishing feature between a preference and undervalues?
The preferences involves a creditor or guarantor.
What is a past transaction of defrauding creditors?
An undervalue transaction where there is an intention to put assets beyond the reach of someone or prejudice their interests in relation to a potential claim.
Is there a time limit for defrauding creditors?
No
When is it used the past transactions of defrauding creditors?
It is often used where the relevant time for undervalue transactions has expired.
Why is it harder to prove a defrauding creditors?
Because of the intention required
What is a past transaction called extortionate credit transaction?
A credit transaction entered into within 3 years of the relevant date that involves grossly exorbitant payments or grossly contravenes ordinary principles of fair dealing.
Who sets out the order of distribution of the bankrupt’s assets?
The IA
What is the order of distribution of the bankrupt’s assets?
Secured creditors
Costs of Bankruptcy
Preferential debts
Unsecured creditors
Postponed Creditors (Spouse/Civil partner of the bankrupt)
Who are the secured creditors and what do they usually do with the money?
They are paid first and they ussually sell the assets.
What if the secured creditors exceeds the secret debt?
They must pay the surplus to the trustee.
What happens if the secured creditors get less sum of money then the secured debt ?
They may claim the balance as an unsecured creditor
What happens if there are insufficient funds to settle preferential debts or unsecured creditors?
Those within the category receive a proportionate sum of what is left.
How many categories are of preferential debts are there?
Two, primary and secondary
Which are the primary preferential debts?
Wages for work
Accrued holiday pay
Which are the secondary preferential debts?
Sums owed to HMRC for PAYE and VAT
When are the wages for work carried out?
in the 4 months preceding the bankruptcy order up to a maximum of £800
What is the maximum of wages after the bankruptcy order?
£800
What are the restrictions of a bankrupt?
they must disclose their bankruptcy if obtaining credit of more than £500 and if trading under a different name
they cannot as as a director
they cannot be a partner
they cannot be involved in company management, promotion or formation without leave of the court
they require the leave of the SRA to practice as a solicitor
What happens to the bankrupt if they breach restrictions?
They can face criminal liability
After how long most bankrupts are usually discharged?
After 1 year
What else does still apply even if the bankrupt is discharged ?
Liability to pay student loans apply, as well as BRO (bankruptcy restrictions orders or BRU (bankruptcy restrictions undertakings)
What is the aim of BRO and BRU?
To protect the public from the financially reckless.
How does BRU work?
They entered into by agreement
How does BRO work?
BRO are issued by the court
What does BRO and BRU do?
Provide additional restrictions for culpable bankrupts for any period between 2-15 years.
What is personal insolvency?
An alternative to bankruptcy
what do you need to know for SQE about personal insolvency?
When they are available
How they operate
Advantages/Disadvantages
What is an IVA (Individual voluntary agreement)?
Is the main alternative to bankruptcy for an individual
Explain IVA
Is a binding agreement to settle between debtor and unsecured creditors. It avoids the stigma of bankruptcy and may give creditors better result.
What is the first 2 steps process to do an IVA?
The debtor appoints a nominee (an insolvency practitioner) to become the supervisor of the IVA.
The debtor then produces a statement of affairs (details of their financial circumstances) and applies to the court to obtain a moratorium.
What is a statement of affairs?
Details of the debtor’s financial circumstances
What is a moratorium?
A stay on further proceedings/enforcement of usually 14 days.
What does it need to happen for the IVA to get approved?
75% of the creditors in value must agree to the proposals of which at least 50% in value are not associates of the debtor.
What happens if the IVA is approved?
It is binding on every ordinary, unsecured creditor.
What happens if the debtor defaults the IVA?
Then petition may be made for their bankruptcy.
What is preferable for a debtor?
Ii is preferable to an informal agreemnt with a creditor, which can be viewed as a voidable preference.
What does DRO stand for?
Stands for Debt relief order
What is DRO?
Is another alternative to bankruptcy
How can you get into a DRO to avoid bankruptcy?
Via online application for a DRO
What does the DRO involve?
Involves writting off the debts
When is a DRO available?
When the assets and liabilities are low
What are the requirements of the low liabilities and assets of the DRO?
Unsecured liabilities cannot exceed 30K
Gross assets cannot exceed 2K
Cannot have car worth 2K or more (unless adapted due to disability)
Cannot have disposable income of more than £75 per month
Cannot have had a DRO in the preceding 6 years
Cannot be subject to any insolvency proceedings
When is the debtor free of debt after relying on DRO?
After 1 year
What does DRS stand for?
Debt respite scheme
When did DRS commence?
May 2021
For SQE what do I need to know for corporate insolvency?
The process of corporate insolvency
What does DRS provide?
DRS provides breathing space for up to 60 days or 30 days plus any treatment period (for mental health crisis). IT provides time during which no further action can be taken against the debtor
