Module 2 Individual insolvency

Question 1

Jude has obtained a judgment against George in the sum of £5,000.
Are the following statements true or false?
Jude can present a bankruptcy petition on the basis of the judgment debt.
A True
B False

If Jude serves a statutory demand on George he will have three weeks to satisfy the demand before a petition can be presented for his bankruptcy.
C True
D False

Answer 1

B
Although the debt satisfies the bankruptcy level requirement (£5000* or more) an unsatisfied judgment is not itself sufficient grounds for the presentation of a petition. To avoid having to serve a statutory demand Jude would need to have a unsatisfied judgment execution. * This increased to £5,000 on 1 October 2016.

C
For a bankruptcy order to be made a debtor must appear to be unable to pay or to have no reasonable prospect of being able to pay. If a statutory demand remains unsatisfied within three weeks of service a petition for bankruptcy can be presented. (Note that the debtor has 18 days from service to apply to set aside the demand and an order will not be made whilst such application is outstanding.)

Question 2

On the making of a bankruptcy order the legislation requires certain formalities to be complied with. In respect of those formalities are the following statements true or false.
The court will send copies of the bankruptcy order to the Official Receiver who will then serve a copy on the bankrupt.
A True
B False

The Chief Land Registrar will record the bankruptcy order in the Register of Writs and Orders.
C True D False

Answer 2

A
Rule 6.34/6.46

C
Rule 6.34/6.46. Note that the Chief Land Registrar also gets notice of the petition which is registered in the register of pending actions under Rule 6.13.

Question 3

Which of the following statements is correct?
A A bankruptcy petition is never advertised
B A bankruptcy petition may be advertised with the permission of the court
C A bankruptcy petition is always advertised
D A bankruptcy petition may be advertised with the permission of the Secretary of State

Answer 3

B
Unlike the position in liquidation a bankruptcy petition is not routinely advertised (though the order is). A petition may be advertised following a court order for substituted service under Rule 6.14.

Question 3

A trustee may use the deemed consent procedure which means that a decision will be made provided that a specified percentage of creditors do not object. What is that specified percentage?
A 5%
B 10%
C 15%
D 20%

Answer 3

B ss246ZF and 379ZB.

Question 4

The Official Receiver must investigate the affairs and conduct of every debtor.
C True D False

Answer 4

D
s289(1) and (2). The general duty of the OR to investigate the conduct and affairs of each bankrupt does not apply if the OR is of the opinion that such investigation is unnecessary.

Question 5

Johanna would like to present a petition for her own bankruptcy. What is the minimum level of unsecured debt that she must have?
A £500
B £750
C In excess of £750
D There is no minimum

Answer 5

D
Unlike a creditor’s petition there is no bankruptcy limit to be satisfied she need only satisfy the court that she is unable to pay her debts. In any event the threshold has been increased to £5,000 with effect from 1 October 2015.

Question 6

When petitioning for one’s own bankruptcy the debtor must make an on-line application containing the prescribed information in schedule 2B to the Rules. Which of the following are required pursuant to Schedule 2B?
I Details about the disposal of assets in the last five years
II Previous bankruptcies, DROs, IVAs and other arrangements with creditors in the last two years
III Details of professional advisers acting in previous five years
IV If applicable VAT details
V Details of assets
VI Details of income and expenditure
A I and II and III and V only
B I and III and IV and V only
C I and III and V and VI only
D All of the above

Answer 6

D
Schedule 2B.

Question 7

Which of the following is not a bankruptcy offence?
A Failure to keep proper accounting records for the two years pre-petition
B Non-disclosure of property
C Concealing books, papers and other records
D Fraudulent disposal of property

Answer 7

A
This is grounds for a Bankruptcy Restrictions Order.

Question 8

If Louise an undischarged bankrupt were to win £10,000 in a raffle within how many days is she required to inform her trustee in bankruptcy? (Enter a whole number.)

Answer 8

21 days
s333(2) and Rule 6.200.

Question 9

A bankrupt commits an offence if he applies for credit without disclosing that he is an undischarged bankrupt. This rule applies where the credit applied for is equal to or exceeds.
A £250
B £500
C £750
D £1,000

Answer 9

B
s360/IP(ML) (Amendment) Order 2004.

