Personal Insolvency Flashcards
What is an individual voluntary arrangement?
Arrangement under which a debtor makes a proposal for a compromise of their liabilities with their creditors meaning that they will only pay part of the contractual debt owed or have longer to pay it
Who oversees an IVA?
An IVA supervisor who must be a licensed insolvency practitioner
Who is bound by a valid IVA?
The debtor and all the creditors
How long can an IVA last?
No limit - common for it to be five years
What is the process for setting up an IVA?
1) the debtor drafts a proposal for compromise of their liabilities and a statement of their affairs usually with assistance of an insolvency practitioner
2) nominee submits a report to the court stating their opinion as to whether the debtor’s proposal has a reasonable prospect of being approved and implemented and whether creditors should be asked to vote on it
3) to become binding, it must be approved by the creditors
What approval is needed for the creditors to be bound by an IVA?
Approved by 75% of creditors in value of total debt owed
And requires that no more than half of the total value of creditors who are not associates of the debtor vote against it
Can the debtor apply for a interim moratorium whilst waiting for creditors to approve IVA? What effect is the moratorium?
Yes.
Moratorium will freeze existing or proposed bankruptcy and other proceedings and legal process against the debtor.
Court order will then be needed by any creditor to exercise any right or remedy otherwise restricted by the moratorium.
Will last 14 days which can be extended by the court
What is the effect of an IVA being approved by the requisite number of creditors?
- binds debtor and unsecured creditors, not secured or preferential creditors though
- nominee becomes supervisor of the IVA and is responsible for implementation
- if debtor fails to comply with IVA, supervisor may petition for bankruptcy
- if debtor has complied with the terms of the IVA then at the end of the IVA, the creditors will have to write off any balance of the pre-IVA debts against the debtor
What are the advantages of an IVA?
- alternative to bankruptcy and avoids the stigma and restrictions associated with bankruptcy
- can bind all unsecured creditors
- a moratorium is available if an interim order is made
What are the disadvantages of an IVA?
- may last longer than a bankruptcy
- cannot bind a secured creditor or preferential creditor without their consent
- can be an expensive and time-consuming process and there is some uncertainty as to whether creditors will approve it
On what grounds can a creditor bring a petition for bankruptcy?
- debt is one that the debtor appears unable to pay or has no reasonable prospect of paying
- debt owed to the creditor is for an unsecured sum exceeding £5,000
- the debtor must be domiciled in England and Wales
On what grounds can a debtor bring a petition for bankruptcy?
- they are unable to pay their debts (must be accompanied by statement of affairs setting out the debtor’s assets and liabilities)
How is a debtor’s inability to pay their debts evidenced?
- statutory demand for payment not satisfied within three weeks from service of demand, nor set aside by court
- unsatisfied execution of judgment debt
Must a court make a bankruptcy order if the grounds for a bankruptcy petition have been met?
No - at their discretion
Who will become the first bankruptcy trustee on the making of a Bankruptcy order? Who can become a the second trustee in bankruptcy?
The Official Receiver
Majority of creditors could appoint another trustee who is a licensed practitioner but unlikely anyone willing to act if insufficient funds to remunerate them
What is the bankrupt prohibited from doing on the making of a bankruptcy order?
- acting as a director
- being involved in the management of a company
- obtaining more than £500 of credit without disclosing the bankruptcy
- giving gifts
- practicing in certain professions
- deprived of ownership of their property except for reasonable domestic needs
What are the powers of trustees in bankruptcy?
- wide powers to sell or otherwise deal with assets in bankrupt’s estate
- can carry on bankrupt’s business
- can grant security over assets
What are the duties of trustees in bankruptcy?
- Collect in the bankrupt’s assets
- Challenging transactions at undervalue or preferences
- Distribute money in estate according to statutory order of priority
How will trustees determine who is a creditor entitled to a claim on the bankrupt’s estate?
They will ask creditors to prove their claims against the bankrupt
Creditors will do this by producing evidence to the Trustee to support their claim
What must trustees do when proposing to pay a dividend to creditors?
They must give notice to the creditors who have proved their debts, stating the amount of the sale proceeds received from a sale of the assets of the estate, any deductions that have been made to these proceeds and amount of any dividend they can expect
What is the statutory order of payments out of bankrupt’s estate?
