The estate of insolvent individuals is dealt with by the trustee-in-bankruptcy and that of companies by the liquidator.
Bankruptcy is applicable only to an insolvent individual (X). A licensed insolvency practitioner (generally one selected by the creditors) is appointed to act as the trustee in bankruptcy, to collect in the realisable assets belonging to X, convert them to cash and distribute this to the creditors. Once this process is complete, X is released from any of the debts he incurred up to the date of bankruptcy if they have not been fully settled in the bankruptcy.
A bankruptcy order is made by the court following presentation of a bankruptcy petition. The rules are complex, but in essence, a petition can be lodged by X (on grounds that he is unable to pay his debts), or by an unsecured creditor of X who is owed more than £750 and can demonstrate that X cannot pay this debt or has no reasonable prospect of doing so.
Once the trustee in bankruptcy is appointed, X’s assets vest in him automatically. Where this includes leasehold property, this automatic assignment does not need the consent of the landlord. It is an ‘excluded assignment’ for the purpose of the Landlord and Tenant (Covenants) Act 1995.
Once the assets have vested in the trustee in bankruptcy, X loses the ability to dispose of them, so Y should not enter into new contracts with X in relation to his property. Y should deal only with the trustee in bankruptcy. However, there is limited protection, in the case of registered land, under s 86 of the Land Registration Act 2002, where Y, in good faith, buys the property from X for value without knowing there has been a bankruptcy petition or order and without these having been registered (as a notice of restriction) against the title to the property (see Pick v Chief Land Registrar  EWHC 206).
Bankruptcy is a procedure by which an insolvent individual surrenders virtually all of his or her assets to a trustee in bankruptcy for distribution among creditors in return for cancellation of debts. For a period of usually one year, until the discharge of the bankruptcy, all assets acquired by the bankrupt also go to the trustee. Bankruptcy may be achieved only by court order and is an entirely statutory process, governed now by the Insolvency Act 1986. Following amendments made by the Enterprise Act 2002 (including reducing the duration of bankruptcy: s. 256 and sch. 19), the punitive aspects of bankruptcy (such as disqualification from Parliament or the magistracy), which used to apply to all bankrupts, now apply only to those subject to a bankruptcy restrictions order or undertaking (Insolvency Act 1986, s. 281A and sch. 4A). However, it is likely that many bankrupts will still find that the procedure is remarkably costly and often unexpectedly unpleasant for the bankrupt and his or her family.
An application for an order adjudging an individual bankrupt must be made by petition (a ‘bankruptcy petition’) presented to the court under the Insolvency Act 1986, s. 264. An individual subject to bankruptcy proceedings is usually referred to as a ‘debtor’.
Only debtors with a sufficient connection with England and Wales can be made bankrupt under English law. The required connection is specified in the Insolvency Act 1986, s. 265. The debtor must:
It is sufficient, for the purposes of condition (c)(ii), that the debtor was a member of a firm or partnership carrying on business, or that an agent or manager carried on the business for the debtor or for a firm or partnership of which the debtor was a member (s. 265(2)).
When domicile is in dispute, the onus is on the petitioner to establish that the debtor is domiciled in England and Wales, but if the petitioner establishes that England and Wales is the debtor’s domicile or origin, the onus is on the debtor to prove a change of domicile (Henwood v Barlow Clowes International Ltd  EWHC 1579 (Ch),  BPIR 1329).
The scope of English bankruptcy law is, by s.265(3), subject to Regulation (EC) No. 1346/2000, art. 3. The effect of art. 3 on bankruptcy jurisdiction is that if the centre of main interests of an individual who would otherwise be covered by the Insolvency Act 1986, s. 265, is in another EU State (apart from Denmark), a bankruptcy order may be made in England and Wales only if ht individual possesses an establishment in the United Kingdom (art. 3(2)), and there are restrictions on who make apply for a bankruptcy order here (art. 3(4). An individual’s centre of main interests ought to be the place where he or she can be contacted by creditors (Skjevesland v Geveran Trading Co. Ltd  EWHC 2898 (Ch),  BCC 391 at ).