Question 10

In relation to the examination of bankrupts are the following statements true or false?
Only the Official Receiver may apply for the public examination of a bankrupt.
A True
B False
Both the Official Receiver and a trustee in bankruptcy can apply for the private examination of a bankrupt.
C True
D False

Answer 10

A
C
s290/366. If the trustee considers that a public examination is appropriate he must ask the Official Receiver to apply for the same.

Question 11

Neil is an undischarged bankrupt. His trustee has discovered that 12 months before the bankruptcy order was made Neil spent £20,000 on a round the world trip. On the face of it what are the consequences of this expenditure likely to be?
A This amounts to unreasonable extravagance which is a ground for a bankruptcy restrictions order
B This amounts to unreasonable extravagance which is a bankruptcy offence
C As this was pre-bankruptcy expenditure there are no consequences
D This is a transaction at an undervalue and the trustee can therefore seek to recover the funds

Answer 11

A

Para 2 (j) sched 4A.

Question 12

1 When is the bankruptcy of an individual deemed to commence?
A The date of the appointment of a trustee
B The date of the making of a bankruptcy order
C The date of the presentation of the petition upon which the bankruptcy order is made
D The date on which the statutory demand was served

Answer 12

B

Question 13

2 Jake owes Crissy £10,500. Crissy has decided to petition for Jake’s bankruptcy. Jake has lived in Birmingham for five years but moved to London one month ago. In what court should Crissy present her petition?
A The High Court in Birmingham
B The High Court in London
C Birmingham County Court
D Central London County Court

Answer 13

C

Question 14

The Official Receiver has a duty apply to the court for the public examination of the bankrupt where he receives notice requiring him to do so supported by what proportion in value of the bankrupt’s creditors?
A 10% B 25% C 50% D 75%

Answer 14

C

s290(2).

Question 15

Whether or not a debt is provable in bankruptcy is important as only those creditors with provable debts may attend and vote at creditors’ meetings and participate in any dividend.
Which of the following debts is provable?
A Student loans
B A lump sum order in matrimonial proceedings
C Fines
D Drug confiscation orders

Answer 15

B

Rule 12.3(2)(a) and the Education (Student Support) Regs 2007.

Question 16

Which two of the following cannot be proved for in bankruptcy?
A A claim for damages arising from an allegation of assault
B A claim by a landlord in respect of future rent following disclaimer by a trustee of a commercial lease
C A claim by the US Revenue for unpaid taxes
D Post commencement interest on a bankruptcy debt

Answer 16

C D

Only EU tax is provable in bankruptcy. Post-commencement interest (unlike pre-commencement interest) is automatically paid if the trustee is in funds.

Question 17

To which of the following offences does the defence of innocent intent not apply?
A Making a material omission s356(1)
B Obtaining credit in excess of the prescribed amount without disclosing bankruptcy status s360
C Concealing property s354
D Failing to deliver up books and records s355

Answer 17

B

Question 18

What % of creditors (in value) must concur to apply to court for an order that the trustee’s remuneration is excessive?
A 5%
B 10%
C 25%
D 50%

Answer 18

B

Question 19

s307 of the Insolvency Act 1986 gives the trustee power to claim, by giving notice, any after acquired property for the bankrupt’s estate. Within what period of time must the trustee give notice claiming the after acquired property?
A Within 42 days of the acquisition by the bankrupt of the property
B Within 42 days from when it first came to the knowledge of the trustee that the property had been acquired by the bankrupt
C Within 21 days of the acquisition by the bankrupt of the property
D Within 21 days from when it first came to the knowledge of the trustee that the property had been acquired by the bankrupt

Answer 19

B

The time limit can be found in s309(1)(a).

Question 20

Under s310A of the Insolvency Act 1986 an income payments agreement must end no later than three years from the:
A Commencement of the bankruptcy
B Appointment of the trustee
C Date on which the agreement was made
D Discharge of the bankruptcy

Answer 20

C 310A(5)(b). Note that agreements and orders may end after discharge.

Question 21

s342A allows the trustee to recover excessive pension contributions where the making of these has unfairly prejudiced the creditors. In order to be recovered by the trustee, the bankrupt must have made these contributions within what period of time?
A Two years prior to the order
B Three years prior to the order
C Five years prior to the order
D At any time prior to the order

Answer 21

D

s342A.

