INSOLVENCY LAW:
 
Insolvency Act 1986
 
Insolvency Rules 1986
 
Enterprise Act 2002
 
Directors Disqualification Act 1986
 
Statutory Instruments
 
Case Law
 
COPORATE INSOLVENCY PROCEDURES
 
1) Liquidations
 
There are three types of Liquidations:
 
a) Members Voluntary Liquidation
 
b) Creditors Voluntary Liquidation
 
c)  Compulsory Liquidation
 
2) Company Voluntary Arrangement
 
3) Administration
 
PERSONAL INSLVENCY PROCEDURES:
 
1) Individual Voluntary Arrangements
 
2) Banruptcy
 
OTHER PROCEDURES
 
Phoenix Companies
 
Voluntary Striking Off and Dissolution
 
A) Members Voluntary Liquidation 
 
This is only available to a solvent company. If it is not solvent, then the creditors’ voluntary liquidation will be used.
 
A Members Voluntary Liquidation would be used under the following circumstances:

a)  The retirement of the Directors/shareholder as there is no one for succession purposes or the company cannot be sold to any third party
 
b) The directors/shareholders have fallen out and wish to separate, thereby, wishing to take advantage of transferring assets without having to find the cash to buy them
 
c) The company is solvent but the Liquidity/Cash flow is not there and the creditors are threatening Compulsory Winding Up
 
d) Tax Advantages i.e. Capital Gains Taper relief pre 05.04.08 or 18% after 06.04.08 as opposed to higher rates of tax on Dividends

The basic procedure for this type of liquidation is as follows:

a)  The directors swear Statutory Declaration of Solvency and convene a meeting of members
 
b) At the meeting of members, which must be held, within five weeks of statutory declaration a Special Resolution is passed by members agreeing to the company being placed into liquidation and for the appointment of a liquidator.
 
c)  Both the Resolution and the Statutory Declaration of Solvency are filed with the Registrar at Companies House.
 
d) Additionally the Resolution and Notice of the liquidator’s appointment must be advertised in London Gazette and two local newspapers and filed with the Registrar at Companies House
 
e) Assets are realised and once creditor’s claims have been approved, and after the liquidators fees and expenses have been deducted, the creditors are paid in order of priority together with statutory interest. Any surplus is then paid to the shareholders.

At times assets can be distributed to shareholders in Specie. Especially when there is a split between the shareholders and they wish to go their own way
 
f) Accounts of the company need to be prepared up to the date of the Liquidation and submitted to the Revenue to establish any tax liabilities that may arise to that date. Additionally tax liabilities have to be paid by the Liquidator that may arise on any sale of assets or of trading profits if the company is being traded during his period of appointment
 
g)  Final meeting of members held to approve the closure
 
h)  Final return filed with registrar
 
i)  Company dissolved three months later.

When the company is in liquidation the liquidator has duties as he would in any other type of liquidation. He must gather in the assets and distribute them in accordance with the statutory order. He is still under a duty to investigate past transactions and to look at the directors’ behaviour prior to liquidation (except wrongful trading which only applies to insolvent companies). However, it is rare in practice that any detailed investigation is undertaken. Quite simply, the reason for this is that the whole nature of the members’ voluntary liquidation is that all the creditors will be paid in full plus Statutory Interest. If creditors are paid in full there is usually very little to complain about.
 
In order to carry out his duties, the liquidator is given extensive powers under Sch.4 to the IA 1986. These include power to:

a)  sell assets or distribute them In Specie to the shareholders;
 
b)  use the company bank account;
 
c)  appoint agents;
 
d)  litigate and defend litigation on the company’s behalf;
 
e) carry on the company’s business; and
 
f)  do all of the things necessary to facilitate the winding up.

If it appears to the liquidator during the course of the members’ voluntary liquidation that the company is insolvent, the liquidator must convert the liquidation to a creditor’s voluntary liquidation. It is important that this process is finalised within 12 months although, if necessary, the Liquidation can continue further than 12 months. A members meeting must be convened on the anniversary of the liquidation.
 
B) Creditors’ Voluntary Liquidation
 
Creditors’ voluntary liquidation is initiated by the directors of the company and is then ratified by the creditors of the company. However, whilst the creditors’ voluntary liquidation procedure is voluntary (in that the directors are not being forced to recommend liquidation), it is usually the result of either outside creditor pressure or professional advice to the directors that the company is insolvent.
 
