Insolvency

Question 1

Corporate insolvency

Answer 1

1. Company is insolvent when:
   * a creditor served a statutory demand for an sum of GBp 750 or more, company does not pay or come into arrangement with creditor within 21 days of service of statutory demand.
   * a creditor has obtained judgment against the company and has tried to enforce that judgement but the debt is still not been paid in full
   * it can be proved to the court that the company is unable to pay its debts as they fall due (cash flow test)
   * it can be proved to the court that the company’s liabilities exceed its assets (balance sheet test)

Question 2

Possible outcomes for an insolvent company

Answer 2

Creditors may force or encourage (CVA) company going to the following processes:
1. go into liquidation
2. administration
3. company voluntary arrangement (CVA)

Secured creditors may have the following options (depending on the terms of security):
1. appoint a LPA receiver
2. appoint an adminisrator out of court or
3. for security created before 15 September 2003, appoint an administrative receiver.

In addition, Corporate Insolvency and Governance Act 2020, became law in June 2020, created two new rescue regimes: moratorium and restructuring plan

Question 3

Liquidation (also winding up)

Answer 3

1. Liquidation is process where the business stops trading , its assets are sold and companies ceases to exist.
2. When liquidation proceeding begins, a liquidator is appointed. Directors power ceases, liquidator runs the company.
3. Liquidator will disribute the assets of company in order set down by statute, and the company will be dissolved at CH in a few months

Question 4

Three types of liquidation

Answer 4

1. Compulsory liquidation where a third party commence insolvency proceedings against insolvent company
2. creditor voluntary liquidation (CVL) commenced by company itself when it is insolvent usually upon pressure from creditors
3. member’s voluntary liquidation commenced by a solvant company, because it wish to cease trading or it is dormant and it wishes to bring its affairs to an end in an orderly manner.

Question 5

Compulsory liquidation

Answer 5

1. commenced by a third party presenting a winding up petition
2. Petitioner will be prevented from proceeding with a winding up petition if the company can show that there is a genuine and substantial dispute in relation to money owed.
3. If company indicates that it will be able to pay the debt within a reasonable period of time, the court may adjourn the hearing to a later date
4. If the court order that company is to be wound up, the Official Receiver will automatically become the company liquidator. The OR is civil servant and court official, employed by Insolvency Service. OR can appoint a private insolvency practitioner depending on nature of case and creditors wishes, as long as company has sufficient assets to pay the insolvency practitioners fee

Question 6

Creditors’ voluntary liquidation

Answer 6

1. inititiated by company through agreement with directors and shareholders, and the creditors take over at early stage.
2. Although technically voluntary, directors will feel pressured to enter into CVL by creditors, they also aware of risk of facing personal claims for misfeasance or wrongful trading if they continue to trade

Question 7

Members’ voluntary liquidation

Answer 7

1. only avalable when company is solvent.
2. if during MVL, liquidator realise that company is insolvent, they must convert to CVL.
3. Common when company is dormant, or directors in owner managed all want to retire or cease trading
4. For MVL, the directors must first swear a statutory declaration that company is solvent

Question 8

Process of liquidation

Answer 8

1. Process generally similar whether voluntary or compulsory.
2. May take few months to few year
3. Effect of liquidation is that the directors lose their powers, and in compulsory liquidation they are terminated.
4. Liquidator takes over running of the company
5. Liquidator will send company’s assets and distribute to company’s creditors
6. After liquidator completed their work (including preparing final accounts) they will apply to be released.
7. Registrar of Companies will dissolves the company 3 months later

Question 9

Liquidator’s powers

Answer 9

1. carry on the company’s business
2. commencing and defending litigation on company’s behalf
3. investigating company’s past transactions
4. investigating director’s conduct
5. collecting and distributing the company assets
6. doling all necessary to facilitate the winding up of the company

Question 10

Preserving and increasing assets

Answer 10

1. Liquidators and administrators are under duty to maximise the assets available to creditors
2. They have power to investigate directors’ action prior to liquidation or administration.
3. Key potential claims:
   * avoidance of certain floating charges
   * preferences
   * transaction at an undervalue
   * transaction defrauding creditors
   * extortionate credit transactions

Question 11

Avoidance of certain floating charges

Answer 11

• 1. invalid floating charge are automatically void where at the relevant time before the onset of company’s insolvency, a charge was granted without company’s receiving fresh consideration in exchange for granting security.
     
