Insolvency

Question 1

What is insolvency, and how is it categorized?

Answer 1

Insolvency refers to the inability to pay debts.

• Corporate insolvency: A company cannot pay its debts.
• Personal insolvency: An individual cannot pay their debts.

Question 2

What are the objectives of corporate insolvency law?

Answer 2

1. Rescuing financially distressed companies.
2. Controlling directors’ conduct to ensure they act responsibly during insolvency.
3. Protecting creditors to maximize debt recovery.

Question 3

What are the aims of personal insolvency law?

Answer 3

1. Protect creditors from further losses.
2. Encourage entrepreneurship by allowing honest bankrupt individuals to be discharged from bankruptcy after one year.

Question 4

What laws primarily govern corporate and personal insolvency in the UK?

Answer 4

• Insolvency Act 1986 (IA 1986): Establishes the legal framework for insolvency processes.
• Insolvency Rules 2016: Provides procedural rules for implementing insolvency laws.

Question 5

What are the four legal tests for determining corporate insolvency under Sections 122 and 123 of the IA 1986?

Answer 5

1. Statutory demand: A debt of £750 or more remains unpaid 21 days after demand is issued.
2. Unpaid judgment debt: A creditor has obtained a judgment but cannot enforce payment.
3. Cash flow test: The company cannot pay debts as they fall due.
4. Balance sheet test: The company’s liabilities exceed its assets.

Question 6

Why is it important to determine if a company is insolvent?

Answer 6

1. Initiation of insolvency proceedings: Insolvency is usually a prerequisite for creditors to start processes like liquidation.
2. Director accountability: Insolvency status determines if directors may face personal liability for wrongful or fraudulent trading.

Question 7

What options are available for an insolvent company, and what is the significance of the Corporate Insolvency and Governance Act 2020 (CIGA 2020)?

Answer 7

1. Liquidation: Selling assets and ceasing operations.
   
   2. Administration: Attempting to rescue the company as a going concern.
   3. Company Voluntary Arrangement (CVA): An agreement to restructure debts.
   4. CIGA 2020: Introduced two new regimes:
      * Moratorium: Temporary protection from creditors to allow for rescue.
      * Restructuring plan: A court-approved restructuring process for company survival.

Question 8

What is liquidation, and what are its key steps?

Answer 8

Liquidation (or winding up) involves:

1. Ceasing business operations.
2. Appointing a liquidator to take over the company.
3. Selling the company’s assets.
4. Distributing proceeds to creditors according to statutory priorities.
5. Dissolving the company in the official registry.

Question 9

What are the three types of liquidation, and how are they initiated?

Answer 9

1. Compulsory liquidation: A third party (often a creditor) petitions the court to wind up the company.
   
   2. Creditors’ Voluntary Liquidation (CVL): Initiated by the company in response to creditor pressure due to insolvency.
   3. Members’ Voluntary Liquidation (MVL): Used by a solvent company, typically for orderly closure or dormancy.

Question 10

What happens in compulsory liquidation, and what role does the Official Receiver (OR) play?

Answer 10

1. A creditor petitions the court using grounds under Sections 122-123 IA 1986 (e.g., inability to pay debts).
   
   2. If granted, the court orders the company to be wound up.
   3. The Official Receiver (OR):
      * Automatically becomes liquidator.
      * May appoint a private insolvency practitioner if assets cover their fees.
      * Manages asset distribution and creditor payment.

Question 11

What powers does a liquidator have during the liquidation process?

Answer 11

1. Carry on the company’s business to realize assets.
   
   2. Commence or defend lawsuits.
   3. Investigate past transactions and directors’ conduct.
   4. Collect and distribute the company’s assets to creditors.
   5. Take necessary steps to complete the winding-up process.

Question 12

What is the avoidance of floating charges under Section 245 IA 1986?

