Personal insolvency (bankruptcy, IVAs)

BLP.12 — Personal Insolvency (Bankruptcy, IVAs)

Governing statute: Insolvency Act 1986 (IA 1986). A creditor's petition needs a debt or debts totalling at least £5,000 (the bankruptcy level), for a liquidated sum, unsecured, which the debtor appears unable to pay (or, for a debt not yet due, to have no reasonable prospect of paying) (s.267(2), (4)). For a debt due now, the debtor appears unable to pay only if (a) a statutory demand requiring payment, or security or compounding to the creditor's satisfaction, was served at least three weeks earlier and has been neither complied with nor set aside, or (b) execution on a judgment for the debt has been returned unsatisfied in whole or part (s.268(1)). There is no free-standing cash-flow route as there is for companies. A petition may be presented within the three weeks only if there is a serious possibility that the debtor's property, or its value, will be significantly diminished in that period (s.270).

Bankruptcy

Who can start bankruptcy:

• Debtor — applies online to the Adjudicator (not the court) since 2016; no court hearing, no minimum debt.
• Creditor — petitions the court; the debt must be £5,000 or more, liquidated and unsecured (s.267(4)). The £5,000 is the petition threshold (debts may be aggregated). Subject to the early-petition rule in s.270, an unanswered statutory demand or execution returned unsatisfied is the statutory way to show that the debtor appears unable to pay a debt that is due. The demand does not prove the debt is undisputed: the debtor can apply to set it aside, and no petition may be presented while that application is outstanding (s.267(2)(d)).

Effect of the bankruptcy order:

• Estate vests automatically in the trustee in bankruptcy (Official Receiver acts initially).
• Trustee realises assets and distributes to creditors. Excluded: tools, books, vehicles and other equipment necessary for the bankrupt's personal use in their employment, business or vocation, and clothing, bedding, furniture, household equipment and provisions necessary for the basic domestic needs of the bankrupt and their family (s.283(2)). The trustee can claim an excluded item whose value exceeds the cost of a reasonable replacement (s.308). Property the bankrupt holds on trust for others is not part of the estate (s.283(3)).
• Discharge is automatic one year after the bankruptcy order (ss.278, 279(1)), unless the court suspends that period, on the application of the official receiver or trustee, because the bankrupt has failed to comply with their obligations (s.279(3)-(4)). For culpable conduct, a Bankruptcy Restrictions Order/Undertaking (BRO/BRU) keeps the restrictions in force after discharge; a BRO lasts between 2 and 15 years from the date it is made (Sch 4A paras 2, 4).
• Order of distribution: secured creditors may enforce their security outside the bankruptcy (s.285(4)) and prove for any shortfall. The estate then pays (1) the expenses of the bankruptcy; (2) ordinary preferential debts; (3) secondary preferential debts (HMRC); (4) ordinary unsecured debts, equally and proportionately; (5) statutory interest on those debts since the bankruptcy began; (6) debts owed to a spouse or civil partner for credit they provided, with interest; and (7) any surplus to the bankrupt (ss.328-330).

Antecedent transactions the trustee can unwind (relevant times run back from the day the bankruptcy petition was presented or the debtor's bankruptcy application was made, s.341(1)):

• Transactions at an undervalue — s.339 (a gift, a transaction for no consideration or in consideration of marriage or civil partnership, or one where the bankrupt received significantly less value than they gave); look-back 5 years. For a transaction less than 2 years before the statutory endpoint, insolvency need not be shown. For a transaction 2–5 years back, the individual must have been insolvent at the time (unable to pay debts as they fall due, or assets less than liabilities including contingent and prospective liabilities) or have become insolvent as a result; this is presumed, rebuttably, where the other party is an associate other than only as an employee (s.341(2)-(3)).
• Preferences — s.340; 6 months, or 2 years for an associate (other than one who is an associate only as an employee). The individual must have been influenced by a desire to improve the recipient's position (subjective); this is presumed for such associates (s.340(4)-(5)). The individual must also have been insolvent at the time or become insolvent as a result, and this is never presumed for a preference (s.341(2)).
• Extortionate credit transactions (s.343): credit transactions entered into within 3 years before the bankruptcy commenced; the transaction is presumed extortionate unless the contrary is proved.
• Transactions defrauding creditors (s.423): a transaction at an undervalue entered into for the purpose of putting assets beyond the reach of a person who is making, or may make, a claim, or otherwise prejudicing that person's interests. It does not require bankruptcy or insolvency and has no statutory look-back period, but Limitation Act 1980 periods apply (Hill v Spread Trustee [2006] EWCA Civ 542).

