Personal insolvency (bankruptcy, IVAs)

BLP.12 — Personal Insolvency (Bankruptcy, IVAs)

Governing statute: Insolvency Act 1986 (IA 1986). The test for a creditor is inability to pay debts, shown by either: failure to comply with a statutory demand for a liquidated debt of £5,000+ that is unpaid/unsecured after 21 days, or an unsatisfied execution of a judgment (IA 1986 s.267–268).

Bankruptcy

Who can petition:

• 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; a statutory demand is simply the usual route to prove the debt is undisputed.

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 of trade and reasonable domestic needs (s.283(2)).
• Discharge is automatic after 1 year (s.279) — but a Bankruptcy Restrictions Order/Undertaking (BRO/BRU) can extend restrictions 2–15 years for culpable conduct (Sch 4A).

Antecedent transactions the trustee can unwind (relevant times run back from the petition, s.341):

• Transactions at an undervalue — s.339; look-back 5 years. Insolvency at the time (or as a result) must be shown, BUT it is presumed where the other party is an associate; for transactions more than 2 years before the petition the trustee must also prove insolvency, and within the last 2 years insolvency need not be shown at all.
• Preferences — s.340; 6 months (extended to 2 years for associates); requires a desire to prefer (subjective), which is presumed for associates.
• Extortionate credit (s.343); transactions defrauding creditors s.423 (no time limit, no insolvency needed).

IVA (Individual Voluntary Arrangement)

• Part VIII; a binding contract between debtor and creditors to pay part/all of debts over time — avoids bankruptcy.
• Proposed via a nominee (an insolvency practitioner) who reports to court; supervised by a supervisor once approved.
• Interim order (optional) halts other proceedings while the proposal is prepared.
• Approval at the creditors' decision needs 75% by value of those voting; binds all unsecured creditors who had notice — even dissenters (s.260). Secured/preferential creditors are NOT bound without consent (s.258).

Common traps

• £5,000 is the creditor-petition / statutory-demand threshold — don't confuse with corporate insolvency.
• Discharge frees the debtor, but does NOT end the trustee's job — the estate stays vested until assets are realised.
• Preference requires desire to prefer (subjective); undervalue does not — and both desire (preference) and insolvency (undervalue) are presumed against associates.
• For an undervalue, the 2-year window before the petition needs no proof of insolvency; 2–5 years does.
• Secured creditors stand outside both bankruptcy distribution and IVA binding (to the extent of their security).
• Debtor route = Adjudicator; creditor route = court.