Answer 12

• A floating charge can be automatically void if it was created:
  
  1. Without fresh consideration (new value) being provided to the company.
  2. Within the relevant time before the onset of insolvency:
     * Two years for charges in favor of a connected person.
     * One year for charges in favor of an unconnected person, and the company must have been insolvent at the time of granting the charge or become insolvent as a result.

Question 13

What is the relevant time for floating charges to be voidable, and how is “connected person” defined?

Answer 13

• Relevant time:
  
  • Two years for charges benefiting a connected person.
  • One year for charges benefiting unconnected persons.
  • Connected person: Defined under Sections 249 and 435 IA 1986 and includes:
    1. A director or shadow director.
    2. Close relatives or business associates of directors.
    3. Associated companies, such as those in the same group or controlled by a director.

Question 14

What are preferences under Section 239 IA 1986?

Answer 14

• A preference occurs when a company, before insolvency, does something to put a creditor or third party in a better position than others in the event of liquidation.
  
  • Requirements for a preference:
    1. Relevant time:
  • Two years for connected persons.
  • Six months for others.
    2. The company was insolvent at the time or became insolvent due to the transaction.
    3. A desire to prefer the recipient is required, presumed for connected persons but rebuttable.

Question 15

What remedies can the court impose for a preference?

Answer 15

1. Order the release of any security granted as part of the preference.
   
   2. Require repayment of transferred property or proceeds from the sale of such property.
   3. Reverse the effect of the preference to ensure equality among creditors.

Question 16

What is a transaction at an undervalue under Section 238 IA 1986?

Answer 16

• A transaction at an undervalue occurs when a company:
  
  1. Makes a gift or transfers an asset for no consideration.
  2. Transfers an asset for significantly less than its market value.
     * Relevant time: Two years before insolvency.
     * If the transaction benefits a connected person, insolvency is presumed unless disproven.

Question 17

What remedies are available for transactions at an undervalue?

Answer 17

The court may:
1. Require the recipient to pay the difference between the market value and the consideration paid.
2. Return the transferred property to the company.
3. Reverse any effects of the undervalued transaction.

Question 18

What is a transaction defrauding creditors under Section 423 IA 1986?

Answer 18

• A transaction is considered to defraud creditors if it was intended to put assets out of their reach or prejudice their interests.
• Key features:
  1. No specific time limit applies, unlike other claims.
  2. Requires proof of intent to prejudice creditors.

Question 19

What are extortionate credit transactions under Section 244 IA 1986?

Answer 19

• Definition: A credit transaction where the terms are unfairly high or the arrangement is oppressive.
• Relevant time: Two years before insolvency.
• The court may:
  1. Reduce the payments owed under the credit agreement.
  2. Set aside the credit agreement entirely.

Question 20

What is a “preference” in insolvency law, and how is it proven?

Answer 20

• A preference occurs when a company puts someone in a better position than they would have been if the company went insolvent (§ 239 IA 1986).
  
  • Proof requirements:
  • Relevant time: Two years for connected persons; six months for others.
  • The company was insolvent at the time or became insolvent as a result.
  • Evidence of a desire to prefer, presumed for connected persons.

Question 21

What is a Creditors’ Voluntary Liquidation (CVL), and why might directors feel pressured to initiate it?

Answer 21

A CVL is initiated by the company through discussions between directors, shareholders, and creditors, with creditors taking over the process early.
* Pressure on Directors:
1. Creditors may pressurize directors to start the process.
2. Directors aim to avoid personal liability for misfeasance, fraudulent trading, or wrongful trading if the company continues to trade while insolvent.

Question 22

What is a Members’ Voluntary Liquidation (MVL), and when is it used?

Answer 22

An MVL is a process available only to solvent companies. If the company is found insolvent during the MVL, it must be converted to a Creditors’ Voluntary Liquidation (CVL).

*	Common Uses:
1.	To wind up dormant companies, such as within a group structure.
2.	When directors in an owner-managed company wish to retire or cease trading.
*	Requirement: Directors must swear a statutory declaration confirming the company’s solvency before the MVL can begin.

Question 23

What constitutes a transaction at an undervalue under insolvency law?

