Individual Insolvency Flashcards
To whom are these rules relevant?
unincorporated businesses and when individuals become insolvent
What is the test for insolvency?
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
How can a creditor prove insolvency?
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
How can a debtor comply with a statutory demand?
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
Who can commence bankruptcy proceedings?
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
On what basis is a bankruptcy order granted?
A bankruptcy order is granted on the basis that the debtor cannot pay their debts (not necessarily that they are insolvent)
What is the process when a debtor make a bankruptcy application?
- 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
- 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.
Can the adjudicator exercise discretion in granting a bankruptcy order?
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.
where a third party petitions to the court, what are the administrative requirements?
- 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
where a third party petitions to the court, what is the position in relation to service of the petition?
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)
where a third party petitions to the court, when will the court grant a bankruptcy order?
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’
what happens when a bankruptcy order is made?
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.
once the office receiver has been appointed to act as the trustee in bankruptcy, can a new trustee be appointed?
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
what powers does a trustee in bankruptcy have?
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
what restrictions are impose by a bankruptcy order?
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
what does a bankrupt’s estate consist of?
The estate consists of all assets and property belonging to the bankrupt at the commencement of bankruptcy
when the trustee is appointed, what happens to the bankrupt’s estate?
it automatically vests in the trustee
what assets is the bankrupt allowed to keep? What is the exception?
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
what is the position in relation to the bankrupt’s salary?
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
what happens if the bankrupt refused to enter into an income payments agreement?
If they refuse or the terms can’t be agreed, the trustee can apply for an income payments order
what power do income payment agreements and orders have and how long do they last for?
income payment agreements and orders are enforceable and can last for a maximum of 3 years
what is the position in relation to the bankrupt’s family home?
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
within what time frame must the trustee act in relation to the family home and what happens if they do not?
if the trustee does not take one of the steps within 3 years, the interest automatically re-vests in the bankrupt
when will the trustee need to apply to court in relation to the family home?
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.
when deciding whether the grant an order in relation to the family home, what will the court decide?
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)
what happens if the trustee makes an unsuccessful application to the court for an order for possession, sale or charge?
the trustees interest re-vests into the bankrupt unless the court orders otherwise
what type of assets can a trustee be discharged from its liabilities in relation to?
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)
if a trustee disclaims onerous property, what may happen?
If anyone suffers a loss as a result, they could make a formal claim to be an unsecured creditor of the estate