     2. Relevant time:
• if charge was created in favour of connected person, during 2 years ending with the onset of insolvent
• if charge was created in favour of any other person, during 12 months prior to onset of insolvency.
  3. Onset of insolvency
• compulsory : date of presentation of winding up petition
• CVL dated company formally enters into liquidation
• administration: when company files a notice of intention to appont an administrator (or the date it actually goes into adminisration whichever earlier).
  4. Floating charge was given to unconnected person then the company must been insolvent at the time or have become insolvent as a resut of floating charge. No such requirement if person is connected.
  5. connected means:
• director or shadow director
• sb in effect a close relative or business associate of director or shadow director
• an associate of the company (a company in the same group or is controlled by director of insolvent company.
  6. If charge holder tries to enforce, the liquidator will seek an injunction on the basis that charge is invalid

Question 12

Preferences

Answer 12

1. liquidator can challenge a transaction where a company at the relevant time has given preference to sb else.
2. preference is where the company put such person in a better position in the event that company went into liquidation than they would have been
3. relevant time:
   a. connected: 2 years ending with onset of insolvency
   b. not connected: 6 months
4. Company must have been insolvent at the time or have become insolvent as a result of giving preference.
5. there must be a desire to prefer other party than just an intention to prefer them. E.g. Re MC Bacon Limited
6. Most common e.g. : one creditor is paid before others, or unsecured is given security
7. where a preference is given to a connected person, desire to prefer is presumed.
8. If preference is proven, court may order release of any security, return of property transferred or payment of proceeds of sale.

Question 13

Transactions at an undervalue

Answer 13

1. any transaction company has entered into at an undervalue at the relevant time
2. Undervalue is wher ethe company makes a gift or enters into a transaction and receives consideration which is significantly lower in value than the consideration provided by company
3. Relevant time: 2 years ending with onset insolvency
4. Company must have been insolvent or have become insolvent as result.
5. Insolvency presumed where the transaction was with a person connected to the company (unlike preference)
6. A defense: if transaction was entered into in good faith, for purpose of carrying on business and where there were reasonable grounds for believing that it would benefit the company (e.g could not find any buyer at full price and need to sell quickly)

Question 14

Extortionate credit transaction

Answer 14

1. liquidator has power to challenge an extortionate credit transaction made in 3 years ending with the day on which company went into liquidation/administration
2. Extortionate: grossly exorbitant payment made, or must otherwise contravene ordinary principles of fair dealing.
3. Rare because difficult to prove

Question 15

Transactions defrauding creditors

Answer 15

1. Transaction at an undervalue which company entered into in order to put assets beyond reach of sb making a claim against it , or to prejudice the interest of such person in relation to any claim they might make
2. No time limit to bring such claim, but difficult to prove
3. Usually only made if liquidator cannot bring a claim of undervalue because of time limit expiry. Creditors may also bring claim as victim

Question 16

Distributing company’s assets during liquidation

Answer 16

1. Fixed charge hoders (opposed to floating charge) will receive the amount owed when asset is sold, Any surplus is paid to liquidator. If there is shortfall, fixed charge hodlder can join the pool of unsecured creditors
2. During liquidation, liquidator send a standard form to unsecured creditors (process of proving debts). Liquidator can decide whether to approve or reject creditor claims. Small debts of 1000 or less will be admitted automatically.
3. Order of paying:
   a. expenses of winding up (fees to liquidator and their professional advisers)
   b. preferential debts which rank adn abate equally
   c. money which is subject to floating charges in order of priority
   d. unsecured creditors who rank adn abate equally.
   the amount the creditors receive is known as dividend.

Question 17

Preferential debts

Answer 17

1. wages/salaries of employees for work carried oput in 4 months immediately preceding the date of winding up order, up to maximum of 800 pounds per employee
2. accrued holiday pay
3. Since December 2020, HMRC became secondary preferential creditor (behind employees0 only in relation to taxes which companies collect on HMRC behalf such as PAYE and VAT.

Question 18

Ring fencing

Answer 18

1. Ring fencing is statutory procedure brought into force in 2003 setting aside a portion of money for** floating charge** holders (where security created on or after 15/9/2003) for benefit of unsecured creditors (not secured creditors_
2. Amount should be set aside is:
   a. 50% of first 10,000 received from money which is subject to floating charges; and
   b. 20% of remaining money; up to limit of 800k (pre 6 April 2020 600k)–

Question 19

Alternatives to liquidation

Answer 19

1. Administration
2. Company voluntary arrangements
3. scheme of arrangement
4. restructuring plans
5. free standing moratorium
6. informal agreement with creditors

Question 20

scheme of arrangement

Answer 20

1. strictly not insolvency procedure although similar to CVAs because involve coming to agreement with creditors
2. can be entered at any time , not necessary when insolvent
3. necessitate 2 court hearings and meetings of creditors and shareholders, thus, expensive and more procedural than CVAs
4. often used to restructure large companies with complicated structures before they are taken over