Answer 23

A transaction at an undervalue occurs when:

1. The company makes a gift or transfers assets to another party for no consideration.
2. The company receives consideration significantly lower in value than the value of the assets it provides.
   Such transactions can be challenged if they occurred during the relevant time before insolvency.

Question 24

What is the “relevant time” for challenging a transaction at an undervalue, and what conditions apply?

Answer 24

• The relevant time is two years ending with the onset of insolvency.
• The company must have been insolvent at the time of the transaction or became insolvent as a result of the transaction.
• If the transaction was with a connected person, insolvency is presumed, though this presumption can be rebutted.

Question 25

What defenses are available for a transaction at an undervalue?

Answer 25

A transaction at an undervalue can be defended if:
1. It was entered into in good faith.
2. It was done for the purpose of carrying on the business.
3. There were reasonable grounds for believing the transaction would benefit the company.

Example: Selling property at less than market value to secure immediate cash when no other buyers are available.

Question 26

What is an extortionate credit transaction, and what is the time frame for challenging it?

Answer 26

• An extortionate credit transaction involves:
  1. Payments that are grossly exorbitant.
  2. Terms that grossly contravene principles of fair dealing.
• The transaction can be challenged if it occurred in the three years ending with the day of the company’s insolvency.

Note: These claims are rare due to the difficulty in proving exorbitant terms or unfairness.

Question 27

What is a transaction defrauding creditors, and how does it differ from a transaction at an undervalue?

Answer 27

• A transaction defrauding creditors occurs when:

1. A transaction at an undervalue is conducted with the intent to put assets beyond creditors’ reach.
2. The purpose is to prejudice creditors’ interests.

Key Differences:
* No time limit applies for claims of fraud against creditors.
* Proving intent to defraud is necessary but often difficult.

Question 28

What remedies are available for transactions defrauding creditors?

Answer 28

• The court may order the recipient of the transaction to:
  
  1. Return property involved in the transaction to the company.
  2. Discharge any security given as part of the transaction.
     * Such claims are typically pursued when time limits for transactions at an undervalue have expired.

Question 29

What is the statutory order of payment during liquidation?

Answer 29

Payments are made in this order:
1. Expenses of the winding up: Fees for liquidators and their advisers.
2. Preferential debts: E.g., employee wages and accrued holiday pay.
3. Floating charge creditors: In order of priority.
4. Unsecured creditors: Share remaining assets proportionally.
5. Shareholders: Receive any surplus after all creditors are paid.

Question 30

What are preferential debts, and who qualifies as a secondary preferential creditor?

Answer 30

• Preferential debts:

1. Employees’ wages (up to £800 per employee for work done in the 4 months preceding liquidation).
2. Employees’ accrued holiday pay.

• Secondary preferential creditor:
  As of December 2020, HMRC for taxes collected on its behalf (e.g., PAYE, VAT). Corporation tax owed directly by the company is not preferential.

Question 31

What is ring-fencing, and how does it protect unsecured creditors?

Answer 31

• Ring-fencing: A statutory procedure ensuring that part of the money from floating charge realizations is reserved for unsecured creditors.
  
  • Allocation:
    1. 50% of the first £10,000 of realizations.
    2. 20% of the remaining amount, up to a cap of £800,000.

Note: The cap increased from £600,000 to £800,000 in April 2020 for charges created after that date.

Question 32

What are the alternatives to liquidation, and how do they differ?

Question 33

What is the purpose of administration in insolvency?

Answer 33

The administrator’s objectives are:

1.	Primary objective: Rescue the company as a going concern.
2.	If rescue is impractical: Achieve a better result for creditors than liquidation would.
3.	As a last resort: Realize assets to pay secured or preferential creditors.

Question 34

What are the two routes for commencing administration?

Answer 34

1. Court Route:
   
   • Court application and hearing.
   • Court must be satisfied the company is insolvent or likely to become unable to pay its debts.
     2. Out-of-Court Route:
   • Filing documents at court by the company, its directors, or a qualifying floating charge holder (QFCH).
   • Notice of intention to appoint triggers a moratorium on legal actions.

