BANKRUPTCY

KNOW WHAT HAPPENS WHEN YOUR CREDITORS' PATIENCE RUNS OUT.

In January 2023 there were 612 individual bankruptcy orders made in England & Wales representing a 5% increase on a year ago. While debtor applications rose by a modest 2%, there was an alarming 21% increment in creditor applications forcing their debtors into 'bankruptcy', a word of dread familiarity to everyone.

The stigma of bankruptcy is internationally recognised however, very few people are familiar with the restrictions, consequences and cost of bankruptcy. This article will provide a brief introduction to these issues with the perspective of creditors in mind.

WHAT IS BANKRUPTCY?

Bankruptcy is 1 of the 3 principal formal individual insolvency procedures in England & Wales. The other 2 being Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs). Theses procedures are differentiated from each other by the amount of debt relief they provide and the restrictions placed upon the debtor.

An individual may be insolvent but this does not mean they are bankrupt. Bankruptcy does not commence until the making of a court bankruptcy order the 2 ground for which, pursuant to the Insolvency Act 1986 are that:

1. A debtor is deemed unable to pay their debts and/or

2. A debtor has breached or otherwise is unable to comply with the terms of their IVA.

Once a bankruptcy order has been made, an Official Receiver (OR) is appointed to act as Trustee In Bankruptcy (TIB) unless the court orders otherwise. Should there be sufficient assets in the bankrupt's estate, the OR or the bankrupt's creditors may appoint a licensed Insolvency Practitioner (IP) to act as the TIB.

The bankrupt's assets and income constitute the 'bankruptcy estate' which vests in, is realised by the TIB and is distributed pari passu to the bankrupt's unsecured creditors. The OR's & TIB's fees and costs are paid out of bankruptcy estate in a prescribed statutory order. While a bankrupt is usually discharged after 1 year, the TIBs administration of the bankrupt's estate often continues beyond discharge from bankruptcy and the estate itself exists in perpetuity.

MAKING A BANKRUPTCY PETITION

Pursuant to s.264 IA 1986, a bankruptcy petition may be presented by:

1. One or more individual creditors owed £5000 or more (aka the Bankruptcy Level).

2. The supervisor or creditor of a debtor's IVA.

3. The Financial Conduct Authority where the debt arises from a regulated activity.

Upon receipt of the Bankruptcy Petition, should the court be satisfied that it meets the requirements accordingly to statute it shall stamp the Bankruptcy Petition for service on the debtor and thereafter, list a hearing for the Bankruptcy Petition. At the hearing, the court shall either dismiss the application, adjourn or declare the debtor to be bankrupt providing it is satisfied that:

1. The Petition Debt remains unpaid; or

2. The debtor has no reasonable prospect of being able to pay the petition debt when it falls due.

Thereafter, upon the making of the bankruptcy order the court transfers their file to the Official Receiver whom takes over the management of the bankrupt's estate.

THE BANKRUPTCY ESTATE

Pursuant to s.291 IA 1986, upon the making of a bankruptcy order the bankrupt must deliver to the OR:

1. An inventory of all their assets.

2. Possession of all the assets within the bankruptcy estate. That is, all the assets and property which belongs to or is vested in the bankrupt at the commencement of the bankruptcy.

3. All books, papers and records relating to their affairs.

It is often misunderstood that property which may be kept by a bankrupt, and which do not vest in the TIB on appointment, include:

1. Items needed for work or tools of the trade (tools, books, vehicles and other items of equipment which the bankrupt needs to use personally in their employment, business or vocation); and

2. Everyday household items (clothing, bedding, furniture, household equipment and other basic items which the bankrupt and their family need at home).

However, the law is that if the value of these assets exceed the costs of a reasonable replacement, then these assets may be claimed by the TIB and replaced with a cheaper alternative.

Further, Sections 284(1) and (3) of the IA 1986 together provide that any disposition of property made by a bankrupt during the period from the date that the petition is presented against them (or a bankruptcy application is made) until their insolvent estate is vested in a trustee is void.

ADMINISTRATION OF THE BANKRUPT'S ESTATE

Pursuant to s.314 IA 1986, The TIB has wide-ranging powers which are similar to that of a liquidator in the context of company liquidation, to:

1. Challenge any Disposition of assets by the debtor at an undervalue within 5 years before the presentation of the bankruptcy petition or only application.

2. Challenge any Preference given by the debtor to any creditor in the 6 months before the presentation of the bankruptcy.

3. Challenge any Agreement made in the 3 years before the bankruptcy order under which the debtor was given credit or extortionate terms.

4. Disclaim any onerous Property including any leasehold property of the debtor.

5. Claw back excessive contributions made by the debtor to their pension scheme to the extent that the making of such excessive contributions unfairly prejudiced the debtor's creditors.

