17. Business Law - Personal Bankruptcy

Summary of bankruptcy procedure

(a) Petition by creditor to court or application by debtor to the adjudicator. (b) Court hearing (if appropriate) and bankruptcy order made. (c) Official Receiver appointed and automatically becomes the trustee in bankruptcy. (d) Bankrupt's property vests in trustee.(e) Statement of affairs submitted to Official Receiver. (f) Creditors may be able to appoint a trustee in bankruptcy to replace the Official Receiver. (g) Trustee collects assets and investigates past conduct. (h) Trustee distributes assets. (i) Bankrupt discharged (automatically one year after bankruptcy order made, unless suspension ordered).(j) A BRO or BRU may remain in place for up to 15 years.

Summary of IVA procedure

(a) Proposal - by debtor or trustee in bankruptcy. (b) Nominee appointed. (c) Interim order - to prevent other creditor actions. (d) Creditors vote on proposals - 75% or more in value (including at least 50% of creditors who are not associates of the debtor) required for approval and to bind all unsecured creditors. (e) Supervisor appointed - nominee becomes supervisor and implements proposals.(f) If proposals carried out by the debtor, the IVA is complete and the debtor is released from it.

Restrictions on business activities, cont.

(c) continue in partnership (Partnership Act 1890, s 33 provides for automatic dissolution), unless the partnership agreement provides otherwise. The bankrupt's share in the partnership will have to be realised. It is common to find a provision in the partnership agreement by which the bankrupt immediately and automatically ceases to be a partner, and the other partners have an option to buy him out, rather than completely dissolving the firm.

Section 340 - What is a preference?

An arrangement is a preference if it places a creditor, surety or guarantor in a better position than he would have been in otherwise on bankruptcy, and the debtor intended (at least partly) to do this (IA 1986, s 340). For example, if the debtor has borrowed money from a friend and, facing imminent bankruptcy, he then repays that friend in order to ensure that the friend does not lose money, that would be a preference.

Restrictions on business activities

A bankrupt is allowed to retain the tools of his trade and a vehicle, but it is a criminal offence for a bankrupt to obtain credit of more than a prescribed amount (currently £500 in total) without disclosing his bankruptcy. Practically, this may make it extremely difficult for him to carry on his business. The following is a list of some of the other automatic business restrictions effective as soon as the bankruptcy order is made. The bankrupt cannot: (a) act as a director of a company, or be (directly or indirectly) involved in the management, promotion or formation of a company, unless the court grants permission to act in such a capacity (Company Directors Disqualification Act 1986 (CDDA 1986), s 11). Breach of this prohibition is a criminal offence (CDDA 1986, s 13). Company articles usually provide that the director immediately ceases to hold office as a director (see model articles for private companies, art 18). (Similar rules apply to members of a limited liability partnership (Limited Liability Partnerships Regulations 2001 (SI 2001/1090, reg 4(2)).) (b) trade under a different name from the one in which the bankruptcy order was made, without disclosing to all those who trade with him under the new name that he is an undischarged bankrupt (IA 1986, s 360(1)(b)).

Section 264 - Creditor's petition

A creditor may present a petition to the court (IA 1986, s 264) if the debtor owes him £5,000 or more (this must be a liquidated, ie known, sum which is unsecured). The creditor must also be able to claim that the debtor is unable to pay the debt or has little prospect of being able to pay it. This will be presumed if the creditor has followed one of the methods set out in IA 1986, s 268 to show insolvency, and, as stated, this is most commonly evidenced by there being an unsatisfied statutory demand. The creditor must also arrange for the petition to be served personally on the debtor; although if the debtor is elusive, the creditor may ask the court for permission to serve another way, such as by pushing the petition through the letterbox at the debtor's home address. This is called obtaining an order for substituted service.

