Individual Insolvency Flashcards

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1
Q

To whom are these rules relevant?

A

unincorporated businesses and when individuals become insolvent

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2
Q

What is the test for insolvency?

A

A person is insolvent when:
o A debt is payable and they do not have the money to pay; or
o A debt is payable in the future and there is no reasonable prospect that they will be able to pay

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3
Q

How can a creditor prove insolvency?

A

A creditor can prove insolvency by:
o Serving a statutory demand for a current or future liability of a liquidated sum of at least £5k that isn’t complied with; or
o Obtaining a court judgment for £5k or more and attempting to enforce it without success

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4
Q

How can a debtor comply with a statutory demand?

A

Compliance with a statutory demand involves either payment (or demonstrating a reasonable prospect of being able to pay when it falls due), reaching an agreement or making an application to the court to have it set aside within 21 days

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5
Q

Who can commence bankruptcy proceedings?

A

Bankruptcy proceedings can be commenced by:
o The individual
o One or more creditors that combined are owed at least £5k
o The supervisor of a failed IVA

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6
Q

On what basis is a bankruptcy order granted?

A

A bankruptcy order is granted on the basis that the debtor cannot pay their debts (not necessarily that they are insolvent)

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7
Q

What is the process when a debtor make a bankruptcy application?

A
  1. Debtor makes an online application to the adjudicator on the basis that they are unable to pay their debts. They will need to pay an application fee and deposit for OR’s fees
  2. The adjudicator will decide within 28 days whether to make a bankruptcy order. This can be ext. to 42 days if they need more information

The adjudicator has no discretion as to whether to grant the order. If the statutory requirements are met, they must grant the order and vice versa.

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8
Q

Can the adjudicator exercise discretion in granting a bankruptcy order?

A

The adjudicator has no discretion as to whether to grant the order. If the statutory requirements are met, they must grant the order and vice versa.

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9
Q

where a third party petitions to the court, what are the administrative requirements?

A
  • The petition must be for a liquidated sum
  • The petitioner will need to pay the costs of the trustee in bankruptcy and court fee and will need to pay a deposit
  • They must arrange for personal service of the petition
  • The petitioner can usually petition at the county court
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9
Q

where a third party petitions to the court, what is the position in relation to service of the petition?

A

They must arrange for personal service of the petition
o The serving agent will need to provide a witness statement confirming this
o If the debtor is avoiding the agent, the petitioner will need to apply for an order for substituted service (i.e. in a letterbox)

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10
Q

where a third party petitions to the court, when will the court grant a bankruptcy order?

A

The court will only grant a BO if the petitioner proves that:
o The debtor is unable to pay their debts; or
o There is little prospect of the debtor paying the debt

This will be presumed if the petitioner has ‘proved insolvency’

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11
Q

what happens when a bankruptcy order is made?

A

Whether the BO is granted by an adjudicator or the court, the effect is the same:

The Official Receiver is appointed to act as trustee in bankruptcy

Their fees are paid from the bankrupt’s estate.

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12
Q

once the office receiver has been appointed to act as the trustee in bankruptcy, can a new trustee be appointed?

A

The OR or creditors can appoint an insolvency practitioner to act as the trustee if there are sufficient assets in the bankrupt’s estate

The trustee’s fees are paid for from the estate

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13
Q

what powers does a trustee in bankruptcy have?

A

the powers are very similar to a liquidator/administrator, i.e. they:
o Obtain information from the debtor
o Investigate their finances and challenge reviewable transactions
o Protect the debtor’s property / sell items decreasing in value (i.e. perishables if they were a catering company)
o Realise and distribute assets to pay creditors
o Apply to be released upon completion

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13
Q

what restrictions are impose by a bankruptcy order?

