Dealing with Financial Difficulties II

Question 1

What legislation reformed laws on individual and company insolvency?

Answer 1

The Enterprise Act 2002

Question 2

What types of insolvency are there?

Answer 2

• Practical insolvency - this arises where the persons assets, though no less in value than their liabilites, are not available in a sufficency to meet current debts
• Absolute insolvency - the persons liabilities exceeds their assets; there is no capital, the consequence is bankruptcy
• Apparent insolvency - a debtor appears to be insolvent and the date on which it is established then becomes important in the calender of subsequent procedures in sequestration

Question 3

What is Insolvency?

Answer 3

The Sale of Goods Act 1893 stated that a person is deemed to be insolvent when debts incurred in the ordinary course of business are not paid as they fall due.

Question 4

What is Bankruptcy?

Answer 4

In England the term covers the process by which an individual is declared by the courts unable to pay their debts and has their fairs administered by a trustee in bankruptcy with assets realised for the benefit of creditors.

Bankruptcy is a generic term used in the law of Scotland covering several types of insolvancy.

Question 5

What does the term bankruptcy mean in Scots law?

Answer 5

It has no precise meaning. It is sometimes used loosely to mean apparent insolvency, but more often referring to sequestration which is the judicial process where the courts in Scotland decree that the debtor is bankrupt.

Question 6

What is the Bankruptcy procedure?

Answer 6

• Begins with a petition to the County Court, or in some cases the High Court
• Following the granting of a Bankruptcy Order the affairs of the debtor are handled by the Official Receiver
• Within 12 weeks of the order the Official Receiver must call a crediors’ meeting to appint a trustee in bankruptcy. During this period and for the duration of the bankruptcy, the bankrupt;
  
  • ​Cannot obtain credit of more than £500 without disclosing their bankruptcy to the lender
  • May not carry on a business unless they do so in the name in which they are bankrupt and announce to all those with whom they deal that they are an undischarged bankrupt
  • May not be a company director or be involved in the management of a company unless the court agrees
• ​When the trustee in bankruptcy is appointed, his function is to liquidate the bankrupt’s estate for the benefit of the creditors
• Notice of every bankruptcy is published in the London Gazette

Question 7

What are the alternatives to personal bankruptcy?

Answer 7

An informal (family) arrangement, an adminstration order and an individual voluntary arrangement (IVA). It’s an alternative to bankruptcy where the debtor, under the supervision of an insolvency practitioner, makes a formal proposal to creditors to pay part or all debts. This prevents the debtor from being made bankrupt, but is often just a postponement of bankruptcy.

In Scotland the alternative is to sign a trust deed.

Question 8

What are the options in proof if a creditor in bankruptcy holds security from a debtor?

Answer 8

1. Hand over (surrender) the security to the trustee and prove for the whole debt
2. Not prove at all and simply rely on the value of the security to recover the debt
3. Realise the security and prove for a shortfall as an unsecured creditor
4. Value the security and prove for the shortfall

Question 9

What are the powers of the interim trustee?

Answer 9

• They may require the debtor to deliver to them money, valuables or documents relating to the debtor’s business and financial affairs
• They may require the debtor to deliver to them any perishable goods and arrange for their sale
• They can require the debtor to complete transactions started but not finished
• They must prepare a valuation of the debtor’s property
• They can close down the debtor’s business, or, if the court authorises it, they may carry on the business and have power to borrow money to do this and to preserve the debtor’s estate

Question 10

What are the duties of a permanent trustee?

Answer 10

• Dealing with creditors’ claims
• Examination of the debtor
• Deciding on the gratuitous alienations or unfair preferences
• Effecting the equalisation of diligence

Question 11

What are Preferences?

Answer 11

The bankrupt may have seen the possibility of bankruptcy looming for some time and taken steps to dispose of property to prevent it going to a potential trustee. To combat this the concept of preference was introduced.

A preference arises when someone who later is declared bankrupt has done something that has placed at least one creditor in a better position than the others.

Preference must be made within 6 months of the presentation of petition, but can extend to 2 years previously if the person gave an asset to a close associate. It must also be shown that the bankrupt was insolvent at the time of the transaction.

Transactions at an undervalue - arise when a debtor anticipates bankruptcy and gives away or sells cheaply an asset to exclude it from the estate when bankruptcy occurs.

Extortionate credit transactions - arise when debtor is charged an extortionate amount for something - which is a way of offloading money

Question 12

What is the order of distribution of debtor’s assets?

Answer 12

1. Interim trustee’s outlays and remuneration
2. Permanent trustee’s outlays and remuneration
3. In the case of a deceased debtor, death bed and funeral expenses
4. Petitioning creditors’ expenses
5. Preferred debts
6. Ordinary debts
7. Interest on preferred and ordinary debts
8. Defferred debts