Note to Candidates and Tutors: LEVEL 4 - UNIT 8 PERSONAL INSOLVENCY SUGGESTED ANSWERS - JANUARY 2015 The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2015 examinations. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners reports which provide feedback on student performance in the examination. Question 1 Bankruptcy is a process where the court adjudicates upon whether an individual is insolvent i.e. whether that individual is unable to meet his/her liabilities as they fall due. It is a process by which the assets of a debtor are realised and distributed amongst his/her creditors. The debtor is released from liability for the balance of any debts on discharge from the bankruptcy. It is a court procedure and begins by the issue of a bankruptcy petition (only after a statutory demand has been served) and culminates in the issuing of a Bankruptcy Order. The first step that Short-Term Loans plc will have to take to be able to declare Peter Smith bankrupt will be to serve a statutory demand to prove that he is insolvent (s.267(2) Insolvency Act 1986 (IA 1986)). The IA 1986, s.286, sets the criteria for the court to be able to presume a debtor to be insolvent. Firstly, the creditor should be owed more than 750. In this instance, the criterion has been fulfilled as Short Term Loans plc is currently owed 1800. Assuming that the statutory demand remains unpaid after 21 days or it has not been challenged, Short-Term Loans plc will then need to petition the court, using Form 6.7. This is a petition made on failure to comply with a demand for a liquidated debt payable immediately. The petition will have to specify the nature of the debt (r6.8 Insolvency Rules 1986). Short-Term Loans plc will need to arrange for personal service of the petition on Peter, at least 14 days prior to the hearing. Then, provided the court is satisfied that Peter is unable to pay all his debts (s.271(3) IA 1986), the court will issue a bankruptcy order. Page 1 of 5
(c) (d) In Peter s circumstances, if he is declared bankrupt, the trustee in bankruptcy will deal with his assets, and pressure on Peter will be reduced as he will not have to deal directly with his creditors. He will be permitted to keep certain property, like the tools of his trade and household goods and a reasonable amount to live on. His creditors will, following the issue of a bankruptcy order, not be able to pursue any court action against him in seeking to get their money back. Once discharged from bankruptcy, Peter will be able to make a fresh start as the bulk of his debts should be cleared. If Peter is declared bankrupt, the Trustee in Bankruptcy (TIB) may have to sell Peter s home to help pay the debts. The TIB will sell the home if this is the only way to release money to the creditors. As Peter lives with his wife and children, it is likely that the sale will be put off until the end of the first year after the bankruptcy. After which the interests of creditors take priority (s.335a(3) IA 1986). The court will only refuse an order for sale in exceptional circumstances. Even taking into account Peter s severely disabled child, it is unlikely that any attempts to delay the sale would be successful. Unless the TIB is able to find funds from Peter s assets (and business), Peter and his family will have one year to make new arrangements for their housing needs. However, it may be that Peter s wife has her own personal funds and may be able to buy Peter s former interest in the home and thereby save the home from sale. Question 2 An Individual Voluntary Arrangement (IVA) is a contractual arrangement entered into between an individual and his/her creditors for a composition of that individual s debts (composition) or a scheme of arrangement (scheme) of his/her affairs. The type and content of the composition or scheme is open-ended and is a matter for the debtor and their creditors, i.e. it is for the parties to agree (with the intention of seeing the creditors repaid), with the assistance of a qualified insolvency practitioner (IP) (described as the nominee before the IVA is approved, and the supervisor thereafter). An IVA allows an insolvent debtor to obtain a moratorium on his/her debts and to repay his/her creditors in a structured way. To obtain an IVA, the debtor will need to put forward a proposal offering to pay a percentage of all unsecured debts. Provided this is accepted by 75% by value of the creditors, it will bind all unsecured creditors, and any balance of the debts owing at the end of the IVA will be legally written off. It is overseen by a nominee or supervisor, who must be an IP. Lisa will need to cover in her IVA proposal the following issues: why the IVA is more preferable for the creditors than bankruptcy; details of her assets and their values and whether those assets are included or excluded from the IVA; details of her anticipate income; Page 2 of 5
