Your quick guide to the basics of Personal Insolvency in the UK
The two main insolvency procedures available to insolvent individuals in England and Wales are: (i) Bankruptcy and (ii) Individual voluntary arrangements. This note will focus on bankruptcy and not individual voluntary arrangements.
What is bankruptcy?
Bankruptcy is a process by which the assets of a debtor are realised and distributed amongst his creditors. The main features of a bankruptcy are:
The debtor’s beneficial interest in the assets and property that fall within his bankruptcy estate vest in his Trustee in Bankruptcy (TIB) The TIB can be either the Official Receiver or an Insolvency Practitioner. The TIB realises the value of the assets within the debtor’s bankruptcy estate and distributes the realised proceeds rateably among the debtor’s unsecured creditors who are owed bankruptcy debts.
The debtor’s creditors are also generally bound to accept the distribution of assets made by the TIB in settlement of the bankruptcy debts owed to them and cannot take action against the debtor to recover the debts.
Bankruptcy is a court procedure and begins by the issue of a bankruptcy petition. A bankruptcy petition can only be presented against a debtor if one of the following criteria applies:
- He is domiciled in England and Wales.
- He is personally present in England and Wales on the day that the petition is presented at court.
- He has had a place of residence or has carried on business in England and Wales at any time in the three years before the issue of the bankruptcy petition.
Bankruptcy commences on the date in the order (not on the presentation of the petition) and continues until the bankrupt is discharged.
Who can petition to make a debtor bankrupt?
The following parties may present a bankruptcy petition:
- The debtor himself.
- One or more of the debtor’s creditors.
- The supervisor of the debtor’s failed IVA or any creditor bound by that IVA.
- A temporary administrator or liquidator (within the meaning given to those terms by the EC Regulation on Insolvency Proceedings 2000 (Council Regulation 1346/2000/EC)) appointed in another EC member state.
Petitioners must present their petition to the debtor’s local court.
Creditor’s petition: process
A creditor (or creditors acting together) can only present a bankruptcy petition to the court in respect of one or more debts if, at the time the petition is presented:
- The amount of the debt (or aggregate amount of the debts) is equal to or exceeds the bankruptcy level (£750).
- The debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor(s) either immediately or at some certain future time and is unsecured.
- The debtor appears either to be unable or to have no reasonable prospect of being able to pay.
- There is no outstanding application to set aside a statutory demand served in respect of the debt (or any of the debts).
Although ultimately a question of fact, a court will presume that a debtor cannot pay his debts if the debtor fails to satisfy a statutory demand served on him by the creditor.
A creditor begins bankruptcy proceedings against a debtor by presenting a bankruptcy petition to the debtor’s local court.
In most cases, the creditor bases the bankruptcy petition upon an unsatisfied statutory demand (it satisfies the statutory definition of the debtor appearing to be unable to pay a debt in section 267(2)(c), IA 1986). However, if the creditor shows there is a serious possibility that the debtor’s assets might diminish significantly between the service of a statutory demand and the issue of a petition, the court may allow the creditor to issue an expedited bankruptcy petition before a statutory demand expires.
When the creditor presents the bankruptcy petition at court, he must also lodge:
- A deposit of £750 to cover the costs of the TIB in dealing with the debtor’s insolvent estate. Cheques should be made payable to “HM Courts and Tribunals Service”. The TIB will repay the deposit to the creditor, if the debtor’s insolvent estate has sufficient assets to meet the trustee’s costs.
- The issue fee for the application.
The creditor must also conduct a search in the Royal Courts of Justice, the County Court at Central London and the debtor’s own county court hearing center (rule 6.9A(3), Insolvency Rules 1986 (IR 1986)) for all bankruptcy petitions presented in the previous 18 months. The creditor should then certify whether any prior petitions remain pending or confirm that they are issuing their petition at risk as to costs.
The petition must give full details of:
- The debtor (including the debtor’s full name and any trading names under which he carries on business).
- The debt that the creditor claims from the debtor.
- The creditor arrange for personal service of the petition on the debtor. If the debtor avoids service, the creditor can ask the court to order substituted service to be effected in such manner as it thinks fit. Where an order for substituted service has been carried out, the petition is deemed duly served on the debtor.
