#3255 - Personal Insolvency - Business Law and Practice

Bankruptcy

Definition: Court order that declares a person to be insolvent. He is unable to pay his debts / has no reasonable prospect of paying his debts when they fall due.

Bankruptcy vests property in a trustee for distribution. At the end of one year the debtor is released from liability.

Procedure:

• Creditor’s petition: must show that

1. Debt of at least 750 (liquidated and unsecured)

2. Debtor appears to be unable to pay / no reasonable prospect of being able to pay (creditor must serve statutory demand and it is unpaid after 3 weeks. There must also be no outstanding application to have statutory demand set aside); OR debtor has failed to satisfy execution of judgment debt.

3. Debtor is domicile

• Petition is presented (i.e. filed in court)

• Petition served on debtor personally

• Hearing: est. 14 days after service

• Bankruptcy order given to debtor

• Debtor’s petition:

1. petition on grounds of inability to pay

2. statement of affairs

• hearing of the debtor’s petition

• Bankruptcy order made; OR court appoints insolvency practitioner to prepare report to consider IVA.

• Official Receiver (OR) appointed

• Trustee in bankruptcy appointed by creditors

• Property vests in trustee – (but there are exceptions – all things necessary for working / living; Also – if the house is jointly owned then trustee only holds bankrupt’s share; Spouse will also have a right of occupancy in the family home S.30 Family Act. If the bankrupt lives with children under age of 18 then he may also have a right of occupancy under S.338 Insolvency Act. However, after 1 year the rights of creditors outweighs spouse’s rights unless there are “exceptional circumstances”.

• Income Payments Order & agreements: Trustee can apply to court for an income order (so trustee gets bankrupt’s income also) but court must leave enough for reasonable needs. This agreement can last after discharge of bankruptcy but no longer than 3 years.

• Distribution of bankrupt’s assets

• Discharge of bankruptcy

How does trustee increase bankrupt’s estate?

1. Set aside Onerous property transactions (S.315 IA 1986)

• Including any unprofitable contracts, property which is unsaleable or requires performance of a onerous act (e.g. lots of repair work)

• Any person sustaining loss as a result ranks as a creditor

2. Set aside transactions at an undervalue (S.339)

• A gift or a transaction for consideration significantly less than the market value; or gift given in consideration of marriage or formation of civil partnership.

• Must have taken place within 5 years of petition

• Debtor is insolvent at the time or as a result of transaction

• If within 2 years – no need to show insolvency

• There is protection for a subsequent purchaser of assets for value without notice who was not a part to the original transaction – subject to S.342(2A)

3. Set aside any Preferences (S.340)

• An individual gives a preference to a creditor if the individual does anything to put that creditor in a better position in the event of the individual becoming bankrupt than he would otherwise have been.

• Anything done within 6 months prior to petition which puts creditors in better position that the others in bankruptcy

• Debtor must be insolvent at the time or as a result of; AND debtor must have intended (even just partially) to prefer the creditor

• If to associates: time limit is 2 yrs before bankruptcy and there is a presumed intention to prefer.

• Same protection under S.342(2A)

4. Set aside transactions defrauding creditors (S.423)

• Transactions at an undervalue

• No time limit

• Must be a intention to make assets unavailable

Statutory order for payment of debts

Restrictions as a result of bankruptcy

• must disclose bankruptcy if obtaining credit of more than 500 and if setting up a business under a different name.

• cannot be a director / indirectly in management of company without court consent

• cannot be insolvency practitioner

• professional restrictions e.g. solicitor

Post-bankruptcy – (fact track IVA)

Discharge S.278 – 282 IA

• discharge can occur any time before or after the estate is wound up

• automatic discharge after one year

• this may be extended if bankrupt fails to comply with the order.

Bankruptcy Restriction Order (BROs) and Undertakings (BRUs)

• can last for 2-15 years

• post-discharge restrictions made by court if B is culpable and / or dishonest.

• Mainly same restrictions for bankruptcy but lasting longer and some extra restrictions.