1. When are you declared bankrupt in England & Wales?

The only grounds for making a Bankruptcy Order against an individual is their inability to pay their debts or in connection with a failed Individual Voluntary Arrangement (IVA). An individual may be insolvent but this does not mean they are bankrupt.

Bankruptcy commences on the making of a Bankruptcy Order, following the individual’s own on-line application to the Adjudicator or a Petition to the Court presented by a Creditor or their IVA supervisor. A Creditor can present a Petition to the Court for a Bankruptcy Order if one or more of the individual Creditors are owed £5,000 or more.

A Company can be liquidated or ‘wound-up’ if they are unable to pay their debts. There are two different tests to ascertain whether a company is unable to pay its debts:-

The cash flow test – this is a commercial test where the Courts look to see if on the evidence the company is paying its debts as they fall due.

The balance sheet test – a company is deemed unable to pay its debts if there is a shortfall in the value of its assets in relation to the amount of its liabilities.

In addition, a Company will be presumed to be unable to pay its debts, if the company fails to satisfy a Creditor’s Statutory Demand for a debt exceeding £750 or if the company fails to satisfy in full a Judgement debt.

2. How long does it take to process a Petition for Bankruptcy?

If you are petitioning for your own bankruptcy, then once you have paid your fee and submitted your application, the Adjudicator has up to 28 days to declare you bankrupt. However, in practice the process is usually much quicker.

The time taken to petition for a Bankruptcy or Winding-Up Order is dependent on how busy the Courts are. In respect of an individual there must be at least 14 days between service of the Petition and the hearing date. In respect of a Company there must be at least 7 days between service of the Petition and an advertisement of the Notice in the London Gazette and at least a further 7 days between the Notice being advertised and the hearing date taking place.

3. What can you do if you disagree with the Bankruptcy Order by the Court?

An individual can apply to the Court for the Bankruptcy Order to be annulled on the basis that it ought not to have been made. Annulment may be granted where the Bankruptcy Petition date could have been disputed by the bankrupt or set-off was available.

The Court can rescind a Winding up Order but the application must generally be submitted within 5 business days of the Order being made. The Court will only rescind the Winding up Order if the Applicant can show that the circumstances of the case are materially different from how they appeared to the Court that heard the Winding up Petition. The Court is unlikely to rescind a Winding up Order unless there is clear evidence that the company is able to discharge in full all Creditor claims and all the properly incurred costs and expenses of the liquidation.

4. What happens if you are declared bankrupt?

On the making of a Bankruptcy Order the Court or Adjudicator passes their file to the Official Receiver (OR) who acts as receiver and manager of the bankrupt’s estate while it remains vested in the bankrupt. The bankrupt must deliver to the OR possession of the assets within their bankruptcy estate, an inventory of their assets and all books, papers and records relating to their affairs.

Once a Winding up Order is made, the OR becomes the Liquidator. Upon the making of a Compulsory Liquidation Order the Liquidator takes control of the Company’s assets and the powers of the Company’s Directors cease. Any disposition of the Company’s property by anyone other than the Liquidator is void. All Company papers and websites must state that the Company is in liquidation. All employees are automatically dismissed.

The OR advertises the fact of the Winding up and notifies the Registrar of Companies that the company is in liquidation. The OR may require the Directors of the Company to prepare a statement of affairs including details of the company’s assets, debts and liabilities and any other information required.

5. What duties and powers does the Trustee have?

The Trustee in Bankruptcy will realise any assets of value in the estate and pay creditors who have proved their bankruptcy debts using a dividend procedure of distribution. The Trustee is under a duty to declare and distribute dividends to Bankruptcy Creditors, wherever he has sufficient funds in hand, subject to the retention of expenses. The Trustee will also have regard to the Bankrupt’s conduct and may need to investigate the existence of possible assets or the merits of a possible claim.

Following a Winding up Order the OR or Liquidator’s role is to fulfil the primary function of collecting in, realising and distributing the assets of a company to its creditors. The Liquidator has a duty to assess the proofs of debt and may accept, reject or seek to compromise that debt. When the assets of the Company have been realised and the liquidation is otherwise complete, the Liquidator will distribute the fund in accordance with the statutory order of priority.

A Liquidator also has a duty to investigate the reasons for the failure of the Company and to report on its Directors. A Liquidator has a duty to preserve the Company’s property and, if possible, to maximise the assets available for creditors.