By the Insolvency Act 1986, s. 264(1), a petition for an order adjudging an individual bankrupt may be presented by:
The Financial Services Authority may petition for an individual’s bankruptcy under the Financial Services and Markets Act 2000, s. 372, alleging the individual’s inability to pay debts incurred in the course of activities regulated by the 2000 Act. The procedure on such a petition is governed by the Bankruptcy (Financial Services and Markets Act 2000) Rules 2001 (SI 2001/3634).
A creditor can present a petition only in respect of a liquidated debt payable immediately or at some certain future time (Insolvency Act 1986, s. 267(2)(b)) and the debt must be at least £750 (s. 267(2)(a) and (4). A secured creditor cannot petition (s. 267(2)(b)) unless the petition states that if a bankruptcy order is made, the creditor will surrender the security for the benefit of all creditors (s. 269(1)(a)). A partially secured creditor may divide the debt into a secured and an unsecured part and petition in respect of the unsecured part (s. 269(1)(b) and (2)).
For the purposes of the law of bankruptcy, the term ‘creditor’ is given a very wide definition in the Insolvency Act 1986, s. 383 (which must be read with s. 382). However, a bankruptcy petition can be filed only in respect of a debt for a liquidation sum payable to the petitioning creditor (or one or more of joint petitioners) immediately or at some certain, future time (s. 267(2)(b)) and the debt must be at least £750 (s. 267(2)(a) and (4)).
The term ‘liquidated sum’ is not defined in the legislation. A debt for a liquidated sum ‘must be a pre-ascertained liability under the agreement which gives rise to it’ (McGuinness v Norwich and Peterborough Building Society  EWCA Civ 1286,  BPIR 145, at ). A contractual liability is for a liquidated sum if the amount due is to be ascertained in accordance with a contractual formula or machinery which will produce a figure (ibid). A claim in tort is invariably unliquidated, because a judicial process is required to ascertain the damage due (ibid). A claim for liquidated damages is a debt for a liquidated sum (ibid. at -. Whether a claim under a guarantee of another person’s debt is a debt for a liquidated sum depends on the wording of the guarantee, as discussed in detail in McGuinness v Norwich and Peterborough Building Society. A judgment debt is a debt for a liquidated sum.
In order to obtain an adjudication of bankruptcy, a creditor petitioner must be able to show, if the petition debt is payable immediately, that the debtor appears to be unable to pay it, or, if the debt is payable in the future, that the debtor appears to have no reasonable prospect of being able to pay it (Insolvency Act 1986, s. 267(2)(c)). This is usually shown by the debtor’s failure to comply with a statutory demand for the debt.
The effect of the Insolvency Act 1986, ss. 267 and 268, is that a creditor who presents a petition in respect of a debt which is payable immediately must prove that the debtor appears to be unable to pay it, and this may be proved only by showing either that a statutory demand for the debt was served on the debtor and not complied with or (if the debt is a judgment debt) that execution issued in respect of it was retuned wholly or partly unsatisfied. (Proof of apparent inability to pay a judgment debt may be either by unsatisfied judgment or by failure to comply with a statutory demand.) The demand must be in the prescribed form, which is form 6.1 in IR 1986, sch. 4 (or form 6.2 if the debt is a judgment debt). Similarly, a creditor who presents a petition in respect of a debt which is payable at some certain, future time must prove that the debtor appears to have no reasonable prospect of being able to pay the debt, and this may be proved only by showing that a statutory demand for the creditor to establish a reasonable prospect of paying was not complied with.
Where a debt is owed to joint creditors, one of them alone may make a statutory demand for it, provided payment to that one creditor would discharge the debt (Mahmood v Penrose  EWHC 1500 (Ch),  BPIR 170).
