Bankruptcy

Making an individual bankrupt and winding up an insolvent company is usually an action of last resort.

In any Bankruptcy and insolvency proceedings, unsecured creditors are not terribly high up the list when it comes to being paid. Any assets of the debtor will usually be applied broadly in the following order:-

  1. The liquidators or Trustee in Bankruptcys costs;
  2. Certain Inland Revenue debts (e.g. PAYE);
  3. Certain Customs and Excise liabilities (e.g. VAT);
  4. Social Security contributions;
  5. Contributions to occupational pension schemes;
  6. Arrears of wages or salary;
  7. Secured creditors and
  8. Unsecured creditors.

As can be seen, the unsecured creditor is a long way down the list!

If you are embarking upon Bankruptcy/Insolvency proceedings for the first time, then it is probably worthwhile viewing the Insolvency Service website www.insolvency.gov.uk

The website has lots of very useful information and leaflets that you can download including:-

  1. How to search the individual insolvency register.
  2. Company Directors Disqualification Act 1986 and Disqualified Directors.
  3. The Insolvency Service Charter.
  4. The Civil Procedure Rules 1998.

The Debt
In order to commence any kind of insolvency action, the debtor must owe the Petitioning Creditor £750 or more.

Bankruptcy Proceedings
A debtor must be served with a Statutory Demand indicating how much is claimed and how the debtor should pay it. The Demand states that if the debt is not paid and/or an application to set aside the Statutory Demand is not made, then the Petitioning Creditor can present a Bankruptcy Petition.

Applications to set aside Statutory Demands can be made at the Defendants home Court or if it is proposed to issue the petition out of the Royal Courts of Justice, at the Royal Courts.

Tip
Not all County Courts have Bankruptcy jurisdiction. It is therefore worthwhile checking with the Court you are using to confirm it has bankruptcy jurisdiction for the area in which the debtor resides.

Proof of service
Statutory demands should be served personally. It avoids later arguments as to whether or not the document ever reached the hands of the debtor. Many debtors will try and evade service. If this is the case then a letter of appointment should be delivered by a process server and the process server should turn up at a later date (as specified in the letter) and then serve the demand through a letterbox.

 

Setting Aside Statutory Demand
If a debtor wishes to set aside a Statutory Demand then he has to make an application to the Court (there is no fee payable). The application must be supported by an Affidavit which sets out the reasons why the debt is disputed.

The grounds of setting aside the Statutory Demand have to be legitimate. If they are not, then the Court may dismiss the application without a hearing.

If the Court does allocate a hearing, both parties will be required to attend the Court and explain to a District Judge why the application should be set aside or otherwise.

Bankruptcy Petition
If there is no response to the Statutory Demand and/or an application to set aside the Statutory Demand does not succeed, the Petitioner can thereafter issue a Petition.

Once the Petition is issued, it must be served on the Defendant at least 14 days before the hearing.

Personal service of the Petition is required, which should again be supported by an Affidavit of service.

If a Debtor tries to evade service, then the Court can make orders for substituted service and allow the notice of issue of the Petition to be, say, advertised in the local paper. However, before the Courts will make orders for substituted service, all other methods of service have to be attempted, including attending residential/business address, letters of appointments and corresponding with any solicitors that were known to have acted for the debtor.

The Hearing
At the hearing (which is held in Chambers), the Petitioning Creditor must be able to produce to the Court:-

  1. Affidavit of service of the Statutory Demand, Petition and Affidavit verifying Petition.
  2. A Certificate of continuing debt, confirming that the debt is still owed and due
  3. Draft Bankruptcy Order (not all Courts require this, but some do).
  4. A list of supporting creditors (if any are known at this stage).

The Bankruptcy hearings are quite quick. In many instances, the debtor will not attend even if he/she has been served.

If the debtor does attend, then the Court will enquire as to whether or not the debtor can pay what is due. If the debtor requires an adjournment for say 7 days and can produce evidence to support the fact that it is trying to raise the money, then 9 times out of the 10, the Court will grant an adjournment. However, if the debtor confirms that he is unable to pay his debts, then the Court will make a Bankruptcy Order and specify the time of which it was made.

Thereafter, the debtor is usually asked by the District Judge to attend the court office and telephone the Official Receiver so that an appointment can be made for the debtor to be interviewed.

Can Bankruptcy Proceedings be defended?
The answer is yes.

Obviously if a debtor does not believe he owes the money the creditor is claiming, then an attempt should be made to set the Statutory Demand aside (see above).

Where a debtor intends to oppose the proceedings it is necessary for him to serve a notice setting out the grounds in which he objects to an order being made. The notice must be served at both the Court and on the Petitioning Creditor.

If it transpires that there is a legitimate reason why the debtor should not be made bankrupt, for example, he may have a legitimate argument as to why he does not owe the money, then the Court can dismiss the Petition.

Winding Up Proceedings

Statutory Demands
As in Bankruptcy proceedings, the debt owing and due by a company has to be £750 or more.

It is possible to avoid Statutory Demand proceedings altogether and merely plead the fact that a Demand for payment has been made on the debtor which has been ignored.

However, if a statutory demand is served and ignored, then the Court regard the failure to respond to the Statutory Demand as evidence that the debtor is unable to pay its debts.

If a creditor wishes to use the short procedure and not serve a Statutory Demand, then the Petitioning Creditor must prove to the satisfaction of the Court that the debtor is unable to pay its debts. This is quite an onerous burden to discharge. The information that is available to the creditor will be old copies of the accounts, not the up to date management information. It is therefore prudent to pursue the statutory demand procedure.

