Bankruptcy

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What is it?
Who can benefit from it?
The effects of Bankruptcy
Who Can Petition For Your Bankruptcy
Advantages of Bankruptcy
Disadvantages of Bankruptcy

What Is It?

Bankruptcy is a term often misquoted by the media and is in fact, an insolvency procedure available only to individuals, sole traders and Partners when unable to meet their liabilities as they fall due or whose liabilities outweigh their assets.

It is a procedure that should always be considered as a last resort and we would urge all individuals, sole traders and Partners experiencing financial difficulties to engage our free business review in order that all alternatives can be considered.

Who Can Benefit from it?

Individuals and the self employed who own no assets other than their tools of trade and household effects.

The Effects of Bankruptcy

You lose control of your assets.

Without leave of court you may not act as a company director or take part in the provision, formation or management of a limited company.

You may not obtain credit in excess of £250 without first advising the lender of your bankruptcy and obtaining his permission. Please note that this relates to trade credit as well as personal credit.

You may not trade in any business other than in your own name unless you inform those parties you will be dealing with of your bankruptcy.

You may not practice or act as a chartered accountant, solicitor or Justice of the Peace, nor become a member of parliament or your local authority.

Who Can Petition For Your Bankruptcy?

An individual, sole trader or Partner himself, (“the Debtor”). This is known as a Debtor’s petition and it is made in the Debtor’s local bankruptcy court. The Debtor is required to complete a statement detailing his assets and liabilities as evidence of his insolvency. Strangely enough there is a cost in presenting this petition, currently £350.

A creditor owed in excess of £750. With the exception of the Government departments, H M Customs & Excise and Inland Revenue, before a creditor may petition for bankruptcy he must have first of all obtained judgement in respect of his debt and show that it has not been settled or alternatively, evidence that a statutory demand served on the Debtor has not been settled or secured within a 21 day period.

In circumstances where the debtor is already subject to an IVA, the Supervisor may present a petition following failure of the Debtor to comply with his obligations under the IVA.

The Debtor’s Petition

The Debtor attends his local bankruptcy court remembering to take the £350 court fee and completes statutory form 6.27 with the following information: -

a)Name, address and occupation.
b)Names, addresses and nature of businesses carried on by the Debtor.
c)Any name other than as indicated in a) above by which the Debtor is known.
d)A statement whether the business identified in b) was his own or a Partnership.
e)Details of any other bankruptcy, IVA or Deeds of Arrangement or composition with his creditors within the last 5 years.
f)An admission of insolvency.
g)A request for a bankruptcy order to be made.
h)If an IVA is currently in force, a statement to that effect.

To support and the Debtor’s petition for bankruptcy Form 6.28 must be completed. This is a statement detailing the Debtor’s assets and liabilities as evidence of his insolvency.

The Creditors Petition

A creditor at his own cost (this can be between £1000 and £2000 and who is owed in excess of £750) may, following obtaining judgement or having issued a statutory demand that remains unsatisfied, unsecured and not subject to dispute after a 21 day period, present a petition for the bankruptcy of the individual.

The petition is personally served on the Debtor, his solicitor or a person instructed by the Debtor.

As soon as the petition has been presented, restrictions apply which affect the capacity of the Debtor to deal with his assets.

If the debt continues to remain outstanding at the date of the hearing, a bankruptcy order is made by the court.

Post Bankruptcy Order

Once the bankruptcy order has been made by the court, control of the Debtor’s estate passes to the Government department known as the Official Receiver’s office (“OR”). It is the responsibility of the OR’s office to take control of the Debtor’s assets and therefore the Debtor is called in for immediate interview to explain his current circumstances and provide information regarding all his assets and liabilities.

Where the Debtor has assets, the OR will instruct agents to secure them. It is also likely that the OR will call a meeting of creditors with a view to appointing an Independent Insolvency Practitioner (“IP”) to act as Trustee and to administer the bankruptcy. It is the role of the Trustee to realise the assets of the Debtor for payment if possible of a dividend to creditors. Alternatively, creditors which account for 25% of the entire creditor base in the bankruptcy may require a meeting to be called by the OR in order that an IP can be appointed. Assuming an IP is appointed it will be the IP’s responsibility to administer the bankruptcy.

In the event that there are insufficient assets with which to seek the appointment of an IP, the role of Trustee will remain with the OR whose responsibility will be to deal with the affairs of bankruptcy.

Advantages of Bankruptcy

The Debtor

Bankruptcy can provide relative peace of mind particularly for those individuals who have no assets. Section 283(2) of the Insolvency Act 1986 precludes creditors from taking enforcement action against the tools of trade and household effects of the Debtor

For first time bankrupts with liabilities under £20,000 an application may be made for a procedure known as summary administration providing automatic discharge after 2 years.

For first time bankrupts with debts in excess of £20,000 automatic discharge will occur after 3 years. A reform to current bankruptcy legislation is awaiting Royal Assent, which will reduce the discharge period to reflect the extent of the liabilities of the Debtor.

Creditors

Provides opportunity for Trustee to investigate the affairs of the Debtor and if applicable bring actions in respect of potential voidable transactions such as transactions at an undervalue and preferences.

Disadvantages of Bankruptcy

The Debtor

Please refer to the effects of bankruptcy above. In addition this, your affairs will be subject to scrutiny by the Trustee in Bankruptcy who has significant powers to investigate transactions entered into by the Debtor prior to bankruptcy.

Creditors

Low expectation of dividend being paid. If assets were available it is likely the Debtor would have sought agreement of an Individual Voluntary Arrangement.

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