A statutory demand may be for a sum in a foreign currency: tendering the sterling equivalent of the amount demanded in a foreign currency would be regarded as compounding the debt in a manner which the creditor could not reasonably refuse (Re a Debtor (No. 51-SD-1991)  1 WLR 294).
When the petition is filed in court it must be accompanied by a certificate of service in accordance with IR 1986, r. 6.11. Care must be taken to provide all the required information in the certificate of service, which is an essential item of evidence that he conditions for making a bankruptcy order have been fulfilled.
A debtor is allowed three weeks to comply with a statutory demand and normally a petition based on failure to comply with a statutory demand cannot be presented until the three weeks have elapsed, though it can be presented immediately after the three weeks have elapsed. However, the Insolvency Act 1986, s. 270, permits presentation before the three weeks have elapsed if there is a serious possibility that the debtor’s property or the value of any of the debtor’s property will be significantly diminished during the three weeks, and the petition contains a statement to that effect. Within 18 days of service of a statutory demand, the person on whom it is served may apply to the court for the demand to be set aside and the creditor cannot present a petition while such an application is pending (s. 267(2)(d)).
An individual on whom a statutory demand has been served may apply under IR 1986, r. 6.4, to the appropriate court for an order setting the statutory demand aside. Rule 6.4(2) provides that the appropriate court is normally the court to which the debtor may present his or her own petition in accordance with r. 6.40A, but it is the High Court where the creditor is a minster of the Crown or a government department intending to petition in the High Court, which intention must be stated in the statutory demand (r. 6.4(2A)). An application to set aside a statutory demand must be made within 18 days of service of the demand (r. 6.4(1)). It is made using form 6.4 in IR 1986, sch. 4, which must be accompanied by written evidence in form 6.5. No court fee is charged.
The court may, of its own initiative, dismiss an application to set aside a statutory demand without a hearing if satisfied that no sufficient cause is shown for it (r. 6.5(1)). Reasons must be given for the dismissal (Vaidya v Wijayawardhana  EWHC 716 (Ch),  BPIR 1016).
The circumstances in which the court may grant an application to set aside a statutory demand are listed in r. 6.5(4) as follows:
In r. 6.5(4)(a) the terms ‘counterclaim’ and ‘cross-demand’ comprehend counter-claims and cross-demands that are not legal or equitable set-offs, and a statutory demand based on dishonour of a cheque or other bill of exchange may be set aside if the debtor has a counterclaim or cross-demand, even if it would not be a defence to the claim on the bill or cheque (Hofer v Strawson  2 BCLC 336). If a court has already dismissed proceedings brought by the debtor advancing the counterclaim etc. which is said to equal or exceed the debt claimed in a statutory demand, the bankruptcy court may nevertheless set aside the statutory demand if persuaded that an appeal against the first decision has a realistic, as opposed to fanciful, prospect of success (Society of Lloyd’s v Bowman  EWCA Civ 1886,  BPIR 324).
The test for setting aside a bankruptcy statutory demand when the debtor claims to have a counterclaim, set-off or cross-demand, or disputes the debt, is whether, in the court’s opinion, the debtor has raised a ‘genuine triable issue’ (PD Insolvency Proceedings, para. 13.4.4; Kellar v BBR Graphic Engineers (Yorks) Ltd  BPIR 544; Crossley-Cooke v Europanel (UK) Ltd  EWHC 124 (Ch),  BPIR 561). The court cannot find that a triable issue is ‘genuine’, or that the grounds of a dispute appear to be ‘substantial’ (IR 1986, r 6.5(4)(b)), simply by finding that the debtor’s case is arguable. There has to be something to suggest that the debtor’s assertion is sustainable, and this may mean that the ‘genuine triable issue’ criterion is the same as having a real prospect of success (Collier v P. And M. J. Wright (Holdings) Ltd  EWCA Civ 1329.  1 WLR 643. Per Arden LJ at ).
