Individual Insolvency

Question 1

what formal insolvency procedures are available for individuals facing financial difficulty?

Answer 1

1. Individual Voluntary Arrangement (IVA)
2. Bankruptcy

Question 2

What is an IVA?

Answer 2

A contractual agreement that an individual undertakes with their creditors to pay off a proportion of their debts over a period of time in settlement of the full debt under the supervision of an insolvency practitioner

Question 3

how can an individual set up an IVA? (5)

Answer 3

1. individual drafts proposals for how to repay their debt and states their assets and liabilities - with the help of the insolvency practitioner (nominee)
2. the nominee submits a report to court - stating if the IVA has a reasonable prospect of being approved by creditors and implemented
3. individual can apply to court for an interim moratorium order - freezing existing or proposed proceedings and bankruptcy for 14 days
4. creditors meet and vote to approve the IVA
5. if approved, the insolvency practitioner implements the IVA

Question 4

what is the threshold of creditor approval for an IVA? who does it bind?

Answer 4

at least 75% by debt value to approve

but it binds all creditors except for secured creditors unless they unanimously consent to the IVA

Question 5

what is the usual consequence if an individual fails to comply with the terms of the IVA?

Answer 5

the insolvency practitioner can petition the court for bankruptcy

Question 6

what happens if at the end of implementing the IVA, the individual’s payments are not enough to pay their debts in full?

Answer 6

usually the shortfall is written off by the creditors

Question 7

what are advantages (5) and disadvantages (4) of an IVA?

Answer 7

advantages:

• alternative to bankruptcy
• binds all creditors except secured creditors who vote against it
• a moratorium is available if an interim order is made - this prevents bankruptcy proceedings
• procedure is flexible and terms of the IVA can be tailored to the individual’s circumstances
• shortfall of payment at the end of an IVA is usually written off

disadvantages:

• may last longer than bankruptcy
• expensive process - as practitioner has fees
• does not bind secured creditors without their unanimous agreement
• uncertainty surrounding whether creditors approve of it

Question 8

what is bankruptcy?

Answer 8

an insolvency procedure allowing the collection, sale, and distribution of the insolvent individual’s assets to their creditors

Question 9

who can initiate bankruptcy and on what grounds? (2)

Answer 9

1. creditor: ground that debtor is unable or has no reasonable prospect of paying its petition debts (debt must be for an unsecured sum of more than £5,000)
2. debtor themselves: ground that the debtor is unable to pay its debts

Question 10

how can an individual’s inability to pay debts be shown? (2)

Answer 10

• statutory demand that is not satisfied within 3 weeks

or

• judgement ordered against the individual is not executed

Question 11

what is the process of initiating and carrying out a bankruptcy? (3)

Answer 11

1. a creditor or the individual petitions the court for a bankruptcy order
2. court has discretion to grant the bankruptcy order
3. Official Receiver as Trustee is appointed to administer the bankruptcy, collect and realise assets (majority of creditors can appoint their own trustee)

Question 12

when a bankruptcy order is made, what is the bankrupt prevented from doing? (4)

Answer 12

1. acting as a director or being involved in management of a company
2. obtaining credit over 500GBP without disclosing bankruptcy
3. giving gifts
4. deprived of ownership of their property except for reasonable domestic needs

Question 13

what are the powers and duties of the bankruptcy trustee?

Answer 13

• individual’s assets are owned by trustee
• wide powers to sell or deal with assets, carry out bankrupt’s business, mortgage property, and challenge voidable transactions
• will distribute assets to creditors according to statutory priority order

Question 14

what is the order of priority for individual bankruptcy? (8)

Answer 14

1. secured creditors (limited by the value of the security itself - the rest of the debt ranks as unsecured creditors)
2. expenses of bankruptcy
3. specially preferred creditors (training/ apprenticeship fees)
4. preferential creditors (employees/HMRC)
5. ordinary unsecured creditors
6. statutory interest
7. debts of a spouse
8. surplus payable to the bankrupt

Question 15

what are the bankrupt individual’s duties? what happens if the individual fails to comply with their duties?

Answer 15

bankrupt has a duty to provide information and assistance to the trustee to allow them to carry out their functions

if bankrupt fails to comply with duties:

• it is a criminal offence (fines / prison)
• insolvency practitioner can apply for an order suspending automatic discharge of bankruptcy

Question 16

when does bankruptcy end?

Answer 16

• a bankrupt is AUTOMATICALLY DISCHARGED from bankruptcy after maximum 1 year
• discharge means that the bankrupt is released from most of the bankruptcy debts and personal restrictions of being bankrupt (acting as director, obtaining credit, giving gifts)

Question 17

when can claims for voidable transactions be brought in relation to individuals? what are the types of voidable transactions?

Answer 17

when an individual is bankrupt, the trustee in bankruptcy can bring voidable transactions to increase the assets available to creditors

types of claims:
1. transaction at an undervalue
2. preference
3. transaction defrauding creditors

Question 18

what is a transaction at an undervalue?

Answer 18

• a gift, or
• consideration of marriage/CP, or
• transaction for a value which is significantly less than the consideration paid by the bankrupt

–> trustee can claim against the recipient of the bankrupt’s assets

Question 19

what is the relevant time for the transaction at an undervalue to be challengeable?

Answer 19

the transaction took place within 5 years before the day the bankruptcy petition is presented to the court

Question 20

for a transaction at an undervalue, is insolvency needed? is there a presumption of insolvency?

Answer 20

• trustee must prove that the individual was insolvent at the time of the transaction only if the transaction took place between 2-5 years before the petition
• insolvency is presumed if the transaction was entered into with an associate of the bankrupt

Question 21

what is a preference?

Answer 21

a trustee can bring a claim for a preference if a bankrupt does anything which has the effect of putting a creditor/ surety/ guarantor in a better position than they otherwise would have been in the event of bankruptcy

Question 22

what is the relevant time for a preference?

Answer 22

• unconnected person: 6 months before bankruptcy petition
• connected person: 2 years before the bankruptcy petition

Question 23

what must be proven for a preference claim? (2)

Answer 23

1. Insolvency = the individual was insolvent at the time of the preference or became insolvent as a result of it - there is no presumption of insolvency
2. desire to prefer = the individual was influenced by a desire to prefer the creditor - this is presumed where the preference is to an associate

Question 24

when can a transaction defrauding creditors claim be brought against an individual?

Answer 24

• the transaction was at an undervalue with an intent to defraud creditors
• no need to prove insolvency and no relevant time
• there is a high evidential burden - so Trustee will only likely bring this claim when this transaction was made more than 5 years before the bankruptcy petition when a TUV claim cannot be brought