Additional restrictions that may be imposed on culpable bankrupts

A significant minority of bankrupts are considered to be 'culpable' and to have caused the bankruptcy by their own dishonesty, negligence or recklessness. Bankruptcy restriction orders (BROs) are intended to protect the public from these bankrupts. Such orders will be made by the court and will last from two to 15 years. Even when an IVA comes into effect after bankruptcy, it will not affect any BRO which has been granted. The bankrupt may avoid court proceedings by agreeing to the restrictions and signing a bankruptcy restriction undertaking (BRU), but the effect is the same as a BRO. Here are a few examples (from a long list) of the restrictions that apply automatically to an individual subject to a BRO or a BRU (IA 1986, Sch 4A). The individual cannot: (a) act as receiver or manager of a company's property on behalf of a debenture holder (IA 1986, s 31); (b) obtain credit above the prescribed limit (currently £500) without disclosing that he is subject to a BRO (IA 1986, s 360); (c) trade in a name other than that under which that person was made bankrupt (IA 1986, s 360); (d) act as an insolvency practitioner (IA 1986, s 390); (e) act as a company director (CDDA 1986, s 11(1)); (f) act as a Member of Parliament in either House (this does not apply if the individual is merely bankrupt) (IA 1986, s 426A); or (g) act as a member of a local authority (again, this does not apply if the individual is merely bankrupt) (Local Government Act 1972).

Section 283A - Matrimonial Homes, cont. - What happens after three years?

After three years the matrimonial home re-vests in the bankrupt (IA 1986, s 283A) unless the trustee has done one of the following: (a) realised the interest (usually, sold the house); (b) applied for an order of sale or possession in respect of the house; (c) applied for a charging order over the house; or (d) entered an agreement with the bankrupt regarding the bankrupt's interest in the house (eg the bankrupt can keep the interest in the house, but will owe more in the bankruptcy).

Individual voluntary arrangement

An IVA may arise as follows: (a) A debtor may take advice and try to instigate an IVA himself. To do this, he requires professional assistance, so he must find an insolvency practitioner who is willing to assist him in drawing up proposals and to supervise their implementation if they receive the approval of creditors. The insolvency practitioner is known initially as the debtor's 'nominee'. It will clearly be difficult to find a nominee if there are no assets at all from which to pay his fees. (b) Alternatively, the debtor's trustee in bankruptcy may apply for an IVA during the bankruptcy process.

Negotiation with creditors

An individual who recognises he is in financial difficulties should always talk to his creditors as soon as possible.

What is an undervalue?

An undervalue is either:(a) a gift; or(b) a transaction where the bankrupt received consideration (in money or money's worth) significantly lower in value than that which he provided (IA 1986, s 339(3)). Any such transaction is caught by this provision, including, potentially, a property adjustment order on divorce, as long as the bankrupt received no consideration, or significantly less consideration than he gave. Although in a clean-break divorce, the person benefiting from the order is usually taken to have given consideration by giving up his or her right to the other marital assets (see Haines v Hill [2007] EWCA Civ 1284). In practice, trustees in bankruptcy do not challenge property adjustment orders made in matrimonial proceedings unless collusion or other nefarious behaviour is evidenced by the parties to the order. EXAMPLE Aasif, who has been running a small building firm for many years, realises that the business is in financial trouble as he has no new contracts at all. The business owns a beautiful flat on Poole Harbour, worth at least £500,000, and which Aasif has always used for entertaining clients. Aasif does not want to lose the flat, so he transfers it into the name of his daughter, and she in return promises to come in to work once a month for six months to try to drum up new business for him.

What is Bankruptcy?

Bankruptcy is a judicial process during which all the assets of the bankrupt are passed to a third party, called the trustee in bankruptcy, who pays as many of the debts as possible in a statutory order. Eventually, even if the debts have not been paid in full, the bankrupt will usually be discharged, free from almost all of the debts, and can start afresh. There are some limited exceptions in terms of assets not passing to the trustee in bankruptcy.

Section 264 of the IA 1986 -Bankruptcy Process - 'Commenced by the presentation to the court of a petition or by the debtor making an online application'

Bankruptcy is commenced by the presentation to the court of a petition or by the debtor making an online application. The latter was a new procedure that commenced in April 2016. A petition may be presented by one or more of the creditors, or by various other parties listed in IA 1986, s 264. Here we are going to concentrate on creditor petitions. If the petition or debtor application is successful, a bankruptcy order is made.

