Personal Insolvency Flashcards
Individual voluntary arrangement
- Proposal for a compromise of their liabilities with their creditors.
- Usually involves the debtor paying only part of the contractual debt owed and/or having a longer period to pay than the contractual period.
- Flexible procedure which can be tailored to the debtor’s circumstances.
- There will be an IVA supervisor and debtor will pay income and/or assets to them, Supervisor then distributes a dividend to the creditors
- need requisite percentage of creditors to bind debtor and all their creditors
- Supervisor must be licensed insolvency practitioner
- usually lasts 3-5 years
Setting up IVA
- Debtor drafts proposal for compromise of their liabilities and a statement of their affairs usually with the assistance of an insolvency practitioner known as a Nominee
- Nominee submits a report to the court stating their opinion as to whether the proposal has a reasonable prospect of being approved and implemented and whether creditors should be asked to vote on it
- Debtor can apply to the court for an interim order. If granted - it brings about a moratorium which lasts 14 days, freezing existing or proposed bankruptcy and other proceedings and legal processes against the debtor (court order will be needed for a creditor to exercise any right or remedy)
Approval of IVA
Must be approved by creditors holding at least 75% (by value) of the total debt owed to the creditors voting on the proposal to become binding
Will not be effective if more than half of total value of creditors who are not associates vote against it
Effect of approval of IVA
- binds debtor and all unsecured creditors
- cannot bind secured creditor or preferential creditor without that creditor’s consent
- Nominee becomes supervisor and is responsible for the implementation.
- Supervisor can apply to court for directors and report to court periodically and if the debtor fails to comply with the terms of the IVA the supervisor usually has the right to petition for bankruptcy
- If at the end of the IVA if the debtor has complied with the terms of the IVA the creditors will have to write-off any balance of their pre-IVA debts against the debtor
Advantages and disadvantages of an IVA
Adv:
- alternative to bankruptcy and avoids stigma and restrictions of bankruptcy
- binds all unsecured creditors
- a moratorium is available if an interim order is made
Dis:
- lasts longer than a bankruptcy
- cannot bind a secured creditor or preferential creditor without that creditor’s consent
- can be expensive and time consuming process and there is some uncertainty as to whether creditors will approve it
Bankruptcy petition grounds
Creditors petition:
- Debt is one which the debtor appears unable to pay or has no reasonable prospect of paying
- The debt owed to the creditor is for an unsecured liquidated sum exceeding £5000
- Debtor must be domiciled in England and Wales
Debtor’s petition:
Only ground: debtor is unable to pay their debts
- petition must be accompanied by a statement of affairs setting out the debtor’s assets and liabilities
Evidence for inability to pay debts
Evidenced by:
- statutory demand that has not been satisfied within three weeks from service of that demand, nor set aside by the court
- an unsatisfied execution of a judgment or of another legal process
If satisfied that the grounds for a petition and these other requirements set out above have been met, the court has a petition to make a bankruptcy order.
Bankruptcy order
Official receiver becomes first trustee in bankruptcy unless the court order otherwise.
Majority of creditors can seek appointment of another person as trustee.
Bankrupt is prohibited from acting as a director or being involved in the management of a company, obtaining credit of over £500 without disclosing the bankruptcy, giving gifts and practicing in certain professions.
Also deprived of ownership of property except for their reasonable domestic means.
Trustee powers and duties
Bankrupt’s estate vests in the Trustee immediately and automatically by operation of law upon making of order.
Trustee has wide statutory powers to sell or deal with assets including carrying on business, selling assets and granting security over them.
Will collect in assets (challenge undervalue) and challenge undervalue or preference. Will see and distribute according to statutory order of priority for bankruptcies.
Can disclaim onerous property or contracts to bring liability to an end - eg ending lease.
Will ask creditors to prove their claims.
Trustee will need to give notice when paying dividend to creditors of sale proceeds from assets and any deductions and then pay creditors.
Bankruptcy order of priority
- Secured creditors
- expenses of bankruptcy including trustees remuneration
- Two tiers of preferential creditors
- Ordinary unsecured creditors
- Statutory debts
- Debts of spouse
- Any surplus is payable to the bankrupt
Bankrupts’ Duties
Bankrupt owes a number of duties to the Trustee including the duty to provide information and assistance to the Trustee to enable the Trustee to carry out their functions.
Criminal offence for trustee to fail to comply with their obligations and they could face imprisonment for up to two years and unlimited fines where there has been a default.
Also runs the risk of having their automatic discharge suspended.
Bankruptcy discharge
A bankrupt is automatically discharged from bankruptcy after a maximum period of one year.
Discharge means that the bankrupt is released from most of the bankruptcy debts and the bankruptcy related restrictions.
Official Receiver or Trustee may apply for an order suspending the automatic discharge if the bankrupt fails to comply with their obligations under IA 1986.
May be discharged in less than one year if the Trustee or OR files a notice stating the bankrupt does not require investigation or stating that they have concluded any such investigation within the one year.
Bankruptcy Restriction Orders
SoS or OR on SoS instructions may apply to court for a Bankruptcy Restriction Order if the court considers it appropriate having regard to the conduct of the bankrupt.
Behaviour includes:
- failure to keep records
- entering into preferences or TUV
- incurring debt without reasonable expectation of being able to pay it
Generally application must be made within a year of the start of bankruptcy
- operates 2-15 years and fur duration is unable to act as director or obtain credit of more than £500 without disclosing subject to BRO
- breach is a criminal offence
- Instead of court process the bankrupt can offer an undertaking which will have the same effect.
Voidable Transactions
- Transactions at an undervalue
- Preferences
- Transactions defrauding creditors
Transaction at an undervalue
What is TUV?
- Trustee can bring a claim if the transaction is either: a gift, in consideration of marriage, consideration is sig. less than value
Relevant time
- Transaction must take place within 5 years preceding the day of presentation of bankruptcy
Insolvency required:
- must prove individual was insolvent but only if transaction took place between 2-5 years from the day of presentation
Presumption:
- insolvency is presumed where a transaction at an undervalue is entered into with an associate of the bankrupt
Preference
What is a preference?
- person is a creditor; and
- individual does anything or suffers anything to be done which has the effect of putting that person in a better position than they otherwise would have been in the event of the individual being made bankrupt
Relevant time:
- within 6 months preceding bankruptcy petition
- within 2 years preceding bankruptcy petition is the preference is to an ‘associate’
Insolvency:
- must be proved that the individual was insolvent at the time or became insolvent as a result of it
Other:
- MUST show the individual was influenced by a desire to prefer the creditor.
- Rebuttable presumption where the preference is to an associate
Transactions defrauding creditors
Show:
- transaction was a transaction at an undervalue;
- there was an intention to defraud creditors or put assets beyond their reach
Therefore there is a high evidential burden.
- No relevant time to bring a claim
- no need to prove debtor was insolvent
Summary: transaction at an undervalue
- Transaction at an undervalue
- Within 5 years preceding the day of bankruptcy
- Individual insolvent at the time/ as a result (presumed if associates)
Transactions defrauding creditors
- transaction for an undervalue
- need intention to defraud creditors or to put assets beyond their reach
- no need for individual to be insolvent and no relevant time to consider
Preferences
- Individual puts creditor in better position and influenced by a desire to prefer
- Within 6 months preceding day of presentation of bankruptcy
- within two years if associate and there will be a presumption of preference if with an associate
- individual insolvent at time/as a result