A

All bankrupts are subject to the following bankruptcy restrictions:
o It is a criminal offence for a bankrupt to obtain more than £500 credit without disclosing their bankruptcy
o They cannot act as a director or be involved with the management, promotion or formation of a company unless approved by the court
o They cannot trade under a different name to that of the BO, unless they have disclosed that they are an undischarged bankrupt
o They cannot continue in the partnership unless there is a partnership agreement in place that has amended the default position (i.e. that they cease to be a partner on bankruptcy)
o They cannot practice in certain professions (i.e. solicitor, IP, MP) without permission from the regulatory body

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14
Q

what does a bankrupt’s estate consist of?

A

The estate consists of all assets and property belonging to the bankrupt at the commencement of bankruptcy

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15
Q

when the trustee is appointed, what happens to the bankrupt’s estate?

A

it automatically vests in the trustee

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16
Q

what assets is the bankrupt allowed to keep? What is the exception?

A

The bankrupt is allowed to keep some assets (i.e. they cannot be sold):
o Items needed for work (i.e. tools, books, vehicles)
o Everyday household items (i.e. clothing, bedding, furniture, household equipment)

Exception - if they are high value items the trustee can sell them and replace them with a cheaper alternative

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17
Q

what is the position in relation to the bankrupt’s salary?

A

The bankrupt is entitled to a salary, but if this is more than what is reasonable to meet them and their family’s needs then the trustee can request they enter into an income payments agreement

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18
Q

what happens if the bankrupt refused to enter into an income payments agreement?

A

If they refuse or the terms can’t be agreed, the trustee can apply for an income payments order

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19
Q

what power do income payment agreements and orders have and how long do they last for?

A

income payment agreements and orders are enforceable and can last for a maximum of 3 years

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20
Q

what is the position in relation to the bankrupt’s family home?

A

the trustee must take steps to deal with their interest in the family home within 3 years of the BO by either:
o Realising the bankrupt’s interest (i.e. selling the property)
o Applying for a possession order, order for sale or charging order
o Agreement with the bankrupt i.e. they can reacquire their interest in exchange for payment

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21
Q

within what time frame must the trustee act in relation to the family home and what happens if they do not?

A

if the trustee does not take one of the steps within 3 years, the interest automatically re-vests in the bankrupt

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22
Q

when will the trustee need to apply to court in relation to the family home?

A

If the property is jointly owned or someone has a right to occupation and they do not agree to the property being sold, the trustee will need to apply for an order for sale.

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22
Q

when deciding whether the grant an order in relation to the family home, what will the court decide?

A

When deciding whether to grant the order, the court will consider:
o All the relevant circumstances,
o Conduct and needs of those living in the family home; and
o Interests of the creditor (these will outweigh the family’s interests after one year)

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23
Q

what happens if the trustee makes an unsuccessful application to the court for an order for possession, sale or charge?

A

the trustees interest re-vests into the bankrupt unless the court orders otherwise

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23
Q

what type of assets can a trustee be discharged from its liabilities in relation to?

A

o Unprofitable contracts; and
o Any other assets that are unsaleable, not readily saleable or otherwise onerous (i.e. that give rise to liability for payment or performance)

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24
Q

if a trustee disclaims onerous property, what may happen?

A

If anyone suffers a loss as a result, they could make a formal claim to be an unsecured creditor of the estate

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25
Q

what reviewable transactions are relevant to bankruptcy?

A
  1. transactions at an undervalue
  2. preferences
  3. extortionate credit transactions
  4. transactions defrauding creditors
26
Q

re: bankruptcy

when may the court set aside a transaction at an undervalue?

A

The court may set aside a transaction at an undervalue if:
o They made a gift or entered into a transaction and received no or consideration which is significantly lower than that provided by the individual; and

o The gift/transaction was made within 5 years of the date the bankruptcy application was made

o if the transaction is more than two years prior to the bankruptcy application, they will need to prove that the person was insolvent at the time of the transaction or became insolvent as a consequence of the transaction

27
Q

re: bankruptcy (transaction at an undervalue)

when will insolvency be presumed?

