Insolvency Flashcards
What is insolvency?
A term which indicates a person or business is unable to pay their debts.
Who is a debtor?
The person owing the debts.
Explain the process of negotiating with creditors and to whom it applies.
An individual (sole trader) or partner who owes more money than they can pay can approach creditors to ask for debt to be reduced / for extra time to pay the debt.
Creditor may agree to this if they are to receive more money in the long run.
Typically this will be an unenforceable agreement as no consideration is given by the debtor. At any point, creditor could still demand the full amount.
Who is a creditor?
The person to whom debts are owed.
What is the drawback of entering into an IVA?
It is not useful unless the debtor has the money to pay the reduced amounts (in full) immediately.
What is an individual voluntary arrangement (IVA)?
Negotiated agreement between debtor and all of their unsecured creditors.
Creditors each agree to accept less in payment than is owed to them.
It avoids enforceability problem of individual negotiation as it is a formal procedure.
What is the first thing an individual must do when wanting to enter into an IVA?
Professional advice must be taken from an insolvency practitioner who will draw up the proposals and supervise the implementation of the IVA.
What two things will the IP do when instructed to assist with a client entering into an IVA?
1) Prepare a statement of affairs and apply for an interim order;
2) Meet the creditors.
Explain how a statement of affairs and an application for an interim order is prepared.
IP will have debtor prepare a statement of affairs and will apply to the bankruptcy court for an interim order.
Whilst the order is in force, no bankruptcy petitions may be presented or proceeded with, unless permission is granted by the court.
No other proceedings/executions can be commenced against the debtor during this time.
This gives the IP time to try and work out which assets and liabilities the debtor has, and whether a successful IVA is likely without creditors sending bailiffs in to take away available assets.
Who has to agree to the IVA for it to be binding?
75% (in value) of debtor’s unsecured creditors must agree to the proposals. If so, proposals are binding on ALL unsecured creditors who had notice of the meeting (even if they did not attend and vote).
Preferential creditors and secured creditors are NOT bound unless they actively agree to the proposal.
Are preferential and secured creditors bound by an IVA?
No - unless they specifically agree to the proposals.
How is the IVA proposal implemented once it is agreed to?
IP oversees and implements the proposals.
If debtor fails to comply with the IVA/ provided false information, the IP or any creditor who is a party to the IVA may petition for the debtor’s bankruptcy.
Who has the power to set aside transactions at an undervalue/ preferential transactions (which a debtor is undertaking prior to signing an IVA)?
The trustee in bankruptcy only.
Give some examples of how a debtor may fail to comply with an IVA/ provide false info.
They may hide money/assets out of reach from creditors prior to the IVA by selling assets at an undervalue or giving preferences.
Summarise what is meant by bankruptcy.
Judicial process in which assets of the bankrupt debtor are passed to a third party (the trustee in bankruptcy) who liquidates the assets and uses the money from liquidation to pay off as many of the debtor’s debts as possible in a strict order set out by legislation.
Once application for bankruptcy is made, debtor’s creditors must stop chasing debtor for payment.
Debtor will be discharged from any remaining debts after one year of bankruptcy.
Explain the three ways a bankruptcy order can be made against an individual.
1) Debtor can apply online, declaring themself bankrupt. Application heard by an adjudicator (apportioned by Secretary of State). Application granted if the adjudicator finds the debtor cannot pay their debts.
2) One or more unsecured creditors who are owed at least £5,000 combined can present a petition for an order of bankruptcy to the bankruptcy court.
3) Supervisor (IP) of an IVA can petition for the debtor’s bankruptcy if the debtor has breached the terms of the IVA, has hidden assets, or given preference to a particular creditor.
Who is appointed if an official bankruptcy order is made?
An official receiver.
An official receiver is a civil servant, who acts as the trustee in bankruptcy unless creditors seek to appoint their own nominee.
Explain what the creditor must prove in order to petition for bankruptcy of the debtor.
That the debtor is insolvent (ie unable to pay their debts) buy showing either:
1) the debt is payable immediately and they do not have funds to pay; or
2) the debt is payable in the future and the debtor has no reasonable prospect of meeting the debts.
On bankruptcy, in whom does the bankruptcy estate vest?
It vests in the trustee in bankruptcy.
This means the bankrupt person does not need to go through legal formalities to transfer legal ownership of the assets.
STFs are not required in relation to shares - legal title vests automatically.
Trustee collects in and sells all of the assets to raise money which is then used to pay off the creditors.
Are any assets exempt from the bankrupt’s estate?
The bankrupt individual is entitled to keep some assets needed for daily living (eg furniture or tools required for their job).
Bankrupt person is also entitled to retain a salary they make as long as the trustee applies for an income payments order. The salary must be reasonable for the needs of the bankrupt and their family.
How long does an income payments order last for?
Max 3 years.
What is an income payments order?
An order where if granted, the bankrupt person can retain any salary they make for the purposes of living, provided it is reasonable for the needs of themself and their dependants.
Does the bankrupt person’s home also vest in the trustee on bankruptcy?
Yes.
What happens if the bankrupt person’s home is not solely owned by them (eg owned as TICs, JTs or someone has a trust interest over it)?
The trustee in bankruptcy is not allowed to sell the home without a court order where someone else has an interest in the property.
The court will consider all of the interests and make an informed decision.
However, if after 1 year the interests of the creditors are deemed paramount, repaying the creditors will take priority over anyone’s interest in the house.
Explain the restrictions placed on the debtor during the bankruptcy proceedings.
They may not:
1) apply for credit of more than a prescribed amount;
2) act as a company director;
3) be a partner in any partnership; or
4) trade under another name without dislcure of the bankruptcy.
Explain the order of priority for distortion to the creditors on bankruptcy.
Order of distribution is as follows:
1) Costs of bankruptcy;
2) Preferential debts (including holiday pay to employees, employee wages due in the last four months and HMRC payments in respect of VAT, PAYE and national insurance);
3) Ordinary unsecured creditors;
4) Postponed creditors (eg a spouse or civil partner).
What happens if there is not enough money to pay all of the creditors?
The debts rank and abate equally (meaning creditors in the same rank will receive an equal percentage of their original debt).
How does the bankruptcy come to an end?
If bankrupt complies with restrictions and did not cause bankruptcy by their own dishonesty or negligence or recklessness, then the bankruptcy will be automatically discharged after one year.