A company is Insolvent if it is unable to pay it’s debts as and when they are due and payable.
 
Directors are usually unwilling to put the company into liquidation as they always think that better times are around the corner. However, the threat of potential actions against them for fraudulent and wrongful trading usually concentrates their minds.
 
Directors can be held personally liable for all liabilities incurred if they continue trading the company after they know or should have known that the company was Insolvent.
 
The basic procedure for a creditors’ voluntary liquidation is as follows:

a)  A meeting of members and creditors are convened by giving minimum 14 days notice. Additionally the Notice must be advertised in London Gazette and two local newspapers
 
b)  The directors prepare a Report and Statement of Affairs giving a brief history and reasons for the company’s demise and of its financial position. This is given to the creditors at the creditors meeting and circularised to all creditors after the meeting.
 
c)  A director has to Swear an Affidavit confirming that the Estimated Statement of Affairs is to the best of his knowledge and belief true
 
d)  At the meeting of members they pass a Resolution to wind up the company and also nominate a liquidator
 
e)  Both the Resolutions and the Sworn Statement of Affairs are filed with Registrar at Companies House
 
f)  Additionally the above Resolutions are advertised in the London Gazette and two local newspaperswithin 14 days
 
g)  The creditors’ meeting must be held within 14 days of the members meeting, although in practice the members meeting is held one hour before the creditors meeting:

• there are minimum 7 days notice requirements for this meeting
• creditors’ choice of liquidator takes priority over that of the members unless they ratify the appointment 

h) The appointment of liquidator is published in London Gazette and two local newspapersand filed with the Registrar at Companies House
 
i)  The company assets are realised. Once creditor’s claims are agreed the balance, after Liquidators fees and expenses, is distributed to creditors in required order
 
j)  A final meetings of creditors and members is held to approve the administration and the closure of the
 
k) Final return filed with Registrar at Companies House
 
l)  Company is dissolved approximately three months later

A Statement of Affairs provides creditors with the following information:

a) Details of all the assets showing the cost and the amount to be realised

b) Details of all secured creditors and the amounts owed to them
 
c)  The names and addresses of all other creditors stating whether they are preferential or unsecured and the amounts due to them

The duties of the liquidator in a creditors’ voluntary liquidation are essentially the same as those in a members’ voluntary liquidation. Again he is the agent of the company and the directors’ powers cease (but the directors are not removed).
 
The directors have a duty to assist the Liquidator otherwise he can apply to court to:

• have them orally examined under oath
• obtain a court order forcing them to comply with the Liquidators requests. Failure to comply will be Contempt of Court which will result in their imprisonment

The liquidator’s duty is to realise the assets and distribute them in accordance with the statutory order and to investigate past transactions and the conduct of the directors. The liquidator has 6 months to make his report to the DTI with his recommendations as to whether the director should or should not be struck off. If the DTI bring such action director’s can be Struck Off for a period of 2 to 15 years. It is this latter point which will usually take up much more time in a creditors’ voluntary liquidation.
 
Additionally the liquidator will see if the directors can be sued for wrongful trading if they were trading while the company was insolvent.
 
The liquidator will be concerned to attack any past transactions which he feels are a preference and to investigate the actions of the directors in order to swell the fund of assets available to creditors. This is Liquidation takes place where a company is insolvent. Therefore the assets are certainly not going to be enough to pay off the creditors in full. The liquidator is concerned to increase the pool of assets to get as big a return as possible for the creditors.
 
The Liquidator has a duty to do a report on the directors to the DTI under the Directors Disqualification Act 1986.

C) Compulsory Liquidation
 
Compulsory liquidation is normally a result of hostile process initiated against the company’s wishes via the courts. This can lead to much litigation.
 
There are various grounds upon which a petition for liquidation can be filed. The most common of these grounds is that the company is unable to pay its debts as and when they are due and payable. The are four circumstances in which a company is unable to pay its debt. These are:

a) neglecting to comply with a statutory demand made by a creditor for a sum of over £750 – If a creditor is owed more than £750 he can serve a statutory demand upon the company. A statutory demand is a prescribed form detailing who the creditor and debtor is, what the debt is and the circumstances upon which the debt occurred. If the company does not respond or challenge such a demand within 21 days then the creditor can issue a petition for winding up.
 
