Personal Insolvency

Question 1

What is an individual voluntary arrangement?

Answer 1

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

Question 2

Who oversees an IVA?

Answer 2

An IVA supervisor who must be a licensed insolvency practitioner

Question 3

Who is bound by a valid IVA?

Answer 3

The debtor and all the creditors

Question 4

How long can an IVA last?

Answer 4

No limit - common for it to be five years

Question 5

What is the process for setting up an IVA?

Answer 5

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

Question 6

What approval is needed for the creditors to be bound by an IVA?

Answer 6

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

Question 7

Can the debtor apply for a interim moratorium whilst waiting for creditors to approve IVA? What effect is the moratorium?

Answer 7

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

Question 8

What is the effect of an IVA being approved by the requisite number of creditors?

Answer 8

• 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

Question 9

What are the advantages of an IVA?

Answer 9

• 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

Question 10

What are the disadvantages of an IVA?

Answer 10

• 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

Question 11

On what grounds can a creditor bring a petition for bankruptcy?

Answer 11

• 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

Question 12

On what grounds can a debtor bring a petition for bankruptcy?

Answer 12

• they are unable to pay their debts (must be accompanied by statement of affairs setting out the debtor’s assets and liabilities)

Question 13

How is a debtor’s inability to pay their debts evidenced?

Answer 13

• statutory demand for payment not satisfied within three weeks from service of demand, nor set aside by court
• unsatisfied execution of judgment debt

Question 14

Must a court make a bankruptcy order if the grounds for a bankruptcy petition have been met?

Answer 14

No - at their discretion

Question 15

Who will become the first bankruptcy trustee on the making of a Bankruptcy order? Who can become a the second trustee in bankruptcy?

Answer 15

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

Question 16

What is the bankrupt prohibited from doing on the making of a bankruptcy order?

Answer 16

• 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

Question 17

What are the powers of trustees in bankruptcy?

Answer 17

• wide powers to sell or otherwise deal with assets in bankrupt’s estate
• can carry on bankrupt’s business
• can grant security over assets

Question 18

What are the duties of trustees in bankruptcy?

Answer 18

• Collect in the bankrupt’s assets
• Challenging transactions at undervalue or preferences
• Distribute money in estate according to statutory order of priority

Question 19

How will trustees determine who is a creditor entitled to a claim on the bankrupt’s estate?

Answer 19

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

Question 20

What must trustees do when proposing to pay a dividend to creditors?

Answer 20

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

Question 21

What is the statutory order of payments out of bankrupt’s estate?

Answer 21

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

Question 22

What duties does the bankrupt owe?

Answer 22

Must provide information and assistance to the Trustee to enable the Trustee to carry out their functions

Question 23

What happens if the bankrupt fails to provide information and assist the Trustee?

Answer 23

They commit criminal offence and could face two years imprisonment and unlimited fine where there has been a default

Question 24

When will a bankruptcy be discharged?

Answer 24

• 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

Question 25

What happens when the bankruptcy is discharged?

Answer 25

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

Question 26

Who may apply for a Bankruptcy Restriction Order (BRO)?

Answer 26

The Secretary of State or the Official Receiver acting on the SofS’s direction may apply to the court

Question 27

What conduct of the bankrupt is relevant for deciding whether or not to apply for Bankruptcy Restriction Order?

Answer 27

• failure to keep records
• entering into preferences or transactions at undervalue
• fraud
• incurring debt without reasonable expectation of being able to repay it

Question 28

How long will a Bankruptcy Restriction Order (BRO) last for?

Answer 28

Between two and 15 years.

Question 29

What effect will Bankruptcy Restriction Order (BRO) have on the bankrupt?

Answer 29

• 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

Question 30

What can a bankrupt offer Secretary of State to avoid court proceedings to impose Bankruptcy Restriction Order (BRO)?

Answer 30

Bankrupt can offer Bankruptcy Restriction Undertaking which will be of same effect as BRO

Question 31

What will trustees have to balance in deciding to challenge a voidable transaction?

Answer 31

Balance the costs and risks of litigation with the chances of success in making recoveries for the bankruptcy estate

Question 32

What transactions are voidable in bankruptcy?

Answer 32

• transactions at an undervalue
• preferences
• transactions at an undervalue defrauding creditors

Question 33

What happens if the requirements for a voidable transaction are met?

Answer 33

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

Question 34

What is a transaction at an undervalue?

Answer 34

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

Question 35

What is the relevant time for a transaction at an undervalue?

Answer 35

Transaction must take place within 5 years preceding the day of the presentation of bankruptcy petition

Question 36

Is insolvency required for transaction at an undervalue?

Answer 36

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

Question 37

What presumption is available for transactions at undervalue?

Answer 37

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

Question 38

What is a preference?

Answer 38

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

Question 39

What is the relevant time within which a preference can be challenged?

Answer 39

• 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

Question 40

Is insolvency required for preference?

Answer 40

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

Question 41

What mental state of mind by the debtor must be shown for there to be a voidable preference?

Answer 41

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

Question 42

Who is most likely to bring a claim challenging transaction at an undervalue defrauding creditors?

Answer 42

Either creditor or Trustee or Official Receiver

Question 43

What must be shown to bring a claim for transaction at an undervalue defrauding creditors?

Answer 43

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