Responding to a bankruptcy petition

We have extensive experience on advising clients on personal insolvency issues.  This includes both advisory and litigation work.

What is the bankruptcy process?

Bankruptcy is one of the principal formal individual insolvency procedures and it is governed by Part IX (sections 263H – 379B) of the Insolvency Act 1986 (the “Act”). It is designed to:

• Grant an insolvent individual relief from their debt; and
• Enable a fair realisation and distribution of their unsecured assets to the bankruptcy creditors.

Prior to the presentation of a bankruptcy petition, a petitioning creditor will normally be required to send you a document called a statutory demand which is issued pursuant to Rule 6 of the Insolvency Rules 1986 (the “Rules”). The purpose of the statutory demand is to give you notice of what the creditor’s alleged claims are and it is the first opportunity for you to negotiate with the creditor and seek to resolve the situation.

The statutory demand must provide an explanation to you of the purpose of the demand and the consequences for failing to comply within the 18-day statutory time limit. You have a few options in terms of responding to a statutory demand namely (1) pay the debt; (2) try to negotiate a settlement on a without prejudice basis or (3) apply to set it aside if the existence and/or nature of the debt is in dispute. If you genuinely dispute the debt, it is important that you make this application with the 18-day time limit to avoid a bankruptcy petition being brought. If no application is made, the creditor is free to immediately present a bankruptcy petition to the Court after 21 days and, as detailed below, bankruptcy has some serious consequences.

If you find yourself in a position where you have not complied with the statutory demand and have been served with a bankruptcy petition and you wish to oppose it, you are required by the Rules to file with the court and serve on the petitioning creditor, a “notice of opposition” along with any supporting evidence in the form of a witness statement. This must be done five business days before the hearing date which will be listed in the bankruptcy petition document which should have been personally served on you. If you decide not to file a notice of opposition, there is a risk that the court will not give any consideration to your grounds of challenge and may make a bankruptcy order against you (provided the petitioning creditor has complied with all procedural requirements under the Act and Rules).

It is therefore extremely important that you act quickly.  However, if you have missed one of the above deadlines, do not panic.  You can provide notice to the petitioning creditor and/or their solicitors and advise them that you intend to file a notice of opposition late or otherwise.  There is usually some flexibility for the court to allow a short adjournment of the first hearing for you to file evidence (provided there is a good reason for the delay).

What are the consequences of a bankruptcy petition?

Even before a bankruptcy order is made, the issue of the bankruptcy petition alone has the following consequences:

• The court notifies the Chief Land Registrar that the petition has been issued. This means that your name will be added to the public bankruptcy register as a pending action which can have extreme reputational and credit rating impacts. Other creditors could become aware of this, and your bank account could be frozen in the interim.
• Any transaction that you entered into six months before being declared bankrupt could potentially be declared void and therefore be clawed back by the trustee.
• The petition cannot be withdrawn without the permission of the court at the hearing of the petition. This can make it difficult to pay off the petitioner, if you have other creditors who become aware of the petition.

Therefore, if you genuinely dispute the issue of the petition or otherwise admit the debt but wish to try to avoid the above consequences, it is important that you immediately try to settle it out of court on a without prejudice basis and/or file a notice of opposition.

What happens when a bankruptcy order is made?

On the making of a bankruptcy order, an official receiver or otherwise a registered trustee in bankruptcy is appointed, and they have control over all your assets. Once the trustee is appointed, you, as the bankrupt, must deliver to them:-

• Possession of the assets within your bankruptcy estate.
• An inventory of your assets.
• All books, papers and records relating to your affairs.

A trustee also has the power to reverse previous transactions concerning your property. This makes it very difficult for you to raise finance through the sale of your assets e.g. house/car, or obtain a loan to pay the debt as purchasers and lenders will be concerned that the trustee may take back the asset or disregard their security for the loan.

How can I defend a bankruptcy petition?