If the company challenges the Statutory Demand then a court date is set for the matter to be brought to Court for the Court to decide whether or not the amount being claimed by the creditor is payable by the company
 
b) An unsatisfied judgment – If a creditor has a judgment against the company he can file a petition based on that judgment.
 
c) The company’s assets are exceeded by its liabilities, including contingent and prospective liabilities – This is the ‘balance sheet’ test, and is not often used in practice.
 
d) The company is unable to pay its debts when they fall due – This is the cash-flow insolvency test. There are a number of indicators that a court can take into account as to whether a company may be unable to pay its debts when they fall due. These include failing to comply with a creditors demand for money without reasonable excuse or admitting it cannot pay the debt (for example, in correspondence).
 
In this procedure the courts are involved, a court date is set for the Hearing of the Petition and, once again, if the amount owed is not paid before the Hearing the company will be Wound Up. In a compulsory liquidation, the company is always insolvent. Once the Petition is advertised the consequence of this is the company’s bank account is frozen and the company must cease to trade. Should the company wish to continue to trade during the period between the issue of the Petition and the hearing of same then it must make an application to court to obtain a Validation Order whereupon the bank account will be unfrozen.
 
Once the company goes into compulsory liquidation the Official Receiver (a civil servant) is always appointed first and continues to be involved as it is his responsibility to investigate the actions of the directors rather than any Insolvency Practitioner appointed in place of the Official Receiver.

The basic procedure for a compulsory liquidation is as follows:

a) A creditor will the petition the court and then the petition is advertised in the London Gazette
 
b) The court hearing
 
c) The court makes order
 
d) Official Receiver becomes liquidator
 
e) Official Receiver advertises order in London Gazette and local newspaper and notifies both the Registrar and the company
 
f)  The directors are asked to prepare a statement of affairs
 
g) A meeting of creditors is convened to enable them to nominate a liquidator of their choice. The Official Receiver may decide not to convene a meeting as there are no assets to realise, but the creditors may request a Secretary of State to appoint a liquidator of their choice
 
h) Assets are realised and distributed to creditors in required order
 
i)  Final meeting of creditors held
 
j) Final return filed with court and registrar
 
k) company dissolved three months later

The powers of the liquidator in a compulsory liquidation are very similar to the powers of a voluntary liquidator. The only major difference is that if he wants to conduct litigation or to carry on the business he needs the sanction of the court.
 
Upon the making of a compulsory winding-up order, the Official Receiver is always appointed liquidator of the company. Directors’ powers pass to the Official Receiver and (unlike voluntary liquidations) the directors’ appointments are terminated.   All legal actions against the company are stayed.
 
The Official Receiver is under a duty to investigate the affairs of the company and the reasons for the company’s failure and the actions of the directors. Even if an independent Insolvency Practitioner is appointed, the Official Receiver is the one that carries out the investigation necessary under The Directors Disqualification Act.
 
Once he has investigated the affairs of the company and the reasons for failure he may report to the court, if necessary. He must also report to the creditors at least once during the course of liquidation on the results of his investigations, but not in respect of his investigations of the directors actions re disqualificartion.
 
The Official Receiver has power to call officers of the company for public examination before a court for them to answer questions regarding the affairs of the company and reasons for the company’s failure. The creditors can compel the Official Receiver to call officers for public examination if half the creditors in value wish public examination to take place.
 
 
An independent Insolvency Practitioner can be appointed in place of the Official Receiver in the following ways:

a) the Official Receiver can call a meeting of creditors to enable creditors to appoint the Insolvency Practitioner of their choice or:
 
b) by the Secretary of State. If there are assets in the liquidation the Official Receiver can request the Secretary of State to appoint an Insolvency Practitioner off of the Rota or the creditors can request that such an appointment to be made.
 
This and the fact that the liquidation is brought about by court order makes it slower than voluntary liquidation, generally more expensive, more formal and more rigorous in terms of examination of the directors and reasons for failure of the company.