the nature and amount of her liabilities and how she proposes to meet those liabilities; the proposed duration of the IVA; the proposed dates for distributions to creditors and estimates of amounts to be paid; the supervisor s function and remuneration; details of any previous proposals for an IVA which have been submitted in respect of Lisa within the preceding 24 months. (c) Lisa is entitled to apply for an Interim Order as she has not applied for an Interim Order in the previous 12 months, and as she would be able to petition for her own bankruptcy. The Interim Order will prevent her creditors taking action against her and her assets (i.e. any court proceedings or enforcement action) until the IVA proposal is considered and voted on (s.252(1) IA 1986). Once made, an Interim Order prohibits (s.252(2) IA 1986) the issue of a bankruptcy petition, or the taking or continuing of any execution or legal process against Lisa or her property. Ordinarily, an Interim Order will last 14 days (s.255(6) IA 1986). However, the court may extend the Interim Order to enable the nominated supervisor of the IVA to prepare a report on the viability of the proposal (s.256(4) IA 1986). Question 3 To confirm Colin Robinson s current whereabouts, there are a number of possible steps that Wapping Finance plc (Wapping) could take, such as: - Internal steps/checks to verify that current records do not hold any errors, e.g.: check customer records to ensure that an address is not recorded, and that there are no misspelt names/words or any other errors made in the original information; dial any known telephone numbers and re-check via a directoryenquiry facility; contact Royal Mail enquiring if any forwarding address or known address; consider also sending a recorded delivery letter to him, as acceptance may confirm occupancy. - Employ Tracing/Enquiry agents to locate the address and prepare financial reports (subject to set costs limits within their instructions, and ensuring compliance with the Data Protection Act 1998). - Make a bankruptcy search against his name, to check whether any other proceedings have already been commenced. - Make a Land Registry search in respect of his business premises. And finally, Wapping could consider various on-line search engines to identify any on-line profile that Colin Robinson may have. On the basis that Colin Robinson can be located, as a creditor, Wapping may apply (without notice to Colin Robinson) for an order to obtain information from a judgment debtor under Civil Procedure Rules (CPR) 71. Page 3 of 5
An order to obtain information requires Colin Robinson to give answers orally on oath to a court officer, and/or to bring relevant documentation with him such as bank statements. Failure to comply will result in the matter being referred to a judge who may make a committal order (CPR 81). (c) (i) Execution against goods requires the issue of a court document, in the High Court called a 'writ of control' (formerly known as a writ of fieri facias) (Rules of the Supreme Court (RSC) Order 47). As the judgment against Colin Robinson is more than 5,000, it can only be enforced in the High Court by an enforcement officer (High Court and County Courts Jurisdiction Order 1991). The proceedings will therefore have to be transferred from the County Court. (ii) (iii) The powers that the court enforcement officers (commonly referred to as bailiffs) have, when attempting to execute a warrant against goods, vary depending on the circumstances. Bailiffs have very limited powers of entry to domestic premises. However, when seeking to enter commercial premises they can force entry (in this case, in relation to the premises where Colin Robinson operates a photographic studio). The High Court enforcement officers are empowered to seize such of the judgment debtor s goods as will be sufficient to cover the cost of the judgment debt, removal and sale. High Court enforcement officers have power to take walking possession of the goods first, by completing an inventory of the goods and informing the judgment debtor that they will return in a few days to remove the goods. In the meantime, the judgment debtor may not dispose of the goods. This does, however, give the judgment debtor extra time to pay and this is often successful. Certain items cannot be seized by virtue of the Tribunals, Courts and Enforcement Act 2007. They include items or equipment such as tools, books and computer equipment that are necessary for the debtor s work, study or education, up to a total value of 1350, unless the debt is for unpaid business rates, in which case such items are not protected. In this instance, this may include Colin Robinson s photographic equipment, which he uses for his profession. Other items excluded include household equipment that can serve the debtor s basic domestic needs and anything that the debtor is paying for on hire purchase or a conditional sale agreement. Question 4 A Debt Relief Order (DRO) operates as an alternative to a bankruptcy order and is for those with little or no income or assets, such as Christopher. Once obtained, a moratorium prevents any enforcement proceedings in respect of debts specified in the DRO for a period of one year (subject to any extension), during which time the debtor is subject to certain restrictions similar to those to which a bankrupt is subject. After expiry of the moratorium, the specified debts are discharged. (i) An application for a DRO is made direct to the Official Receiver (via an online application form), through an approved intermediary also known as an authorised debt adviser. The fee is currently 90. The Official Receiver makes the order if satisfied that the criteria are met. Page 4 of 5
(ii) For Christopher to be eligible for a DRO, he must: be unable to pay his debts; have total unsecured liabilities which must not exceed 15,000; not have total gross assets of more than 300; have a disposable income, after deduction for normal living expenses, of not more than 50 per month; be domiciled in England and Wales in the last three years; not be involved in any other formal insolvency procedure or have been subject to a DRO within the last six years; not have entered into any preference or transaction at an undervalue within the two years prior to application. Subject to establishing the last two points above, it would appear that Christopher is eligible for a DRO. Page 5 of 5