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LPC Law Notes Business Law and Practice Notes

Personal Insolvency Notes

Updated Personal Insolvency Notes

Business Law and Practice Notes

Business Law and Practice

Approximately 649 pages

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Personal Insolvency

2 options for a person / partnership that is insolvent (i.e. has no more money – cannot continue to do business):

  1. Bankruptcy

  2. Individual Voluntary arrangement (IVA)


Definition: Court order that declares a person to be insolvent. He is unable to pay his debts / has no reasonable prospect of paying his debts when they fall due.

Bankruptcy vests property in a trustee for distribution. At the end of one year the debtor is released from liability.


  • Creditor’s petition: must show that

  1. Debt of at least 750 (liquidated and unsecured)

  2. Debtor appears to be unable to pay / no reasonable prospect of being able to pay (creditor must serve statutory demand and it is unpaid after 3 weeks. There must also be no outstanding application to have statutory demand set aside); OR debtor has failed to satisfy execution of judgment debt.

  3. Debtor is domicile

  • Petition is presented (i.e. filed in court)

  • Petition served on debtor personally

  • Hearing: est. 14 days after service

  • Bankruptcy order given to debtor

  • Debtor’s petition:

  1. petition on grounds of inability to pay

  2. statement of affairs

  • hearing of the debtor’s petition

  • Bankruptcy order made; OR court appoints insolvency practitioner to prepare report to consider IVA.

  • Official Receiver (OR) appointed

  • Trustee in bankruptcy appointed by creditors

  • Property vests in trustee – (but there are exceptions – all things necessary for working / living; Also – if the house is jointly owned then trustee only holds bankrupt’s share; Spouse will also have a right of occupancy in the family home S.30 Family Act. If the bankrupt lives with children under age of 18 then he may also have a right of occupancy under S.338 Insolvency Act. However, after 1 year the rights of creditors outweighs spouse’s rights unless there are “exceptional circumstances”.

  • Income Payments Order & agreements: Trustee can apply to court for an income order (so trustee gets bankrupt’s income also) but court must leave enough for reasonable needs. This agreement can last after discharge of bankruptcy but no longer than 3 years.

  • Distribution of bankrupt’s assets

  • Discharge of bankruptcy

Advantages Disadvantages
Relieves stress of dealing with creditors Bad publicity, stigma, scrutiny of financial affairs
Debtors may pay less to creditors than in IVA Public examination in court
Shorter period – 1 year Loss of home, assets, business & employees
Creditors limited to fund available Bankruptcy restrictions and disabilities
Upon discharge – most debt is written off Previous transactions may be set aside – loss of control compared to IVA

How does trustee increase bankrupt’s estate?

  1. Set aside Onerous property transactions (S.315 IA 1986)

  • Including any unprofitable contracts, property which is unsaleable or requires performance of a onerous act (e.g. lots of repair work)

  • Any person sustaining loss as a result ranks as a creditor

  1. Set aside transactions at an undervalue (S.339)

  • A gift or a transaction for consideration significantly less than the market value; or gift given in consideration of marriage or formation of civil partnership.

  • Must have taken place within 5 years of petition

  • Debtor is insolvent at the time or as a result of transaction

  • If within 2 years – no need to show insolvency

  • There is protection for a subsequent purchaser of assets for value without notice who was not a part to the original transaction – subject to S.342(2A)

  1. Set aside any Preferences (S.340)

  • An individual gives a preference to a creditor if the individual does anything to put that creditor in a better position in the event of the individual becoming bankrupt than he would otherwise have been.

  • Anything done within 6 months prior to petition which puts creditors in better position that the others in bankruptcy

  • Debtor must be insolvent at the time or as a result of; AND debtor must have...

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