Company Voluntary Arrangements
 
Company voluntary arrangement (‘CVA’) is a potential rescue mechanism and is therefore an alternative to Liquidation. In reality, it is also an alternative to Receivership or Administration as a CVA will require the support of anyone entitled to appoint a Receiver or Administrator. CVA is an easy and comparatively low-cost procedure for rescuing the company.
 
A CVA can also be proposed by a Liquidator or an Administrator.
 
A CVA is available for solvent companies (unlike Administration) as well as insolvent ones. Although a CVA is for the benefit of the company only the directors can apply on its behalf.
 
During the preparation of the Proposal any creditor can take precipitous actions against the company which could bring it to its knees i.e. Bailiffs.
 
The big disadvantage of a CVA was the lack of a moratorium (a ‘freeze’ on debts) but this is now available for small companies.
 
Third parties are not subject to the CVA, so a creditor could pursue a director who has given that creditor a personal guarantee. (See b) below)
 
Perhaps the downside of a CVA for creditors is that it may simply be postponing the inevitable - the liquidation of the company.
 
The procedure for a CVA is as follows:

a)  The directors make a written proposal; they are normally assisted by the Nominee to prepare this proposal, which is then circularised to all the creditors. It will identify an insolvency practitioner, known as the Nominee at this point. The Nominee has 28 days to look at the proposal and to report to the court on its viability. If it is viable, then he decides to call meetings of members and creditors. Creditors must be given minimum 14 clear days form date of receipt notice of the meeting.
 
b)  It is possible to have a moratorium on actions by the creditors in the case of small companies by applying for one to the Court. It will last for 28 days after filing the proposal at the court. It can be extended for up to a further two months, that is giving a total period of almost three months. Floating Charges cannot crystallise during the moratorium. This procedure is not used frequently because the Nominee can be held personally liable for any liabilities incurred during this period even though he has no control over the day to day running of the company. Nowadays, if the company needs a moratorium the Administration procedure will be used.
 
c)  The proposal will be offering contributions to be paid monthly to the Supervisor which will give creditors a dividend from 0 – 100p in the £.
 
At the creditors meeting, a majority of more than 75% in value of the creditors present and voting is required to approve the proposal. Creditors may put forward modifications which if approved will supersede Terms in the proposal.
 
d) Also at the Members meeting the Proposal must also be approved by the majority of Members.
 
e) The chairman of the meeting must report its outcome to the court, members and creditors. Unsecured creditors who had notice of the meeting, and those creditors who have not had notice of the meeting, are bound by the proposal as regards past debts but not as regards future debts.
 
f) Secured creditors are not bound by the CVA. They could find that assets which are subject to their charge are dealt with in a way they disapprove of, or are even impressed with a quasi trust in favour of the unsecured creditors. The company must continue with any arrangements that it has made with the Secured Creditors.
 
g) Once a Proposal has been approved creditors have up to 28 days, from the date the Report is filed into court, to challenge the decision of acceptance of the arrangement either because the proposal or the Chairman made decisions that were prejudicial against them.
 
h) The Supervisor (previously the Nominee) must be handed control of the assets that are subject to the CVA. In the majority of the cases the “assets” are contributions being made over the duration of the voluntary arrangement, normally 5 years or earlier if creditors are paid in full beforehand.
 
i)  On completion of the CVA, the supervisor must make a final report to the creditors and members within 28 days.
 
j)  Should the company fail to comply with the Terms of the proposal the Supervisor must fail the arrangement and Petition for the compulsory winding up of the company. In the majority of the cases the Supervisor will be appointed Liquidator unless the court receives objections from the creditors.

The proposal should be comprehensive, and must cover such matters as:

a) The reasons/history that has caused the company to apply for the Arrangement
 
b) Particulars of the company’s assets, and how they are to be dealt with
 
c) The manner in which the liabilities are to be dealt with, particularly secured creditors, preferential creditors, unsecured creditors and debts due to associates of the company
 
d) A Statement of Assets and Liabilities
 
e) The company’s last accounts
 
f)  A Cash Flow
 
g) Contributions payable and any assets that will be included
 
h) Dividend payable to creditors
 
i) A Comparison of the dividend payable to creditors compared between a CVA and liquidation
 
j) The duration of the Arrangement
 
k) The name, address and qualifications of the Nominee and proposed Supervisor
 
l) The remuneration of the Supervisor
 
m) Whether the business is to continue, and if so, on what terms
 
n) The Supervisors banking arrangements
 
o) Powers and duties of the Supervisor.

