Advise on circumstances in which a D can be become bankrupt

Personal insolvency = ‘bankruptcy’; applies only to indiv s.265 IA86

- Any person domiciled in England and Wales and who is personally present in E&W on day bankruptcy petition is presented; or

- Any person who has in the land 3 years ending on day petition presented:

- has a place of residence or has been ordinarily resident in E&W; or

- has carried on business in E&W

Aim to encourage entrepreneurship by allowing honest bankrupts to be discharged after one year or less with a clean slate, while punishing reckless by imposing restrictions for up to 15yrs.

When is an indiv insolvent?

IA 1986 contains 2 tests (s.267(2)) based on whether able to pay debts:

Debt(s) payable immediately and debtor doesn’t have sufficient funds to do this, even though may at some point in the future
Debt(s) payable at some specified point in the future and debtor has no reasonable prospect of being able to pay

How can creditor prove debtor insolvent?

Three ways creditor may show debtor insolvent and so force bankruptcy (s.268):

Serve stat demand on debtor for a liquidated debt in excess of 750 and wait 3 weeks to see whether pays or applies to court to set aside
Serve stat demand on debtor in respect liability to pay creditor a sum in excess 750 on a future date and wait 3 weeks to see whether shows reasonable prospect of being able to pay the sum when it falls due, or applies to court top set aside.
Obtain court judgment for debt in excess of 750 and attempt execution of that judgment debt without debt being satisfied in full.

Insolvent debtor’s options?

Petition for own bankruptcy to show trying to sort things out
Talk to creditors – compromise
Enter into formal arrangement with creditors called (IVA)Individual Voluntary Arrangement
Apply for debt relief order

Bankruptcy is a judicial process during which court passes all assets to an official – the trustee in bankruptcy – to pay off as many debts as poss. Once done, bankrupt will usually be discharged, free from almost al debts and able to start afresh.

Can visit Official Receiver’s Office for discharge or auto discharge after one year (IA s.279)

