The bankruptcy process (s.264)
The bankruptcy process is initiated in one of two ways:
- by the insolvent debtor applying online for his/her own bankruptcy to a bankruptcy adjudicator; or
- by a person who is entitled to do so by presenting a bankruptcy petition to the court requesting the court to make a bankruptcy order against the debtor.
The main persons who can present a bankruptcy petition are (i) a creditor (the usual petitioner or (ii) the supervisor of an IVA (or creditor bound by an IVA in certain circumstances) (s.264).
Adjudication of debtor’s own application
If the debtor applies for his/her own bankruptcy, the only ground permitted is inability to pay his debts. In addition, the application must be accompanied by particulars of the debtor’s affairs (to include information regarding his assets and liabilities); s.263J.
Grounds of creditor’s petition
The most common ground for a petition is that the debtor appears to be unable to pay (or has no reasonable prospect of being able to pay) his debts referred to in the petition (s.267). Inability to pay must be demonstrated by proving either:
- that a statutory demand has neither been satisfied within 3 weeks from service of that demand, nor set aside by the court on application (within 18 days) in accordance with the rules; or
- that there has been an unsatisfied execution of a judgment.
Other requirements for a creditor’s petition
The debt must be for a liquidated sum exceeding £5,000, generally unsecured (but subject to some exceptions under.269) and the debtor must have his/her centre of main interests located in England and Wales or, if that centre is not in an EU member state, must be domiciled, ordinarily resident or have carried on business in England and Wales in the three years before the presentation of the bankruptcy petition (s.265).
The bankruptcy order
The making of the order is at the discretion of the adjudicator or the court (as the case may be) and they will make the order if the grounds for the application or petition and other requirements are satisfied and the adjudicator or the court deems it appropriate in the circumstances. If a bankruptcy order is made, all the rights, interests and assets of the bankrupt vest automatically as a matter of law in the trustee in bankruptcy (s.306).
Usually, the first trustee will be the Official Receiver (the “OR”), a civil servant working for the Insolvency Service, a Government department. As such, the sensitive area of personal bankruptcy is one which may give rise to applications under the Human Rights Act 1998 with reference to the First Protocol to the European Convention on Human Rights, Article 1 (right to peaceful enjoyment of possessions), Article 6 (right to a fair trial) and Article 8 (right to respect for private and family life).
The bankrupt is deprived of ownership of his property, subject to some limited exceptions. These include his personal earnings to the extent necessary to meet the reasonable domestic needs of the bankrupt and his immediate family (s.310(2)). He must provide a statement of affairs to the OR within 21 days of the order (unless the OR dispenses with this requirement). He is (whilst undischarged) prohibited from doing a number of things, including acting as a director or being involved in the management of a company, obtaining credit of over £250 without disclosing that he is a bankrupt, giving gifts and practicing in certain professions (including as a solicitor) or acting as certain public officers e.g. as a M.P. or J.P.
The trustee in bankruptcy
As stated above, the first trustee is usually the OR. Alternatively, in more complex or asset-rich bankruptcies, an insolvency practitioner from the private sector may be appointed as trustee instead at the time of the making of the bankruptcy order or subsequently by a creditor decision made by a majority of creditors by value voting on the matter. Creditors are entitled to require the OR to seek a creditor decision on his replacement if at least one quarter in value of creditors so require. If there are insufficient funds to bear the costs and fees of a private trustee, the OR is likely to remain the trustee.
The trustee’s role is to ‘get in, realise and distribute the bankrupt’s estate’ (s.305(2)) in accordance with the provisions of IA 1986.
The bankrupt is under an obligation to pass over present and future assets to the trustee. The trustee may claim for the benefit of the bankrupt’s estate assets acquired by the bankrupt after the making of the bankruptcy order and before the bankrupt is discharged (s.307(1)).
The trustee has wide statutory powers to sell or otherwise deal with the assets in the estate and generally; s.314 and is under various statutory duties. His ability to retire and the right to remove him from office are governed by IA 1986 and the Insolvency Rules.
Three years from the date of the bankruptcy, any interest (not already realised by the trustee in bankruptcy) that the bankrupt had in his, his wife’s or his former wife’s home will vest back in the bankrupt, subject to certain exceptions; s.283A.
