Bankruptcy - A Guide for Partners
The following guide to bankruptcy cannot be comprehensive, given that it is a general discussion of the process, application and exit from a mechanism that can be very complex depending on your individual circumstances. It is important that you seek professional advice before entering bankruptcy. Other alternatives are available and it is vital that you consider all of those options by reading them on the site or contacting us by email or phone. Read through our IVA and SIMIVA pages if you wish to look at other options.
First things first, companies can’t go bankrupt, only individuals can. Usually the press describe a business going busy as bankruptcy but this isn't the correct term. If it is the end of a business, it is usually liquidated.
In the UK, 10-15,000 people each year enter into bankruptcy. In recessionary times, this can rise as high as 25-30,000 people, therefore you are definitely not alone in this.
Bankruptcy is considered as the last resort so it is crucial to review your situation and ask yourself some important questions before you proceed. Are you insolvent? Is the business no longer viable? If you've answered yes to both of these and you've look at all the available options, read on...
No Fault Bankruptcy
Since 2004, bankruptcy rules have relaxed. A partner in a partnership who files for bankruptcy can usually be discharged after a year (as long as there are no issues of fraud etc). Before 2004, it was three years.
Bankruptcy is now a quick and powerful process, helping individuals move on with their lives. There are also an increasing number of lenders out there that can provide credit and mortgages to individuals who have filed for bankruptcy in the past.
Steps to bankruptcy
To enter bankruptcy, the individual, creditor or supervisor of the individual can petition the court. You must collect all the relevant information, such as financial accounts of the business, legal actions against you, financial and business plans, personal creditor statements and a list of all your assets (and their value). You must also produce a statement of affairs (your supervisor can help) known as SOFA, which compares your assets against your liabilities. Each partner will need to have his or her own statement of affairs.
Together with the above, take all notes and minutes of conversations and emails with creditors as these will provide a record of events to assist you with proceedings.
Only stop trading when you can no longer continue with the current cashflow or you have been advised by a solicitor or insolvency specialist to cease trading.
The individual or ‘Debtor’s’ Petition
If you wish to file for bankruptcy, contact your local County Court and ask for a ‘debtors petition’ pack. There may be a fee for this but it’s worth noting Court officials should be able to help you complete the application and answer any further questions you may have.
Once you’ve given the completed form to the Court, a hearing will be arranged and your petition will be addressed.
It is usually best if the debtor starts the process as it can take off pressure right away and will ensure creditors don’t add extra costs to the proceedings if they do it themselves.
The Creditor's Petition
If creditors can prove they are owed debt by the individual, usually in the form of a County Court Judgement or Statutory Demand, they can issue a petition for bankruptcy. Creditors can try to recover money owed by using a bailiff or warrant.
As a creditor, HMRC can initiate the petition if there are outstanding VAT or PAYE payments. If the business isn’t viable, bankruptcy may be the best solution.
If it is too expensive for the individual to file bankruptcy, he or she can wait for the creditor to issue the petition, however this isn't recommended as it gives the wrong message. Creditors and the court may think the individual has ‘buried their head in the sand’.
The Supervisor's Petition
If you have previously entered an individual voluntary arrangement (IVA) which has failed, your supervisor can petition for your bankruptcy if payments have been missed or the IVA terms have been breached. If you’re concerned the IVA is failing and your under severe financial pressure, call us on 08009700539.
Before the supervisor can issue a petition, he or she will need to provide an abort certificate to you and your creditors, explaining why the IVA has failed. You will most likely know this already and have been in talks with your supervisor.
At the court hearing
At the hearing, the court will look at all the information you or the creditors have provided and will grant bankruptcy. The Official Receiver (OR) of the court is usually appointed trustee in bankruptcy, however an Insolvency Practitioner may be appointed by the Official Receiver or the court if there are significant assets. The IP will be able to recover assets over time to pay back creditors.
The OR will check through all the documents and account information when bankruptcy has been granted.
The individual’s estate consists of all his or her assets, which can include partially owned assets. The individual will have provided estimates of how much of these shared assets he or she owns in the SOFA. Shared homes or vehicles under a partnership agreement may only be partially available to the trustee on behalf of the creditors.
The undischarged bankrupt is allowed to maintain tools of the trade, which can include items like a modest motor vehicle and hand tools etc. Large tools such as lathes and machinery will usually not fall into this description unless they have little re-sale value. And, where furniture and other items belonging to the bankrupt are under disputed ownership, it is unlikely that the trustee will seek to recover them. For example a TV bought jointly by husband and wife.
Pension funds are usually included in the estate and are available to creditors. This is a very complex area and information can only be general in this regard on this website so please contact an insolvency practitioner for specific advice.
Some debts will not be dismissed, like CSA (Child Support Agency) payments, maintenance costs to spouse, government fines and mortgages.
The Matrimonial Home
The trustee usually has access to 50% of the matrimonial home for creditors, however it may be possible to keep the home if you can continue to make mortgage payments.
For example, your partner may have enough income to continue making payments or there may only be a small amount of equity available to the trustee.
The Trustee can register a Caution for the Land Registry to prevent the home from being sold (without the Trustee’s position) if the bankrupt individual has equity in it.
Sadly, if the individual gains new equity, this can be available to creditors’ years after the individual has been discharged.
Jobs and professional qualifications
An undischarged bankrupt cannot be a member of parliament, Justice of the Peace or an insolvency practitioner. If you enter bankruptcy, other professional qualifications may be affected, for example solicitors, accountants and auditors. You also cannot be a member of the local authority. If you’re unsure how your qualifications or training will be affected and you need some advice, contact the professional organisation.
Income Payment Order
If you get a new job and it is a higher salary than before, the trustee can seek to retrieve a percentage of the difference in income, known as an Income Payment Order.
If you fail to comply, this can be taken to court and put to a judge. The trustee may sell property or other assets on the creditors’ behalf.
Bankruptcy rules and discharge
After you have been made bankrupt, you cannot be a director, manager or act in the formation of a limited company in the UK as it is a criminal offence to do so. You can also not be a partner in a partnership. You can continue to trade as a sole trader, however you must not use a new or different name.
If you need to obtain credit during bankruptcy, you will need to disclose your situation to the lender or business.
After the bankruptcy term has finished, you will be discharged. Most debts will be written off, however some, like child support, mortgages etc won’t be written off. After you have been discharged, you may become a director or partner again and can begin to work on your credit rating.
Always seek advice
This is a general guide and should be not be used as legal advice. You must get professional advice from a solicitor or insolvency practitioner before you proceed and be aware of all available options.
We would like to point out that bankruptcy is not as scary as it seems and can often help people let go of worry and stress and continue their lives, often happier and wealthier in the long run!
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.