Personal Insolvency Flashcards
What are the two formal insolvency procedures for insolvent individuals?
- Bankruptcy
- IVA
What is bankruptcy?
A collective insolvency procedure enabling an orderly collection, sale and distribution of an insolvent individual’s assets for the benefit of all the bankrupt’s creditors
What is an individual voluntary arrangement (IVA)?
An arrangement under which a debtor makes a proposal for a compromise of their liabilities with creditors (part payment of contractual debt, longer period to pay)
Similar to CVA (part payment/extended time for companies)
Is there a time limit for an IVA?
No - is flexible and can be tailored to debtor’s circumstances - but usual 3-5 years
How does an IVA work?
- Debtor will pay funds to IVA supervisor out of (business) income/assets or both
- Supervisor then pays dividend to creditors based on determined claims against debtor
Licensed insolvency practicioner must be appointed as supervisor
Does IVA bind debtor and all creditors to IVA terms?
If approved by requisite % of creditors
How is an IVA set up?
- Debtor drafts a proposal for compromise of their liabilities and statement of affairs (assistance of nominee)
- Nominee submits to court stating opinion on whether debtor’s proposal has a reasonable prospect of being approved/implemented and whether creditors should be asked to vote on it
- A debtor can apply for an interim order
- IVA is (not) approved
What happens if the court approves an interim order for an IVA?
- Brings about 14-day moratorium: freezing existing/proposed bankruptcy and other proceedings (e.g. landlord’s right of peaceable re-entry)
- Court order needed for creditor to exercise right restricted by moratorium
How does the proposal become binding?
I.e. how is it voted on/approved
- Approved by creditors holding at least 75% of value of total debt owed to creditors
- Not voted against by more than half of the total value of creditors who are not associates of the debtor
What happens when an IVA is approved to the debtor/unsecured creditors, the nominee, and creditors’ pre-IVA debts not paid back at the end?
- Debtor and all unsecured creditors bound
- Nominee becomes Supervisor of IVA and responsible for implementation and reporting to court
- Creditors will have to write off any balance of pre-IVA debts against debtor not paid back at end
Can an IVA bind secured and preferential creditors?
Not without their consent
What are the advantages and disadvnatages of an IVA?
Advantages:
- Avoids stigma of bankruptcy
- Binds unsecured creditors
- Moratorium available (if interim order made)
Disadvantages:
- May last longer than bankruptcy
- Cannot bind secured/preferential creditor without their consent
- Can be expensive/time-consuming process
What can a supervisor do if debtor fails to comply with IVA terms?
Petition for debtor’s bankruptcy
Who can petition for bankruptcy?
Creditor or debtor
What is the creditor’s ground for petition for bankruptcy and the two requirements?
Debt is one that debtor appears unable to pay/has no reasonable prospect of paying at the time of presentation of petition
- Debt owed to creditor is for unsecured liquidated sum exceeding £5,000
- Debtor must be domiciled in E+W
What is the debtor’s ground of petition for bankruptcy?
That debtor is unable to pay debts
Must be accompanied with statement of affairs
What 2 things can the debtor’s inability to pay their debts be evidenced by?
- A statutory demand that has neither been satisfied within 3 weeks from service nor set aside from court
- An unsatisfied execution of a judgement/other legal process
What happens to the official receiver upon the making of a bankruptcy order?
They will become the ‘Trustee’ unless court orders otherwise
Hard to convince others to be Trustee if there are few assets in bankruptcy estate (will be insufficient to pay fees)
What is the bankrupt prohibited from doing upon the making of a bankruptcy order?
3 things
- Acting as a director/being involved in managing a company
- Obtaining credit of over £500 without disclosing bankruptcy
- Giving gifts and practising in certain professions
Also deprived of ownership of property bar reasonable domestic needs
What happens to the bankrupt’s estate (all assets and right of bankrupt) upon the making of a bankruptcy order?
It vests in the Trustee immediately and automatically by operation of law
Bankrupt must give access to assets to Trustee
What does the Trustee do with the assets in the bankrupt’s estate?
- Collect in assets of the estate (inc challenging prior undervalue/preference transactions)
- Sell assets and distribute proceeds in accordance with statutory order
What do trustees have the right to disclaim?