Under r. 6.5(4)(d) a statutory demand will be set aside if no bankruptcy order would be made on a petition based on not complying with it, for example, because it is for an unprovable debt (Levy v Legal Services commission  1 All ER 895).
If the amount of the debt is overstated in the demand, the debtor will be deemed to have complied with it if the correct amount is paid within the time allowed (IR 1986, r. 6.25(3)).
A creditor’s petition in respect of a debt or debts cannot be presented at a time when there is an outstanding application to set aside a statutory demand served in respect of the debt or any of the debts (Insolvency Act 1986, s. 267(2)(d)). An application made out of time, and for which the court has not extended time, does not count for the purposes of s. 267(2)(d) (Re Chohan (2000) LTL 7/11/2000), not does an appeal against a dismissed application (Hurst v Bennett (2001) The Independent, 9 April 2001).
Usually, a court’s decision to set aside a statutory demand does not determine any substantive dispute about the existence or size of the debt demanded. It follows that on an appeal against a decision to set aside, further evidence concerning that dispute may be admitted even if it does not satisfy the tests established in Ladd v Marshall  1 WLR 1489 (Heavy Duty Parts Ltd v Anelay  EWHC 960 (Ch), LTL 5/4/2004). The court should consider (a) the importance of the evidence to the party seeking to adduce it, (b) the reasons for not adducing it in the court below, (c) the extent of any prejudice which its admission would cause the opposing party, and (d) the overriding objective (Sadrolashrafi v Marvel Food International Logistics Ltd  BPIR 729 at ).
If the person who served the statutory demand ought to have known of the circumstances which would lead to it being set aside, the costs of applying under r. 6.4 may be awarded on an indemnity basis (Re Kirkman-Moeller  EWHC 205 (Ch), LTL 19/1/2005 (sub norm. Re Moller)).
On an application to set aside a statutory demand, the court may make a consent order dismissing the application, setting aside the demand, or giving permission to withdraw the application, without the attendance of the parties (PD Insolvency Proceedings, para. 16.3(1)). Such orders may be made with or without an order for costs as may be agreed. A consent order dismissing an application to set aside a statutory demand will give permission to present a petition on or after the seventh day after the date of the order, unless a different date is agreed.
At any time after the presentation of a bankruptcy petition, but before a bankruptcy order is made, the court may, under the Insolvency Act 1986, s. 286, appoint the official receiver as interim receiver of the debtor’s property. It must be shown that the appointment is necessary for the protection of the debtor’s property (s. 286(1)).
An application for the appointment of an interim receiver may be made by the debtor or any creditor, of, if the proceedings are secondary proceedings, a temporary administrator or member State liquidator appointed in the main proceedings (IR 1986, r. 6.51(1)). The application must be supported by a witness statement showing (r. 6.51(2)):
The applicant must send copies of the application and evidence to the official receiver (r. 6.51(4)), who may attend the hearing of the application and make representations (r. 6.51(5)). If it is not possible to send these copies, the official receiver must at least be informed of the application in time to attend the hearing (r. 6.51(4)).
The court may make the appointment applied for, on such terms as it thinks fit, if satisfied that sufficient grounds are shown for the appointment (r. 6.51(6)).
Before an order appointing the official receiver as interim receiver of a debtor may be issued, the applicant must deposit with the official receiver such sum as the court directs to cover remuneration and expenses (r. 6.53(1)). Alternatively, security for the amount may be given if the official receiver agrees (ibid.).
From time to time the official receiver may apply to the court to order a further amount to be deposited or secured, and if the order is not complied with within two days of service, the court may discharge the official receiver’s appointment as interim receiver (r. 6.53(2)).
The court’s order of appointment must state the nature of and describe the property to which the appointment relates and state what duties are to be performed in relation to the debtor’s affairs (r. 6.52(1)).
