Personal insolvency guide

Statutory demand

What is a statutory demand?

A statutory demand is a formal written demand for payment of a debt (in excess of £750) within 21 days.

It must be issued in the correct form. There are prescribed forms on the Insolvency Service website.

It may only be issued for undisputed debts; the creditor must genuinely believe the debt is valid and the debtor must not have raised an objection to the debt’s validity. It may induce the debtor to pay, but there are risks for the creditor.

Steps to take in preparing and presenting a Statutory Demand

1. Prepare a Statutory Demand.
2. Arrange for and effect personal service of the statutory demand on the debtor by a process server. Obtain from the process server, or serving agent, a certificate of personal service of the statutory demand, as this document is required when issuing the bankruptcy petition.
3. Allow the debtor 21 clear days from service to either pay the debt, or secure/satisfy it to the creditor’s satisfaction, or 18 clear days from service to make an application to court seeking an order to set aside the statutory demand.

Bankruptcy petition

What is a bankruptcy petition?

Bankruptcy in England and Wales is a process where the court adjudicates that an individual is declared bankrupt. Bankruptcy has its own prescribed process, which must be followed before the court is able to make the bankruptcy order. Failure to follow the correct procedure and process could lead to the court refusing to make the bankruptcy order.

Where to issue the bankruptcy petition

The basic rule on where to present the bankruptcy petition is that it should be presented at the county court in the district where the debtor has, for the greater part of the preceding six months immediately before the bankruptcy petition is presented, resided or carried on business. This provision applies for petitions presented by both creditors and the debtor.

There is an exception to this rule, which has been subject to judicial change under the Insolvency (Amendment) Rules (2011/785) and the High Court and County Courts Jurisdiction (Amendment) Order 2014 (SI 2014/ 821) bringing changes to IR 1986 r 6.9A. Under these changes, and relevant to creditor's petitions, if the petition debt is £50,000 or more and the debtor resides in the London insolvency district, (or where the debtor has not resided in England & Wales, or their residence/place of business cannot be ascertained), then the petition should be issued at the High Court. If the debtor resides in London, but the petition debt is less than £50,000, then it should be issued in the County Court at Central London (albeit these petitions will still be heard in the High Court, with the District Judges sitting there).

When issuing the petition the following documents need to be filed:

1. The Bankruptcy Petition itself which must be properly completed and set out the nature and details of the debt;
2. The witness statement in support verifying the contents of the statements made in the petition; and
3. Where appropriate, a true copy of the affidavit of service of the statutory demand or any other evidence which shows the statutory demand has been deemed served. 

Service of the bankruptcy petition

Personal service on the debtor

The general rule for service of Bankruptcy Petitions is that they must (absent any order of the court for substituted service) be personally served on the debtor. This provides that personal service is effected by the delivery of a sealed copy of the petition to the debtor by either an officer of the court, or by the petitioning creditor, or his solicitor, or by a person instructed by the creditor or his solicitor.

What if personal service cannot be effected?

The court has power to make an order for the substituted service of the bankruptcy petition on the debtor. If the court is satisfied by a witness statement, or other evidence on oath, that prompt personal service cannot be effected because the debtor is keeping out of the way to avoid service, it may order substituted service to be effected in such manner as it thinks just. Therefore, should the petitioning creditor consider that the debtor is avoiding service of the bankruptcy petition, it can make an application (supported by a witness statement and supporting evidence) to court seeking an order for the bankruptcy petition to be served in a manner the court thinks fit.

An application for an order for substituted service is normally made without notice to the debtor therefore the petitioning creditor has an obligation to provide full and frank disclosure. If the court makes an order for substituted service, the petition will be deemed served once the order has been complied with.

After service is effected

Once the petition has been served on the debtor (either personally, or in accordance with an order of the court) a certificate of service must be filed with the court as soon as practicable (and not less than five days before the hearing of the petition), which must set out (among other things):

1. the name of the debtor and the petitioner;
2. the name of the court where the petition was filed and the court number;
3. the date of the petition;
4. whether the copy served was a sealed copy;
5. the date when the petition was served and the manner; and
6. If the bankruptcy petition was served pursuant to an order for substituted service, a copy of the sealed order must be attached to the certificate of service.

