Bankruptcy

INTRODUCTION

A person ("the debtor") can be declared bankrupt by the Court if he or she is unable to pay debts. A person can be made bankrupt either on his or her own application or on the application of one or more of the people to whom money is owed ("creditors"). However, there are strict rules governing the procedures which must be followed. The creditor can start bankruptcy proceedings by issuing, via the Court, a statutory demand for payment of the debt as non compliance with the demand is one of the grounds for petitioning for bankruptcy. The proceedings could also be based upon unsatisfied County Court or High Court judgment. However, making someone bankrupt is often not the best way for a creditor to secure repayment as the creditor would have to compete with other creditors for a share of the bankrupt's assets.

STATUTORY DEMAND

The statutory demand, is a document prepared by the creditor requiring the debtor to pay the debt within a certain timescale. If the debtor does not pay within the time he or she is deemed unable to comply with the demand. If the debtor wishes to try to set aside the demand the application must be made. Common reasons for applying to set aside are that the debt is disputed, the debtor has a counterclaim or the demand does not comply with the rules.

INDIVIDUAL VOLUNTARY ARRANGEMENT

In order to avoid a bankruptcy petition, the debtor can make a proposal for an individual voluntary arrangement "IVA". This is essentially a private arrangement between a debtor and his creditors whereby the creditors agree to accept deferred payment and/or something less than 100 pence in the pound to pay their debts. While an IVA is proposed, protection can be obtained from the Court for the debtor from his creditors.

BANKRUPTCY PETITION

A bankruptcy petition can be presented to the Court if the debtor is unable to pay and has no reasonable prospect of being able to pay. This requirement is satisfied if the debtor has been served with a statutory demand and has failed to comply with it in time. The bankruptcy petition will come before the Court for a hearing after service of the petition. If the debtor wishes to oppose the petition he must give notice to the petitioning creditor, stating the grounds of his objection. The creditor who has brought the petition must appear at the hearing. Other creditors must give notice of their intention to appear at the hearing and must state whether they intend to support or oppose the petition.

BANKRUPTCY ORDER

If satisfied that the debt has not been paid, or, if the debt is payable at a future time, the debtor has no reasonable prospect of being able to meet the debt, the Court may make a Bankruptcy Order. If the Court is satisfied that the debtor can meet his debts, it will dismiss the petition. If the debt is less than a certain amount the Court may issue a certificate of summary administration, which means that there is no obligation on the Official Receiver to investigate the debtor's conduct. In other cases an Insolvency Practitioner is normally appointed to look into the question of whether a meeting of creditors can be arranged and whether the debtor is willing to enter into a voluntary arrangement (see above).

STATEMENT OF AFFAIRS

Once a Bankruptcy Petition has been presented, a Court may stay any action or other legal process against the debtor or his property. A creditor has no remedy against the person or property of the bankrupt and may not commence any action against him without the leave of the Court. Where a Bankruptcy Order is made, the bankrupt is obliged to submit a statement of affairs, which contains full particulars of creditors, liabilities and assets. Either the Official Receiver or a creditor who is owed more than 50% of the debts may apply to the Court for a public examination of the bankrupt.

CREDITORS MEETING

The next stage is usually a meeting of creditors who will appoint a trustee in bankruptcy. The trustee is the person to whom creditors must submit their claims to the bankrupt's assets. There are four classes of creditor - secured, preferential, unsecured and deferred. The secured creditor is not given preference when it comes to payment, but is entitled to rely on the security. Preferential debts consist mainly of taxes such as PAYE, VAT and social security contributions and certain wages due to employees in the period prior to the petition. Unsecured debts are those which are neither secured nor preferential. Deferred debts are those owed by a bankrupt to his spouse.

BANKRUPT'S ASSETS

Once the trustee has realised all the bankrupt's assets, the creditors who have proven their debts can be paid dividends. The bankrupt is authorised to continue in business providing he informs everyone from whom he tries to obtain credit that he is a bankrupt. The bankrupt is entitled to retain such tools, books, vehicles and other items of equipment, as are necessary for use in employment or business, and his or her personal effects. The Court must not require the bankrupt to make any payments, which might affect the well being of the bankrupt and his family. The trustee can ask the Court for an order requiring the bankrupt to pay over a proportion of his income. Property acquired by the bankrupt after an order has been made does not automatically become part of the estate but the trustee can claim it by giving notice to the bankrupt. Where the bankrupt has a spouse, the trustee is not automatically entitled to the sale of the bankrupt's house but must apply to the Court. The Court will take into account the interest of the creditors, the conduct of the spouse in contributing to the bankruptcy and the needs of the spouse and children.

DISCHARGE

Unless the bankrupt has already been made bankrupt in the last 15 years or has been made criminally bankrupt, the Bankruptcy Order is automatically discharged after 3 years. Where a certificate of summary administration has been issued, the period is 2 years. There are certain offences set out in the Insolvency Act for which a bankrupt can be prosecuted. For example, it is an offence to be a company director while an undischarged bankrupt. Concealment of property is also an offence.