Question 22

What is the maximum value of the charge that can be imposed on the bankrupt’s home under s313 of the Insolvency Act 1986?
A The value of the bankrupt’s interest in the property at the date of the charging order plus statutory interest
B The value of the bankrupt’s interest in the property at the date of the charging order
C The value of the bankrupt’s interest at the date of the bankruptcy order plus statutory interest D The value of the bankrupt’s interest at the date of the bankruptcy order

Answer 22

A

s313(2A).

Question 23

A ‘windfall’ may be clawed back for the estate by the trustee in bankruptcy providing it was acquired by the bankrupt:
A Before discharge
B Before the expiry of one year beginning with the bankruptcy order
C Before the expiry of three years beginning with the bankruptcy order
D At any time prior to any annulment of the bankruptcy

Answer 23

A s307(2)(c).

Question 24

Where it is alleged that a bankrupt has entered into a preference in favour of an associate, s340(1) requires that the trustee show that this was done at a relevant time. Which of the following best defines relevant time where a preference is given to an associate?
A In the two years prior to the presentation of the petition providing the giver of the preference was insolvent at the time
B In the six months prior to the presentation of the petition providing the giver of the preference was insolvent at the time
C In the two years prior to the presentation of the petition – insolvency at the date of giving of preference being presumed
D In the six months prior to the presentation of the petition – insolvency at the date of giving of preference being presumed

Answer 24

A

ss341(1)(b) and 341(2). The presumption of insolvency only applies to transactions at an undervalue. In respect of a preference given to an associate the desire to prefer is presumed.

Question 25

Vivek transfers his half share in a holiday home to his son in return for natural love and affection. Eighteen months later he is made bankrupt. If the trustee is to successfully challenge the gift as a transaction at undervalue what must be proved?
A That Vivek was insolvent at the date of the gift or became insolvent as a result of it
B That Vivek was insolvent at the date of the gift or became insolvent as a result of it – however, this will be presumed as Vivek’s son is an associate
C It is not necessary to prove that Vivek was insolvent at the date of the gift as his son is an associate
D It is not necessary to prove that Vivek was insolvent at the date of the gift as the transaction took place within two years of the bankruptcy petition

Answer 25

D

s341(2)

Question 26

Under s283A of the Insolvency Act 1986, the trustee has how many years to deal with his interest in the matrimonial home?
A One year
B Three years
From what date does this time period run from?
C Appointment of the trustee D Bankruptcy order

Answer 26

B D

Failure to deal with the home means that the trustee’s interest in it will revert back to the bankrupt.

Question 27

What is the effect of a successful claim under the principle of ‘equitable exoneration’ in respect of property owned jointly by the bankrupt and another?
It allows:
A A person to claim an interest in property through a direct contribution to its purchase
B A person to claim an interest in property through an indirect contribution to its purchase
C A person to pass the burden of a secured debt (in whole or in part) against another person and so increase his share of the available equity
D A person to treat a secured debt as unsecured and so increase the available equity in the property

Answer 27

C

Equitable exoneration allows the party who has not benefited from the loan but has secured it, to be treated as a surety only. Consequently, any share of equity that that person has is only called upon to the extent that the primary creditor’s share of the equity is unable to satisfy the outstanding debt.

Question 28

What is the ‘prescribed amount’ below which the court will not grant a possession order in respect of a bankrupt’s matrimonial home is? (Enter a whole number in pounds.)

Answer 28

£1,000

s313A and Insolvency Proceedings (Monetary Limits) Order.

Question 29

In accordance with the principles of equitable accounting where the property is jointly owned by the bankrupt and the bankrupt’s spouse (or civil partner) the non-bankrupt spouse in occupation may be credited for payments made for which of the following?
A 50% of the cost of improvements to the property (or 50% of the uplift in equity if lower)
B 100% of any repayments of the capital element of the mortgage liability
C 100% of any occupational rent
D 100% of any mortgage interest payments

Answer 29

A

The purpose of equitable accounting is to identify sums of money for which one party ought to give credit to the other. The proportion in which that credit will be given is determined by the size of the parties beneficial interests (50:50 where property is jointly owned).