Steps to take in preparing and presenting a bankruptcy petition

1. Prepare bankruptcy petition, statement of truth of statements in bankruptcy petition and supporting documents (which should include a copy of the statutory demand and certificate of personal service) and issue three copies at court (one for the court, one for service and one for the petitioner), with the court fee, which currently amounts to £1,030.
2. When the bankruptcy petition is issued at court, the sealed bankruptcy petition will need to be personally served on the debtor. It should be ensured that service of the bankruptcy petition is effected at least 14 days before the hearing of the petition.
3. Prepare (if necessary) and file the certificate of service as soon as reasonably practicable after service of the bankruptcy petition on the debtor and at least five clear business days before the first hearing.
4. Wait to see if the debtor files and serves a notice of opposition to the bankruptcy petition, which must be filed and served five business days before the hearing.
5. Wait to see if any creditors file a notice of intention to appear at the bankruptcy hearing, such notices to be received by the petitioning creditor by 4 pm on the day before the hearing.
6. Complete and file (on day of hearing, or evening before if practicable) a list of creditors proposing to attend who have given notice to do so.
7. Complete and file a certificate of continuing debt. In the High Court in London, this certificate is incorporated into the attendance sheet the parties complete at court before the hearing. This document must be completed for each adjourned hearing (if any).
8. Attend first hearing of the bankruptcy petition.

What happens after the bankruptcy order is made?

The purpose of a bankruptcy order is to secure the bankrupt's estate for the benefit of the bankrupt's creditors so that it can be realised to pay out a dividend. What happens immediately after the bankruptcy order is made and the effect it has on the debtor is crucial in securing the estate and investigating the events and circumstances giving rise to the bankruptcy order.

After the bankruptcy order is made, the following will typically happen:

1. the bankruptcy order is drawn up by the court and must contain (among other things) the date the petition was presented, the date and time the order was made, and a notice for the bankrupt to immediately attend on the Official Receiver (OR) after service of the order.

2. two sealed copies of the bankruptcy order must be sent by the court to the OR, who in turn must serve one copy on the bankrupt.

3. the OR must give notice of the bankruptcy order to the Chief Land Registrar, advertise the order in the London Gazette (or its equivalent) and (in some cases) an appropriate newspaper, and cause the details of the bankruptcy to be entered on the individual insolvency register. These steps may be suspended, on order of the court, where an application is made by the bankrupt/a creditor. Typically this would be where the bankrupt applies to annul the bankruptcy order.

4. Once the bankrupt has been served with the bankruptcy order, they are required to attend an appointment with the OR to complete the OR’s questionnaire, where the bankrupt will answer questions on their assets, known liabilities and the reasons for their bankruptcy.

5. The trustee is appointed: by a general meeting of the bankrupt’s creditors, by the secretary of state (SOS) or by the court. In practice, if the OR receives requests from creditors to appoint a certain insolvency practitioner (IP) as trustee, as long as the creditors amount to more than 50% of the known pool of creditors in value, the OR will normally arrange for a SOS appointment to take place.

What are the main effects of a bankruptcy order?

The effect of a bankruptcy order that is of most interest to the creditors is that the bankrupt’s property will vest in the trustee, whose task is to realise that property in order to pay a dividend to the creditors. In return for the bankrupt’s property vesting in the trustee, the debts fall on the estate and it is no longer the bankrupt’s responsibility to pay those debts.

However, the vesting of property in the trustee is just one of the effects of a bankruptcy order. There are a number of other restrictions, which affect the bankrupt, their estate and creditors. These are:

1. most (if not all) proceedings against the bankrupt and the bankrupt’s property can be stayed by the bankruptcy court dealing with the bankruptcy proceedings. A creditor with a provable claim can bring a claim, or continue with it, only with the leave of the court:
2. the bankrupt cannot act as a director of a company, or take part in the management, formation or promotion of a company without the leave of the court;
3. in addition, there are a number of additional restrictions for un-discharged bankrupts, such as not acting as a trustee of a pension scheme, a charitable trust trustee, a solicitor, and an insolvency practitioner; and
4. it is an offence for a bankrupt to obtain credit above the prescribed amount (currently £500) without first declaring that they are an un-discharged bankrupt. These provisions also apply where there is a bankruptcy restriction order in place.

Role of trustee in bankruptcy

The main role of the trustee is to realise and distribute the bankruptcy estate. This role may include:

1. considering what assets belong to the bankruptcy estate and securing them so they can be realised;
2. reviewing, adjudicating on and agreeing creditors' claims; and
3. looking into any transactions out of the bankruptcy estate/dispositions of property which should be recouped for the benefit of creditors. If necessary this will be done by way of an application to court.