The TIB has statutory powers to investigate the bankrupt's affairs and may apply to the court to summon the bankrupt, their spouse or business partner or any other person able to give information concerning the bankrupt’s dealings, affairs or property. Consequently, upon such an application the court can summon:

• The bankrupt.

• The bankrupt's spouse or civil partner.

• The bankrupt's former spouse or civil partner.

• Any person known or believed to have in his possession any property which should form part of the bankrupt's estate.

• Anybody indebted to the bankrupt.

• Anybody the court thinks capable of providing information about the bankrupt, their dealings or property.

Debtors involved with faux-companies which often involve family members should note that in seeking to exercise their powers, the TIB may be authorised by the court to pierce the corporate veil of companies operated by or in connection with an undischarged bankrupt.

More importantly however, unless there are sufficient assets in the bankruptcy estate then within 3 years of the making of a bankruptcy order and assuming the bankrupt owns a home/property, the TIB must make a decision as to whether or not to proceed with a court order for possession and sale of the bankrupt's property. This includes the debtor's family home with a presumption in favour of the creditors.

CONSEQUENCES ON THE BANKRUPT

Upon the making of a bankruptcy order:

1. Bank Cards: The bankrupt will be required to handover all bank debit and credit cards to the OR.

2. Money: Any money in a bankrupt's account(s) as of the date of the bankruptcy order are property of the bankrupt and consequently, these funds are assets that rest within the bankruptcy estate.

3. Joint Bank Accounts: The beneficial interest of a bankrupt held in a joint account at the date of the bankruptcy order will comprise an asset in the bankruptcy estate which will vest in the TIB.

4. Contact the Banks: The OR will then contact the bankrupt's banks to inform them of the bankruptcy order and;

   1. Request that no further transactions take place from the account without authorisation of the TIB.

   2. Arrange for the transfer of any funds belonging to the bankrupt into the bank account of the bankruptcy's estate.

5. Prevented from obtaining Credit: It is an offence for a bankrupt to obtain credit in excess of £500 (whether by themselves or with another) without first disclosing their status as an undischarged bankrupt.

6. Prevented from acting as a Director: A bankrupt may not act as a director of a company (directly or indirectly) or be involved in the management promotion or formation of a company unless the court grants permission to act in this capacity. Breach of this prohibition is a criminal offence.

7. Trading Name: A bankrupt may not trade under a different name from the one in which the bankruptcy order was made, without disclose to all those whom with they trade that they are an undischarged bankrupt. Breach of this provision is also a criminal offence.

8. Dissolve Partnerships: Should a bankrupt be part of a partnership, the making of the bankruptcy order automatically dissolves that partnership in the absence of contrary provision in the partnership agreement.

9. Subject to the TIB putting an Income Payment Order (IPO) or an Income Payment Agreement (IPA) in place, the TIB may claim any earnings, income or payments of the bankrupt beyond the amounts needed to satisfy the bankrupt's basic domestic needs. This may be for a lump sum payment following a windfall, regular monthly payments or both. IPOs and IPAs typically last for 36 months and so will continue to bind the debtor after their discharge from bankruptcy as well as employers.

There are further obligations on a bankrupt that if breached would constitute an offence but these are beyond the scope of this article.

DISCHARGE FROM BANKRUPTCY

Subject to the bankrupt's conduct during the bankruptcy, a bankrupt should be automatically discharged from their bankruptcy on the first anniversary on the order becoming a 'discharged bankrupt'.

Thereafter, the now discharged bankrupt is freed from any debts that were included in the bankruptcy. This means that these debts are wiped out.

However, a debtor's discharge from bankruptcy does not end the process of asset realisation and distribution.

The TIB remains in office for the purpose of completing the realisation of the assets within the bankruptcy estate. Any creditor owed a bankruptcy debt may still claim their share of the asset realisations available for distribution.

HOW WE CAN HELP

Unlike most law firms, our standard retainer includes a commitment to support clients past judgement and through enforcement. Our dedication to you does not cease with judgement but until you have received your court ordered damages/compensation in full and recovered with the costs of the litigation.

Prior to commencing any litigation, we undertake a detailed search of your opponents assets in order to ensure the cost of litigation never outweighs its benefits. Thereafter, we maintain a watchful vigil over these resources so you can be secure that you will receive your due judgment.

Gavin Renwick has successfully dealt with fraudulent debtors whom have supplied false information to county court bailiffs, High Court Enforcement Officers and/or made false representations in the Insolvency Courts in a bid to frustrate enforcement, hinder judgement and inflict further financial pressure on their creditors. In these cases often involving attempts to hide assets in faux-companies, by sham-divorces or fake addresses it may sometimes be necessary to present a bankruptcy petition at court and place the debtor's assets under the stewardship of the courts to protect them.

We have successfully advised and appeared for creditors at bankruptcy hearings. Should you require any legal advice whether as a debtor or creditor then contact us for confidential legal advice.