IVA (Individual Voluntary Arrangement)

• Part VIII; an arrangement that, once approved, binds creditors by statute as if they were parties to it (s.260(2)) to pay part/all of debts over time — avoids bankruptcy.
• The debtor gives the proposal and a statement of affairs to a nominee (an insolvency practitioner). If there is no interim order, the nominee reports within 14 days (or longer if the court allows) to the debtor's creditors on whether the arrangement has a reasonable prospect of being approved and implemented and whether the creditors should consider it (s.256A(3)). If an interim order has been made, the nominee reports to the court (s.256(1)). Once approved, a supervisor implements the arrangement.
• Interim order (optional; made by the court): while it is in force, no bankruptcy petition may be presented or proceeded with, and, without the court's leave, no landlord may forfeit by peaceable re-entry and no other proceedings, execution or other legal process may be commenced or continued against the debtor or their property (s.252(2)).
• Approval needs 75% or more by value of those responding, and fails if more than half the total value of non-associate creditors admitted for voting vote against (IR 2016 r.15.34(6)–(7)). An approved IVA binds every creditor who was entitled to vote, or would have been had they had notice, including dissenters (s.260(2)(b)). But the creditors cannot approve terms that affect a secured creditor's right to enforce its security, or that alter the priority or equal treatment of preferential debts, unless the creditor concerned agrees (s.258(4)–(5)).

Common traps

• £5,000 is the bankruptcy level for a creditor's petition (s.267(4)); for a company, the statutory-demand route needs a debt exceeding £750 (s.123(1)(a)). Do not confuse the two.
• Discharge releases the bankrupt from bankruptcy debts, but not from debts incurred by fraud, fines, or (unless the court directs) personal-injury damages and family-proceedings orders. It does not affect a secured creditor's security or the trustee's remaining functions, so the estate stays with the trustee until it is realised (s.281).
• A preference requires the individual to have been influenced by a desire to prefer (subjective); an undervalue does not. Desire (preference) and insolvency (undervalue, 2–5 years) are presumed against associates, except associates only as employees. Insolvency is never presumed for a preference.
• For an undervalue, a time less than two years before the petition or bankruptcy application needs no proof of insolvency; 2–5 years does, but insolvency is presumed for an associate (other than only as an employee).
• Secured creditors stand outside both bankruptcy distribution and IVA binding (to the extent of their security).
• Debtor route = Adjudicator; creditor route = court.
• The bankrupt's home: s.283A concerns a dwelling that at bankruptcy was the sole or principal residence of the bankrupt, their spouse or civil partner, or former spouse or civil partner. Normally, if the trustee has not realised the bankrupt's interest in the home, applied for sale, possession or a charging order, or agreed terms with the bankrupt within 3 years of the bankruptcy, the interest revests in the bankrupt (s.283A). Failure to disclose the interest within three months postpones the start to the trustee’s or official receiver’s awareness; the court can extend the period. The statutory steps and any relevant agreement must satisfy s.283A, rather than merely amount to informal negotiations. On an application for sale under TOLATA 1996 s.14, the court has regard to the creditors' interests; where the land includes a dwelling house that is or has been the home of the bankrupt or of the bankrupt's spouse, civil partner, former spouse or former civil partner, to the conduct of that spouse, civil partner, former spouse or former civil partner so far as contributing to the bankruptcy, to their needs and financial resources, and to the needs of any children; and to all the circumstances of the case other than the bankrupt's own needs; after one year from the estate first vesting in a trustee, it assumes the creditors' interests outweigh all other considerations unless the circumstances are exceptional (s.335A).
• Income and later property: on the trustee's application before discharge, the court may make an income payments order claiming part of the bankrupt's income, but not so as to leave less than is needed for the reasonable domestic needs of the bankrupt and family; it may run for up to 3 years from the order, beyond discharge (s.310). An income payments agreement has the same effect by written agreement (s.310A). The trustee may claim by written notice qualifying property acquired after bankruptcy and before discharge, subject to the exclusions in s.307 and the notice time limits in s.309. It is the acquisition date, not necessarily the notice date, that must precede discharge. Income within s.310 is dealt with separately.
• Restrictions: an undischarged bankrupt (or a person subject to a BRO/BRU) commits an offence by acting as a company director, or taking part in the promotion, formation or management of a company, without the court's leave (CDDA 1986 s.11), and by obtaining credit of £500 or more without disclosing their status, or trading under a different name without disclosing the name in which they were made bankrupt (IA 1986 s.360).
• Secured petitioning creditor: under s.269 the creditor can state willingness to surrender the security for all creditors, or petition only for the unsecured balance and state the estimated security value. The statutory debt threshold still applies.
• Claiming later property: without court leave, a s.307 notice must be served within 42 days beginning with the trustee’s first knowledge of the acquisition; changing trustees does not restart the clock (s.309).

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