A

o if the transaction was made within 2 years of the date of the bankruptcy application, the trustee will not need to prove insolvency

o Insolvency will be presumed (rebuttably) if the transaction was to a connected person

28
Q

re: bankruptcy

when does an individual give a preference?

A

o They do (or suffer) something which puts a creditor in a better position than it otherwise would have been on the individual’s bankruptcy
o The transaction was made within a ‘relevant time’; and
o At the time the preference was given, the company was insolvent or became insolvent due to the preference
o The individual was influenced by a desire to prefer that person

29
Q

re: bankruptcy

what is the ‘relevant time’ for the purposes of a preference?

A

Connected person - within 2 years prior to the date of the bankruptcy application

Unconnected person - within 6 months prior to the date of the bankruptcy application

30
Q

re: bankruptcy (preferences)

what is meant by ‘desire’?

A

 Desire is a higher threshold than intention (i.e. the individual must have positively wished to put them in a better position)
 This is presumed if the person is connected

31
Q

re: bankruptcy (preferences)

who does the trustee bring the claim against?

A

the preferred creditor

32
Q

what are the bankruptcy restriction schemes?

A

This consists of a bankruptcy restriction order and bankruptcy restriction undertaking

32
Q

who can apply for a bankruptcy restriction order?

A

the official receiver or Secretary of State

32
Q

what is the distribution of assets on bankruptcy? how are assets distributed?

A
  1. Secured creditors can sell their secured assets
    a. Any surplus is given to the trustee
    b. If there is a shortfall then they join the pool of unsecured creditors
  2. Costs of the bankruptcy procedure are paid (i.e. legal fees)
  3. Preferential debts (same rules as corporate insolvency)
  4. Ordinary unsecured creditors
  5. Postponed creditors
    a. This is the bankrupt’s spouse/CP

Within each category (not inc. secured creditors), creditors rank and abate equally

33
Q

when can the official receiver or Secretary of State or apply for a bankruptcy restriction order?

A

o The bankrupt has caused their own bankruptcy by being dishonest, negligent or reckless; and/or
o They have failed to cooperate with the trustee

34
Q

how long can a bankruptcy restriction order and bankruptcy restriction undertaking be in place for?

A

2 - 15 years

35
Q

who can make an offer of a bankruptcy restriction undertaking? Why?

A

the bankrupt to the Secretary of State. They might do this to avoid court proceedings.

36
Q

where are bankruptcy restriction orders and bankruptcy restriction undertakings recorded?

A

on a public register

37
Q

what are the consequences for breaching a bankruptcy restriction order or undertaking?

A

It is a criminal offence to breach a BRO or BRU, and the individual is liable to imprisonment, a fine or both

38
Q

when is a bankruptcy order discharged?

A

automatically discharged after one year, unless extended

Discharge does not end the process of asset realisation and distribution. The trustee will continue to do this until they have dealt with the entirety of the bankruptcy estate

39
Q

what happens upon discharge of a bankruptcy order?

A

Once discharged, the individual will be released from bankruptcy restrictions and not liable to pay their previous debts (noting some exceptions)

40
Q

which debts are not discharged on bankruptcy?

A

o Debts gained by fraud
o Court fines
o Money owed under family proceedings
o Damages for personal injury
o Student loans

41
Q

when is a trustee released from office?

A

when the estate is dealt with

42
Q

what must a trustee do before it vacates office?

A

At least 8 weeks before they intend to vacate office, they must send a final report to the creditors and a notice of intention to vacate office

43
Q

what is an individual voluntary arrangement?

A

This is a contractual agreement between an individual and its unsecured creditors under a statutory procedure (very similar to CVAs)

44
Q

who is bound by an IVA?

A

All unsecured creditors will be bound by the decision, even if they did not vote

This does not apply to preferential or secured creditors, unless they agree.

45
Q

When can an IVA be agreed?

A

This can be agreed before or during a bankruptcy procedure

46
Q

what are the advantages of an IVA?