Question 30

In bankruptcy from what date is the bankrupt’s estate deemed vested in the trustee?
A Bankruptcy order
B Presentation of the bankruptcy petition
C Appointment of the trustee
D Appointment of the Official Receiver as receiver and manager

Answer 30

C

s306

Question 31

Which of the following assets are excluded from the bankruptcy estate?
A A second property located in Spain and used as a holiday home
B A van used by the bankrupt for work and worth £20,000
C An insurance claim by the bankrupt for damage to his car
D Shares in an employee share scheme

Answer 31

B

s283(2)(a) excludes the bankrupt’s tools of trade from the estate, however given the value of the van it is likely that a trustee would seek to claim the van as an item of excess value and replace it with a cheaper model.

Question 32

John an undischarged bankrupt and has lived with his girlfriend and her 13-year old son in a property of which he is the sole legal and beneficial owner for the last five years.
Are the following statements true or false?
The girlfriend has a right of occupation which will take priority to the interests of creditors for twelve months from the date of the bankruptcy order.
A True
B False
John has a right of occupation which will take priority to the interests of creditors for twelve months from the date of the bankruptcy order.
C True D False

Answer 32

B & C

Where a person has no legal or beneficial interest in a property the Family Law Act gives occupation rights to spouses and civil partners. These rights are not extended to unmarried partners.
The bankrupt will have occupation rights against the trustee where a person under the age of 18 occupies the property with the bankrupt (as his/her home) at both presentation of the petition and making of the order.
These occupation rights mean that the trustee will have to seek an order for possession. It is only if the trustee applies for possession and sale after 12 months from the bankruptcy order that the needs of creditors will outweigh all other considerations.

Question 33

Simona is the trustee in the estate of Elena. One of Elena’s creditors is Big Store Card Ltd. Elena owes £5,000 on the card most of which has arisen through the accumulation of interest. Simona has discovered that the interest rate charged on the card is 30% above the Bank of England base rate and Elena was contractually obliged to make a minimum payment of £50 per month or 5% of the outstanding balance, which ever was the lower. Elena entered into the agreement for the card two and a half years ago. The other terms of the agreement are broadly in line with market practice. Is this an extortionate credit transaction as defined in s343 of the Insolvency Act 1986?
A Yes, as it charges interest at the rate of more than 25% above the Bank of England base rate
B Yes, as it requires grossly exorbitant payments to be made
C No, because the trustee can only attack credit agreements taken out within two years of bankruptcy
D No, the level of interest and payment terms do not render this an extortionate credit transaction

Answer 33

D

s343. The legislation does not specify a specific interest rate as being extortionate. The section requires the trustee to establish that the payments required are ‘grossly exorbitant’ or the agreement otherwise grossly contravened the ordinary principles of fair dealing. Neither of these requirements are satisfied here.

Question 34

In relation to the power of the trustee to disclaim onerous property are the following statements true or false?
Under s316 any person with an interest in property can call upon a trustee to decide whether or not he intends to disclaim it. The trustee must decide whether or not to disclaim within 28 days of receiving any such notice.
A True
B False

Answer 34

A
s316

Question 35

A trustee may disclaim property even if he has taken possession of it and marketed it for sale.
C True
D False

Answer 35

C
s316

Question 36

Under what section of the IA 86 may a trustee apply to the court for an order for the production of documents by HM Revenue and Customs?
A s54
B s112
C s268
D s369
E s412

Answer 36

D

s369

Question 37

Which of the following actions never require the trustee to obtain a court order?
A Obtaining office copies of entries in the land registry
B Seeking re-direction of the debtor’s mail
C Obtaining documents held by HMRC for the purpose of an examination
D Subjecting the bankrupt to a private examination

Answer 37

A

Question 38

A
trustee in bankruptcy is the agent of the bankrupt.
A True
B False

Answer 38

B

Question 39

A trustee in bankruptcy is personally liable in connection with any action he takes in connection with the administration of the estate.
C True D False

Answer 39

C

Question 40

A Trustee cannot seek directions from the court on matters of commercial judgment.
True or False

Answer 40

True
Under s303 the trustee may apply for directions but not in respect of commercial or other decisions that fall within his general discretion.