6. What kind of obligations do I have as a Bankrupt?

A Bankrupt has a general duty to cooperate with the Trustee in Bankruptcy by providing information, attending meetings with the Trustee and undertaking other acts that their Trustee may require. In particular the bankrupt must notify their Trustee if their income increases or if they acquire any property that falls within the bankruptcy estate as after acquired property. The Official Receiver can apply to the Court for an order that a bankrupt attend a public hearing or private examination at which the OR will examine the bankrupt about their financial affairs and property and the reasons for their bankruptcy.

As a director of a company that has been wound up, you have a duty to cooperate with the Liquidator. You must ensure that you give any information about the company that they ask for, hand over the company’s assets, records and paperwork and allow the Liquidator to interview you if they ask.

7. How can I monitor the progress of the Bankruptcy?

If you believe an individual or company may be subject to insolvency proceedings and you have not heard from the Official Receiver/Insolvency Practitioner, you should contact the Official Receiver’s office nearest to the individual or Company. If it is a company insolvency you can also use the search facility at Companies House www.companieshouse.gov.uk. If it is a bankruptcy you can search the Individual Insolvency Register www.insolvency.gov.uk.

As a creditor, do not expect frequent reports from the Official Receiver/Insolvency Practitioner. Once your claim is filed with the OR/IP you will be sent a report to Creditors which will give you information about the assets and liabilities of the individual or company and the circumstances of the insolvency. You will be notified automatically of any distribution of money or that no money is available and the case is to be closed. If you are concerned you should contact the OR/IP handling the case.

8. How long does a bankruptcy last?

A bankrupt is automatically discharged from bankruptcy on the first anniversary on the commencement of bankruptcy. Once discharged from bankruptcy an individual is released from the statutory bankruptcy restrictions and the liability for bankruptcy debt. An individual’s discharge from bankruptcy however does not end the process of asset realisation and distribution. Their Trustee remains in office for the purpose of completing the realisation of the assets within the bankruptcy estate.

Once the Winding up is complete, the Liquidator must prepare a final account and send this to the Company’s Creditors. The Liquidator then sends a copy of the final account to the Court and Registrar of Companies with a statement of whether Creditors objected to his or her release. The process of Winding up a Company varies in length and can take weeks, months or years in some complex cases. Once complete, the Company is automatically dissolved 3 months later.

9. Can I make arrangements with my Creditors?

Once a Bankruptcy or Winding up Order has been made by the Court the debtor is no longer able to make arrangements with their creditors.

Before a Bankruptcy Order is made, an individual can make arrangements with their creditors to pay their debts. The options depend on the amount of money and assets you have. You can pay your debts in instalments by setting up a Debt Management Plan, an Administration Order or an Individual Voluntary Arrangement which is managed by an Insolvency Practitioner. You also have the option of reaching an informal agreement with your Creditors.

If a company is struggling to pay its debts, then it is strongly recommended that you seek expert legal advice. Options open to you would include an informal agreement with your Creditor, a Company Voluntary Arrangement (CVA) or Administration.

10. How can an Employee collect outstanding salary from his Bankrupt Employer?

Once a Winding up Order has been made, an Employee will become a Preferential Creditor of the employer company and will be eligible to receive a payment from the company for unpaid wages, payment in lieu of notice, redundancy pay or holiday pay. Preferential Creditors are only paid after the Liquidator’s fees and secured creditors such as banks and other lenders have been paid. As such, in many cases there is not enough money to settle all employee claims. If there are insufficient funds to pay employees from the Company Liquidation, they will be entitled to claim redundancy and other payments from the National Insurance Fund subject to a cap.

11. What important advice can be given to a Company Director in the event of imminent bankruptcy?

As soon as directors are aware that a company is in financial difficulty they should seek expert advice. Directors of companies in financial difficulty face a number of issues which often interlock. These include:-

• What can they do to keep the company in business without committing an offence or incurring personal liability?
• At what stage must they decide to cease trading?and
• If they do decide to cease trading, which insolvency procedure should the company enter?

It is crucial that regular full board meetings are called if the company is in financial difficulties and that the commercial decisions of the directors are reported in full in the company’s minutes. It is also important that the directors reach their commercial decisions at board meetings independently on the basis of the financial and legal information and advice available to them.

12. Is there a special arrangement for a private person who is in danger of going bankrupt?

Yes an individual could enter into one of the arrangements listed in Question 9.

Publisher: Graham & Rosen Solicitors