Like liquidators
Onerous property or contracts - brings bankrupt’s liability under them to an end
What must creditors provide to Trustee if they want to claim a dividend from the bakrupt’s estate?
Provide evidence to Trustee of their claim
Court decides matter if creditor disagrees with Trustee’s determination
What must a trustee give creditors when proposing to pay them a dividend?
Notice stating:
- Amount of sale proceeds received from sale of assets in the estate
- Any deductions made from proceeds
- Amount of dividend they can expect to receive
What is the order of priority of payments under bankruptcy?
- Secured creditors (limited to value of security itself - rank with unsecured creditors for amount not recovered under security)
- Expenses of the bankruptcy inc Trustee’s remuneration;
- 2 tiers of preferential creditors (same as corporate winding up);
- Ordinary unsecured creditors;
- Statutory interest;
- Debts of a spouse (must be provable but they are postponed to other creditors); and
- Any surplus is payable to the bankrupt.
What duties does the bankrupt have to the trustee? What happens if they fail to comply
- Give information as to his affairs
- Attend on trustee at such times
- Do all things as trustee may reasonably require for purpose of carrying out functions
Failure to comply = imprisonment for 2 years or unlimited fines - could have automatic discharge suspended
What is discharge?
Bankrupt is released from most of bankruptcy debts and personal restrictions (e.g. acting as director, obtaining credit etc.)
When is a bankrupt automatically discharged?
After a maximum period of one year or less if bankruptcy does not require investigation/investigation concluded in one year period
What happens to the automatic discharge if a bankrupt does not comply with their obligations?
A trustee may apply for an order suspending the automatic discharge
What does a Bankruptcy Restriction Order (BRO) mean for the bankrupt?
Between 2-15 years the bankrupt is unable to act as a director or obtain credit of more than £500 without disclosing they are subject to a BRO
Breach = criminal offence (fine/imprisonment)
Who applies for a BRO?
Sec of State/Official Receiver acting on their direction
What conduct of the bankrupt would the court have regard to when making a BRO?
- Failure to keep records
- Entering into preferences or transactions at an undervalue
- Fraud and incurring a debt without reasonable expectation of being able to pay it
When must application for BRO be made?
Generally within a year of start of bankruptcy
What is a Bankruptcy Restriction Undertaking (BRU)?
An undertaking offered to Sec of State instead of BRO, has same effect if accepted
What can the Trustee do with the aim of increasing assets available to creditors with respect to the bankrupt’s transactions?
Challenge voidable transactions
What are the voidable transactions a Trustee can challenge?
- Transactions at an undervalue
- Preferences
- Transactions defrauding creditors
What can the court do if the requirements of voidable transactions are met?
Make an order to d have been but for the transaction/preferencerestore the position to what it woul
What is an ‘associate’ in the context of voidable transactions?
Partner, relative or their partner, employee/employer etc.
For what transactions can a Trustee bring a claim for transaction at an undervalue (TUV)?
Where the transaction is either:
- A gift
- In consideration of marriage/CP
- For consideration significantly less than consideration provided by the bankrupt
When must a transaction subject to a TUV claim have taken place? When must it be proved that the individual was insolvent?
Must have taken place within 5 years preceding the day of bankruptcy petition presentation
If transaction took place between 2-5 years from day of petition presentation = must be proved individual was insolvent
When is insolvency presumed in the context of a TUV?
Where transaction at undervalue was entered into with an associate of the bankrupt
When can a trustee bring a claim for a preference?
Where:
1. That person is a creditor (or surety/guarantor) and
2. The individual does anything/suffers anything to be done which has effect of putting person in better position than otherwise in the event of individual being made bankrupt
When must the preference have happened?
- If to unconnected person = within 6 months preceding day of presentation of petition
- If to an associate = within 2 years preceding day of presentation of petition
What must be proved re insolvency in preferences?
- Individual was insolvent at the time; or
- Individual became insolvent as a result of it
What else must be shown with preferences
That individual was influenced by desire to prefer the creditor
(Rebuttably) presumed where preference is to an associate
What must be shown if Trustee brings a claim for transaction defrauding creditors (TDC)?
That transaction was one at an undervalue with an intent to defraud creditors or put assets beyond their reach
High evidential burden
Is there a relevant time for bringing a TDC claim and must it be proved that debtor was insolvent?
No and no!
So likely to bring a claim when outside time for TUV