A bankruptcy petition cannot be withdrawn without the court’s permission (Insolvency Act 1986, s. 266(2)). Permission to withdraw a creditor’s petition will not be given until the petition is heard (IR 1986, (r. 6.32(3)). If a creditor has given notice of intention to appear at the hearing, or if the court so orders, a witness statement must be filed specifying the grounds of the application and the circumstances in which it is made (r. 6.32(1)). If any payment has been made to petitioner since the petition was filed, the witness statement must include the information set out in r. 6.32(2), which will reveal whether the payment might be avoided under the Insolvency Act 1986, s. 284, if another creditor were to be substituted as petitioner and a bankruptcy order made.
If the petition has not been served and either form 6.21 or a statement that no notices have been received from supporting or opposing creditors is given by or on behalf of the petitioning creditor, the court may make a consent order, giving permission to withdraw the petition (with no order for costs), without the attendance of the parties (PD Insolvency Proceedings, para.16.3(2)).
If the debtor intends to oppose a creditor’s bankruptcy petition, a notice specifying the grounds of objection must be filed in court at least five business days before the day fixed for the hearing (IR 1986, r. 6.21). A copy must be sent to the petitioner or the petitioner’s solicitor (r. 6.21).
By IR 1986, r. 6.23, any creditor wishing to appear on the hearing of a creditor’s bankruptcy petition must send notice to the petitioner to arrive not later than 4 p.m. on the business day before the date appointed for the hearing (or the date of an adjournment).
A notice of appearance must be in form 6.20 in IR 1986 sch. 4, and must state whether the appearance will be to support or oppose the petition (r. 6.23(2)(b)). The notice must also state the name and address of the person giving it, and any telephone number and reference which may be required for communication with that person or with any other person (to be also specified in the notice) authorised to speak or act on behalf of the person giving the notice (r. 6.23(2)(a)). The notice must also state the amount and nature of the debt claimed by the person giving the notice (r. 6.23(2)(c)).
The petitioner must prepare for the court a list of persons who have given notice of intention to appear, stating whether they support or oppose the petition, and must hand a copy of the list to the court before the commencement of the hearing (IR 1986, r. 6.24; prescribed form is form 6.21 in sch. 4).
A person who has not given notice in accordance with r. 6.23 may appear on the hearing of the petition only with the permission of the court (r. 6.23(4)).
The petitioner must add to the list required by r. 6.24 the name of anyone given leave by the court to appear without having given proper notice (r. 6.24(4)).
When a bankruptcy petition is pending, r. 6.30 of IR 1986 permits the substitution of a new petitioner if the original petitioner:
Any creditor who has
If a bankruptcy petition asks for the opening of secondary proceedings, and the member State liquidator appointed in the main proceedings is not the petitioner, that member State liquidator may be substituted as petitioner if he or she is desirous of prosecuting the petition (r. 6.239).
It is also possible to make a change of carriage order at the hearing of the petition.
On the hearing of a creditor’s bankruptcy petition, the court may make a bankruptcy order if satisfied that the statements in the petition are true, and that the debt o which it is founded has not been paid, or secured or compounded for (or, if it is a future debt, that the debtor has no reasonable prospect of being able to pay when it falls due) (Insolvency Act 1986, s. 271(1); IR 1986, r. 6.25(1)). The payment referred to in the Insolvency Act 1986, s. 271(1), is a payment which is unconditional in the sense that it is not liable to be avoided under s. 284(1) if a bankruptcy order is made (Smith v Ian Simpson and Co.  Ch 239). The court will normally be satisfied that a debt has not been paid, or secured or compounded for if a certificate (known as a certificate of continuing debt) is provided in the form set out in PD Insolvency Proceedings, para. 14.5.