There is no register of company voluntary arrangements; details are filed with the registrar at Companies House.
 
The above procedure is also available to Partnerships as they are treated the same as company’s. In many instances though, due to individual circumstances of Partners, many Individual Voluntary Arrangements will be entered into.
 
Administration
 
Administration is one of the alternatives to liquidation of a company. It is only available for insolvent companies (IA 1986, Sch. B1, para 11). It is intended as a rescue mechanism.
 
The advantage of Administration is that there is a moratorium (‘freeze’) on creditor actions. This is a major factor as it gives the Administrator the time to try to rescue the company, if that is in fact possible.
 
The purpose of an Administration Order must achieve one of the following:

a)  rescuing the company as a going concern; or
 
b)  achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
 
c) realising property in order to make a distribution to one or more secured or preferential creditors.

The revised regime for Administration, introduced by the Enterprise Act 2002, was implemented on 15 September 2003. The revised regime replaces Administrative Receivership for charges coming into existence on or after that date, and radically remodels the old form of Administration. The reasons for the reform are twofold:

a) Administrative receivership was seen to be too slanted toward the interests of the secured creditor who appointed the Administrative Receiver. This was at the expense of other creditors, and hampered the ‘rescue’ of a company in financial difficulty.
 
b)  The old model of Administration was unwieldy, expensive and often of indeterminate duration.

Receivership (including Administrative Receivership) still exists for charges created before 15 September 2003 but will become less important as time passes.
 
Key features of the new Administration regime include the following:

a) Qualifying Floating Charge Holders (“QFCHs”), the company or directors are empowered to appoint an Administrator without petitioning the court, though the court route still exists known as “Out of Court Appointment”.
 
A QFCH is a creditor who has the benefit of a Floating Charge created after 15 September 2003. A QFCH, which was created before 15 September 2003 has the choice of appointing either an Administrative Receiver or an Administrator
 
b) Creditors other than QFCHs can petition the court for an Administration Order.
 
c) A QFCH can apply to court for an Order for its own Administrator to replace the one proposed or appointed by the creditor or directors. This would apply when the QFCH receives notice that creditors have applied to court for the appointment of an Administrator or that directors have will appointed an Administrator. The QFCH must receive 5 days notice before any appointment can be made but only when a QFCH exists.
 
d) The Administrator is under a duty to act in the interests of all creditors, unlike the situation under Administrative Receivership. This applies even where a QFCH has appointed the Administrator.
 
e)  Administrators does not have the powers to make payments to unsecured creditors without court permission

The upshot of Administration is that it is a process to rescue the company or the business rather than being a precursor to CVA or liquidation.
 
Invariably most Administrations are dealt with by a Pre-Pack sale. The business is valued beforehand and on the appointment of the Administrator the business is sold on to “New Company”.
 
The Administrator has to perform his duties in the interests of the company’s creditors as a whole
 
An Administrator is an officer of the court, no matter which route is used to appoint him. He has to be such in order to comply with EC Regulation on insolvency proceedings. He has to be an Insolvency Practitioner and will almost always be an accountant.
 
Once the Administrator is appointed the main moratorium comes into effect and protects the company whilst the administrator tries to rescue it.
 
The Administrator will put forward his proposals to a creditors’ meeting which must be held within 10 weeks of his appointment. Creditors can seek further details or can amend the proposals. It is important to remember that the Administrator could have been appointed by the directors and the creditors may regard him as the directors’ stooge.
 
The initial creditors’ meeting can be dispensed with if:

a) the creditors are likely to be paid in full;
 
b) the unsecured creditors are unlikely to be paid at all; or
 
c) only the third purpose applies (realising property in order to make a distribution to one or more secured or preferential creditors).

The Administrator is required to convene further meetings of the creditors if the court orders him to do so, or creditors holding 10% of the debts request it.
 
