Bankruptcy is the legal term for the administration of the affairs of an insolvent individual against whom a Bankruptcy Order has been made by a Trustee in the interests of his/her creditors generally.
An application made by way of a petition may be made by the individual debtor concerned or by a creditor or creditors owed £750 or by the Supervisor of a failed Individual Voluntary Arrangement (IVA).
Bankruptcy will impose certain restrictions on the debtor prohibiting him acting as a company director, from obtaining credit of £500 or more without disclosing the Bankruptcy Order and from carrying on a business using any name other than that in which the Bankruptcy Order was made. Bankrupts will face difficulties in obtaining future credit but will be given a fresh start from overwhelming debts.
Bankruptcy petitions can be presented by the debtor (debtor’s petition), by one or more unsecured creditors (creditor’s petition) owed £750 or more by the Supervisor of a failed lVA (Supervisor’s petition). Such petitions are usually presented in the High Court or Central London County Court or alternatively in a County Court having insolvency jurisdiction where the debtor lives or trades.
When the petition is presented a date and time for the hearing thereof is fixed. Creditor’s and Supervisor’s petitions must be served on the debtor, The petition has to be Gazetted not more than 7 days after it has been served and not less than 7 days before the hearing.
Bankruptcy proceedings commence on the making of a Bankruptcy Order by the Court. Once the Order is made the Official Receiver, who is an Officer of the Court employed by the Insolvency Service - an executive agency within the DBIS, becomes receiver and manager of the bankrupt’s estate and takes control of the bankrupt’s assets. The Official Receiver has a duty to investigate the bankrupt’s affairs and send a report to creditors. Following a Bankruptcy Order no action can been taken, commenced or proceeded with against the bankrupt except with the leave of the Court.
Certain assets are statutorily exempt such as “tools of trade” and similar equipment to be used in employment, a not too valuable motor vehicle, household contents sufficient to meet basic domestic needs and pension policies. After acquired property (eg an inheritance or a windfall) is claimable post-bankruptcy subject to certain time limits.
Where there are significant assets an Insolvency Practitioner will usually be appointed to act as Trustee in Bankruptcy, either by a meeting of creditors or by the Secretary of State for DBIS from a localised rota. Where no Insolvency Practitioner is appointed the Official Receiver will act as Trustee.
Within 3 months of the Bankruptcy Order the Official Receiver is required to decide whether to call a creditors’ meeting for the purpose of electing an Insolvency Practitioner as Trustee in Bankruptcy. If he decides not to then notice must be given to the Court and to creditors. Such meeting must be held if requested by 25% in value of the creditors within 3 months of the request. For a resolution to be valid it must be passed by a majority in value of those voting. In the event of different persons being nominated at the creditors’ meeting a straight majority in value of creditors voting will determine which Insolvency Practitioner is appointed.
Once the appointment of Trustee has been resolved the creditors may, if they wish, appoint a Creditors’ Committee comprising a minimum of 3 and maximum of 5 creditors whose functions include approving payment of a class of creditors in full, approving compromises with debtors or creditors, receiving progress reports from the Trustee and fixing the bases of the Trustee’s fees and certain disbursements. Where an Insolvency Practitioner is Trustee but there is no Creditors’ Committee then the functions conferred thereon are vested in the Secretary of State for DBIS and may be exercised by the Official Receiver.
Trustee in Bankruptcy
At any time that the Official Receiver is Trustee he may apply to the Secretary of State for the appointment of an Insolvency Practitioner in his place usually either the request of a major creditor or from a rota of lPs in the locality. An Insolvency Practitioner appointed as Trustee must give notice to the bankrupt and to the creditors and Gazette his appointment if appointed at a creditors meeting.
A wide range of powers are afforded to the Trustee to facilitate realisation of the bankrupt’s assets, bring or defend legal actions, examine antecedent transactions and agree creditors‘ claims.
Reports are sent to creditors in accordance with statute.
The Official Receiver retains the responsibility for investigating the conduct of the bankruptcy as well as any other investigation work required.
The Trustee is required to obtain formal sanction from the Secretary of State in the absence of any Creditors Committee to exercise certain powers such as bringing or defending any action or legal proceedings in the name of the bankrupt, paying any class of creditors in full and to make any compromise or arrangement with creditors having a claim against the bankrupt.
There are special rules regarding the bankrupt’s home. Generally speaking, if the bankrupt has equity in a house it may have to be sold. However, the law discourages a Trustee from taking steps to force a sale through the Court during the first 12 months of the bankruptcy where the bankrupt owns the property jointly with a spouse or civil partner or has family or dependants living with him/her. The Trustee has 3 years from the date of the Bankruptcy Order to sell the house or otherwise deal with the bankrupt’s interest in it. If the Trustee does not do so within that time then the property will revert back to the individual. If the value of the equity is less than £1000 then it cannot be claimed by the Trustee at all.
If a bankrupt has surplus income above his needs and those of his dependants he may be required to make contributions towards repaying some of his debts through an Income Payments Agreement or Order (IPA/O) which lasts for up to three years. The Trustee will distribute any surplus funds after costs amongst the creditors in accordance with statute.
Bankruptcy Restrictions Order (BRO)
If the Official Receiver believes that a bankrupt has been dishonest or is blameworthy in some way the Official Receiver can apply to the Court for a Bankruptcy Restrictions Order (BRO) against the bankrupt. Conduct which could lead the Official Receiver to apply for a BRO is varied and can include an individual incurring debts which they had no reasonable chance of repaying, gambling, fraud, giving away assets or selling them at less than their value or carrying on business when the individual knew or ought to have known that they could not pay their debts.
The Official Receiver must apply for a BRO within 12 months of the Bankruptcy Order being made although he may ask the Court’s permission to apply outside of the 12 month period. The Court will consider the Official Receiver’s report and any other evidence before deciding whether to make a BRO.
If the Court decides to make the Order the bankrupt will be subject to all of the bankruptcy restrictions for an extended period of between 2 and 15 years. In general, the more blameworthy the individual’s conduct the longer the BRO is likely to last. Individuals can also voluntarily sign a Bankruptcy Restrictions Undertaking (BRU) which has the same effect as a BRO without the need for a Court process. If the individual breaches the restrictions during the period of their BRO / BRU he may be liable to criminal prosecution.
Discharge from bankruptcy is automatic after one year. Once discharged the bankrupt is released from his bankruptcy debts, with some exceptions such as Court fines, matrimonial debts and certain student loans. After he has been discharged the bankrupt does not have any right to take back from the Trustee any property that was part of his estate in the bankruptcy and the Trustee will remain in office for as long as is necessary to realise the property vested in him and distribute the proceeds in accordance with statute. Discharge can be suspended upon the Trustee's or the Official Receiver's application
Upon completion of the bankruptcy the Trustee is required to report to creditors on the outcome thereof and to call and convene a meeting of creditors to seek his release, notice of which must be sent to all creditors, the Official Receiver and the London Gazette. The result of the meeting must be notified to the Court and the Official Receiver and a final receipts and payments account sent to the Secretary of State for the DBIS.
The debtor’s books and records may be destroyed upon the authorisation of the Official Receiver.