If the petition is in respect of a judgment debt, or a sum ordered to be paid by a court, the court may stay or dismiss the petition if an appeal is pending from the judgment or order, or if execution of the judgment has been stayed (IR 1986, r. 6.25(2)). On a petition in respect of a judgment debt, if there is no appeal against or application to stay judgment, the only grounds on which the correctness of the judgment may be challenged are that:
A petition will not be dismissed on the ground that the amount of the debt was overstated in a statutory demand, unless the debtor notified the creditor, within the three weeks allowed for complying with the demand, that he or she disputed it validity (r. 6.25(3)).
Ordinarily a debtor will not be permitted to re-argue, on the hearing of a petition, a contention that the statutory demand was invalid if that contention has already been rejected on a substantive hearing of an application to set aside the statutory demand (Turner v Royal Bank of Scotland plc  BPIR 683). The same applies if a contention advanced in preparation for an application to set aside was abandoned (Adams v Mason Bullock  EWHC 2910 (Ch),  BPIR 241). The question may be reopened if there has been a change of circumstances (Turner v Royal Bank of Scotland at p. 294). The principle does not apply if there has been no reasoned determination at all at the earlier stage (Commissioners of Inland Revenue v Lee-Phipps  BPIR 803; Vaidya v Wijayawardhana  EWHC 716 (Ch),  BPIR 1016). If no reasons were given for dismissing the application to set aside the statutory demand without a hearing, the court cannot infer that a particular contention of the debtor had been considered and rejected (Vaidya v Wijayawardhana).
If either form 6.21 or a statement that no notices have been received from supporting or opposing creditors is given by or on behalf of the petitioning creditor, the court may make a consent order, dismissing the petition with or without an order for costs as may be agreed, without the attendance of the parties (PD Insolvency Proceedings, para. 16.3(2)).
At the hearing of a creditor’s petition, the court may, under IR 1986, r. 6.31, give another creditor carriage of the petition if it appears that the petitioning creditor:
After a change of carriage order the petition is still based on the original petitioner’s debt, unlike the position where there is a substitution of the petitioner.
If a bankruptcy order is made on the creditor’s petition, the court will settle it (IR 1986, r. 6.33(1)). Two sealed copies will be sent to the official receiver, who will forthwith send on to the bankrupt (r. 6.34(1)).
The official receiver will send a notice to the Chief Land Registrar for registration in the register of writs and orders, affecting land, cause the order to be gazetted, cause prescribed information to be entered in the individual insolvency register, and may also advertise notice of the order in such other manner as he or she thinks fit (rr. 6.34(2) and 6A.4). However, the bankrupt or a creditor may apply to the court for an order requiring the official receiver not to do these things pending a further order by the court (r. 6.34(3)). An application for such an order must be supported by a witness statement stating the grounds for applying (r. 6.34(3)). If the order is made, the application must deliver it forthwith to the official receiver (r. 6.34(4)).
The only ground on which a debtor may petition for his or her own bankruptcy is inability to pay his or her debts (Insolvency Act 1986, s. 272(1)) and that fact must be admitted in the petition (IR 1986, r. 6.39(1)). The prescribed form of petition is form 6.27 in IR 1986, sch. 4. The petition must be accompanied by a statement of the petitioner’s affairs (Insolvency Act 1986, s. 272(2)), which must be in form 6.28 in IR 1986, sch. 4, and must be verified by a statement of truth (IR 1986, rr. 6.41(1) and 6.68). The petition itself does not have to be verified.
Section 273 of the Insolvency Act 1986 provides for special treatment of a debtor’s petition where the aggregate amount of the debtor’s unsecured debts is less than £40,000 and the debtor has not, within the five years preceding presentation of the present petition:
If, in such a case, it appears that the debtor’s assets are worth at least £4,000, the court may appoint a qualified insolvency practitioner to investigate, under s. 274, whether an IVA can be made. The court will send the appointed practitioner a sealed copy of the order of appointment and copies of the petition and statement of affairs (IR 1986, r. 6.44(1)(a)).