PERSONAL INSOLVENCY

The foundation of English Insolvency Law in relation to individuals is located in the provisions of the Insolvency Act 1986, the Insolvency Rules 1986 and associated legislation. In giving an introduction to the topic, it is inevitable that we cannot focus on the detail of the legislation (which is complex) but only seek to give a broad overview, enabling you to have an understanding of the basic procedures that are followed in the event of your wishing:

(i) to make a proposal to creditors for what is called a composition in satisfaction of debts or a scheme of arrangement (a "voluntary arrangement"); or

(ii) to pursue a debtor to bankruptcy; or

(iii) contest a Petition to make you bankrupt. This part of the note deals with each of these possibilities in turn.

Individual Voluntary Arrangement

A debtor may apply to the Court for an Interim Order (under Section 252 IA). This has the effect of shielding the debtor from a Bankruptcy Petition as well as from other Court proceedings, execution and other legal processes, during the time that the debtor makes a proposal to his creditors to deal with his debts. Where an Interim Order has been made, the trustee or supervisor of the Proposed Voluntary Arrangement ("the nominee"), within the period of time covered by the Order, submits a report to the Court stating whether he considers that a meeting of the debtor's creditors should be summoned to consider the debtor's proposal and, if he does consider that such a meeting should be summoned, proposing a date, time and place at which the meeting should be held. The nominee summons the creditors meeting and every creditor of whose claim and address the nominee is aware should be summoned.

The creditors meeting decides whether or not to approve the proposed voluntary arrangement and may resolve to modify the proposal before approving it. The rights of secured creditors of the debtor, and of preferential creditors, cannot be affected without the agreement of the creditors concerned. The result of the creditors meeting is reported to the Court. If the meeting declines to approve the debtor's proposal, the Court may discharge the Interim Order. There are provisions in the Act to allow challenges to be made to the decision of the meeting of creditors by application to the Court on specified grounds.

Bankruptcy

An individual may petition for his own bankruptcy, as may his creditors and the supervisor of, or any person (other than the individual in question) who is for the time being bound by, a voluntary arrangement. To present the Petition to the Court, the debtor must be domiciled in England and Wales, or be personally present in England and Wales on the day on which the Petition is presented, or at any time in the period of 3 years ending with that day, have been ordinarily resident, or have had a place of residence, in England and Wales, or have carried on business in England and Wales. The bankruptcy level is £750 and the amount of the debt or debts must be equal to or exceed this amount. The debt must be for a liquidated sum payable either immediately or at some certain future time and be unsecured. It is usual, prior to the issue and service of a Bankruptcy Petition, for a Statutory Demand to be served on the debtor since, if this fails to produce payment, the creditor can rely on the failure of the Statutory Demand to prompt payment as evidence to satisfy the Court that the debtor is unable to pay the amount due. Statutory Demands must be in the prescribed form and have been delivered to the debtor at least 3 weeks prior to the presentation of the Petition.

If the Court is satisfied that the debt has neither been paid, nor secured or compounded, or is one which the debtor has no reasonable prospect of being able to pay when it falls due, it may make the Bankruptcy Order. Generally, the Court will not make the Order if the debt is disputed on bona fide grounds or there is a cross-claim equal to or exceeding the amount of the debt and such cross-claim arises out of or is linked in an appropriate way to the debt in relation to which the creditor petitions the Court.

A debtor's Petition may be presented to the Court only on the grounds that the debtor is unable to pay his debts.

If the Court makes the Bankruptcy Order, it commences on the day on which it is made and continues until discharged. Usually, the bankrupt may seek discharge of a Bankruptcy Order three years after the date of commencement of the bankruptcy. Where the Bankruptcy Order is discharged, the discharge releases the bankrupt from all bankruptcy debts subject to certain exceptions. In particular, discharge from bankruptcy will not release the bankrupt from any bankruptcy debt incurred in respect of any fraud or fraudulent breach of trust to which he was a party.

The Court may annul a Bankruptcy Order at any time if it appears appropriate for it to do so.

After the making of the Bankruptcy Order, the Bankrupt has to submit a statement of his affairs to the Official Receiver within 3 weeks of the date of the Bankruptcy Order. It is the duty of the Official Receiver to investigate the conduct and affairs of every bankrupt and to make any report to the Court he considers fit. The Official Receiver may at any time before the discharge of the bankrupt apply to the Court for the bankrupt to be publicly examined as to his affairs, dealings and property.

When made bankrupt, the bankrupt has a duty to deliver possession of his estate to the Official Receiver and to deliver up to the Official Receiver all his books, papers and other records (in his possession or control) relating to his estate and affairs. If the bankrupt fails, without reasonable excuse, to comply with his duties in relation to the Official Receiver, he may be guilty of a contempt of Court and liable to be punished, such punishment including the possibility of imprisonment.

