Bankruptcy Law

Bankruptcy proceedings are started by a bankruptcy petition, which may be presented to the court by

(1) a creditor or creditors;

(2) a person affected by a voluntary arrangement to pay debts set up by the debtor under the Insolvency Act (1986);

(3) the Director of Public Prosecutions; or

(4) the debtor.

The grounds for a creditors' petition are that the debtor appears to be unable to pay a debt for which a statutory demand has been made or that a court has ordered him or her to pay. The debt must amount to at least £750. The grounds for a petition by a person bound by a voluntary arrangement are that the debtor has not complied with the terms of the arrangement or has withheld material information. The Director of Public Prosecutions may present a petition in the public interest under the Powers of Criminal Courts Act (1973). The debtor may also present a petition on the grounds of being unable to pay his or her debts.

Once a petition has been presented, the debtor may not dispose of any property. The court may halt any other legal proceedings against the debtor. An interim receiver may be appointed. This will usually be the official receiver, who will take any necessary action to protect the debtor's estate. A special manager may be appointed if the nature of the debtor's business requires it.

The court may make a bankruptcy order at its discretion. Once this has happened, the debtor is an undischarged bankrupt, who is deprived of the ownership of all property and must assist the official receiver in listing it, recovering it, protecting it, etc. The official receiver becomes manager and receiver of the estate until the appointment of a trustee in bankruptcy. The bankrupt must prepare a statement of affairs for the official receiver within 21 days of the bankruptcy order. A public examination of the bankrupt may be ordered on the application of the official receiver or the creditors, in which the bankrupt will be required to answer questions about his or her affairs in court.

Within 12 weeks the official receiver must decide whether to call a meeting of creditors to appoint a trustee in bankruptcy. The trustee's duties are to collect, realize, and distribute the bankrupt's estate. The trustee may be appointed by the creditors, the court, or the Secretary of State and must be a qualified insolvency practitioner or the official receiver. All the property of the bankrupt is available to pay the creditors, except for the following:

• equipment necessary for him or her to continue in employment or business;

• necessary domestic equipment;

• income required for the reasonable domestic needs of the bankrupt and his or her family.

The court has discretion whether to order sale of a house in which a spouse or children are living.

All creditors must prove their claims to the trustee. Only unsecured claims can be proved in bankruptcy. When all expenses have been paid, the trustee will divide the estate. Legislation sets out the order in which creditors will be paid (see preferential creditor).

The bankruptcy may end automatically after two or three years, but in some cases a court order is required. The bankrupt is discharged and receives a certificate of discharge from the court.