Question 41

effect of the second bankruptcy?
A All creditors of whom he is aware
B Those creditors that have proved in the bankruptcy
C Those creditors of whom he is aware who have not proved in the bankruptcy
D There is no requirement for the trustee to give notice of his intention to declare

Answer 41

C
Note that the question asks about notice of intention to declare and is governed by s324 and Rule 11.2.

Question 42

A debtor was adjudged bankrupt on the 9 May 202X and then again on the 7 August 202X. What is the effect of the second bankruptcy?
A The bankrupt will have to apply to the court for discharge and may not apply until the expiry of five years from the 7 August 202X
B The bankrupt will be entitled to automatic discharge in the usual way but the second bankruptcy constitutes a bankruptcy offence
C The bankrupt will be entitled to automatic discharge in the usual way but the second bankruptcy constitutes grounds for a Bankruptcy Restrictions Order
D The bankrupt will be automatically discharged in three years from the second order

Answer 42

C
Schedule 4A para 2(3).

Question 43

Who may apply to court for an order suspending automatic discharge?
I The Official Receiver
II The Trustee
III Any creditor
IV The Secretary of State on public interest grounds
A I only
B I and II only
C I, II and III only
D I, II, III and IV

Answer 43

B s279(3)

Question 44

Which of the following is not a good ground for annulment of a bankruptcy order pursuant to the Insolvency Act 1986?
A Payment of all debts and expenses to the court’s satisfaction
B Approval of an Individual voluntary arrangement
C Approval of a Debt Relief Order
D The bankruptcy order should not have been made

Answer 44

C
Part 1 Sched 4ZA IA 1986. A person is not eligible for a DRO if an undischarged bankrupt. The other grounds for annulment are found in s282 or ss261/263D.

Question 45

Which of the following are valid grounds on which the decision of the creditors to approve an IVA can be challenged?
I Material Irregularity at the creditors’ meeting
II Unfair Prejudice in the terms of the voluntary arrangement proposal
III Failure to comply with the Nominee’s reasonable requests
IV 10% of the creditors object to the terms of the proposal
A I only
B I and II only
C I, II and III only
D I, II, III and IV

Answer 45

B s262(1)

Question 46

Where there is equity in the debtor’s home how would the proposal normally provide for the realisation of that equity in an Individual Voluntary Arrangement? (Assume that this is a non-protocol compliant proposal governed by the R3 Standard conditions.)
A The proposal will normally provide that the debtor’s home is excluded
B The home will be valued and placed onto the market at the end of year four of the arrangement unless previously bought out by the debtor
C The home will be sold immediately unless there are rights of occupation
D The proposal will provide for the debtor’s interest in the home to be bought out by a third party contribution

Answer 46

B

This is the usual provision in the R3 Standard conditions which Insolvency Practitioners are strongly encouraged to adopt. However, use of the standard conditions is not mandatory (in the way that Rule 5.3 is) and the individual circumstances of a case may mean that it is only right to deal with matters differently.

Question 47

What majority is required to approve an IVA?
A A simple majority in number and 75% by value of the votes cast at the meeting
B 75% in number of those attending at the meeting in person or by proxy
C 75% by value of the votes cast at the meeting
D 75% by value of all the creditors of the debtor

Answer 47

C
Rule 5.23(2).

Question 48

Which of the following will not be prevented by an interim order?
A Forfeiture of a lease
B CRAR for unpaid rent
C Enforcement of a judgment debt
D Repossession of goods subject to an HP agreement

Answer 48

D
s254. The moratorium granted by an interim order does not prevent HP (or retention of title) creditors from repossessing goods nor will it prevent secured creditors from enforcing their security. (Note that this is different than the position in administration.)

Question 49

In relation to an IVA are the following statements true or false?
The proposal for an IVA is prepared by the nominee.
A True B False
A debtor subject to an IVA may petition the Court for his bankruptcy despite being subject to an IVA.
C True D False

Answer 49

B
Although the nominee may give guidance to the debtor it is the debtor’s proposal and he will take responsibility for its content.
D
A debtor’s application for bankruptcy is dealt with on line.