The Court may appoint a trustee of the bankrupt's estate as may a general meeting of the bankrupt's creditors. The trustee in bankruptcy must be a qualified insolvency practitioner. (For hot links to the Insolvency Practitioners Association, click here). The Official Receiver has to decide within the period jof 12 weeks from the date of the Bankruptcy Order whether or not to summon a general meeting of the bankrupt's creditors for the purpose of appointing a trustee of the bankrupt's estate. If he does not do so, he must give notice of his decision to the Court and to every creditor of the bankrupt who is known to him. Any creditor of the bankrupt may request the Official Receiver to summon a meeting for the purpose of appointing a trustee in bankruptcy. If a meeting summoned for the purpose of appointing a trustee is held but no appointment of a person as trustee is made, the Official Receiver has the duty to decide whether to refer the question to the Secretary of State for Trade and Industry. Often, the trustee may wish to be assisted by a creditors committee made up of a number of the creditors of the debtor, these being appointed at the general meeting of creditors. The trustee in bankruptcy is subject to a general control by the Court. It is the duty of the trustee to gather in the estate of the bankrupt and, subject to payment of the trustee's proper expenses, distribute the estate to the creditors calculated on the basis of the distribution being "pro rata" to their claims.

The trustee has what is called a right to "disclaim onerous property". Typically, this will mean that the trustee may disclaim unprofitable contracts and any other property in the bankrupt's estate which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act.

After the payment of the expenses of the bankruptcy, preferential debts come next in priority and rank equally between themselves. Remaining debts again rank equally and any surplus remaining after the payment of debts is to be applied in paying interest on debts in respect of the periods during which they have been outstanding since the commencement of the bankruptcy.

Where the bankrupt was living in a dwelling house with any person under the age of 18 at the time of presentation of the Bankruptcy Petition and at the commencement of the bankruptcy, the bankrupt has the right as against the trustee of his estate not be evicted or excluded from the dwelling house or any part of it, except with the leave of the Court.

The trustee has the power to apply to the Court for an Order to set aside a transaction made at an undervalue at a relevant time and the Court may make such Order as it thinks fit to restore the position to what it would have been if that individual had not entered into that transaction. Such transactions include the making of gifts to a person, or a transaction in consideration of marriage or for consideration the value of which, in money or money's worth, is significantly less than the value of the consideration provided by the individual. The trustee has a similar power in relation to preferences. In essence, a preference is anything done which has the effect of putting a person into a position which, in the event of the individual's bankruptcy, will be better than the position he would have been in if that thing had not been done. The relevant time for establishing whether or not a transaction at an undervalue or a preference has occurred is five years prior to the date of presentation of a Bankruptcy Petition in the case of transactions at an undervalue and, in the case of preferences which are not transactions at an undervalue, two years.

Contesting a petition to make you bankrupt

I. As we have said above, the law relating to insolvency is particularly complex and to make a debtor bankrupt, a creditor has to satisfy a number of procedural requirements before the Court will make an Order making the debtor bankrupt. It is likely that a creditor, before issuing a Petition for Bankruptcy will serve on the debtor a "statutory demand". This has to be in a prescribed form and must be served at least 3 weeks prior to the presentation of the Petition to the Court. The presumption is that a debtor is unable to pay the amount due if, after service of a valid statutory demand, no payment of the debt is made. The first step therefore for the debtor is to consider whether there are any grounds to apply to the Court to set aside the statutory demand.

II. The debtor may secure or compound for the debt. If he does so to the satisfaction of the creditor, the Court will not make a Bankruptcy Order. The Petition must be served personally on the debtor by delivery to him of the sealed copy of the Petition. In certain cases, the Court may order what is called substituted service if it is satisfied that prompt personal service cannot be effected because the debtor is keeping out of the way to avoid service of the Petition or other legal process. Proof of service of the Affidavit must be made by an Affidavit.

iii. The debtor may appear at the hearing of the Petition to contest the claim that he be made bankrupt. In such case, he must not later than 7 days before the date fixed for the hearing, file a notice with the Court specifying the grounds on which he objects to the making of the Order and send a copy of the notice to the petitioning creditor or his solicitor. At the hearing, if the Court is satisfied that the statements in the Petition are true and that the debt on which it is found it has not been paid, or secured or compounded for, it may make the Bankruptcy Order. However, if the Petition is brought in respect of a judgment debt, or a sum ordered by any Court to be paid, the Court may stay or dismiss the Petition if there is an appeal pending from the judgment or order, or another Court has ordered that execution of the judgment be stayed.

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