Section 341 - How far back may the trustee go?

The trustee may investigate transactions up to five years before the presentation of the bankruptcy petition (IA 1986, s 341).

Section 108 and Sch 17 of the Tribunals, Courts and Enforcement Act 2007 - Debt Relief Orders

Debt relief orders (DROs) are a relatively recent addition to the insolvency procedures for individuals and became available on 6 April 2009 (Tribunals, Courts and Enforcement Act 2007, s 108 and Sch 17). The DRO is made by the Official Receiver following an on-line application. It is available only to those debtors whose liabilities and assets are small. The key criteria are that the debtor must not: (a) have total unsecured liabilities exceeding £20,000; (b) have total gross assets exceeding £1,000 and not own a car worth £1,000 or more (unless it has been specially adapted because the debtor has a disability); (c) have disposable income exceeding £50 per month, after deduction of normal household expenses;(d) have been the subject of a DRO in the preceding six years; and(e) be subject to another formal insolvency procedure. The effects are that the debtor will be: (a) protected from enforcement action by most of his creditors; (b) free of the debts at the end of the DRO period (usually 12 months); (c) obliged to co-operate with the Official Receiver and provide information; and (d) expected to make arrangements to pay his creditors if his financial situation improves.

Advantages for the debtor in a voluntary arrangement

If a debtor manages to reach a voluntary arrangement with his creditors, he avoids the stigma of bankruptcy, the accompanying bad publicity and the trauma of, possibly, a public examination in open court.

Advantages for the creditor

If the debtor is insolvent (as he frequently will be) then creditors, particularly ordinary unsecured creditors, will have to accept that they are unlikely to be paid the amount due to them in full. They may feel that if they accept a voluntary arrangement proposed by the debtor they will recover a higher percentage of the debt due to them (because the costs involved in a voluntary arrangement may be lower than in a full bankruptcy), or that they will be paid sooner (because the full bankruptcy process can be extremely lengthy).

Section 335A - Special rules for the matrimonial home

If the debtor owns his own home, his interest in that home passes to the trustee. However, there may be other legal or equitable interests in the house, for example: (a) the house may be held in joint names; (b) the spouse/partner may have an equitable interest arising from a trust (eg where the spouse/partner contributed to the purchase price); (c) the spouse may also have a right of occupation under the Family Law Act 1996 and related legislation; (d) minor children (under 18) may live with the bankrupt in his home, which may give him (and the spouse/partner) a right of occupation. In these situations, the debtor cannot be evicted from his home immediately, so the trustee cannot sell it without a court order. The court will consider the interests of creditors; the conduct and needs and financial resources of the spouse/civil partner or former spouse/ former civil partner; the needs of the children (if any) and all relevant circumstances. During this time, the bankrupt may be able to arrange for his spouse/partner to buy his share of the property, or to find alternative accommodation. The thrust of the legislation, though, is that if there are competing interests, then, after one year of the bankruptcy, the interests of the creditors are paramount (IA 1986, s 335A).

Alternatives to Bankruptcy

It is not inevitable that the individual facing financial difficulties will become bankrupt. There are some alternatives, and it is better to consider these sooner rather than later or the creditors may start proceedings themselves. The main options are: (a) an individual voluntary arrangement (IVA); (b) negotiation with creditors; and (c) for the debtor with minimal assets and income, a debt relief order (DRO).

Section 42 of the Higher Education Act - Student Loans

It is worth noting that student loans are one of those debts specifically excluded, and they remain payable even after the bankrupt has been discharged (Higher Education Act 2004, s 42).