Question 50

At a meeting of creditors for the purpose of approving a voluntary arrangement £150,000 of debt was represented at the meeting of which £120,000 voted in favour of the arrangement. Of that £120,000, £30,000 was owed to the debtor’s father.
Has the arrangement been approved?
A Yes
B No

Answer 50

A Where a creditor voting on the arrangement is an associate of the debtor and he votes in favour, two counts of the votes cast must be carried out. Assuming that the proposal is initially approved with 75% or more voting in favour a second count is carried out excluding the associates’ votes. Of the non-associated creditors 50% or more must also be in favour of the arrangement for it to be approved.

Question 51

If a creditor is unhappy with the conduct of the creditor’s decision procedure he may apply to court to challenge the decision. Within how many days of the report of the decision being filed at court must the application be made?
C 14 days
D 28 days

Answer 51

D
s262(3).

Question 52

Where no application for an extension is made (IVA), after what period will an interim order cease to have effect?
A 7 days
B 14 days
C 21 days
D 28 days

Answer 52

B
14 days

Question 53

What is the effect of default in the voluntary arrangement on the voluntary arrangement assets? (Assume that the proposal does not deal with this issue.)
A The assets must be handed over to the trustee in bankruptcy for distribution to all creditors
B The assets are held on trust for the benefit of the creditors bound to the voluntary arrangement and should be distributed by the supervisor
C The assets must be handed over to the trustee who will distribute them to the voluntary arrangement creditors only
D The assets must be handed over to the trustee who will treat the voluntary arrangement creditors as preferential to the extent of the voluntary arrangement assets in the bankruptcy estate

Answer 53

B
N.T. Gallagher & Sons.

Question 54

Where there is no provision in a voluntary arrangement proposal for variation of the terms of an agreement what percentage of unsecured creditors would need to approve such variation? (Enter a whole number.)

Answer 54

100%
Raja v Rubin.

Question 55

In the event that the chairman of a creditors’ meeting convened to approve an IVA is unable to agree the value of an unliquidated claim for voting purposes, what value should she place on the debt?
A £1
B Whatever sum the debtor agrees to
C Whatever sum the creditor has proved for
D Nothing as unliquidated claims are not admitted for voting purposes

Answer 55

A
£1
Rule 5.21

Question 56

A debtor is preparing a proposal for a voluntary arrangement. Within the last month he repaid a loan of £2,000 to his sister and his wife has privately repaid a credit card debt.
Pursuant to Rule 8.3 must the proposal explain the repayment of the loan to his sister?
A Yes
B No
Pursuant to Rule 8.3 must the proposal explain the payment made by his wife?
C Yes
D No

Answer 56

A
Antecedent transactions that may constitute a preference (or a transaction at an undervalue etc) must be disclosed under Rule 5.3.
D
With regard to the payment by the debtor’s wife Rule 5.3 does not demand it’s disclosure however one has to be careful about the decision arising in the case of Cadbury Schweppes v Somji. Failure to disclose such a payment may amount to a material omission in the proposal which might be grounds for either an appeal against the decision of the meeting or presentation of a bankruptcy petition.

Question 57

A voluntary arrangement proposal intends to treat all creditors equally with each creditor being offered total settlement of 35% of their outstanding debts.
Of the following creditors which two cannot be bound to the proposal without his/her individual consent?
A An employee owed £300 in holiday pay
B A trade supplier owed £400 for stock
C A landlord owed £10,000 in unpaid service charge
D A mortgagee owed £150,000 on a mortgage secured against the debtor’s house

Answer 57

A
D

Secured creditors cannot be bound by an IVA without their consent and can therefore still enforce their security. Employees are preferential creditors and their priority position cannot be altered in an IVA without consent.

Question 58

Ali, Bal and Colin are partners in a simple partnership that operates under the provisions of the Partnership Act 1890. There is no partnership agreement.

If Colin enters into an individual voluntary arrangement will this result in the automatic dissolution of the partnership?
C Yes D No

Answer 58

D - No

Question 59

If a partnership is insolvent and seeks a partnership voluntary arrangement with its creditors will the partnership have the benefit of an interim order?
A Yes B No

Answer 59

B
No

Question 60

The creditors’ meeting to approve the partnership voluntary arrangement will be proceeded by a meeting of the partners whose approval must be sought before the proposal can be put to creditors.
C True D False

Answer 60

C
s5(2) IA as modified by IPO 1994, Art 4 Schedule 1, a separate meeting required.