A trustee must be licensed by a recognised professional body, must be qualified to act and have a sufficient bond in place, which is an insurance policy for creditors.

What is the period of bankruptcy and when is the bankrupt discharged?

The period of bankruptcy commences when the bankruptcy order is made and continues until discharge. The bankruptcy will also come to an end if the order is annulled.

The bankrupt will be automatically discharged on the first anniversary of the bankruptcy order. However, there are two exceptions to this:

1. discharge can take place earlier if the OR files a notice at court stating that the investigations into the bankrupt’s affairs/conduct have concluded and will take effect on the day the notice is filed (albeit there is currently a government consultation mooting removing this provision and in practice this is very rare); and

2. on an application to the court by the OR/Trustee, automatic discharge can be suspended. The suspension can be for either a specified period, or on fulfilment of a specified condition. In assessing whether to make an order to suspend automatic discharge from bankruptcy, the court will need to be satisfied that the bankrupt has failed to comply with any of their obligations under the relevant provisions of the Insolvency Act 1986  (in contrast to when considering an application for a bankruptcy restriction order when conduct both before and after the bankruptcy order can be taken into account).

The bankruptcy estate

The bankruptcy estate is set out and defined in Insolvency Act 1986, sections 283–283A. The bankruptcy estate is, broadly speaking, the property which belonged to the bankrupt (or where the bankrupt held an interest in it) prior to being declared bankrupt. By virtue of the IA 1986, the bankruptcy estate will be left for the trustee in bankruptcy (the trustee) to deal with and will be divisible among the bankrupt's creditors. This is because, in principle, bankruptcy is a two-way process. On the making of a bankruptcy order, the bankrupt is no longer liable to pay the debts (and the creditors are entitled to prove for them in the bankruptcy process), the bankrupt will also be released from the debts on discharge. However, in return for this, any assets or property (subject to some exceptions) which belonged to the bankrupt at the time of the bankruptcy order will be left for the bankrupt's trustee to deal with in order to pay a dividend to the bankrupt's creditors.

The property which will make up the bankruptcy estate is also widely defined in IA 1986, s 436 and includes 'money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property'. This statutory definition is sufficiently broad to cover a wide spectrum of property, both tangible and intangible and wherever situated (albeit with real estate, the usual rules of international law provide that the trustee will require an order from the court where that property is situated to secure and enforce their rights).

In addition, the trustee will be able to claim assets as part of the bankruptcy estate if the bankrupt acquires an interest in that property after the bankruptcy order is made, but before discharge from bankruptcy, and where the trustee has (within the prescribed time-limit) served a notice on the bankrupt (IA 1986, s 307).

Vesting—what it is and how it operates

The process by which assets are transferred to the trustee on appointment is called vesting. Vesting takes place under IA 1986, s 306, which provides that the bankrupt's estate will vest in the trustee immediately on their appointment. Therefore, vesting takes place by operation of the law and without the need for a formal transfer or assignment. Where the bankrupt holds property solely (i.e. they own a property both legally and beneficially on their own), the entire legal and beneficial interests will vest in the trustee. Where the bankrupt holds property jointly with other persons, the bankrupt and the other persons will hold the property on trust for the trustee and the other persons with an equitable interest.

Where the entire legal and beneficial interest in the asset/property vests in the trustee, they are able to transfer the legal estate into their own name. Examples of this would include real estate and shares.

Assets which will vest in the trustee in bankruptcy and assets which won't

Assets which will typically vest in the trustee include:

1. the bankrupt's family home/sole or principal residence (IA 1986, s 283)
2. any other freehold property (IA 1986, ss 283 and 436)
3. any cash/cash deposits belonging to the bankrupt at the time of the bankruptcy order (IA 1986, ss 283 and 436)
4. any shares or stock held by the bankrupt (IA 1986, ss 283 and 436)

Examples of assets which typically will not vest include:

1. the bankrupt's pension if the bankruptcy petition was presented on or after 29 May 2000 and the pension is an approved scheme (Welfare Reform and Pensions Act 1999, s 11)
2. certain causes of action, such as claims for pain and suffering and libel (Heath v Tang [1993] 4 All ER 694)
3. the bankrupt's domestic and household items, which are necessary for satisfying the basic needs of the bankrupt and their family (IA 1986, s 283)
4. the bankrupt's tools of trade, or items/equipment necessary for the bankrupt to use in their employment, business or vocation (IA 1986, s 283)

How long the assets vest in the trustee in bankruptcy

The assets which vest in the trustee will do so for as long as it takes the trustee to realise their interest in them. There are some exceptions to this, the most common being the bankrupt's sole or principal residence (IA 1986, s 283A). This asset will vest in the trustee for a period of three years from the date of the bankruptcy order. If the trustee fails to realise their interest in that property within the three years, or fails to apply to court to realise/secure their interest in the property, the interest will revert back to the bankrupt.