Straightforward Consumer IVA Protocol (the Protocol)

Many debtors are consumers with large credit card debts. In this situation the lenders will usually follow the Protocol, which has been approved by the British Bankers' Association.The latest version of the Protocol was published in June 2016 and is effective from 1 October of that year. It can be found at . EXAMPLE OF AN IVA Narinder, who used to have a good job in the City, has been steadily building up huge credit card debts following his redundancy. He has been using one card to pay off another and opening new cards; but he can no longer do this, as he has reached his limit on all the cards and cannot apply for any more. Narinder recently managed to get a fairly well-paid job (although after paying his living expenses he still did not have enough income to pay even the minimum monthly payments on the cards) and consulted an insolvency practitioner about what he should do. The insolvency practitioner advised that Narinder should seek to implement an IVA and offered to act as his nominee. The creditors have now agreed to accept monthly payments for five years, at which point they will write off any remaining debts. They have reserved the right under the terms of the proposal to review the payments if Narinder's income improves.

What are the insolvent debtor's options?

Many debtors bury their heads in the sand, ignoring bills and final demands, only to find that matters are taken out of their hands by one or more disgruntled creditors who serve statutory demands or sue for the debt. However, this does not have to be the case; the insolvent debtor does have some options. He may: (a) apply online for his own bankruptcy, to show the courts that he is doing his best to sort out things for himself; (b) talk to his creditors, to see if they will wait for payment or come to a compromise; (c) enter into a formal arrangement with all his creditors, called an individual voluntary arrangement (IVA). This may be an agreement to pay the creditors less than the full amount owed, and/or for the creditors to wait longer (probably years) to be paid. An IVA may allow the debtor to avoid bankruptcy completely; (d) apply for a debt relief order (DRO).

Section 253 - IVA procedure - 'Once he has found someone willing to be his nominee, the debtor must prepare a statement of affairs for that nominee, and should apply to the bankruptcy court for an interim order '

Once he has found someone willing to be his nominee, the debtor must prepare a statement of affairs for that nominee, and should immediately apply to the bankruptcy court for an interim order (IA 1986, s 253). This has the effect of stopping any other proceedings being taken against him while his creditors consider his proposals. While the interim order is in force (usually for 14 days, but it may be extended) no bankruptcy petition may be presented or proceeded with unless the leave of the court is obtained. No other proceedings, execution or other legal process may be commenced or continued against the debtor or his property. The interim order thus creates a moratorium. It is possible (but rare) to proceed with an IVA proposal without applying for an interim order. If this procedure is adopted then no statutory moratorium applies.

Section 283 - What happens to the bankrupt's property?

The bankrupt's estate vests in the trustee and is defined in IA 1986, s 283. It includes most of the bankrupt's real and personal property. However, the bankrupt is able to keep some assets which are needed for day-to-day living, such as: (a) tools of any trade; and (b) clothing and furniture, unless it is of high value, in which case the trustee has power to sell the asset and replace it with something cheaper (see IA 1986, s 308). Also, the bankrupt is entitled to retain any salary he makes; but the trustee may apply for an income payments order if the salary exceeds a sum sufficient to meet the reasonable needs of the bankrupt and his family (IA 1986, s 310).

Sections 328 and 329 - Distributing the Bankrupt's Assets

Once the trustee has taken control of the bankrupt's assets and finalised investigations and proceedings to set aside antecedent transactions, the assets must be converted into money and distributed to the creditors. Secured creditors, of course, may sell the charged assets themselves, pay their debt and pass any surplus to the trustee. If the asset does not produce sufficient funds, the secured creditor will have to claim the balance as an unsecured creditor, along with everyone else. The assets must be distributed in accordance with the statutory order set out mainly in IA 1986, s 328, as follows: (a) The cost of the bankruptcy. The first items to be paid are the expenses incurred as a result of the bankruptcy, including the professional charges of the trustee in bankruptcy; then (b) Preferential debts. If there is insufficient money available to pay all preferential debts, they rank and abate equally; then (c) Ordinary unsecured creditors. If funds are insufficient to pay all debts in this category, they rank and abate equally; then (d) Postponed creditors. These are debts to the spouse or civil partner (IA 1986, s 329).

Schedule 6 of the IA 1986 - What are preferential debts?

Schedule 6 to the IA 1986 contains a list of debts that are designated as 'preferential debts'. They include: (a) accrued holiday pay owed to employees; and (b) wages of employees due in the last four months before the bankruptcy order (subject to a current maximum amount of £800 per employee (Insolvency Proceedings (Monetary Limits) Order 1986 (SI 1986/1996))).