The creditors may establish a creditors’ committee. The effects of the Administration Order are that:

a) The company’s affairs is managed by the Administrator and he acts as it’s agent;
 
b) The directors’ powers cease, though they are still in office;
 
c) The moratorium continues. No action can be brought against the company without the Administrator’s or the courts consent;
 
d) The Administrator controls the company’s assets (but does not own them); and
 
e) The Administrator carries out his proposals, which have been approved by the creditors.

The Administrator has statutory powers under Sch 1 to the IA 1986. He is, however, an officer of the court and obstruction of him could constitute contempt of court.
 
An Administrator acts as an agent for the company and is not personally liable on contracts made by him. He has 14 days to reject the existing contracts of employment otherwise it is deemed that he ahs adopted them.
 
In addition to these powers, he has the power to do anything necessary or expedient for the management of the affairs, business and property of the company. He is required to exercise his powers for the purpose of the Administration.
 
An administrator also has the power to:

a) Remove and appoint directors;
 
b) Call a meeting of creditors or members;
 
c) Apply to the court for directions;
 
d) pay money to a creditor but only with court’s permission if it is to an unsecured creditor;
 
e) Pay money to any party if it is likely to assist the administration;
 
f) deal with property that is subject to a floating charge;
 
g) Deal with property subject to a Fixed Charge, subject to the permission of the Fixed Charge Holder or of the court; and
 
h) Deal with property that is the subject of a hire purchase agreement.

One of the problems of the old Administration procedure was the difficulty of exiting without an application to court. The revisions brought in by the EA 2002 have greatly simplified the procedures.
 
The procedures for ending Administration are:

a) automatic end of the administration after one year from the date the administration took effect, unless extended by the court or by prior approval of the creditors;
 
b) on application by the administrator to the court, if:

• He thinks the purpose of Administration cannot be achieved in relation to the company;
• He thinks the company should not have entered administration;
• A creditors’ meeting requires him to make an application; or
• He thinks that the purpose of administration has been sufficiently achieved in relation to the company;
• He will make an application to court to bring the Administration to an end and ask the court to place the company into Compulsory Liquidation

c) Termination where the object has been achieved (for administrator appointed by the out of court route);
 
d) The court ending the administration on the application of a creditor;
 
e) The court converting the Administration into liquidation, in the public interest;
 
f) The Administrator converting the Administration into a Creditors’ Voluntary Liquidation;
 
g) The Administrator dissolving the company where he believes there is no property which might permit a distribution to creditors; and
 
h) The administrator resigns, is removed, ceases to be qualified or is replaced by those who appointed him in the first place.

Individual Voluntary Arrangement
 
The Insolvency Act of 1986 (amended by the Insolvency Act 2000 and the Enterprise Act 2002) introduced a new procedure whereby a debtor could come to an arrangement with his/her creditors to pay the debts in full or in part over time as an alternative to bankruptcy. This arrangement is known as an individual voluntary arrangement (IVA) and may be entered into either before or after a bankruptcy order has been made.
 
An IVA begins with the debtor drafting a formal proposal to be put to his/her creditors to pay part or all of the debts. The debtor may even propose that the creditors agree to a deferment or postponement of their debts to some future time.
 
The debtor may make an application to the court for an Interim Order at an early stage but it is not compulsory. The Insolvency Act 2000 amendments which came into force on 1 January 2003 removed the requirement to apply for an Interim Order in every case to cut down on costs and delays in the IVA procedure. Applications for Interim Orders are now only done when creditors are in the process of taking precipitous actions. The main effect of an interim order is to prevent a bankruptcy petition being presented or proceeded with. It will also prevent other proceedings such as, execution being commenced or continued without leave of the court.
 
An Interim Order will only be granted if no previous application has been made in the last 12 months. The official receiver, any trustee and the nominee should be given at least 2 days notice of any interim order application. The hearing will usually be in chambers before the district judge or registrar.
 
Once prepared the proposal will then be considered by the Nominee (usually an Insolvency Practitioner) who will make a recommendation to the court as to whether the proposal is acceptable and viable. In practice the majority of proposals are prepared by the Nominee’s firm.
 
Once the proposal is final then this will be lodged with the court to obtain a special number, unless an Interim Order is in place. Once the special number is obtained the proposal will then be put to a meeting of creditors. Creditors must be given 14 clear days Notice from day of receipt of such Notice convening the meeting. At the meeting the proposal must be approved by more than 75% of creditors voting. Additionally creditors may put forward modifications which if approved will supersede Terms in the proposal.
 