1) Secured creditors (limited to the value of security itself and ranking with ordinary unsecured creditors for any amount no recovered under the security)
2) Expenses of the bankruptcy including the Trustee’s remuneration
3) Two tiers of preferential creditors (identical to the ones of corporate winding up)
4) Ordinary unsecured creditors
5) Statutory interest
6) Debts owed to a spouse (note they rank last among other creditors)
7) Finally, any surplus is payable to the bankrupt
What duties does the bankrupt owe?
Must provide information and assistance to the Trustee to enable the Trustee to carry out their functions
What happens if the bankrupt fails to provide information and assist the Trustee?
They commit criminal offence and could face two years imprisonment and unlimited fine where there has been a default
When will a bankruptcy be discharged?
- normally automatically discharged after one year
- Official Receiver or Trustee may apply for order suspending the automatic discharge if the bankrupt fails to comply with their obligations under IA 1986
- Can be discharged in less than a year if the Official Receiver or Trustee files a notice stating the bankruptcy does not require investigation or stating that they have concluded any such investigation within the one-year period
What happens when the bankruptcy is discharged?
The bankrupt is released from most of the bankruptcy debts and the bankruptcy related restriction eg acting as a director, obtaining credit etc mentioned earlier in this chapter
Who may apply for a Bankruptcy Restriction Order (BRO)?
The Secretary of State or the Official Receiver acting on the SofS’s direction may apply to the court
What conduct of the bankrupt is relevant for deciding whether or not to apply for Bankruptcy Restriction Order?
- failure to keep records
- entering into preferences or transactions at undervalue
- fraud
- incurring debt without reasonable expectation of being able to repay it
How long will a Bankruptcy Restriction Order (BRO) last for?
Between two and 15 years.
What effect will Bankruptcy Restriction Order (BRO) have on the bankrupt?
- they cannot be a director
- cannot obtain credit of more than £500 without disclosing they are subject to a BRO
- if they breach BRO, then criminal offence punishable by fine or imprisonment
What can a bankrupt offer Secretary of State to avoid court proceedings to impose Bankruptcy Restriction Order (BRO)?
Bankrupt can offer Bankruptcy Restriction Undertaking which will be of same effect as BRO
What will trustees have to balance in deciding to challenge a voidable transaction?
Balance the costs and risks of litigation with the chances of success in making recoveries for the bankruptcy estate
What transactions are voidable in bankruptcy?
- transactions at an undervalue
- preferences
- transactions at an undervalue defrauding creditors
What happens if the requirements for a voidable transaction are met?
The court has power to make any such order as it thinks fit to restore the bankrupt’s estate to the position it would have been in but for the voidable transaction
What is a transaction at an undervalue?
It is a:
- gift
- transaction in consideration of marriage or the formation of a civil partnership or
- transaction for a consideration the value of which in money or money’s worth is significantly less than the consideration provided by the bankrupt
What is the relevant time for a transaction at an undervalue?
Transaction must take place within 5 years preceding the day of the presentation of bankruptcy petition
Is insolvency required for transaction at an undervalue?
Yes - must be proved individual was insolvent (cash flow or balance sheet test) at the time the transaction took place between two to five years prior too bankruptcy petition
No - if less than two years prior to bankruptcy petition
What presumption is available for transactions at undervalue?
Insolvency of the bankrupt is presumed where a transaction at an undervalue is entered into with an associate.
This is subject to rebuttal by the associate
What is a preference?
If creditor and the debtor does anything which has the effect of putting the creditor in a better position than they otherwise would have been in the individual’s bankruptcy
What is the relevant time within which a preference can be challenged?
- within 6 months preceding the day of presentation of the petition if to an unconnected person
- within two years preceding the day of the presentation of the petition if to an associate
Is insolvency required for preference?
Yes must be proved that the individual was insolvent at the time of the preference or became insolvent as a result of it.
Insolvent on either cash flow or balance sheet test
What mental state of mind by the debtor must be shown for there to be a voidable preference?
Must be shown that the debtor was influenced by a desire to prefer that creditor
Rebuttable presumption that the bankrupt individual was influenced by the desire to prefer the creditor where the preference is to an associate
Who is most likely to bring a claim challenging transaction at an undervalue defrauding creditors?
Either creditor or Trustee or Official Receiver
What must be shown to bring a claim for transaction at an undervalue defrauding creditors?
Must be shown that the transaction was at an undervalue with an intent to defraud creditors or to put assets beyond their reach
No need to show debtor was insolvent