From our experience with bankruptcy proceedings, some of the usual defences that you can raise are (but not limited to):

• The debt is substantially disputed;
• The debt has already been paid;
• There is a valid counterclaim or cross claim against the creditor which basically extinguishes their debt (or part of their debt);
• There are procedural defects in the petition itself (for example, an issue with the description of the debt in the petition document or issues with personal service of the petition);
• The petition debt is already secured (for example, the petitioning creditor has a charge over your property or other assets to satisfy the petition debt);
• Instances whereby the petition creditor has filed the petition in a court that does not have jurisdiction to either hear bankruptcy matters or otherwise, instances where the monetary value of the debt is substantial warranting a transfer from the County Court to the Insolvency and Companies Court; and/or
• There has also been instances whereby the court is inclined to either adjourn subject to further directions, stay or otherwise dismiss a petition if the debt petitioned against you is connected somehow to separate civil proceedings which are being appealed or yet to conclude (for example in instances whereby you intend to pay the bankruptcy petition from monies recoverable from other civil proceedings that are nearing an end).

Other options you can consider to avoid a bankruptcy order?

Even if the debt is owed, there might still be ways of avoiding bankruptcy. These include

• Negotiating a settlement with the creditor who has presented the Bankruptcy Petition, for example by proposing instalment payments;
• Agreeing to provide a charge over a property;
• Arranging payment via a third party; and/or
• Entering into an Individual voluntary Arrangement (“IVA”).

The court also has the power to dismiss a creditor’s bankruptcy petition where the creditor has refused a reasonable offer of security (for example, offering a charge over property/assets), even if the debtor is insolvent.

Deciding what to do?

As mentioned above, the consequences of being made bankrupt are potentially very serious. You and your family may lose your home. You may lose your business. You may have to stop being a director or otherwise involved in the management of a company. You will be subject to restrictions as to what you can do during bankruptcy and your credit rating may be badly affected in the future.  However, for some people bankruptcy may be the best way out of their financial problems. If you are in business or in the middle of a property transaction you may need to apply to the court for an order allowing you to carry on with these things without the risk that they will subsequently be undone. If you want to propose an arrangement to all of your creditors with a view to avoiding bankruptcy, you will need the assistance of an insolvency practitioner. If there are grounds on which to challenge the bankruptcy petition, you should take legal advice on this at an early stage so that your prospects of success can be assessed and, if necessary, other options can be considered in the time available keeping in mind the above deadline to file certain documents in court if you wish to oppose it.

What happens at the end of a bankruptcy?

A bankrupt is normally automatically discharged from bankruptcy 12 months after the making of the Bankruptcy order. A discharge can happen earlier if:

• The bankruptcy order should not have been made however, you must apply for permission to appeal the decision within 21 days of the order being made;
• Within three months all debts owing to creditors are paid in full from your bankrupt estate; or
• A IVA has been agreed. If an IVA has been agreed, details of this will appear on the register.

Once discharged from bankruptcy, an individual is released from the statutory bankruptcy restrictions and their liability for bankruptcy debts, unless those debts arise from obligations:

• Arising under a criminal confiscation order; or
• To repay funds advanced from the Social Fund (a government fund that assists individuals on low incomes to purchase household goods).

A discharge can be suspended if an individual breaks any of the terms set by the Official Receiver, or fails to co-operate with them.

You should note that whilst you may be discharged from bankruptcy and you are entitled take control over any remaining assets that were not realised by the trustee, your bankruptcy is recorded on your credit file for at least six years from the date the order was made which can have detrimental effects to your future ability to borrow and/or to your reputation if you are a business owner.

How do I instruct Brett Wilson LLP?

Get in touch with one of our specialist insolvency solicitors by sending us an email, completing our online enquiry form or calling us on 020 7183 8950.  If emailing or using the online form, please provide a short outline of your situation.

Where possible, we recommend that you contact us before responding to any claim.

Costs information will provided following your enquiry.