Section 263H - Debtor's application - 'The ground for the application is that the debtor is unable to pay his debts'

Since 6 April 2016, a debtor can no longer petition the court to be made bankrupt. Instead, a debtor must now apply online to an adjudicator appointed by the Secretary of State who will make a bankruptcy order if appropriate. The adjudicator is not a judge but an employee of the Insolvency Service and has authority to make a bankruptcy order. The ground for the application is that the debtor is unable to pay his debts (IA 1986, s 263H). The fees payable can currently be found in the Insolvency Proceedings (Fees) Order 2016 (SI 2016/692).

Section 267(2) of the IA 1986 - When is an Individual Insolvent?

The IA 1986 contains two tests (IA 1986, s 267(2)) based on whether the individual is able to pay his debts: (a) The debt (or debts) is payable immediately and the debtor does not have sufficient funds to do this, even though he may be able to at some point in the future (see Example (a) below). (b) The debt (or debts) is payable at some specified point in the future and the debtor has no reasonable prospect of being able to pay (see Example (b) below). EXAMPLES (a) David throws a lavish 40th birthday party; the following week he is made redundant. When the invoice for the catering arrives, payable immediately, he has no funds in his bank account to pay. He has no credit cards or other means of borrowing, as he has been bankrupt before. There is a possibility he might be able to borrow from an old friend, but the friend needs to sell some paintings first and has no buyers at the moment. (b) Geraint buys an expensive set of lounge furniture for £7,500 on a special deal: 'Buy and take home now - no payment for two years!' After 18 months, Geraint loses his job and he is forced to claim benefits. He knows he will not receive enough to make the payment on the sofa in six months, and the sofa is already rather tatty and cannot be returned.

Section 306 - The role of the trustee in bankruptcy

The bankrupt's estate vests automatically in his trustee in bankruptcy (IA 1986, s 306). The trustee's function is to collect and, if necessary, sell the bankrupt's assets, so that they may be distributed to the creditors in accordance with IA 1986, s 328. The trustee then applies for his or her release. The trustee has wide-ranging powers to investigate the debtor's affairs, and may scrutinise and in some cases set aside or challenge transactions the debtor has entered into prior to the bankruptcy.

Section 268 - How can a creditor prove the debtor is insolvent?

The courts have provided three relatively easy ways in which to do this (IA 1986, s 268): (a) serve a statutory demand (a formal, written demand) on the debtor for a liquidated debt of £5,000 or more (either pre- or post- judgment) and wait three weeks to see whether the debtor pays the demanded sum or applies to court to set aside the statutory demand; (b) serve a statutory demand on the debtor in respect of a liability to pay the creditor a sum of £5,000 or more on a future date and wait three weeks to see whether the debtor shows a reasonable prospect of being able to pay the sum when it falls due or applies to court to set aside the statutory demand; (c) obtain a court judgment for a debt of £5,000 or more and attempt execution of that judgment debt (ie send enforcement officials to recover assets or cash from the debtor) and that execution fails.

Section 360 - Personal disabilities

The following is a brief list of some of the other things bankrupts cannot do during the period of bankruptcy until the order is discharged: (a) obtain credit of the prescribed amount (currently £500) or more (whether by himself or jointly with another), without informing the lender that he is an undischarged bankrupt (IA 1986, s 360(1)(a)). Obtaining credit includes taking possession of goods under a hire-purchase agreement (IA 1986, s 360(2));(b) practise as a solicitor without the leave of the Solicitors Regulation Authority (Solicitors Act 1974, s 15). Other professions generally have similar restrictions. The main practical effect of these restrictions for the average bankrupt is that it is difficult to obtain a bank account and impossible to obtain a credit card, and the bankrupt may have to conduct his financial affairs mainly using cash. This can, of course, cause problems for employees whose salary is usually paid straight into a bank account. Though a bank will not allow a bankrupt to maintain a normal current account, it is possible to have a bank account, as long as it is one that does not allow an overdraft, or the provision of credit.