If the proposal is accepted at the meeting, the Nominee will then become Supervisor of the IVA and oversee its operation. Any agreement reached with the creditors will be legally binding.
 
If a person has been made bankrupt then he can still make a proposal to his creditors and should the proposal be approved then they will apply to the court to have the Bankruptcy Order Annulled.
 
A voluntary arrangement with creditors offers flexibility to the debtor. It may include assets not normally available in bankruptcy, for example, the use of third party funds or income from the debtor's continued trading or employment. It gives the debtor more say in how his/her assets are dealt with, for instance, creditors may allow the debtor to exclude and retain certain assets such as his/her home. Also the restrictions which apply to a bankrupt are avoided.
 
The proposal must be comprehensive and must cover such matters as:
 

a) An explanation why the debtor considers that the voluntary arrangement is desirable;
 
b) give reasons why creditors may be expected to concur with the arrangement;
 
c) The reasons/history that has caused the individual to apply for the Arrangement
 
d) Particulars of the individual’s astts and how they are to be dealt with if appropriate
 
e) The manner in which the liabilities are to be dealt with, particularly secured creditors, preferential creditors, unsecured creditors and debts due to associates of the individual
 
f) A Statement of Affairs showing the debtor’s Assets and Liabilities
 
g) If the individual is trading their last accounts
 
h) A Cash Flow
 
i) Contributions payable and any assets that will be included
 
j) Dividend payable to creditors
 
k) A Comparison of the dividend payable to creditors compared between an IVA and Bankruptcy
 
l) The duration of the Arrangement
 
m) The name, address and qualifications of the Nominee and proposed Supervisor
 
n) The remuneration of the Supervisor
 
o) Whether the business is to continue, and if so, on what terms
 
p) The Supervisors banking arrangements
 
q) Powers and duties of the Supervisor.

In order to make it likely that the creditors will accept the proposal, it should be credible and provide an acceptable alternative to bankruptcy.
 
The proposal will set out clearly the debtor’s obligations particularly as to the time and amount of contributions, so that there is no dispute over whether he/she has complied with the terms of the arrangement.
 
The nominee must exercise professional independent judgment in making his/her report to court or he/she can be made personally liable for the costs of any proceedings where the IVA is challenged successfully.
 
The debtor is required to give the nominee access to his/her accounts and records so that the nominee may consider the proposal. It is important for the debtor to provide the nominee with accurate records of all his/her creditors’ names and addresses, as only those creditors included in the voluntary arrangement are legally bound to it.
 
The approved arrangement is deemed to be in force and effective from the date of the meeting. An application to annul the bankruptcy order may not be made until 28 days after the chairman’s report of the creditors' meeting has been made to court or whilst a challenge against the meeting's decision is pending.
 
Once a Proposal has been approved creditors have up to 28 days, from the date the Report is filed into court, to challenge the decision of acceptance of the arrangement either because the proposal or the Chairman made decisions that were prejudicial against them.
 
The Insolvency Act 1986 identifies default by a debtor in connection with a voluntary arrangement as a ground for a bankruptcy order. A bankruptcy petition on this ground may be presented by the supervisor or any other person bound by the arrangement (other than the debtor).
 
If the supervisor is without funds, he may circulate to creditors a “certificate of non-compliance” which states that the debtor has defaulted and the arrangement is at an end. This will leave the creditors or the debtor with the option of presenting a bankruptcy petition.
 
The debtor commits an offence if he/she deliberately misleads creditors, the nominee or the court for the purpose of obtaining approval of a voluntary arrangement. A person found guilty of such an offence is liable to imprisonment, a fine or both.
 
BANKRUPTCY
 
WHAT IS BANKRUPTCY?
 
Bankruptcy is an insolvency procedure in which an individual enters when one cannot pay their creditors.
 
The bankruptcy proceedings free the individual from overwhelming debts so that they can make a fresh start, subject to certain restrictions and make sure their assets are shared out fairly amongst their creditors.
 
Anyone can be made bankrupt, including individual members of a partnership.
 
There are different procedures for dealing with Companies and for partnerships themselves.
 