Question 21

Restructuring plans

Answer 21

1. similar in form to schemes of arrangement
2. brand new procedure brought in by CIGA 2020
3. Company will propose a plan to its creditors or members
4. it is easier for restructuring plan to be sanctioned by the court than scheme of arrangement even if a group of creditors or members voted against it

Question 22

Moratorium

Answer 22

Directors may seek a free standing moratorium by making a filing at court
Moratorium is designed to give a company in distress breathing space to attempt to rescue the company

Question 23

Informal agreement with creditors

Answer 23

1. not statutory and not binding
2. risk that creditors may chooes to wind up instead of going ahead with what informally agreed
3. not a feasible or recommended option

Question 24

Administration

Answer 24

1. Administration is process where an administrator (independent insolvency practitioner) is appointed to run the company, make any changes to improve financial performance or aim to get the company into position where it can be sold as going concern.
2. Main advantage: during administration, there is a statutory moratorium (diff from procedure under CIGA 2020). It is not possible for anyone to commence or continue a legal action against company enforce a judgement or issue a winding up petition without the administrators consent.

Question 25

Duties of adminisrator

Answer 25

1. must perform their duties in the interests of all creditors as a whole
2. primary objectivel to rescue the company as a going concern
3. if not practicable, must try to achieve a better result for creditors as a whole
4. if not practicable, must realise property to pay one or more secured or preferential creditors

Question 26

Commencing administration

Answer 26

two ways:
1. court route: by court order, following an application to court and a court hearing.
2. out of court route: involves the company, its directors or holder of qualifying floating charge or unsecured creditor filing documents at court

Question 27

Court route

Answer 27

1. court can make administration order only if it is satisfied that the company is likely to become unable to pay its debts and administration order is reasonably likely achieve one of three purposes.
2. After applying for adminisration, applycant must notify any person who has apponted or entitled to appoint administrative receiver of company and any qualifying floating charge holder QFCH who entited to appoint administrator

Question 28

Out of court route (by company or directors)

Answer 28

1. First stage: serve notice of intention orf administration on the court, and QFCH and any lender who entitled to appoint any administrative receiver
2. Directors must file at court a statutory declaration that company is unable to pay its debts and is not in liquidation.
3. If a compulsory winding up petition already been presented to cour, directors cannot use out of court route and must use court route to apply for company to go into administration in place of winding up petition to proceed. Moratorium comes into effect as soon as the notice of intention to appoint is filed at court.

Question 29

Out of court route- by QFCH

Answer 29

1. A qualifying floating charge is a floating charge where charge doc states that para 14 of Schedule B1 to IA 1986 applies to it and:
   a. purports to empower the holder of floating charge to appoint an adminisrator; or
   b. purports to empower the holder to appoint an adminisrative receiver within meaning of IA 1986; and
   the charge doc relates to the whole or substantially whole of company’s assets (or does so when added to other securities of the same lender.
2. Outof court route allows lenders with floating charges to easily appoint administrators.
3. Other QFCH must be notified to have opportunity to appoint administrator if they wish.
4. Floating charge must be enforceable (charge holder must be entitled to enforce security under loan agreement)
5. Administrator has duty to all of creditors
6. Administrative receivers have primary duty to those who appointed them and secondary duties to others
7. Lender must file notice of appointment at court: which must include statutory declaration stating that:
   a. lender is holder of QFC
   b. floating charge is enforceable
   c. appointment complies with IA 1986, sch B1.
   Administration begins when the documents are filed at court.

Question 30

Process of administration

Answer 30

1. A moratorium comes into effect
2. Administrator will put forward the proposal for company to creditors
3. Creditors can suggest amendments to the proposals
4. Administrator’s proposals will be approved if a majority in value of the creditors, present and voting, vote in favour, provided that those who vote againts them do not constitute more than 50% in value of creditors who are unconnected to the company.

Question 31

Administrators power and duties

Answer 31

• removing and appointing directors;
• paying creditors, but only with the court’s permission if the payment is to an unsecured creditor;
• calling a meeting of creditors or shareholders;
• dealing with property that is subject to a floating charge;
• dealing with property that is subject to a fixed charge (with the permission of the court);
• investigating and applying to have the company’s past transactions set aside or challenged
• commencing fraudulent or wrongful trading proceedings against directors

The order of distribution of assets is very similar to liquation. In addition,
the administrators have the power to do anything necessary or expedient for the management of the affairs, business and property of the company.