A

o Debtor avoids stigma of bankruptcy, restrictions & disqualifications
o It is cheaper than bankruptcy procedure for the creditor

47
Q

When is an IVA commonly used and how?

A

Credit card providers tend to use the standard terms under the Straightforward Consumer IVA Protocol

48
Q

what is the IVA procedure?

A
  1. Debtor takes advice from IP and will need to prepare a statement of affairs.
    a. The IP will only act if they think the debtor can pay and their proposals are credible and reasonable
    b. If the IP agrees to act, they become the nominee
  2. The debtor will then need to apply to the court for an interim order to obtain a moratorium. This will be in place for 14 days.
  3. The IP will then prepare a report for the court as to whether they think the proposals are fit to be put to creditors.
  4. Proposals must be approved by creditors using a decision procedure.
  5. If approved, the IP becomes the ‘supervisor’ and will need to oversee the IVAs implementation
49
Q

re: IVA process

when will the insolvency practitioner agree to act?

A

The IP will only act if they think the debtor can pay and their proposals are credible and reasonable

50
Q

re: IVA process

when will the proposals be approved?

A

if the creditors holding over 75% of the total debt owed vote in favour and not more than 50% of these are connected to the debtor

The chair of the meeting decides whether they are connected

51
Q

what will be included in the terms of the IVA?

A

The terms of the IVA will specify the recourse if the debtor breaches the IVA

52
Q

what happens if the debtor breaches the IVA?

A

Usually, the IVA will be terminated and the supervisor and/or creditors can apply to the court for bankruptcy

53
Q

when will a debtor not be eligible for a debt relief order?

A

A DRO will not be available if the debtor:
(a) has total unsecured liabilities exceeding £30,000;
(b) has total gross assets exceeding £2,000;
(c) has a car worth £2,000 or more (unless it has been adapted because the debtor has a disability);
(d) has disposable income in excess of £75 per month, after deducting normal household expenditure;
(e) has been subject to a DRO in the preceding six years;
(f) is subject to another, formal insolvency procedure; or
(g) owns their own home.

54
Q

who considers an application for a debt relief order?

A

the official receiver

55
Q

which debts are not included in a debt relief order?

A

fines, liability for damages, student loans

56
Q

re: debt relief order

what can the official receiver do the the debtor does not comply with their duties?

A

o Extend the time for the DRO; or
o Apply to the court for a debt relief restrictions order

57
Q

what is the effect of a debt relief order?

A

A DRO grants a statutory moratorium, usually for a period of 12 months

During this time, the same restrictions apply to the debtor as if they were bankrupt

The debtor will owe a duty to comply and provide all requested information to the official receiver

58
Q

what happens upon expiry of the debt relief order?

A

the debtor has no obligation to pay the debts under the order

59
Q

what does the debt relief scheme do?

A

This provides a statutory moratorium for eligible people who are seeking professional debt advice

60
Q

what schemes are available under the debt relief scheme?

A

o Standard breathing space
o Mental health crisis breathing space

61
Q

what is the eligibility criteria to access the breathing space scheme?

A

o Owe a qualifying debt(s) they cannot pay
o Not be subject to a DRO, IVA or they are an undischarged bankrupt
o Not had breathing space in the last 12 months
(+ current mental health treatment for mental health crisis breathing space)

61
Q

what is the effect of the mental health crisis breathing space? when is this available?

A

 Only available if the debtor is receiving mental health crisis treatment
 Protection from enforcement action for length of treatment + 30 days
 Stronger protections than standard above

62
Q

how can the debtor access the breathing space schemes?

A
  • The debtor will need to take debt advice from a provider authorised by the FCA
  • The debt advisor will decide if breathing space is appropriate and if so, make the application
62
Q

what is the effect of the standard breathing space?

A

 Protection from enforcement action for 60 days
 Freezes interest, fees and charges on qualifying debts

63
Q

when does the moratorium take effect once they have applied for breathing space?

A

The moratorium takes effect when the debtor’s details are place on the register