The trustee in bankruptcy holds office until he believes he has completed the administration of the estate. Many bankruptcies continue after the bankrupt has received his discharge from bankruptcy.
Assets in the bankruptcy
The trustee will collect in the assets (and may disclaim any onerous property or contracts pursuant to ss.315-317), including those assets which may be available to swell the estate as a result of challenging certain fraudulent or undervalue transactions or preferences. The trustee must distribute the estate in accordance with the statutory provisions (ss.322-332 and rule 14).
Distribution of assets
Subject to the procedure for the submission, agreement and determination of creditors’ claims (known as “proving a debt”), the trustee must give notice to the creditors of realisations, deductions, retentions and the amount by way of dividend (if any) that is available for distribution. The final distribution will take place only when the trustee has realised all of the assets that he can and distributed them in the prescribed order of priority.
Priority of payment
The order of priority for payment is on the basis that debts within one class are only payable if debts in earlier classes have been fully paid. The order is as follows:
- secured creditors (but limited to the value of the security itself and ranking with ordinary unsecured creditors for any excess amount owing);
- expenses of the bankruptcy;
- specially preferred creditors (training/apprenticeship fees); s.348;
- preferential creditors (similar to those on corporate winding up); see s. 386 and Schedule 6;
- ordinary unsecured creditors;
- statutory interest;
- debts of a spouse or civil partner (must be provable but they are postponed to other creditors); and
- any surplus is payable to the bankrupt.
Discharge of bankruptcy
There is an automatic discharge after a maximum period of one year (s.279). The OR or the trustee in bankruptcy may apply for an order suspending the automatic discharge if the bankrupt fails to comply with his obligations under IA 1986 e.g. to inform the trustee of all the assets he owned. The bankrupt may be discharged in less than a year if the OR files a notice stating that the bankruptcy does not require investigation under s.289 or stating that he has concluded any such investigation within the one year period. Previously, there was a duty of the OR to investigate each bankruptcy. However, in many cases it was obvious why the bankruptcy arose and so the Enterprise Act 2002 removed the need for an investigation of each case.
The effect of discharge is that the bankrupt is released from most of the bankruptcy debts; s.281. He is also released from the personal restrictions mentioned above.
Prior to the Enterprise Act 2002 coming into force, bankruptcy usually lasted for three years as opposed to the current one year. This may be one of the reasons why the number of personal insolvencies is high as debtors may view bankruptcy as a less onerous procedure than was previously the case.
Bankruptcy Restriction Orders (BROs)
The Secretary of State, or the OR acting on the Secretary of State’s direction, may apply to the court for a BRO if the court considers it appropriate having regard to the conduct of the bankrupt (before or after the bankruptcy order). Behaviour to be taken into account is listed in Schedule 4A and includes failure to keep records, entering into preferences or transactions at an undervalue, fraud and incurring a debt without reasonable expectation of being able to pay it. Generally, the application must be made within a year of the start of the bankruptcy. This year period will be extended if the one year bankruptcy discharge period is extended under s.279.
A BRO will operate for a period of between two and fifteen years. For the duration of the order, the bankrupt is unable to act as a director or obtain credit of more than £250 without disclosing that he is subject to a BRO. It is expected that this will have a more severe effect on the bankrupt’s ability to obtain credit than the equivalent restriction on bankruptcy given the nature of the debtor’s behaviour resulting in the BRO. Breach of a BRO will be a criminal offence punishable by fine and/or imprisonment.
Instead of being subject to court process, a bankrupt can offer the Secretary of State a bankruptcy restriction undertaking (BRU) which, if accepted, will have the same effect as a BRO.
Debt Relief Orders (DROs)
A debt relief order provides a mechanism for debtors with few assets and little income over and above their domestic needs to obtain a release from their debts, where those debts are less than £20,000, thereby avoiding bankruptcy proceedings. A DRO provides the debtor with protection lasting one year from their creditors taking steps to enforce their debts without court permission. At the end of that year, the debtor is discharged from their liability for those debts – there is no asset realisation or distribution to creditors (although creditors may receive some payment if the debtor’s circumstances significantly improve during that period).