Opposing the Statutory Demand
Unlike Bankruptcy proceedings, there is no procedure as such whereby the statutory demand can be set aside.

If a company wishes to dispute the proceedings, then usually it will arrange for its solicitors to send to the Petitioning Creditor a very aggressive letter threatening to obtain an injunction and obtain an order for costs against the Petitioning Creditor. If the demand is not withdrawn by consent, then the debtors solicitors will have to issue an application in order to apply for an injunction to restrain the petition being advertised.

Tip
If there is a legitimate grievance as far as the debtor is concerned, it is worth consenting to a statutory demand being set aside. The Courts do not like Insolvency proceedings being issued if there is a legitimate dispute. The costs that could be thrown away in respect of an injunction application could well outweigh the sum in dispute.

Formalities of Petition
A Petition needs to contain all kinds of information including details of

  1. Share capital
  2. Memorandum/Articles
  3. Details of service of Statutory Demands

The Petition must also be verified by Affidavit.

Service of Affidavit/Petitions
The Statutory Demand and Petition should be personally served at the debtors registered office. It is worthwhile endeavouring to ensure that the Petition is actually served on one of the officers of the company, as some Judges have been known to throw Petitions out that have been left at a registered office merely with a receptionist.

Once the Petition has been served at the registered office, the Affidavit should be filed with the Court.

Unless the Court otherwise directs, every Petition must be advertised in the London Gazette, not less than 7 business days after it has been served on the company and not less than 7 business days before the day fixed for the hearing.

The advertisement must indicate the companys name and registered office, the name and address of the Petition, the date of presentation of the Petition, the date and place of the hearing and the name of the Petitioners Solicitor, if any and to provide anyone wishing to support or oppose the Petition to give Notice of Intention to do so.

If the Petition is not properly advertised, the Court may dismiss it.

If a Petitioner desires to withdraw a Petition before advertisement, then an application can be made to the Court to do so. The Court has to be satisfied the Petition has not been advertised and that no notices in support have been received by the Petitioner and that the company consents to the order.

Certificate of Compliance
It is necessary for a Petitioner to file a Certificate of Compliance with the Rules relating to the service and advertisement showing the date of presentation of the Petition, the date of the hearing and the date on which the Petition was advertised. The Certificate must be filed at least 5 days before the hearing.

Preparation of lists of names and addresses of supporting/opposing Creditors The Petitioner must prepare a list of names and addresses of persons who have given notice of their intention to appear at the hearing.

The list must be handed up in Court on the day of the hearing and prior to the Petition being called.

Opposing Petitions
If the Respondent wants to oppose the Petition, it must file an Affidavit in response, not less than 7 days before the hearing.

The Court may adjourn the hearing, conditionally or unconditionally or make an interim order.

If the Petition is to be defended, the Registrar will adjourn it to a Judges list.

Unopposed Hearings
Most company winding up Petitions are unopposed.

The hearings before the Registrar are extremely short. Blink and you will miss them! It is merely a question of confirming to the Court:-

  1. Name and address of the debtor.
  2. Date on which Petition issued.
  3. Date on which Statutory Demand/petitions have been served.
  4. Confirm that the Petition has been advertised/Certificates of Rules have been complied with and thereafter the Registrar will make the usual order.

Alternatives to Bankruptcy/Insolvency
There are a number of procedures that are open to individuals and companies that wish to avoid being made bankrupt/insolvent.

The mechanics of obtaining such orders are really beyond the scope of this fact sheet. However, briefly the options that are open to individuals and limited companies are as follows:

Individual Voluntary Arrangements
If a debtor wishes to avoid being made bankrupt, but cannot afford to pay the full amount to his creditors it is possible to apply to the Court for an individual voluntary arrangement (IVA).

It is normal for IVAs to be compiled by an Insolvency Practitioner, who will then apply to the Court for an interim order (which will give the debtor a breathing space) and thereafter liase with all of the creditors to see whether the debtors proposals are acceptable.

An IVA can only be granted if 75% of the creditors approve it.

If the agreement is passed, then it is overseen by an Insolvency Practitioner (who becomes known as the supervisor). The IVA would be binding on those creditors who had notice of the meeting and were entitled to vote.

Corporate Insolvency
Company Voluntary Arrangement A company voluntary arrangement (CVA) is essentially a structured re-organisation of the company which can lead to payments of debt by instalments to enable the company to continue trading or as a worse case scenario to allow the company time to dispose of its assets in an orderly fashion rather than have a fire sale.

  • Like IVAs, the scheme is overseen by an Insolvency Practitioner who acts as a supervisor.
  • Like IVAs, the CVA requires a majority of 75% in value of the creditors.

Administration Order
Administration Orders are usually obtained by companies that are in dire financial straits and are on the verge of becoming insolvent.

An Administration Order is essentially an application to the Court to allow the company breathing space to dispose of its assets in an orderly fashion. The Court have got to be satisfied that the Administration Order will be of more benefit than putting it into liquidation. obviously if the company is on the verge of insolvency, the Court does not want to effectively postpone the demise of the company if all creditors are going to be wrapped up.

  • If the Petition for an Administration Order is successful the company has an administrator appointed.
  • Once the Court makes the order the company is protected from other creditors.
  • An independent report is required to obtain an Administration Order which is usually prepared by an Insolvency Practitioner