When the court issues a bankruptcy petition it will list a hearing of the petition. The debtor may file evidence in opposition to the petition and any creditor of the debtor may attend the hearing and make representations to the court.
The court cannot make the debtor bankrupt if it is satisfied that either:
- The debtor (taking into account all his contingent and prospective liabilities) is able to pay all his debts.
- The petitioning creditor has unreasonably refused an offer from the debtor to secure or compound the debt detailed on the petition.
When is a debtor deemed insolvent?
The court will presume a debtor to be insolvent if one of the following conditions applies:
- The creditor has served a statutory demand on the debtor for a liquidated debt equal to or exceeding the bankruptcy level (£750) and three weeks have passed since the demand was served, without the debtor complying or applying to court to set it aside.
- The creditor has served a statutory demand on the debtor in respect of his liability to pay the creditor a debt equal to or exceeding the bankruptcy level on a future date and three weeks have passed since service without the debtor establishing to the creditor’s satisfaction that he has a reasonable prospect of being able to pay the debt when it falls due or applying to court to set aside the statutory demand.
Debtor’s bankruptcy petition: process
A debtor may present a bankruptcy petition against himself, on the ground that he cannot pay his debts. He must submit a statement of his assets and liabilities in support of the petition.
The process of a debtor’s bankruptcy petition is usually swift. In some cases, the court makes the bankruptcy order on the same day as the petition is issued.
In a case where the debtor is divorced or party to divorce proceedings, the High Court has suggested that the court hearing the petition should adjourn the hearing for a short time, to allow the debtor’s spouse to receive notice of the debtor’s bankruptcy petition and to make representations at the hearing if appropriate.
When is a trustee in bankruptcy appointed?
On the making of a bankruptcy order, the court passes its files to the Official Receiver. The debtor must deliver to the Official Receiver:
- Possession of the assets within his bankruptcy estate.
- An inventory of his assets.
- All books, papers and records relating to his affairs.
What are the powers and duties of a trustee in bankruptcy?
The debtor’s bankruptcy estate vests in the TiB upon his appointment. This vesting is automatic and takes place without the need for any documentation to effect or evidence the transfer of title to the TiB. The bankruptcy estate vests in the TiB even if a party to litigation against the debtor has the benefit of freezing order over the debtor’s assets.
The primary function of a TIB is to realise the value of the assets within the debtor’s bankruptcy estate and to distribute the asset realisations to satisfy, as far as possible, the debtor’s bankruptcy debts.
The TIB pays his costs and expenses from asset realisations before making a distribution to creditors.
When does a bankruptcy end?
A debtor is automatically discharged from bankruptcy on the first anniversary of his becoming bankrupt. Once discharged from bankruptcy, a debtor has no further liability for his bankruptcy debts, unless those debts arise from obligations:
- Arising under a criminal confiscation order.
- To repay funds advanced from the Social Fund (a government fund that assists individuals on low incomes to purchase household goods), in cases where the bankruptcy order was made on a petition issued after 19 March 2012.
The discharge of a debtor from bankruptcy does not end the process of asset realisation and distribution. The debtor’s TIB remains in office for the purpose of completing the realisation of the assets within the debtor’s insolvent estate. Any creditor owed a bankruptcy debt by the debtor may still claim its share of the asset realisations available for distribution, despite the debtor’s discharge.
Annulment of a bankruptcy order
The court may annul a bankruptcy order (whether or not the debtor has been discharged from bankruptcy) if either:
- The grounds for making the order were not made out at the date that it was made.
- The debts and expenses of the bankruptcy have been paid or secured to the court’s satisfaction.
Please note our update on this topic here.
– – –
The law firm Graf & Partners (Germany) has been assisting businesses and private clients since 2003. Do not hesitate to contact us by calling German solicitor Bernhard Schmeilzl on +49 941 463 7070 or send an email to: mail [at] grafpartner.com If you need to see an English lawyer in Germany, you can arrange for a personal appointment with English solicitor Elissa Jelowicki in Munich or we can arrange for a secure video or telephone conference if you are located elsewhere. To contact Elissa please write an e-mail to elissa (AT) grafpartner.com.