Question 35

What is a Qualifying Floating Charge (QFC), and what powers does it grant?

Answer 35

• A QFC is a floating charge over the company’s substantial property.
  
  • It allows the holder to:
    1. Appoint an administrator.
    2. Appoint an administrative receiver.
  • The floating charge must be enforceable, usually due to payment default or other terms of the charge.

Question 36

What is administration, and how does it function as an alternative to liquidation?

Answer 36

• Definition: Administration is a process where an independent insolvency practitioner (administrator) is appointed to manage the company with the aim of rescuing it.
• Key Features:
  1. A statutory moratorium is in place, preventing legal action, enforcement of judgments, or winding-up petitions without the administrator’s consent.

2. The administrator’s goal is to:
   
   • Rescue the company as a going concern.
   • Achieve a better outcome for creditors than liquidation, if rescue is not feasible.
   • Realize assets to pay secured or preferential creditors as a last resort.

Question 37

What is a Company Voluntary Arrangement (CVA), and how does it work?

Answer 37

• Definition: A CVA is an agreement between a company and its creditors to restructure or reduce debts, allowing the company to continue trading.
  
  • Key Features:
    1. The CVA proposal must be approved by:
  • 75% of creditors by value of the debt.
  • 50% of unconnected creditors.
    2. It is binding on all creditors, including those who voted against it.
    3. It is used by companies with viable business models but unsustainable debt burdens.

Question 38

What is a scheme of arrangement, and how does it differ from a CVA?

Answer 38

• Definition: A scheme of arrangement is a court-supervised restructuring process under the Companies Act 2006.
  
  • Key Features:
    1. It is not strictly an insolvency procedure and can be used at any time in a company’s life.
    2. Requires two court hearings and meetings of creditors and shareholders.
    3. Used by large companies with complex debt structures, often as part of a takeover or financial restructuring.
    4. More expensive and procedurally complex than a CVA.

Question 39

What is a restructuring plan, and what are its advantages?

Answer 39

• Definition: Introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020), it allows a company to propose a plan to restructure debts.
  
  • Key Features:
    1. Similar in form to a scheme of arrangement but easier to sanction by the court, even if some creditors or shareholders oppose it.
    2. Designed for companies that need to restructure but face creditor dissent.

Question 40

What is a moratorium under CIGA 2020, and how does it help companies?

Answer 40

A moratorium is a temporary breathing space that protects a company from legal action while it attempts to restructure or recover.
* Key Features
1. Directors must apply to court for a moratorium.
2. Lasts for an initial period of 20 business days, extendable with creditor consent.
3. Allows the company to continue trading while planning recovery.

Question 41

What are informal agreements with creditors, and what are their limitations?

Answer 41

• Definition: Non-statutory agreements between a company and its creditors to manage debts without formal insolvency proceedings.
  
  • Key Features:
    1. Agreements are not binding unless all creditors agree.
    2. Risky because any creditor can choose to initiate winding-up proceedings despite the agreement.
    3. Often considered a last resort due to lack of enforceability.

Question 42

What is the moratorium in administration, and how does it protect the company?

Answer 42

A moratorium is a legal protection that prevents creditors from taking legal or enforcement actions against the company during administration.
* Key Features:
1. It comes into effect as soon as administration begins.
2. It allows the administrator to focus on recovery or orderly management without external interference.
3. Creditors cannot enforce judgments, commence legal actions, or file a winding-up petition without court permission.

Question 43

How do creditors approve the administrator’s proposals, and what voting thresholds apply?

Answer 43

• Approval Process:
  
  1. The administrator presents proposals to creditors.
  2. Creditors can request amendments or additional information.
  3. The proposals are voted on by creditors.
     * Voting Requirements:
  4. A majority in value of creditors present and voting must approve the proposals.
  5. Those voting against must not exceed 50% in value of unconnected creditors.

