Imagine this scenario, your debt has not been paid and the liquidator of your customer’s company has confirmed that there will be no dividend to unsecured creditors, what can you do?
When faced with such circumstances, exploring bankruptcy as a potential solution becomes essential for protecting your interests and recovering outstanding amounts. To be able to make well informed decisions in these situations you must understand fully the options that you have.
Exploring Personal Guarantees
If you have a valid Personal Guarantee (“PG”), then petitioning for the individual’s bankruptcy could be a viable option. Before pursuing this next step, an element of due diligence would need to be carried out, such as: What other PGs have they provided? What assets does this individual personally own?
If the due diligence steers you towards pursuing a bankruptcy, then you will need to instruct solicitors to make the individual bankrupt.
When the Bankruptcy order is made the Official Receiver (“OR”) is appointed as the Trustee in bankruptcy, and, with immediate effect, assets of the bankrupt individual will vest in the Trustee.
As a creditor, you have the right to appoint your own independent Trustee if you feel that the OR are not carrying out lines of enquiries that you have identified.
If you appoint your own independent Trustee, will it cost you more?
The OR have their own costs and expenses, but the OR also charge for the realisation of any assets as a percentage of realisations and these costs come from the realisations made in the estate. The same applies for an independent Trustee who may choose to charge on a time costs basis, percentage of realisations, a set fee or a combination of the three. So, in short, will it cost you any more to appoint an independent Trustee? The answer is “no”.
What are the advantages of pursuing bankruptcy?
Whether managed by the OR or an independent Trustee, a thorough investigation of the individual’s financial circumstances will take place, undertaking wide ranging enquiries into whether they are putting assets illegitimately beyond the reach of their creditors.
Given the cost-of-living crisis, why are bankruptcy numbers so low?
In Q1 of 2024, it was reported that bankruptcy levels (21.3 per 10,000 adults in England and Wales) were at the lowest rate to the 12 months ending November 2017.
Aside from the cost of making an individual bankrupt, the answer to this is twofold:
- The popularity of Individual Voluntary Arrangements (“IVA”) which are commonly used for consumer debt; and
- Debt Relief Orders (“DRO”), which were introduced to deal with the individuals who were being made bankrupt but had minimal assets, so no likelihood of returning any funds to creditors.
Debt Relief Orders (DROs)
DROs were introduced in 2009 and the thresholds to allow an adult to apply for a DRO have been increasing. Current limits are:
- Total debts of £50,000 or less;
- Assets worth less than £2,000; and
- Has £75 or less of surplus income per month.
These increased on 28 June 2024 from £30,000 of debt. There are other stipulations of seeking a DRO such as having no previous DRO in the last six years, and you must have lived in the England and Wales for the last three years. However, the above provides you with an indication of why their levels have grown, during the rising popularity of a credit society.
Summary
Bankruptcy may currently be an underused tool, but it’s advantages are clear. It ensures that the individual is thoroughly investigated and denies them the opportunity to simply walk away from the debts that have been incurred or promised to be paid under a PG.
When a petition is considered for the company’s winding up, usually how the relationship with the customer will end is of concern. However, unless you want to trade with the individual again, then any relationship deterioration becomes irrelevant.
Whilst an individual only remains an undischarged bankrupt for one year, the assets that vested in the Trustee, remain vested in the estate until they have been dealt with.
Remember, a defence for Breathing Space may be used by the individual.
Don’t assume that your PG is worthless. If you are at all in doubt, seek advice from an Insolvency Practitioner.
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