Question 32

End of administration

Answer 32

• Administration ends automatically one year from the date the administration took effect, but this can be extended.
• It can also be ended earlier, including by:
  1. application to the court if its objective has been achieved; or
  2. if the administrator believes its objective cannot be achieved, or
  3. by application to the court by a creditor. The creditor may then present a winding up petition

Question 33

Pre pack administration

Answer 33

1. A pre-packaged administration: a company goes into administration and the administrator sells its assets and business straight away, often to the management of the insolvent company.
2. The sale is effectively agreed before
   the company appoints an administrator
3. The unsecured creditors are not consulted and are unlikely to receive very much in payment of the debts they are owed.
4. Recent legislation places additional, requirements on prepacks involving connected parties, partly to address the concerns of unsecured creditors.

Question 34

Company voluntary arrangement (CVA)

Answer 34

1. A CVA is a written agreement which binds all of the parties to it, as long as the statutory procedures are followed. The parties are usually
   the company and all of its creditors.
2. In a CVA, the creditors usually agree to wait longer to receive what they are owed, or accept payment of only part of the debt, or both.
3. CVA are generally used when the company’s business is potentially
   sound.
4. In a CVA, the proposals put forward for payment of creditors must be approved by:
   * 75% or more in value of the creditors; and
   * 50% or more of non-connected creditors.
   The chair of the CVA meeting (the Insolvency Practitioner supervising CVA) decides if creditors are connected. Secured creditors are not allowed to vote in the CVA, apart from in relation to any part of the debt owed to them that is unsecured.
5. Once the proposal is approved, it is binding on all unsecured creditors in
   relation to past debts, but not future debts.
6. The CVA does not affect the rights of secured and preferential creditors, unless they agree to it.

Question 35

Restructuring plan under CIGA 2020

Answer 35

1. The restructuring plan is courtsupervised and is an ‘arrangement’ or ‘compromise’
   between the company and all of its secured and unsecured creditors and shareholders.
2. Companies do not need to be insolvent to apply for a restructuring plan but they must have encountered or be likely to encounter financial difficulties.
3. The directors (creditors/shareholders) will usually prepare a restructuring plan and apply to court for approval to call meetings of the company’s creditors and shareholders.
4. Implementation of the plan involves two court hearings and creditors can make representations at the first
   hearing.
5. At the second hearing, the court will decide whether to sanction the proposed plan.
6. Between the two hearings, the creditor and shareholder meetings will be held. Creditors and shareholders are divided into classes,
   and each class will be deemed to have approved the plan if 75% by value of that class vote in favour.
7. The key feature of the restructuring plan is the ‘cross-class cram down provision’. It enables a dissenting class of creditors to be ‘crammed down’ so that they cannot block otherwise viable plans, and it must be sanctioned by the court. The court will only sanction it where no member of the dissenting classes would be any worse off under the plan than they would be if the court were not to sanction the plan.

Question 36

Moratorium under CIGA 2020

Answer 36

1. In this moratorium, the company is protected from actions by creditors relating to pre-moratorium debts, but it must pay debts incurred during the moratorium in full.
2. During the moratorium, the company’s directors remain in control, but a qualified insolvency practitioner acts as an independent
   monitor who has oversight of the moratorium and can terminate it in certain circumstances.
3. Requirements:
   a. the company must be unable to pay its debts or likely to become unable to pay its debts.
   b. the company has NOT already entered into a moratorium during the
   previous 12 months.
   c. certain companies not eligible for the moratorium, including banks,
   often known as the financial services exception.
   d. moratorium is only available for English companies with no outstanding winding up petitions against them.
4. To obtain the moratorium, the directors must file documents at court, and the proposed monitor must also confirm that it is likely that the moratorium will result in the
   rescue .
5. most pre-moratorium debts are suspended during the
   moratorium, except:
   a. employees’ wages or salary arising
   under a contract of employment,
   b. the monitor’s remuneration or expenses, and
   c. goods or services supplied during the moratorium

Question 37

Term of Moratorium under CIGA 2020

Answer 37

1. The moratorium lasts 20 business days beginning with the business day after the moratorium comes into force (date of filing of the documents at court or the court
   order).
2. it can be extended for a further 20
   business days by filing certain documents at court.
3. The moratorium can be extended by the directors for a period of up to one year if the creditors who are not going to get paid because of the payment holiday consent to this.