The bankruptcy process

Step 1: petition	Commenced by presentation to Official Receiver of petition by debtor, any creditor or various others listed in s.264. If petition granted, bankruptcy order is made.
Creditor’s petition s.267	Creditor may petition if debtor owes his 750 or more. Must also be able to claim that debtor is unable to pay debt or has little prospect of being able to s.267(2)(c). Will be presumed if follows one of the methods in s.268 (above). Creditors owed less than 750 may join tog to petition if tog owed more than 750 s.267(2)(a) Present petition to debtor’s local court Creditor must pay a deposit to cover costs of trustee in bankruptcy and fee to the court Must arrange for petition to be served personally on debtor
Debtor’s petition s.272	- Must allege he cannot pay his debts (IA s.272(1)), accompanied by statement giving details of creditors, debts, liabilities and assets. - Must not abuse process (e.g. cannot withdraw petition once made, without leave of court s.266) -> places responsibility for his financial affairs into hands of trustee in bankruptcy
Step 2: the order	Where creditor’s petition before court, order will usually be granted if court satisfied the debt is either: currently payable and hasn’t been paid, secured or compounded (i.e. creditor agreed to accept less or not currently payable but one which debtor has a real prospect of being able to pay Court can dismiss petition if satisfied either: D can pay its debts Creditor unreasonably refused offer to secure or compound the debt If debtor’s petition, court won’t make order immediately if: Thinks debtor could raise funds in a short time (e.g. sell house) Debts are below small bankruptcies level (currently 40,000) and debtor has some assets (currently at least 4,000) -> court will require a report to be prepared (s.263) on possibility of an IVA Within 5 years petitioner has neither been adjudged bankrupt nor been in a scheme of arrangement – court will ask for report under s.273 Under changes by the EA, aim for general discharge period to be one year. However, may be reduced if OR states that further investigation into bankrupt’s conduct is unnecessary or has been concluded (s.279)
Role of the Official Receiver	Initially takes control bankrupt’s property when order made. Will: Ask d for statement of affairs and investigate if necessary Take steps to protect property Possibly dispose of perishable goods or those going down in value Decide whether OR should carry on himself or call meeting of creditors to appoint insolvency practitioner to act as trustee in bankruptcy Insolvency practitioner must be licensed to act as trustee (usually an accountant). Creditor may demand a meeting if he and those supporting him comprise 25% of bankrupt’s creditors (s.294)
Role of trustee in bankruptcy	Bankrupt’s estate vests automatically in them (s.306). Function to collect and, if necessary, sell assets, so can distribute to creditors in accordance s.328. Can then apply for release. Wide ranging powers to investigate affairs and may set aside some transactions entered prior to bankruptcy
Bankrupt’s property	Estate vests in trustee (defined s.283); includes most real and personal property except bankrupt able to keep some assets needed for day-to-day living, e.g. tools of trade, clothing and furniture, unless it is of high value (trustee able to sell and replace with lower value item – s.308) also entitled to retain salary, but trustee may apply for income payments order if exceeds a sum sufficient to meet the reasonable needs of bankrupt and his family (s.310) -> this order can last up to 3 years even if b discharged Matrimonial home debtor’s interest passes to trustee however, others may have interests (spouse – often JTs and family law act 1996 and minors, giving b right of occupation) debtor cannot be evicted immediately – trustee cannot sell without court order court will consider interests of creditors, financial resources of b, needs of children, all relevant circumstances After one year, needs of creditors outweigh all other considerations and home may be sold. Unless exceptional circumstances (s.336(5)) – forced housing would exacerbate occupants physical illness R v Raval After 3 years, home re-vests in bankrupt (s.283A) unless trustee has: realised the interest applied for order of sale or possession applied for a charging order over the house entered into an agreement with the bankrupt regarding their interest in the house
Effect of bankruptcy on the bankrupt	Subject to a number of restrictions and disabilities – to protect creditors. Restrictions that apply at time of the order: restrictions on business activities: criminal offence to obtain credit of more than prescribed amount (currently 500 total) without disclosing bankruptcy -> practically almost imposes to carry on business can’t act as D of a co or involved in management etc (s.11 CDDA) can’t trade under a different name without disclosing that he is an undischarged bankrupt (s.360(1)(b) IA) can’t continue in partnership (s.33 Partnership Act 1890 provides for auto dissolution) unless partnership agreement provides otherwise. Personal disabilities: can’t obtain credit over prescribed amount (500 currently) on own or with another without informing lender he is an undischarged bankrupt (s.360(1)(a)) can’t practice as a solicitor without leave of the SRA -> difficult to obtain a bank account and impossible to obtain a credit card. Have to conduct financial affairs in cash (issue for employers) Additional restrictions on culpable bankrupts ‘culpable’ if cause bankruptcy by own dishonestly, negligence and recklessness. Bankruptcy Restriction Orders imposed to protect the public after discharge. BROs last from 2 to 15 years.

Preserving and increasing the bankrupt’s assets

Trustee duties to creditors to increase funds available and do nothing to reduce. Therefore has various powers:

...

Disclaim onerous property (s.315 IA)

e.g. land burdened by onerous covenants

disclaimer ends all bankrupt’s rights and liabilities in respect of the property and discharges trustee from personal responsibility for it.

Any person who suffers loss becomes unsecured creditor any person with interest in property previously owned by b entitled to serve written notice on t in b requiring him to disclaim within 28 days, failing which loses power to do so (s.316)

Transactions at an undervalue

s.339(3) undervalue is:

a gift
transaction where b received consid significantly lower in value than that he provided

s.341 – may investigate transactions upto 5yrs pre-bankruptcy petition

no need to prove insolvency at time, unless more than two years pre-petition (s.341(2)).

Even more than two yrs pre-petition, insolvency will be presumed if to an ‘associate’ (s.435), which may be rebutted

preferences

Places creditor or surety in better position than would otherwise have been in bankruptcy and b intended (at least partly) to do this (s.340).

If in favour of an associate, presumption of intention, which may be rebutted

s.341(1) may make an app to set aside any preference made in 6 months prior to petition or within 2 years prior if to an associate.

Trustee must prove debtor was insolvent at time or became insolvent as result of the preference (s.341(2))

#10471 - Personal Insolvency - Insolvency and Liquidation

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