Question 44

What happens to directors’ powers once an administration order is made?

Answer 44

Directors’ Status:
1. Directors remain in office but lose their powers to manage the company.
2. They can no longer make decisions regarding company operations or assets.
* Administrator’s Role:
* The administrator assumes full control of the company’s management and assets.

Question 45

What are the administrator’s statutory powers under the Insolvency Act 1986 and the Insolvency Rules?

Answer 45

• Statutory Powers:
  
  1. Remove or appoint directors.
  2. Make payments to creditors, with court approval for unsecured creditors.
  3. Convene meetings of creditors or shareholders.
  4. Deal with assets under fixed charges (requires court approval).
  5. Manage assets under floating charges.
  6. Investigate and challenge past transactions (e.g., transactions at undervalue).
  7. Initiate proceedings for fraudulent trading or wrongful trading by directors.
  8. Take any action necessary for the management of the company’s business and property.

Question 46

How are a company’s assets distributed in administration, and how does it compare to liquidation?

Answer 46

• Order of Distribution:
  
  1. Expenses of administration (e.g., administrator’s fees).
  2. Preferential creditors (e.g., employee wages and holiday pay).
  3. Floating charge creditors, in order of priority.
  4. Unsecured creditors, sharing proportionally.
  5. Any remaining funds go to shareholders.
     * Comparison to Liquidation: The order is similar, but administration focuses on maximizing returns for creditors as a whole.

Question 47

What are the possible ways an administration can end?

Answer 47

1. Automatic End: Administration terminates after one year unless extended by creditors or court approval.
   
   2. Early Termination:
      * If objectives are achieved (e.g., the company is rescued).
      * If objectives cannot be achieved (administrator applies to court).
   3. Court Application by Creditors: If dissatisfied, creditors may apply to court to end administration, often leading to liquidation.

Question 48

What is a pre-packaged administration (pre-pack), and what are its advantages and criticisms?

Answer 48

A pre-pack involves selling the company’s business or assets immediately after entering administration, with the sale agreed upon beforehand.
* Advantages:
1. Saves the business as a going concern.
2. Preserves jobs.
3. Reduces disruption to operations.
* Criticisms:
1. Unsecured creditors are excluded from negotiations and often receive little.
2. Connected parties, such as management, often benefit, raising concerns about fairness.
3. Recent regulations impose stricter requirements for pre-packs involving connected parties to address these issues.

Question 49

What is a Company Voluntary Arrangement (CVA), and how does it function?

Answer 49

A CVA is a legally binding agreement between the company and its creditors to restructure debts and avoid liquidation.
* Key Features:
1. Creditors agree to wait longer for payment, accept partial payment, or both.
2. Approved by:
* 75% in value of creditors voting.
* 50% in value of unconnected creditors.
3. Secured and preferential creditors are unaffected unless they consent.
* Advantages:
1. Comparatively cheaper and simpler than administration.
2. Creditors often recover more than in liquidation.
* Disadvantage: If the CVA fails, the company may still enter liquidation.

Question 50

What is the restructuring plan introduced by CIGA 2020, and how does it address dissenting creditors?

Answer 50

• Definition: A court-supervised arrangement allowing companies to restructure debts with creditors and shareholders.
  
  • Key Features:
    1. Cross-Class Cram-Down Provision: Allows the court to enforce the plan even if dissenting creditor classes vote against it.
    2. Requires 75% in value approval from each creditor or shareholder class.
  • Court Sanction: The court must confirm that dissenting creditors are no worse off than they would be under liquidation.

Question 51

How does the moratorium under CIGA 2020 support distressed companies?

Answer 51

A moratorium is a temporary measure providing protection from creditor actions while the company attempts to recover.
* Features:
1. Lasts 20 business days, extendable up to one year with creditor or court approval.
2. Directors retain control of the company.
3. Overseen by a licensed insolvency practitioner acting as a monitor.
4. Certain debts, like employee wages and new obligations, must be paid during the moratorium.