Question 38

Options for secured creditors

Answer 38

1. Secured creditors may appoint receivers to take possession of property which is subject of the charge and deal with it for charge holder’s benefit.
2. Two types of receivers in relation to insolvency:
   a. Law on Property Act (LPA) receivers
   b. Administrative receivers

Question 39

LPA receivers

Answer 39

1. The term ‘LPA receiver’ is used to describe a receiver appointed by a fixed charge holder.
2. These receivers were once appointed under the Law of Property Act 1925 (‘LPA’). However, now, the power to appoint the receiver is usually in the charge document.
3. The aim of appointing an LPA
   receiver is usually to sell the charged property so that the creditor can be repaid. If the sum realised is not enough to pay what the creditor is owed, the creditor will become an
   unsecured creditor for the remainder. Any surplus will be returned to the company and will be available for unsecured creditors.
4. Law of Property Act receivers do not have to be licensed insolvency practitioners.

Question 40

Administrative receivers

Answer 40

1. Administrative receivers are appointed by floating charge
   holders, when the floating charge is over the company’s
   whole undertaking. Subject to some exceptions, they are only used for floating charges created before 15
   September 2003. Charges created on or after 15 September 2003 use the administration route instead.

Question 41

Administrative receiver appointment

Answer 41

1. The loan agreement will list the events which trigger the lender being able to appoint an administrative receiver. E.g. failure to make a payment, the company being unable to pay its debts, breach of the
   loan agreement or presentation of a petition to wind up the
   company.
2. The administrative receiver runs the company and sells the charged assets. They will use the proceeds to pay their own costs and pay the charge holder what they are
   owed under the loan secured by the charge.
3. In theory, the administrative receiver then resigns, and the directors take over the management of the company once more. Unfortunately, liquidation will more often than not follow administrative receivership.

Question 42

Personal insolvency

Answer 42

An individual is insolvent under s 267 IA 1986 when:
* A debt is payable now but the debtor does not currently have enough money to pay; or
* A debt is payable in the future and there is no reasonable prospect that the individual will be able to pay.

Question 43

Proving personal insolvency

Answer 43

Three ways a creditor can prove that an individual is insolvent:
1. By serving a statutory demand on the debtor for a liquidated sum of £5,000 or more, and waiting three
weeks to see whether the debtor pays or applies to court to set aside the statutory demand.
2. By serving a statutory demand on the debtor in respect of a future liability to pay a debt of £5,000 or
more, and waiting three weeks to see whether the debtor either:
a. shows a reasonable prospect of being able to pay the sum when it falls due; or
b. applies to court to set aside the statutory demand.
3. By obtaining a court judgment for a debt of £5,000 or more, and attempting execution of the judgment without success.

Question 44

Options for insolvent person

Answer 44

1. The debtor does not have to wait until a creditor petitions for their bankruptcy.
2. They can always try talking to their creditors to come to an agreement regarding the payment of the debt.
3. If this does not resolve matters, they can apply for their own bankruptcy.
4. Finally, they could enter into an individual voluntary arrangement (‘IVA’) or apply for a debt relief order.
5. Note that the new Debt Respite Scheme may be available to give the debtor breathing space from creditor action for up to 60 days.

Question 45

Bankruptcy

Answer 45

1. Bankruptcy is the process whereby the debtor’s assets pass to a trustee in bankruptcy, whose job it is to pay as many of the debts as possible to the debtor’s creditors.
2. The debtor is known as the bankrupt, and is subject to restrictions on their activities and spending during the bankruptcy process, and possibly afterwards.
3. After one year (or possibly longer), the bankrupt is discharged, meaning that the bankruptcy ends and the
   bankrupt is free from almost all their debts, even though the bankrupt has not paid all of their debts in full.
4. Student loans are not part of this process: they must be
   paid in full, even after the bankrupt has been discharged.

Question 46

Petition for bankruptcy by creditors

Answer 46

1. A creditor is entitled to present a bankruptcy petition at court if they are owed £5,000 or more. This must be a fixed sum, rather than, for example, the creditor claiming that they are owed unspecified damages
   which the court would need to assess. 2. The creditor must also show that the debtor is unable to pay their debt or has little prospect of being able to pay their debt, which is presumed if the creditor has proved that the debtor is insolvent.
2. Creditors owed less than £5,000 may join other creditors and petition together, provided the total amount owed to all the petitioners is not less than £5,000.
3. Creditors must pay a deposit to meet the costs of the trustee in bankruptcy and the court fee.
4. The creditor must usually present the petition at the debtor’s local county court hearing centre
5. The creditor must also arrange for personal service of the petition. (agent hand the petition to debtor and provide witness statement confirming so). If debtor avoids agent, creditor can seek to obtain a court order for substituted service (which means that e.g. posting letterbox)

Question 47

Debtors’ application for bankruptcy

Answer 47

1. Debtor must apply online
2. An adjudicator, who is an employee of the Insolvency Service, will decide whether to make a bankruptcy order.
3. The ground for the application is that the ebtor is unable to pay their debts. In addition to the fees
   for the application, the debtor will also need to pay a deposit in respect of the Official Receiver’s administration fees.
4. The adjudicator must make a bankruptcy order, or refuse to make one because the debtor has not proven that they are unable to pay their debts, within 28 days from the
   application (unless the adjudicator requires further information from the debtor, in which case the decision
   deadline is extended to 42 days). In practice, the order is almost invariably made within 48 hours.