Insolvency Act (IA) 1986 and Enterprise Act 2002 (EA 2002)

The law relating to bankruptcy is mainly contained in the Insolvency Act 1986 (IA 1986) and the Enterprise Act 2002 (EA 2002), and its aim is to encourage entrepreneurship by allowing honest bankrupts to be discharged after one year with a clean slate, while punishing reckless bankrupts by imposing restrictions on their activities for up to 15 years.

Section 258 - 'Preferential and secured creditors are not bound by the voluntary arrangement unless they agree to it'

The nominee will prepare a report for the court advising whether there are any realistic proposals to be made and therefore whether it is worth calling a meeting of creditors. If a meeting of creditors is called and the meeting approves the proposals (by 75% or more majority in value, of which at least 50% in value of creditors who are not 'associates' of the debtor agree), then the proposal will be passed. Effectively, therefore, two votes take place. It is for the convenor or chair of the meeting to decide if a creditor is an associate of the debtor. Every ordinary, unsecured creditor who had notice of the meeting and was entitled to attend and vote is bound by the decision of the meeting, whether or not he actually did attend and vote. Preferential and secured creditors are not bound by the voluntary arrangement unless they agree to it (IA 1986, s 258). If the creditors approve the proposed voluntary arrangement, the nominee (now called a 'supervisor') will implement the proposals.

Bankruptcy

The term 'bankruptcy' applies to individuals, not to companies or limited liability partnerships. However, individual partners in a partnership can be made bankrupt (although, interestingly enough, the partnership itself is subject to the winding-up regime). Individuals may find themselves insolvent and, possibly, bankrupt for many reasons. For example: cash-flow problems, such as borrowing too much and being unable to make the repayments; losing their jobs; being part of an unsuccessful business or partnership which fails; being a director of a company and incurring personal liability in some way, eg by giving a personal guarantee.

Preserving and Increasing the Bankrupt's Assets

The trustee has a duty to creditors to increase the fund available to pay them, if possible, and to do nothing that might reduce whatever money is available. Therefore the trustee has various powers that allow investigation of the bankrupt's affairs prior to bankruptcy. In this section we look briefly at the powers to: (a) disclaim onerous property; (b) set aside transactions at an undervalue; (c) set aside preferences; (d) set aside transactions defrauding creditors; and (e) avoid extortionate credit transactions. The aim of these powers is to make sure that the trustee does not retain assets that will reduce in value and tries to swell the assets by clawing back money that the bankrupt, intentionally or otherwise, has put out of reach of his creditors.

Section 343 - Extortionate credit transactions - 'able to apply to set aside or vary the terms of any credit provided to the bankrupt within the three years prior to the bankruptcy order'

The trustee is able to apply to set aside or vary the terms of any credit provided to the bankrupt within the three years prior to the bankruptcy order, if the credit terms are 'extortionate' (IA 1986, s 343). This means that the terms require 'grossly exorbitant' payments or have 'grossly contravened ... fair dealing'.

Onerous property

The trustee may disclaim onerous property, such as land burdened with onerous covenants or unprofitable contracts (IA 1986, s 315). In practice, this is often an action around a lease that the bankrupt is subject to and for potentially a number of future years. A disclaimer ends all the bankrupt's rights and liabilities in respect of the property in question, and discharges the trustee from any personal responsibility for that property. Any person who suffers loss as aresult of a disclaimer by the trustee in bankruptcy may prove in the bankruptcy for their loss.

Section 341(2) - Does the bankrupt have to have been insolvent at the time?

The trustee must prove that the debtor was insolvent at the time, or became insolvent as a result of the preference being granted (IA 1986, s 341(2)). CASE STUDY Joseph's trustee is able to establish that the payment to Joseph's friend was a preference, because he obtains a copy of an e-mail sent to the friend saying that Joseph would make the repayment now, while he still could, as his creditors were 'baying for blood' and he felt he could be made bankrupt 'at any time'. On investigation of his finances, it is clear that he was already technically insolvent.

