Bankruptcy

Bankruptcy is an insolvency process for individuals, which commences on the day a Bankruptcy Order is made, following the presentation of a bankruptcy petition. Until 6th April 2016, unlike its corporate equivalent liquidation, only the Court could make an individual bankrupt. However, on 6th April 2016, a new bankruptcy applications regime came into force replacing debtor’s bankruptcy petitions (but not creditor’s petition. It now means that any individual debtor who wishes to make himself bankrupt has to make a bankruptcy application which is determined by an Adjudicator, and not by the Court.

The making of a Bankruptcy Order – whether by the Court or by the Adjudicator – will free a debtor from the debts due to the creditors and will prevent unsecured creditors from commencing, or continuing with, any legal process against the bankrupt or his property.

For a creditor’s Bankruptcy Petition to be presented the debtor must be unable to pay his debts. This will be presumed if he fails to adequately deal with a statutory demand served, or an enforcement process is returned unsatisfied. A debt of £5000 or more must be due for a creditor to present a petition.

A bankruptcy petition can also be presented by the Supervisor of a failed IVA or by creditors of an IVA where the debtor has provided false information in the IVA proposal.

Upon the making of a Bankruptcy Order the Official Receiver (an Insolvency Service employee) is automatically appointed as Trustee in Bankruptcy unless the Court makes an order for the Supervisor of any failed Individual Voluntary Arrangement (IVA) as Trustee.

The debtor’s creditors may appoint an Insolvency Practitioner to act as Trustee. In addition, the Secretary of State may appoint an Insolvency Practitioner as Trustee. A Trustee in Bankruptcy is an Officer of the Court.

The Property comprising the bankruptcy estate will vest in the Trustee, who will realise the property and distribute same to the creditors in the bankruptcy (after the costs of administration of the estate) in accordance with the statutory ranking of creditors. In return for the bankrupt’s property vesting in the Trustee, the debts fall into the estate and it is no longer the bankrupt’s responsibility to pay those debts. In addition, the Bankruptcy Order has the following effects:

• Proceedings against the bankrupt or the bankrupt’s property are stayed.
• The bankrupt cannot act as director of a limited company, or take part in the management, formation or promotion of a company without the leave of the court.
• It is an offence for a bankrupt to obtain credit above the prescribed amount (currently £500), without first declaring that they are an undischarged bankrupt.

The Trustee’s fees are paid as an expense of the bankruptcy. The fees of the Official Receiver as a Trustee are laid down by statute and comprise fixed statutory charges plus percentage fee rates on assets realised and on money distributed to creditors.

The rules as to how an Insolvency Practitioner’s remuneration is fixed are set out in the IR2016 (Part18).

Where an Insolvency Practitioner is the Trustee creditors are required to be presented with reports of the progress of the bankruptcy with the first report required to be issued by the Trustee after 12 months and annually thereafter until the Trustee submits a final report to conclude the administration of the bankrupt’s estate. If the administration of the bankruptcy does not exceed 12 months then only the final report will be submitted to creditors.

Creditors may form a Committee of 3 to 5 creditors to assist the Trustee in carrying out his functions and to fix the basis of the Trustee’s remuneration.

Bankruptcy estate’ is defined in section 283 of the Insolvency Act 1986 (IA86) as being property which either belonged to the bankrupt or in which the bankrupt had an interest, at the date the Bankruptcy Order was made.

Certain assets do not form part of the bankruptcy estate such as the bankrupt’s pension, certain causes of action personal to the bankrupt, “tools of trade”, and domestic or household furniture and essentials sufficient to meet the debtor’s and his family’s basic needs.

Property comprising the bankruptcy estate vests with the Trustee automatically upon his appointment and without any conveyance, assignment or transfer.

The Trustee will also investigate transactions entered into by the bankrupt prior to a bankruptcy to see whether any are capable of being challenged.

The Trustee may lay claim to assets for the bankruptcy estate if the bankrupt acquires an interest in that property after the Bankruptcy Order is made, but before he is discharged from bankruptcy (so-called ‘after-acquired property’).

Property comprising the bankruptcy estate vests in the Trustee until it is realised, or disclaimed. There are, however, some exceptions to this, the most common being the bankrupt’s sole or principal residence, which re-vests in the bankrupt on the third anniversary of the Bankruptcy Order unless the Trustee has by then taken certain prescribed steps to deal with the property.

If a Trustee establishes that a debtor has surplus income available above that normally required to maintain his standard of living an application may be made before the debtor is discharged from bankruptcy for an Income Payments Order (IPO). Alternatively a Trustee may seek an Income Payments Agreement (IPA) from the debtor to save on costs.

Normally a debtor will be automatically discharged from bankruptcy upon the first anniversary of the Bankruptcy Order, although there are exceptions where a successful application for the suspension of the automatic discharge may have been obtained by the Official Receiver or Insolvency Practitioner as Trustee.

If a partnership (not LLP) owes debts, all of the partners will stand to be jointly and severally liable to pay sums owed. Each partner is liable not only for his or her personal debts but they are also liable for the partnership business debts on a joint and several basis.

A creditor of a partnership can petition for either:

• The winding up of the insolvent partnership as an unregistered company, with no action taken against the individual partners; or
• The winding up of the insolvent partnership as an unregistered company, with bankruptcy petitions also presented against one or more of the partners.

Alternatively, a creditor may choose to only pursue a certain partner or certain partners for the debt by petitioning for the bankruptcy of one or more of the partners without petitioning for the partnership to be wound up. The partnership debt is pursued as the debt of the partner against whom the bankruptcy petition is presented.

The members of a partnership may also petition for the insolvent partnership to be wound up as an unregistered company with no action against the insolvent partners and/or with action taken against the insolvent partners individually.

Further information on bankruptcies can be obtained from the website of the Association of Business Recovery Professionals (R3) at www.r3.org.uk.