Question 48

Official Receiver and trustee in bankcruptcy

Answer 48

1. Once a bankruptcy order has been made, the Official Receiver (OR) acts as the trustee in bankruptcy and takes control of the bankrupt’s assets. 2. The OR is employed by the Insolvency Service and is an officer of the court. The OR will ask the debtor for a statement of affairs, detailing
   their financial position and recent financial transactions.
2. It is possible for the creditors to appoint a private trustee in bankruptcy, just as with corporate insolvency, but only when the bankrupt has enough assets to fund the private trustee’s fees.
3. Whether the trustee in bankruptcy is the OR or a private trustee in bankruptcy, the bankrupt’s estate vests in them automatically from the moment the bankruptcy order is made. The trustee must, where necessary, realise and sell the bankrupt’s assets and use the proceeds of sale to pay the creditors. When the trustee has done this, they will apply to be released.
   The trustee has the power to investigate the bankrupt’s
   affairs, and set aside or challenge transactions which the bankrupt entered into before the bankruptcy order was made, which is effectively part of the realisation of assets
   process.

Question 49

Bankcrupt’s property

Answer 49

1. Bankrupt is permitted to keep some assets which are needed for
   day-to-day living, such as items they need for work (the ‘tools of their trade’) and everyday household items such as clothing and furniture. However, if any of these items
   are of high value, the trustee can sell them and replace them with a cheaper alternative.
2. Bankrupts are entitled to be paid their salary, but if their salary is more than to meet the reasonable needs of the bankrupt and their family, the trustee can ask the bankrupt to enter into an income payments agreement (‘IPA’), which requires the bankrupt
   to pay some of their salary to the trustee to meet their liabilities.
3. If the bankrupt and the trustee cannot agree on a sum to be paid, the trustee can apply to court for an
   income payments order (‘IPO’), and the court will determine the amount payable. An IPA is enforceable just
   as an IPO is.
4. The IPA and IPO normally last for a maximum of three years from the date the arrangement is made and, therefore, will survive the debtor’s discharge from bankruptcy in most cases.

Question 50

Bankcrupt’s home

Answer 50

1. If the bankrupt is a homeowner, their interest in that home passes to the trustee. If someone else has a legal or equitable interest in the house, or a right of occupation, the
   bankrupt cannot be evicted straight away and the trustee needs a court order to sell the house. When deciding whether to make an order for sale, the court will weigh up
   all of the relevant circumstances, including the interests of the creditors, the conduct and needs of a current or former spouse or civil partner and the needs of any children.
2. After one year of bankruptcy, under s 335A, the creditors’ interests outweigh those of anyone else living in the house, unless the circumstances are ‘exceptional’, and the trustee is therefore likely to be able to obtain an order for sale.
3. Three years after the bankruptcy order, ownership of the home transfers back to the bankrupt, unless the trustee has:
   a. sold the property;
   b. applied for an order for sale or possession or a charging order over the house; or
   c. entered into an agreement with the bankrupt regarding the home, for example that they may keep their interest in the house in exchange for payment.

Question 51

Preserving and increasing the bankcrupt’s assets

Answer 51

The trustee’s primary duty is to the creditors, and they have powers to investigate the bankrupt’s affairs. Following investigation, the trustee can choose to:
1. disclaim onerous property (s 315 IA 1986);
2. apply to set aside transactions at an undervalue (s339 IA 1986);
3. apply to set aside preferences (s 340 IA 1986);
4. apply to set aside transactions defrauding creditors (s 423 IA 1986); and
5. avoid extortionate credit transactions (s 343 IA 1986)

Question 52

Disclaiming onerous property

Answer 52

1. The trustee may disclaim onerous property, for example, unprofitable contracts, land that has the burden of an onerous covenant or a lease which does not have a capital value to be realised for the creditors’ benefit.
2. The trustee’s disclaimer means that all of the bankrupt’s rights and liabilities in respect of the onerous property come to an end and the trustee is discharged from personal
   responsibility for the property.
3. If anyone suffers loss as a result of the disclaimer (for example, the money they would have earned on an onerous contract), they may prove as an unsecured creditor in the bankruptcy, meaning that they can make a formal claim to be a creditor of the bankrupt.