Bankrupt’s property

Where an individual who is registered as the sole proprietor of property for their own benefit is made bankrupt, the property forms part of the bankrupt’s estate and when a trustee in bankruptcy is appointed, the property automatically vests in the trustee. The definition of 'property' is wide. It includes 'land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property'.

The trustee accordingly has the right to apply to be registered as the proprietor, but this may not always be exercised. Since the trustee is entitled to be registered as proprietor, he has the benefit of ‘owners' powers’ and is therefore able to effect a transfer of the property.

Where a bankrupt holds property on trust for any other person, there is no automatic vesting of the legal estate. But if the bankrupt has a beneficial interest in the property (e.g. as a joint owner), the beneficial interest vests in the trustee and any joint tenancy is severed.

Restrictions on dispositions of property

Where a person is adjudged bankrupt, any disposition of property (including payments) made by that person in the period from the date of presentation of the petition until the vesting of the bankrupt’s estate in a trustee to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court (in the case of a deceased debtor any disposition of property after the date of death is treated as void). The provisions do not apply in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented. Typically, a disposition will be ratified by the court if it can be shown that full value has been given and the creditors are likely to benefit from the disposition.

This may be of particular concern to a landlord who may have to return rent that it has been paid in the period between the petition and the vesting unless it can demonstrate that the exception applies.

Trustee's powers

The trustee's function is to get in, realise and distribute the bankrupt's estate. In carrying out that function, the trustee is entitled to ‘use his own discretion’.

The trustee can sell any part of the property in the bankrupt's estate without the consent of the creditors' committee or the court, but the trustee cannot accept money payable at a future time as consideration for the sale of any property (e.g. planning overage) without the consent of and subject to such conditions as to security or otherwise as the creditors' committee or the court thinks fit.

A person dealing with a trustee in good faith and for value does not need to inquire whether any necessary permission has been obtained.

Where a trustee, not being the official receiver, disposes of any property comprised in the bankrupt's estate to an associate of the bankrupt, or employs a solicitor, he must give notice to the creditors’ committee (where one exists) of that exercise of his powers.

Bankruptcy annulment

When a bankruptcy order is made against a debtor and it then transpires that order should not have been made, there are a number of options available to the court. The court can either annul the bankruptcy order under Insolvency Act 1986 (IA 1986), s 282, or it can review the bankruptcy order under IA 1986, s 375.

Annulment and its effects

The annulment of a bankruptcy order effectively restores the position to what it was before the bankruptcy order was made, as it cancels the bankruptcy order. Therefore, the debtor will remain liable in full for all of the bankruptcy debts and any property which vested in the trustee in bankruptcy will revert to the debtor (IA 1986, s 282(4)).

The grounds for applying

There are three situations where the court can make an order annulling a bankruptcy order. Each of these are set out in IA 1986, s 282. They are:

1. if it appears to the court that, on any grounds existing at the time when the bankruptcy order was made, the order ought not to have been made (IA 1986, s 282(1)(a));

2. if it appears to the court that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the bankruptcy order, been either paid or secured to the satisfaction of the court (IA 1986, s 282(1)(b)); and

3. where an undischarged bankrupt enters into an IVA with their creditors (IA 1986, s 282(1)(c)).

In summary, the court will annul a bankruptcy order where the order should not have been made, the bankruptcy debts and expenses have been paid or the bankrupt has entered into an IVA.

Who can apply and when?

The categories of persons who can apply to annul the bankruptcy order is not limited by the IA 1986. In practice, the persons who will typically apply are the bankrupt, the trustee in bankruptcy, or any person affected by the bankruptcy order, such as the bankrupt's spouse/civil partner who considers that the bankruptcy order was initiated in order to defeat ancillary relief proceedings.

There is no period set out by the IA 1986 stating when the application to court must be made. The application can even be made after the bankrupt has been discharged from bankruptcy. However, as an application to annul is discretionary, long periods of time between the bankruptcy order and the application to annul may mean the court does not make the order, as per Gill v Quinn [2004] All ER (D) 21 (Apr).