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Individual insolvencyGeneral
There are two main types of insolvency procedure applicable to individuals:
individual voluntary arrangements, and
bankruptcy
Individual insolvency is:
governed by Insolvency Act 1986 and Insolvency Rules 1986, SI 1986/1925 and
subject to the supervision of the High Court (Chancery Division) or designated county courts
Individual voluntary arrangements (IVAs)
An IVA allows an insolvent debtor to obtain a moratorium on his debts and to repay his creditors in a structured way. It is overseen by a nominee, who must be a qualified insolvency practitioner, and may be structured as:
a composition in satisfaction of his debts, or
a scheme of arrangement
The nominee prepares a proposal for the IVA, setting out what payments are to be made and from what assets. This must be approved by 75% or more of creditors. Once approved, the nominee becomes the supervisor of the arrangement, and any bankruptcy is annulled. All creditors who could vote at the meeting are bound.
The supervisor administers the IVA, paying monies to creditors as agreed. He must keep accounts and records of dealings and payments. The debtor must provide him with full details of his assets and liabilities. The supervisor must report periodically to the debtor, to creditors and to the court.
If the debtor breaches the IVA, he may be made bankrupt. Credit and lending institutions do not usually differentiate between IVAs and bankrupt for rating and lending purposes.
Bankruptcy
Bankruptcy discharges an individual from debt, and divides his assets amongst his creditors. A bankruptcy petition may be presented by the debtor himself, or by a creditor to whom the debtor owes £750 or more. The basis of the petition is that the debtor is unable to pay, and has no reasonable prospect of being able to pay his debts.
On a creditor's petition, a debtor is deemed unable to pay his debts if he has failed to comply with a statutory demand (a demand in prescribed form requiring payment) or execution on a judgment debt is unsatisfied. The court will dismiss the petition if the debtor can pay his debts or there is a genuine triable issue relating to a debt; it will not normally make a bankruptcy order if an IVA is in force.
A duly signed VAT return gives rise to a debt sufficient to ground a statutory demand (served by HMRC as a creditor), bankruptcy petition and order. The insolvency courts can only look behind tax liability established by the statutory procedures in the tax regime in exceptional circumstances (Chamberlin v Revenue and Customs Commissioners [2011] All ER (D) 250 (Mar)).
A bankruptcy order is supervised either by:
the Official Receiver (from the Insolvency Service, part of the DTI), or
a trustee in bankruptcy, who must be a qualified insolvency practitioner. This requires sufficient assets in the estate to pay the trustee's fees
An order normally stays any action against the bankrupt. It must be advertised, and is entered on the register of individual insolvencies.
The bankrupt's estate, which vests in the trustee, is what the bankrupt owned when the bankruptcy began, and which he acquires afterwards, eg income. It does not include what the bankrupt needs to earn an income and maintain a reasonable standard of living.
Once an order is made:
the bankrupt may not make any payment or dispose of property without the court's consent
unsecured creditors may not exercise any remedy without leave of the court
secured creditors (eg mortgagees) may enforce their security – this is not affected by the bankruptcy
goods taken in execution may be recovered if the execution is not complete
landlords may distrain for up to six months' rent (due before commencement of bankruptcy)
The trustee deals with the estate to repay creditors, under the supervision of a creditors' committee. He needs permission for certain purposes, eg to carry on the bankrupt's business, or conduct litigation. In other matters, eg selling property for cash, he may act himself. He has power to disclaim onerous property and obligations (those which do not benefit the estate), and distributes assets in a specified order.
The court may revoke or vary pre-bankruptcy transactions which diminish the value of the estate.
On completion of the bankruptcy, the trustee will convene a final creditors' meeting to receive his report and release him.
A bankrupt is normally discharged after one year, although he may be subject to bankruptcy restrictions orders or undertakings for between two and fifteen years. Discharge releases the bankrupt from bankruptcy debts.
Other forms of personal insolvency
Non-bankruptcy forms of personal insolvency used in smaller cases include:
administration orders under the County Courts Act 1984, where a debtor cannot satisfy a judgment for £5000 or less, and asks the court to make such an order, and
debt relief orders, confined to cases where the debtor's liabilities are not over £15000 and his assets not over £300
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