HOW IS ONE MADE BANKRUPT?
 
A Court makes a Bankruptcy Order only after a bankruptcy petition has been presented.
 
A petition is usually presented either:
 
a. By the debtor himself
 
b. By one or more of his creditors who are owed at least £750 and that amount is unsecured.
 
In many instances a statutory demand will be issued prior to the presentation of a petition and the debtor will have 21 days in which to respond, ie pay the amount or dispute the amount. If no dispute is made, then a petition will be presented for the person’s bankruptcy.
 
If the creditors claim is disputed, then the debtor should try and reach a settlement before the bankruptcy petition is heard or apply to the Court to have it dismissed.
 
WHERE IS THE BANKRUPTCY ORDER MADE?
 
Bankruptcy petitions arc usually presented either at the High Court in London or a County Court near where the debtor lives.
 
A petition can be presented against anyone, even if they are not present in England or Wales at the time of presentation of the petition. This can happen when the debtor normally lives in or within the previous three years has had residential or business connection within England and Wales. Also if the debtor owes money or income tax for any business they have carried on in England and Wales before leaving the Country.
 
Most Government Departments commence bankruptcy proceedings in the High Court of London. If the debtor does not trade or live in the London area, the case will usually be transferred to the appropriate local Court and dealt with by the local Official Receiver.
 
Once a Bankruptcy Order has been made, it is advertised in “The London Gazette” and in a local or national newspaper.
 
WHO WILL DEAL WITH THE BANKRUPT’S CASE?
 
a. The Official Receiver
 
The Official Receiver is a Civil Servant in the Insolvency Service and an Officer of the Court. The Official Receiver has the responsibility of administering the bankruptcy and protecting the bankrupt’s assets from the date of the Bankruptcy Order and will act as Trustee of the Estate unless an Insolvency Practitioner is appointed.
 
The Official Receiver is also responsible for looking into the bankrupt’s financial affairs for the period before and during their bankruptcy. The Official Receiver will report to the Court and to the creditors. Also there will be a need to report any matters which indicate that the debtor may have committed criminal offences in connection with their bankruptcy.
 
WHAT ARE THE DUTIES OF A BANKRUPT?
 
When a Bankruptcy Order has been made, the debtor must go to the office of the Official Receiver and provide information about their financial affairs. Now days the Official Receiver conducts a number of interviews by telephone rather than face to face.
 
Usually before the interview, the bankrupt will be sent or given a questionnaire for completion to fully document assets and liabilities of the bankrupt.
 
The bankrupt will also be required to hand over the books and records, bank statements etc to the Trustee in Bankruptcy and any insurance policies and other papers relating to their financial affairs.
 
The bankrupt has a duty to report to the Trustee details of all the assets and increases in income that he obtains during his bankruptcy. This also includes such property as lump sum cash payments that may be received from redundancy payments or money left is a will.
 
Once adjudicated bankrupt, the bankrupt must immediately cease using bank or Building Society or credit cards or similar accounts straight away and will not be allowed to obtain credit of more than £250 without first disclosing the fact that they are bankrupt.
 
If the bankrupt does not assist the Trustee in every way, the Trustee can apply to the Court to have him arrested.
 
HOW WILL BANKRUPTCY AFFECT THE DEBTOR?
 
1) In Relation To His Creditors
 
Once made bankrupt, they must not make any payments direct to their creditors, as the creditors need to lodge a claim with the Trustee.
 
There are some very limited exceptions to this, the main ones being:
 
a) Creditors who have a mortgage or charge on the house, if mortgage payments are not made, the lender may sell the home.
 
b) Court fines and other obligations arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991.
 
Obviously certain payments are still made by the bankrupt from the date of his bankruptcy such as rent, electricity, gas etc and these are basically the essentials required to live.
 
2. The Bankrupts Assets
 
The assets of the bankrupt rest and come under the control of the Trustee in Bankruptcy. If the bankrupt has a business, this will normally be closed and the employees dismissed or the Trustee may obtain authority to trade the business until it is sold
 
The bankrupt can keep the following items, unless their individual value is more than the cost of a reasonable replacement: -
 
a) Tools, books, vehicles and other items of equipment which are needed to use personally in employment, business or vocation.