What Is Bankruptcy

The main Act regulating all matters to do with bankruptcy is the Insolvency Act of 1986. There are substantial amendments to this Act in the Enterprise Act 2002 and the Insolvency Amendment Rules 2003, and various statutory regulations. The principles of insolvency in these laws and their related practice have two main concerns:

• Dividing the assets of an insolvent person among creditors; and

• Relieving the insolvent person of the burden of debts.

These principles apply to individuals as well as to companies. However, there is a little difference in terminology: companies go into liquidation whilst individuals go bankrupt.

Petitions

Petitions for a Bankruptcy Order may be presented by the debtor, the creditor or creditors (acting jointly), or the supervisor of a scheme proposed by the debtor.

A Creditor's petition should involve £750 or more, and be based on non-payment of money by the debtor within a three-week period after a demand for payment has been served in writing, or when an execution intended for payment is returned unsatisfied, in its entirety or partially. The creditor's petition requires a £330 deposit to cover the appointed receiver's fees and expenses. Creditors' petitions are never advertised.

A Debtor's petition may be presented only on the basis of a debtor's inability to pay off debts. The debtor must present along with the petition a statement of affairs, accompanied by £250 in cash as payment for fees.

A Statement of Affairs presents a schedule of the assets of the debtor (or bankrupt), with details on their realisable value and also the estimates of amounts owed to creditors.

Order

Upon hearing of a petition, the court may issue a bankruptcy order, which has the following effects:

• The court-appointed receiver assumes receivership of the debtor's assets

• No proceedings may be taken against the debtor or the assets for any provable debt.

However, secured creditors are not prevented from acting on the securities they hold. Normally, the designated official receiver is an officer of the court or a civil servant who is an employee of the Department of Trade and Industry. It is the duty of the receiver to protect the debtor's assets until they are finally distributed among the creditors. It is prohibited to sell the assets, unless they are of a perishable nature.

In the case of a business, the practice is for the business to be discontinued, unless in the judgement of the official receiver it is necessary to do so. In such cases, an application is made to court for the appointment of a special manager to oversee the business pending the appointment of a trustee.

The official receiver conducts a private examination on the debtor. Within 12 weeks of the issuance of the bankruptcy order, the receiver must determine whether to call a meeting of the bankrupt's creditors. This meeting will not be done unless it is likely that a professional trustee will be appointed (that is, the business will be permitted to continue).

The receiver issues the notice of the creditors' meeting, and includes forms of proxy and proof of debt. A creditor's representative must submit the proxy form, in order to be entitled to vote, unless the creditor is an individual creditor attending in person, or a partnership represented by a partner. The proof of debt should also be presented.

The purpose of the creditors' meeting is to appoint a trustee and to appoint a committee of creditors, and voting is determined by a majority in value. If the creditors do not appoint a trustee, the receiver may approach the Secretary of State for Trade and Industry to appoint one; but if the assets are not that substantial, the receiver will act as trustee.

The committee of creditors consists of not less than three and not more than five creditors. The committee will make decisions whether to continue the bankrupt's business, to institute legal action if necessary, or to effect compromise agreements with any debtors and creditors.