What is Bankruptcy?
Formal bankruptcy proceedings on an individual level governed by the Insolvency Act.
Either the individual voluntarily applies to an adjudicator for a bankruptcy order
or a creditor files a petition with the court for a bankruptcy order (BO).
Creditor’s Bankruptcy Petition - Requirements
Conditions:
- Debt for a liquidated sum of at least 5,000 GBP
- Unable to pay the debt and no reasonable prospect of paying it
- Debt is unsecured
- No statutory application outstanding to set aside a statutory demand for the debt
The court will make a BO only if:
- Debt remains unpaid
- No reasonable prospect of paying it when it falls due
Individual Bankruptcy Application - Requirements
Conditions:
- Debtor unable to pay their debts
- No bankruptcy petition by a creditor is pending
- No BO was made for the same debts
A trustee in bankruptcy is appointed - an official receiver by the court.
Statutory order of Bankruptcy
Payment of debts and expenses:
- Secured creditors
- Expenses and costs by the trustee in bankruptcy
- Preferential debts
- Unsecured debts
- Interest on preferential and unsecured debts
- Debts to spouse/CP
- Interest on debts to spouse/CP
- Any other debts
- Surplus - returned to the bankrupt
Effect on Bankruptcy Order
- Automatic end of partnership
- Undischarged bankrupt cannot be a trustee of a charity or a director
- Bankruptcy is registered in the Insolvency Register
- Creditors are bound to accept what they are given as part of BO and cannot recover more via enforcement action
On the anniversary of the BO the bankrupt will be discharged from liability to pay his debts.
Pre-Bankruptcy Transactions that can be set aside by Trustee in Bankruptcy or OR
Undervalue transactions (different timelines vs corporate insolvency):
- 5 years before the onset of bankruptcy if the individual was bankrupt at the time of the transaction or became bankrupt as a result of it (presumed if made to an associate) / OR
- any undervalue transaction made 2 years before the onset of bankruptcy
Transactions defrauding creditors - same definition as insolvency
- Transactions at an undervalue
- Entered into with the purpose to defraud creditors and put assets beyond reach in case a claim is raised
NO REQUIREMENT FOR INSOLVENCY
Preference transactions - same definition as insolvency
- Transactions to grant a preference
- With the intention to grant it (presumed if to a connected person)
- Within 6 months before bankruptcy petition or application (or 2 years if to an associate)
- The person was bankrupt at the time or became bankrupt as a result of this transaction
Associate / associated person - Definition according to the Insolvency Act
- Spouse
- Civil partner
- Relatives and their SP/CP
- Any person in partnership
- Any relatives of the partner
Alternatives to Bankruptcy
- Informal negotiations with creditors
- Restructure debts on better terms to allow the individual to repay debts
- Individual Voluntary Arrangement (IVA)
Individual Voluntary Arrangement
- Statutory arrangement between unsecured creditors and debtor, a flexible scheme of arrangement. The sole trader or partnership can continue working to generate income to repay the creditors.
Process:
- A proposal is drafted by the debtor, a nominee is appointed.
- The proposal must be approved by unsecured creditors who are owed at least 75% of the debts in value; of them at least 50% should not be associates of the debtor.
- The nominee becomes an IVA supervisor and supervises the debtor’s compliance. IVA lasts for 3-5 years.
- At the end if there is some outstanding debt not paid by the debtor, it is usually written off.
No automatic statutory moratorium - debtor can make an interim order for a moratorium to have a break from creditors pursuing them to satisfy debts.
- If approved, IVA binds all unsecured creditors. It doesn’t bind secured creditors unless they approve to be bound by it.
[A debt relief order (DRO) is entered into the Individual Insolvency Register and lasts 1 year]
