#13620 - Personal Insolvency - Business Law and Practice

Business Law & Practice

Insolvency Revision: Personal

No definition of Insolvency. 3 tests creating a rebuttable presumption s268 IA 1986

Cash flow Test (can’t meet debts when due) (750+)

Statutory Demand (750+)

Not able to enforce a judgment debt (750+)

Options:

• Petition for Bankruptcy

• Re-negotiate with creditors

• Individual Voluntary Arrangement

• Debt Relief Order

Who can petition? s264 (debtor, one or more creditors, IVA supervisor, anyone bound by IVA)

Who can be made bankrupt? s265 (domiciled in England & Wales, resident for 3 years+)

Creditors Petition: (s267)

• Owes him 750+

• Unsecured

• Must show debtor is unable to pay his debts or that he is unlikely to be able to in the future (s268)

• Pay a substantial deposit to cover the cost of the trustee in bankruptcy and also court fee

Debtors Petition: (s272)

• Must allege he cannot pay his debts

• Submit a statement of creditors, debts, liabilities and assets

• Court appoint a trustee in bankruptcy to manage the debtors affairs

• Court will not automatically grant an order but will have regard to:

  • Whether the debts can be repaid in a short time

  • If debt is below 40,000 and assets are 4,000+

  • In this case the court will ask for a report to consider an IVA

The Official receiver will:

• Ask for the debtors statement of affairs and investigate

• Take steps to protect property

• Possibly dispose of perishable goods

• Decide whether the he should carry on as Trustee or call a meeting of the creditors for them to appoint a new trustee (s294)

Estate automatically vests in the trustee in bankruptcy (s306) and he must collect and if necessary sell assets so they may be distributed to creditors (s328)

Debtor can keep some property (clothes, tools for trade s308) and also his salary (s310)

Joint assets will vest in the trustee and any cash from sale will be split between the trustee and the other owner

Restrictions:

• Can’t obtain credit more than 500 without disclosing bankruptcy

• Can’t act as a director

• Can’t trade under a different name

• Can’t continue in a partnership

• Culpable bankrupts may be subject to a Bankruptcy Restriction Order for up to 15 years which may impose dramatic limitations on the individual.

Order of Distribution

• Fixed Charge Holders

• Costs of liquidation

• Preferential Debts (wages)

• Ordinary Unsecured Creditors

  • If not enough money, work out how much each person gets for each pound

• Postponed creditors, debts to the spouse or civil partner (s329)

Preserving Assets:

• Set aside transactions at an undervalue

• Disclaim onerous property

• Set aside preference

• Avoid Extortionate Credit Transactions

• Set aside Transactions Defrauding Creditors

• Must apply to court which will only grant if thinks fit (s342)

• Time Limits (s341)

• Only application by trustee in bankruptcy, NOT supervisor of IVA (ss339, 340)

Bankruptcy period discharged after 1 year (s279)

Individual Voluntary Arrangement (IVA)

• Agreement between Debtor and creditors (75% unsecured must agree)

• Insolvency Practitioner as ‘nominee’

• Nominee will not authorise IVA unless Secured creditors also agree.

• Apply to court for an Interim Order (s253)

  • 14 days, creates moratorium for 14 days

• Needs approval of 75% of creditors

• All unsecured creditors then become bound (NOT preferential or secured though unless...