Question 53

Transactions at an undervalue

Answer 53

1. An undervalue is either a gift or a transaction in which the bankrupt received consideration (in money or money’s worth) significantly lower in value than that which they provided. 2. The trustee can investigate transactions during the five years prior to the presentation of the bankruptcy petition.
2. The trustee does not have to show that the bankrupt was insolvent at the time of the transaction or as a result of the transaction, unless the transaction was more than two years before the petition.
3. If the transaction was with an associate, which essentially means a close relative or business associate (s 435 IA 1986), then even if the transaction was more than two years prior to presentation of the bankruptcy petition, there is a rebuttable presumption that the bankrupt was insolvent at the time of
   the transaction.

Question 54

Preferences

Answer 54

1. A preference is where an arrangement places a creditor, surety or guarantor in a better position than they would otherwise have been in on bankruptcy, and the debtor intended to do this. An example is repaying a loan to a friend before a loan to the bank, so that the friend does not
   lose out when the debtor is made bankrupt.
2. There is a rebuttable presumption of intention to prefer if the preference is in favour of an associate (essentially a close relative or business associate). 3. The trustee can challenge any potential preferences within the six months prior to the presentation of the bankruptcy petition, or within the two years prior to presentation of the petition if the preference is in favour of an associate.
3. The bankrupt must have been insolvent at the time of the preference, or must have become insolvent as a result of it.

Question 55

Extortionate credit transactions

Answer 55

1. If the bankrupt has obtained any credit in the three years prior to the bankruptcy order, and the terms of the credit are ‘extortionate’, the trustee can apply to set aside or vary
   the terms of the credit.
2. ‘Extortionate’ means that the terms
   require ‘grossly exorbitant’ payments or have ‘grossly contravened…fair dealing’.
3. There is no substantive reported case law on the use of s 343, This is probably because of the difficulty in showing that the interest rate is ‘grossly exorbitant’.

Question 56

Distribution of assets

Answer 56

Secured creditors can sell their charged assets.
Once the trustee has finished realising the bankrupt’s
assets and challenging any of the transactions, the assets will be distributed in the following
order:
1. The costs of the bankruptcy. mainly the trustee’s professional charges and disbursements (eg legal fees).
2. Preferential debts.
3. Ordinary unsecured creditors.
4. Postponed creditors, who are the bankrupt’s spouse or civil partner.

Question 57

Preference debts

Answer 57

Preferential debts rank above the debts of ordinary unsecured creditors include:
1. the wages/salary of employees for work carried out in the four months immediately preceding the date of the bankruptcy of their employer, up to a maximum of £800, plus accrued holiday pay owed to employees.
2. HMRC is now also a secondary preferential creditor

Question 58

Discharge

Answer 58

1. A bankruptcy order is discharged automatically after one year, unless discharge is suspended
2. they may still be subject to a bankruptcy restriction order (‘BRO’) or bankruptcy restriction
   undertaking (‘BRU’)
3. The property which was vested in the trustee is not returned to the bankrupt, apart from the matrimonial home in some cases (see 8.43).
4. The trustee may not have realised all of the bankrupt’s assets by this point, and the former bankrupt must still assist the trustee with this even
   once the bankruptcy order has been discharged.
5. Sometimes automatic discharge is suspended if the bankrupt is uncooperative or dishonest during the bankruptcy.

Question 59

Restriction on bankcruptcy

Answer 59

1. it is a criminal offence for a bankrupt to obtain credit of more than £500 without disclosing their
   bankruptcy.
2. The bankrupt cannot:
   * act as a director of a company
   * be involved in the management, promotion or formation of a company, unless the court grants permission
   * trade under a different name from the name in which the bankruptcy order was made, without disclosing to
   anyone they trade with that they are an undischarged bankrupt; or
   * continue in partnership
   unless the partnership
   agreement varies the default position in the Partnership Act 1890, which is that the bankrupt will automatically
   cease to be a partner when they are made bankrup

Question 60

Personal restrictions

Answer 60

1. Undischarged bankrupts cannot obtain credit of more than £500 without informing the lender that they are an undischarged bankrupt. This means that a bankrupt cannot obtain a credit card or have a normal current account – the bankrupt’s bank will probably only allow the bankrupt to have a current account without an overdraft facility.
2. Bankrupts cannot practise as a solicitor without the leave of the Solicitors’ Regulation Authority, and there are similar restrictions for other professions.