Question 52

What are the options available to secured creditors during insolvency?

Answer 52

1. LPA Receivers: Appointed by fixed charge holders to manage or sell specific secured assets.
   
   2. Administrative Receivers: Appointed by floating charge holders to manage and sell charged assets (only for charges created before 15 September 2003).
   3. Administration: Secured creditors may support administration to achieve a better recovery for their debts.

Question 53

What triggers the appointment of an administrative receiver, and what are their responsibilities?

Answer 53

• Trigger Events:
  
  1. Loan repayment default.
  2. Company insolvency.
  3. Breach of loan terms.
  4. Filing a winding-up petition.
     * Responsibilities:
  5. Manage the company.
  6. Sell charged assets to repay secured creditors.
  7. Cover their own costs from the proceeds.
     * Outcome: Administrative receivership often leads to liquidation if the company lacks funds to continue.

Question 54

What are the common causes of personal insolvency?

Answer 54

1. Cash-flow problems: Overborrowing and inability to repay debts.
   
   2. Job loss: Lack of income to meet financial obligations.
   3. Failed unincorporated businesses: Personal resources drained by the business’s failure.

Question 55

When is an individual considered insolvent under Section 267 IA 1986?

Answer 55

1. Current Debt: The debtor owes a sum currently payable and cannot pay it.
2. Future Debt: A debt is due in the future, but there is no reasonable prospect of payment.

Example: Kate owes £4,000 for furniture, payable in six months. With £300 disposable income per month, she can only save £1,800, falling short. This makes her insolvent.

Question 56

How can creditors prove an individual is insolvent under Section 268 IA 1986?

Answer 56

1. Statutory Demand:
   * Serve for a liquidated sum of £5,000 or more and wait three weeks for payment or court application to set it aside.
2. Future Liability Demand:
   * Serve for a future debt of £5,000 or more, waiting to see if:
   * The debtor shows a reasonable prospect of payment.
   * Applies to court to set aside the demand.
3. Court Judgment: Obtain judgment for £5,000 or more and attempt enforcement unsuccessfully.

Question 57

What is bankruptcy, and what does it mean for the debtor?

Answer 57

Definition: A legal process transferring the debtor’s assets to a trustee in bankruptcy to repay creditors.
* Debtor’s Status:
1. Referred to as the bankrupt during the process.
2. Subject to restrictions on activities and spending.
3. Discharged after one year (or longer in specific circumstances).
4. Excluded Debts: Student loans must still be repaid even after discharge.

Question 58

How is bankruptcy initiated, and what are the requirements for creditors and debtors?

Answer 58

1. Creditor’s Petition:
   * Minimum debt: £5,000 (fixed, not estimated or damages).
   * Use statutory demand or court judgment to prove insolvency.
   * Petition must be personally served; substituted service allowed if the debtor avoids contact.
2. Debtor’s Application:
   * File online, pay fees and deposit for the Official Receiver’s costs.
   * Decision by an adjudicator within 28–42 days (usually within 48 hours).

Question 59

What is the role of the Official Receiver (OR) and trustee in bankruptcy?

Answer 59

• Official Receiver’s Role:
  
  1. Acts as the trustee unless creditors appoint a private trustee.
  2. Collects a statement of affairs and investigates financial transactions.
  3. Protects or disposes of perishable assets.
     * Trustee’s Duties:
  4. Realizes and sells assets.
  5. Challenges improper transactions (e.g., undervalue, preferences).
  6. Distributes proceeds to creditors.
  7. Applies for release after completing duties.

Question 60

What assets are included in the bankrupt’s estate, and what items can they retain?

Answer 60

• Included Assets:
  
  1. Property (e.g., home equity).
  2. Savings and other valuables.
     * Exclusions:
  3. Tools of the trade.
  4. Household essentials (e.g., basic furniture, clothing).
  5. Income exceeding reasonable needs is subject to an Income Payments Agreement (IPA) or Income Payments Order (IPO). These typically last three years.