Section 279 of the IA 1986 - Automatic Discharge after One Year

The vast majority of bankrupts obtain automatic discharge after one year.

Section 341(2) - Does the bankrupt have to have been insolvent at the time?

There is no need to prove the debtor was insolvent at the time (or as a result of the transaction), unless the transaction was more than two years before the petition (IA 1986, s 341(2)). Even if the transaction was more than two years before the petition, insolvency may be presumed if the transaction was in favour of an 'associate' (broadly, a close relative or business associate, as defined by IA 1986, s 435). This presumption may be rebutted. CASE STUDY Joseph's trustee is not able to establish that the transfer of the cottage was a transaction at an undervalue, as Joseph is able to prove he was not insolvent at the time or as a result of the transaction. have been insolvent at the time? There is no need to prove the debtor was insolvent at the time (or as a result of the transaction), unless the transaction was more than two years before the petition (IA 1986, s 341(2)). Even if the transaction was more than two years before the petition, insolvency may be presumed if the transaction was in favour of an 'associate' (broadly, a close relative or business associate, as defined by IA 1986, s 435). This presumption may be rebutted. CASE STUDY Joseph's trustee is not able to establish that the transfer of the cottage was a transaction at an undervalue, as Joseph is able to prove he was not insolvent at the time or as a result of the transaction.

Section 423 of the IA 1986 - Transactions defrauding creditors

This is a recovery action that applies to both corporate and personal insolvency and can be found at IA 1986, s 423. Where a transaction has been made at an undervalue deliberately for the purpose of making the debtor's property unavailable to pay creditors, any 'victim' of the transaction, or the trustee or supervisor of a voluntary arrangement, may make application to have the transaction set aside (IA 1986, s 424). It can even be utilised by a creditor pre-insolvency as an asset recovery tool if that creditor is a 'victim' of the transaction. If a creditor wants to take action post-insolvency as a victim, rather than allow the insolvency practitioner to take the action, then permission of the court must be sought.

What does 'rank and abate equally' mean?

This means that each creditor in a particular category (eg, preferential and unsecured creditors) will share the money available. Since there may not be enough for every creditor in that category to be paid in full, each will receive the same percentage of his or her original debt.

The Role of the Official Receiver

When a bankruptcy order is made by the court or the adjudicator, the Official Receiver (OR) (who is a civil servant employed by the Insolvency Service and officer of the court) initially takes control of the debtor's property. He, or his department, will: (a) ask the debtor for a statement of affairs and investigate, if necessary; (b) take steps to protect property; (c) possibly, dispose of perishable goods or those going down in value. The OR will act as the trustee in bankruptcy from the moment a bankruptcy order is made, but, just as for a compulsory liquidation order, there is the possibility of creditors seeking the appointment of a trustee in bankruptcy from the private sector under similar procedures.

What is the effect of bankruptcy on the bankrupt?

When a bankruptcy order is made, the individual who is the subject of that order is subjected to a number of restrictions and disabilities.

Section 279 - Discharge - 'occurs automatically after one year'

When the bankruptcy order is discharged, the bankruptcy comes to an end. The effect of this is that the bankrupt is released from most of his previous debts (IA 1986, s 281) (see 20.3 for an example of debts that are not released) but may still be subject to a BRO or BRU. Discharge occurs automatically after one year (IA 1986, s 279) unless it is suspended, as stated below. At this point, the realisation and distribution of the assets of the bankrupt may not be complete. Any property which has vested in the trustee in bankruptcy remains so and is not returned to the debtor (other than the special rules for the realisation of the matrimonial home, where particular time periods exist), and the debtor is still required to assist the trustee with his task of the realisation of assets.

Preferences, cont. - How far back may the trustee go? - 'made within the six months prior to the bankruptcy petition (IA 1986, s 341(1)), or within two years prior to the petition if the preference is in respect of an associate (IA 1986, s 435)'

he trustee in bankruptcy may make an application to set aside any 'preference' made within the six months prior to the bankruptcy petition (IA 1986, s 341(1)), or within two years prior to the petition if the preference is in respect of an associate (IA 1986, s 435).