Pt 3. Laws and legal concepts relevant to financial advice - Bankruptcy and insolvency

Question 1

What is an individual voluntary arrangement (IVA)?

Answer 1

• Decide whether IVA is acceptable, a creditors meeting is called, and vote taken, with creitors representing at least 75% of debts to vote in favour of IVA.
• IVA is approved, creditors are unable to take any legal action to recover debt.
• Fees payable, included as part of original monthly repayment when proposal is agreed.
• Insolvency practitioner reviews debtors fiannces yearly, and annual progress report is snet to creditors.
• Debtor is notified when IVA has ended.
• IVA can be cancelled if debtor cannot keep up with repayments.

Question 2

What are the 2 fees payable for IVA?

Answer 2

1. A set-up (nominee) fee to cover teh ocst of setting up IVA.
2. A handling (supervisor) fee each time payment is made.

Question 3

What happens when an IVA is in progress?

Answer 3

• Debtor will need to get permission from the insolvency practitioner to apply for credit.
• Debtor will ot be able to get a mortgage, and may only be able to borrow from less reputable lenders at high rates.
• Added to individual insolvency register, removed 3 months after it ends.
• Appears on individuals credit reference agency report for a minimum of 6 years after it commences.
• Debtor will not lose their home, but may be asked to remortgage it if equity can be used to pay off creditors.
• Partners/sole traders are unable to pay debts, as they fall due they may be made bankrupt if liabilities exceed assets.

Question 4

What is bankruptcy?

Answer 4

This is when individuals are unable to pay their debts and financial commitments, under which virtually all assets are taken and shared among creditors.

• Once it ends, debtor is largely free from debts, and able to make a fresh start.

Question 5

Who governs bankruptcy?

Answer 5

• Insolvency Act 1986
• Enterprise Act 2022

Question 6

When would court get involved in bankruptcy dealings?

Answer 6

• A petition where the creditor is owed at least £5,000 or share of debts totalling at least £5,000.
• Before courtwill make the order, the debtors inablity to pay debt must be proved by showing statutory demand has not complied within 21 days, or court of order has not been enforced e.g. bailiffs unsuccessful at obtaining property.
• You can apply online to make yourself bankrupt if cannot pay your debts, and an insolvency practitioner can make you bankrupt if you break terms of IVA.
• After bankruptcy order, the official receiver initally takes control of debtor’s property, then deciding if necesary to call meeting of creditors to appoint insolvency practitioner of choice as trustee in bankruptcy.

Question 7

What is a trustee’s function?

Answer 7

This is to realise and distribute bankrupt’s estate in accordance with Insolvency Act 1986.

All property owned by debtor at date of bankruptcy order or acquired during will pass to the trustee.

Question 8

What is the trustee’s task to convert bankrupts property into money?

Answer 8

• Costs of bankruptcy
• Preferential debts e.g. accrued holiday pay to employees, wages of employees, and contributions to occupational pension schemes.
• Insufficient funds to pay all debts in category, treated equally so each creditor will receive same % amount due to them.
• Ordinary unsecured creditors are treated equally if insufficient funds to pay debts in full.

Question 9

What are the effects of bankruptcy?

Answer 9

• Under Enterprise Act 2022, normally continues for 12 month period through culpable bankrupts may remain discharged longer than this.
• Number of disqualifications will apply; from acting as company directors, obtaining credit above prescribed limit (£500) without disclosing fact os uncharged bankruptcy, and certain personal disqualifications, i.e. accountancy, FS, banking.

Question 10

What is liquidation?

Answer 10

• The process by which existence of a company is brought to end and property is administered for benefit of creditors and shareholders.
• Liquidator = appointed to take control of company collect all its assets, pay all its debts, distribute any surplus between members.
• Company is then dissolved and struck off Register of Companies.

Question 11

What are the alternatives to liquidation?

Answer 11

• Administration - when an administrator is appointed to run company affairs and aims and attempts to rescue company as going concern.
• Voluntary arrangements - insolvency proceedings avoided by substituting satisfactory settlement of financial difficulties between companies and creditors.