Question 61

How is a bankrupt’s home treated in bankruptcy?

Answer 61

1. Interest Transfers to Trustee: The bankrupt’s share of the home vests in the trustee.
   
   2. Sale Requires Court Approval: Consideration for other occupants’ rights (e.g., spouse, children).
   3. Three-Year Rule: If not sold, the home reverts to the bankrupt unless the trustee has:
      * Sold the property.
      * Applied for a court order for sale or possession.
      * Made an agreement with the bankrupt (e.g., payment in exchange for retaining the home).

Question 62

What actions can a trustee take to preserve or increase assets for creditors?

Answer 62

1. Disclaim Onerous Property: (Section 315 IA 1986) End rights and liabilities on unprofitable contracts, burdensome land, or leases.
   
   2. Challenge Undervalue Transactions: (Section 339 IA 1986) Investigate transactions within five years of bankruptcy petition. Insolvency is presumed for transactions with associates.
   3. Challenge Preferences: (Section 340 IA 1986) Reverse payments or arrangements favoring certain creditors within six months (or two years for associates).
   4. Challenge Fraudulent Transactions: (Section 423 IA 1986) Set aside transactions made to defraud creditors.
   5. Avoid Extortionate Credit Transactions: (Section 343 IA 1986) Address loans requiring grossly exorbitant payments.

Question 63

What is a Debt Relief Order (DRO), and who is eligible?

Answer 63

A low-cost alternative to bankruptcy for individuals with minimal assets and income.
* Eligibility Criteria:
1. Unsecured debts < £20,000.
2. Total gross assets < £1,000 (car value < £1,000 unless adapted for disability).
3. Disposable income ≤ £50/month.
4. No DRO in the last six years or concurrent insolvency procedures.

Question 64

What is the Debt Respite Scheme (‘Breathing Space’), and what types exist?

Answer 64

1. Standard Breathing Space:
   
   • Protects against creditor action for up to 60 days.
   • Freezes interest, charges, and enforcement on qualifying debts.
     2. Mental Health Crisis Breathing Space:
   • Available to individuals receiving mental health treatment.
   • Protection lasts throughout treatment + 30 days.

Question 65

What is an Individual Voluntary Arrangement (IVA), and how is it approved?

Answer 65

• Definition: A legally binding agreement between the debtor and creditors to settle debts over time.
  
  • Approval Requirements:
    1. 75% by value of voting creditors.
    2. At least 50% by value of unconnected creditors.
  • Binding Effect: Secured and preferential creditors are only bound if they consent.

Question 66

What are the advantages of an IVA for debtors and creditors?

Answer 66

• Debtor’s Advantages:
  
  1. Avoids bankruptcy’s stigma and restrictions.
  2. More privacy and fewer public consequences.
     * Creditor’s Advantages:
  3. Higher returns than bankruptcy.
  4. Lower procedural costs and simpler process.

Question 67

How are a bankrupt’s assets distributed, and in what order?

Answer 67

1. Costs of Bankruptcy: Trustee’s fees and legal costs.
   
   2. Preferential Debts: Employee wages (up to £800) and holiday pay.
   3. Unsecured Creditors: Proportional distribution among remaining creditors.
   4. Postponed Creditors: Debts owed to the bankrupt’s spouse or civil partner.

Question 68

What restrictions apply to bankrupts under Section 8.53 IA 1986?

Answer 68

1. Business Restrictions:
   
   • Cannot act as a company director without court permission.
   • Cannot trade under a new name without disclosure of bankruptcy.
     2. Personal Restrictions:
   • Cannot obtain credit over £500 without disclosure.
   • Restrictions on certain professions (e.g., solicitors).

Question 69

What are Bankruptcy Restriction Orders (BROs) and Undertakings (BRUs)?

Answer 69

• BRO: Court-imposed restrictions lasting 2–15 years for bankrupts deemed reckless, negligent, or dishonest.
  
  • BRU: Voluntary agreement by the bankrupt, carrying the same effects as a BRO.