Question 61

Bankcruptcy restrictions orders and undertakings

Answer 61

1. Bankruptcy restriction orders (BRO) are designed to protect the public from those bankrupts who are considered to be ‘culpable’ and to have caused their own bankruptcy by being dishonest, negligent or reckless. They are made by the court and last between 2 and 15 years.
2. Instead of going through court proceedings, the bankrupt could agree to a bankruptcy restriction undertaking (‘BRU’) instead, which is an agreement having the same effect as a BRO.
3. The person who is subject to the order cannot act as a company director (or insolvency practitioner or MP) for the length of the order or undertaking, or obtain credit over
   a certain amount (currently £500) without disclosing the BRO.

Question 62

Alternatives to bankcruptcy

Answer 62

1. IVA is a binding agreement between unsecured creditors, setting out how much each creditor will receive from the bankrupt in settlement of their debts.
2. The debtor’s trustee may seek
   an IVA during bankruptcy, or the debtor may seek one to avoid the bankruptcy procedure.
3. An insolvency practitioner will
   effectively formulate the proposals and supervise their implementation if the creditors approve the process.

Question 63

IVA procedure

Answer 63

1. Once the debtor has appointed a nominee, the debtor must prepare a statement of affairs for the nominee to consider, and should then apply to the court for an interim order to obtain a moratorium.
2. The interim order is usually in force for 14 days.
3. The nominee then prepares a report for the court whether they are prepared to support the calling of acreditors’ decision-making process. If such a process takes place, and:
   * 75% or more of the creditors in value
   * of which at least 50% in value are not associates of the debtor agree to the proposals.
4. The chair of the meeting (Insolvency Practitioner) decides if a creditor an associate of the debtor. Every unsecured creditor entitled to attend and vote is bound by the decision, even if they did not actually attend the meeting. The IVA is not binding on preferential or secured creditors unless they specifically agree to it.
5. the nominee is from that point onwards called a supervisor, implements the proposals

Question 64

Advantages of IVA

Answer 64

1. For debtors: avoids the stigma of bankruptcy and possibly bad publicity. They will possibly avoid a private public examination in court in some cases. They avoid the disabilities and disqualifications to which a bankrupt is subject.
2. For creditors: low cost of an IVA compared, the whole process is more
   straightforward, and the fact that the bankrupt will be offering greater returns than would be received in
   bankruptcy. However, creditors will need to consider whether the bankrupt can be trusted to honour the IVA.

Question 65

Straightforward Consumer IVA Protocol

Answer 65

1. Credit card providers will usually follow the Protocol in relation to these debts, although the Protocol, approved by the British Bankers’ Association, is voluntary.
2. The Protocol aims to balance the need for the consumer to be free of
   debt with the creditors’ need to recoup as much as possible. It contains standard terms, including fees for insolvency practitioners and levels of return for creditors

Question 66

Debt Relief order

Answer 66

1. Debtors apply online for a debt relief order (‘DRO’).
2. Debt relief orders are only for debtors whose assets and liabilities are low in value.
3. They are not available if the
   debtor:
   (a) total unsecured liabilities exceeding £20,000;
   (b) has total gross assets exceeding £1,000;
   (c) has a car worth £1,000 or more (unless it has been adapted because the debtor has a disability);
   (d) has disposable income in excess of £50 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.

If the application for a DRO is accepted, the OR makes the
order. The debtor will then be protected from enforcement action by most of their creditors in the same way as bankruptcy, and will in the vast majority of cases be free of debt at the end of the DRO period, which is 12 months (unless it is extended because of non-cooperation by the
debtor)
The debtor must cooperate with the Official Receiver and provide information they request, and is expected to pay their creditors if their financial situation improves. During
the time that the debtor is subject to the DRO, the same restrictions apply to them as to a bankrupt. As with bankruptcy, these restrictions may last up to 15 years if the debtor is dishonest or culpable, and this extra period is obtained by the Official Receiver applying for a Debt Relief Restrictions Order against the debtor

Question 67

Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium)

Answer 67

1. the Debt Respite Scheme (‘Breathing Space’) in 2020: This can give someone in problem debt the right to legal protection from creditor action.
2. There are two types of breathing space:
   (a) a standard breathing space and
   (b) a mental health crisis breathing
   space.
   A standard breathing space is available to any client with problem debt, for up to 60 days (a moratorium). The protection includes pausing most enforcement action and
   contact from creditors and freezing most interest and charges on their debts.
   A mental health crisis breathing space is only available to a client who is receiving mental health crisis treatment. It lasts as long as the client’s mental health crisis treatment, plus 30 days.
   To obtain a breathing space, the debtor must apply to a debt advice provider authorised by the Financial Conduct Authority.
   Conditions:
   * the debtor cannot pay some or all of their debt as it falls due.
   * The debtor cannot be an undischarged bankrupt and must not be in an IVA or subject to a debt relief order.
   * The debtor must also not
   have already had another breathing space in the previous 12 months.