InsolvencyPersonal Insolvency FAQs

Personal Insolvency FAQs

"What is a statutory demand?"

A statutory demand is the first step in bankruptcy proceedings.

A statutory demand is a document served by a creditor on a debtor, demanding payment of a debt that exceeds £5,000. The statutory demand must comply with the provisions of the Insolvency Act 1986. If the debtor does not pay the demand within 21 days, he will be deemed unable to pay the debt, and the creditor can present a petition for the debtor's bankruptcy.

A statutory demand is a powerful debt-collection tool, and presents a debtor with the stark choice of paying the debt or potentially being made bankrupt.

If a debtor does not pay the sum claimed under the statutory demand, the creditor can (but does not have to) present a bankruptcy petition.

"Can a statutory demand be challenged?

A debtor may, within 18 days of being served with a statutory demand, apply to the Court to have it set aside. The grounds for setting aside the demand are as follows:

  • If the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand
  • If the debt is disputed on grounds which appear to the Court to be substantial. If the debt is disputed, the proper forum for the creditor to seek payment is by issuing a County Court or High Court claim where the dispute can be determined by a Judge after full consideration of the evidence, rather than initiating insolvency proceedings
  • If it appears that the creditor holds security in respect of the debt claimed by the demand. If the creditor has sufficient security for the debt, he will not be entitled to initiate insolvency proceedings
  • If the Court is satisfied on other grounds that the demand ought to be set aside. This might include a situation where there are technical errors in the demand itself

"What is a bankruptcy petition?"

A bankruptcy petition is a petition made to the Court seeking an individual's bankruptcy.

A debtor can petition for their own bankruptcy if they cannot afford to pay their debts, or a creditor can petition in respect of an unsatisfied statutory demand. The Court will list the petition for a hearing and if the Court is satisfied then the debtor cannot pay their debts, it will make a bankruptcy order.

"Can a bankruptcy order be opposed?"

If a bankruptcy petition is presented by a creditor, there are limited grounds on which a debtor may oppose the making of a bankruptcy order.

The Court has to be satisfied that an undisputed debt exists. If the debt is disputed, the Court will dismiss the petition if the defence raises a genuinely triable issue. Arguments which have already been made in an application to set aside a statutory demand and have not been successful, cannot be reheard on the hearing of the bankruptcy petition.

The Court may also dismiss the petition if it is satisfied that the debtor is able to pay all of their debts or has made an offer to secure or compound the petition debt and that the offer has been unreasonably refused.

Even though a bankruptcy petition has been presented, it may still be possible to negotiate a settlement with the petitioning creditor. The creditor is likely to look at bankruptcy as a last resort as it will be in no better position than other creditors, and may only receive a few pennies in the pound after a bankruptcy order has been made. Commercially, a creditor may still be prepared to accept a reduced figure or instalment payments.

"Can a bankruptcy order be cancelled?"

In certain circumstances, the Corut has the power to annul a bankruptcy order. The effect of an annulment is to cancel the bankruptcy order, and it is treated as if it was never made.

An application for an annulment can be made if:

  • The bankruptcy order should never have been made. An example of this is where there has been a procedural flaw in the making of this order. It is not a further opportunity for a debtor to argue that the debt itself is disputed
  • All the bankruptcy debts and expenses of the bankruptcy have been paid in full or secured to the satisfaction of the Court
  • The debtor has agreed an Individual Voluntary Arrangement with his or her creditors

If the grounds for an annulment of a bankruptcy order are not satisfied, a debtor may still be able to apply to the Court to review, rescind or vary the bankruptcy order. The Court's discretion to review, rescind or vary is exercised by the Court with caution and only in exceptional circumstances.

"What is the effect of a bankruptcy order?"

As soon as a bankruptcy order is made, the bankrupt's estate vests in the Trustees in Bankruptcy. The bankrupt has a duty to ensure his estate is delivered up to the Trustees including all books, papers and other records which related to their estate and affairs. If the bankrupt acquires further assets or income after the bankruptcy order is made, they have an obligation to inform the Trustees.

Fail to comply with these obligations is a criminal offence.

Whilst an undischarged bankrupt, a person may not do the following:

  • Obtain a credit for more than £500 without first disclosing his bankruptcy
  • Act as a director of a limited company (unless with permission from the Court)
  • Trade using any business name other than that in which he was adjudged bankrupt without first disclosing his bankruptcy to all persons with whom he trades
  • Act as a Trustee of a charity

A bankrupt has a general duty to co-operate with the Trustee in Bankruptcy to enable him to carry out his duties. This includes giving information to the Trustee, attending meetings and doing anything else the Trustee may require.

"What happens to the family home?"

The estate of the bankrupt vests in the Trustee in Bankruptcy, and this includes any interest the bankruptcy has in a dwelling house, whether solely or jointly-owned. The Trustee may have to sell the property to pay the bankruptcy debts.

If the dwelling house is the bankrupt's sole or principal residence, the Trustee has a time limit of 3 years to sell the property or to apply to the Court for an Order for Possession or Sale. If the Trustee does not take this action, the property will automatically re-vest in the bankrupt. The 3 year period runs from the date of the bankruptcy order or the date the Trustee was informed of the interest in the property, whichever is later.

If the property is not the bankrupt's sole or principal residence, the 3 year limit does not apply.