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Business Law and Practice (V) > Personal Insolvency > Flashcards

Personal Insolvency Flashcards

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1
Q

What are the two formal insolvency procedures for insolvent individuals?

A
  1. Bankruptcy
  2. IVA
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2
Q

What is bankruptcy?

A

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

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3
Q

What is an individual voluntary arrangement (IVA)?

A

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)

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4
Q

Is there a time limit for an IVA?

A

No - is flexible and can be tailored to debtor’s circumstances - but usual 3-5 years

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5
Q

How does an IVA work?

A
  • 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

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6
Q

Does IVA bind debtor and all creditors to IVA terms?

A

If approved by requisite % of creditors

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7
Q

How is an IVA set up?

A
  1. Debtor drafts a proposal for compromise of their liabilities and statement of affairs (assistance of nominee)
  2. 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
  3. A debtor can apply for an interim order
  4. IVA is (not) approved
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8
Q

What happens if the court approves an interim order for an IVA?

A
  • 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
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9
Q

How does the proposal become binding?

I.e. how is it voted on/approved

A
  • 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
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10
Q

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?

A
  • 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
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11
Q

Can an IVA bind secured and preferential creditors?

A

Not without their consent

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12
Q

What are the advantages and disadvnatages of an IVA?

A

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
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13
Q

What can a supervisor do if debtor fails to comply with IVA terms?

A

Petition for debtor’s bankruptcy

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14
Q

Who can petition for bankruptcy?

A

Creditor or debtor

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15
Q

What is the creditor’s ground for petition for bankruptcy and the two requirements?

A

Debt is one that debtor appears unable to pay/has no reasonable prospect of paying at the time of presentation of petition

  1. Debt owed to creditor is for unsecured liquidated sum exceeding £5,000
  2. Debtor must be domiciled in E+W
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16
Q

What is the debtor’s ground of petition for bankruptcy?

A

That debtor is unable to pay debts

Must be accompanied with statement of affairs

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17
Q

What 2 things can the debtor’s inability to pay their debts be evidenced by?

A
  • 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
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18
Q

What happens to the official receiver upon the making of a bankruptcy order?

A

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)

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19
Q

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

3 things

A
  • 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

20
Q

What happens to the bankrupt’s estate (all assets and right of bankrupt) upon the making of a bankruptcy order?

A

It vests in the Trustee immediately and automatically by operation of law

Bankrupt must give access to assets to Trustee

21
Q

What does the Trustee do with the assets in the bankrupt’s estate?

A
  • Collect in assets of the estate (inc challenging prior undervalue/preference transactions)
  • Sell assets and distribute proceeds in accordance with statutory order
22
Q

What do trustees have the right to disclaim?

Like liquidators

A

Onerous property or contracts - brings bankrupt’s liability under them to an end

23
Q

What must creditors provide to Trustee if they want to claim a dividend from the bakrupt’s estate?

A

Provide evidence to Trustee of their claim

Court decides matter if creditor disagrees with Trustee’s determination

24
Q

What must a trustee give creditors when proposing to pay them a dividend?

A

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
25
Q

What is the order of priority of payments under bankruptcy?

A
  1. Secured creditors (limited to value of security itself - rank with unsecured creditors for amount not recovered under security)
  2. Expenses of the bankruptcy inc Trustee’s remuneration;
  3. 2 tiers of preferential creditors (same as corporate winding up);
  4. Ordinary unsecured creditors;
  5. Statutory interest;
  6. Debts of a spouse (must be provable but they are postponed to other creditors); and
  7. Any surplus is payable to the bankrupt.
26
Q

What duties does the bankrupt have to the trustee? What happens if they fail to comply

A
  • 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

27
Q

What is discharge?

A

Bankrupt is released from most of bankruptcy debts and personal restrictions (e.g. acting as director, obtaining credit etc.)

28
Q

When is a bankrupt automatically discharged?

A

After a maximum period of one year or less if bankruptcy does not require investigation/investigation concluded in one year period

29
Q

What happens to the automatic discharge if a bankrupt does not comply with their obligations?

A

A trustee may apply for an order suspending the automatic discharge

30
Q

What does a Bankruptcy Restriction Order (BRO) mean for the bankrupt?

A

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)

31
Q

Who applies for a BRO?

A

Sec of State/Official Receiver acting on their direction

32
Q

What conduct of the bankrupt would the court have regard to when making a BRO?

A
  • 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
33
Q

When must application for BRO be made?

A

Generally within a year of start of bankruptcy

34
Q

What is a Bankruptcy Restriction Undertaking (BRU)?

A

An undertaking offered to Sec of State instead of BRO, has same effect if accepted

35
Q

What can the Trustee do with the aim of increasing assets available to creditors with respect to the bankrupt’s transactions?

A

Challenge voidable transactions

36
Q

What are the voidable transactions a Trustee can challenge?

A
  1. Transactions at an undervalue
  2. Preferences
  3. Transactions defrauding creditors
37
Q

What can the court do if the requirements of voidable transactions are met?

A

Make an order to d have been but for the transaction/preferencerestore the position to what it woul

38
Q

What is an ‘associate’ in the context of voidable transactions?

A

Partner, relative or their partner, employee/employer etc.

39
Q

For what transactions can a Trustee bring a claim for transaction at an undervalue (TUV)?

A

Where the transaction is either:

  • A gift
  • In consideration of marriage/CP
  • For consideration significantly less than consideration provided by the bankrupt
40
Q

When must a transaction subject to a TUV claim have taken place? When must it be proved that the individual was insolvent?

A

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

41
Q

When is insolvency presumed in the context of a TUV?

A

Where transaction at undervalue was entered into with an associate of the bankrupt

42
Q

When can a trustee bring a claim for a preference?

A

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

43
Q

When must the preference have happened?

A
  • 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
44
Q

What must be proved re insolvency in preferences?

A
  • Individual was insolvent at the time; or
  • Individual became insolvent as a result of it
45
Q

What else must be shown with preferences

A

That individual was influenced by desire to prefer the creditor

(Rebuttably) presumed where preference is to an associate

46
Q

What must be shown if Trustee brings a claim for transaction defrauding creditors (TDC)?

A

That transaction was one at an undervalue with an intent to defraud creditors or put assets beyond their reach

High evidential burden

47
Q

Is there a relevant time for bringing a TDC claim and must it be proved that debtor was insolvent?

A

No and no!

So likely to bring a claim when outside time for TUV

Business Law and Practice (V) (13 decks)

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