Company Law: The Law of Bankruptcy in Ireland

Date: July 19th, 2010 | Filed under: mediation, Mediation & Company Law Articles | Tags: bankruptcy, Company law, ireland

1. What is Bankruptcy
2. How does a debtor become Bankrupt
3. The Consequences of Bankruptcy
4. The Bankrupt
5. The Family of a Bankrupt
6. Commercial relationship with a Bankrupt’s  Creditor
7. Creditors
8. Discharge  From Bankruptcy
9. High Court Scheme of Arrangement.

Legislation

INTRODUCTION

‘Bankruptcy’ is a relatively common and often quoted term.

Bankruptcy is a collective procedure for the realisation of the debtor’s assets (including as necessary, the avoidance of certain pre-bankruptcy dispositions or actions regarding the debtor’s assets), the ascertainment of his/her debts and the distribution of the proceeds to the creditors, according to the statutory order of priority.

Bankruptcy has serious implications not only for debtors and their creditors, but

for family members and for others who have entered into business arrangements

with bankrupts.

Some of the common questions that arise in relation to bankruptcy are:

• can a bankrupt continue to earn a living,
• do all creditors have the same status and
• how can a bankruptcy be discharged.

Despite changed attitudes to debt and easier access to credit in recent years,

there remains a stigma attached to those who are bankrupt as a consequence

of their inability to pay debts.

The legislation is complex and it can be daunting for an individual bankrupt, in particular where property, including a family home, may be sold.

It can be difficult for creditors who are owed, at times, significant amount of funds.

The Bankruptcy Act, 1988 seeks to balance the rights of creditors with those of bankrupts and the obligations placed on all parties as a bankruptcy case progresses.

Bankruptcy is normally a last resort used by creditors, when all other means of securing payment of a debt properly due to them are exhausted.

Alternatively it is sometimes used by debtors to seek protection from their creditors.

1. WHAT IS BANKRUPTCY

Bankruptcy is a process where the property or assets of an individual, who is unable or unwilling to pay their debts (called a debtor), is transferred to a person given charge of the property by the High Court (called a trustee) to be sold.

When the property or assets are sold, the costs, expenses, court fees and certain priority debts are paid.

After this, the net proceeds are distributed to those owed money (the creditors).

In nearly all cases, the Official Assignee in Bankruptcy, a court official is the trustee to whom this property is transferred. (This is the person who administers the estate of bankrupt persons).

Bankruptcy proceedings are brought in the High Court.

The application for a Bankruptcy Order (as well as any other application for the Bankruptcy list of the High Court) is filed in the Office of the Examiner of the High Court.

In order to make somebody bankrupt they have to commit an act of bankruptcy. The Bankruptcy Act 1988 is very clear in that if the creditor present a petition upon a debtor in the prescribed manner such as the Bankruptcy Summons, and he  does not within 14 days after service of the Summons pay the sum then this shall be deemed to be an act of bankruptcy.

However, for the past 20 years or so, it has been a practice direction of the High Court that in order to take out a Bankruptcy Summons you must have either an unsatisfied judgement or a “Nulla Bona” before the High Court would allow you issue a Bankruptcy Summons.

Last year, the Collector General, Gerard Harrahill challenged this practice direction of the High Court when he applied to issue a Bankruptcy Summons. He had obtained a number of judgements against the taxpayer but it appears no efforts were made by the Collector Generals office to execute these judgements by way of the Sheriff or the County Registrar’s office. In such circumstances, when you make no effort to enforce judgement you don’t get a “Nulla Bona” the Collector General continued on with his application before the High Court on the basis that the “Nulla Bona” was not a necessary requirement under the legislation. Judge Dunne in the High Court refused the Collector General’s application to issue a Bankruptcy Summons based on the practice direction of the High Court.

Mr. Justice Geoghegan in an ex tempore judgement on 20^th February 2009 effectively overturned the practice direction of the High Court.

He stated that the Court was quite satisfied that this so-called rule of practice is a relatively modern invention and that the Supreme Court was satisfied that there should be no such rule of practice as such rule conflicts with the Bankruptcy Act 1988 and with the Rules of Court and that such a rule of practice has an extraordinary effect in respect of the only two acts of bankruptcy from which in practice one can now obtain leave to serve a Bankruptcy Summons there would be an overlap which just does not make sense he said. The court noted that one of them requires a judgement executed and a return of a “nulla Bona”

Senior counsel appearing on behalf of the Collector General made a submission to the Supreme Court that the High Court should have no discretion. However, the Supreme Court noted a distinction between a rule of practice on the one hand and having a discretion on the other hand and stated that it has always been understood that there was some discretion but the court was satisfied that it should not interfere with that principle and held that there is no rule of practice as alleged and allowed the appeal of the Collector General.

As there are still a tiny number of final successful applications brought before the High Court for bankruptcy proceedings relative to the general business population it is inevitable that there will be considerable developments in this area very shortly.

Following this, the proceedings are dealt with by the High Court.

1. HOW DOES A DEBTOR BECOME BANKRUPT?

The High Court makes a debtor bankrupt either at the request of a creditor or at his own request.

In either case, this request is made in a document called a petition.

This must be filed in the Office of the Examiner of the High Court.

When the petition is filed, the petitioning creditor or debtor undertakes to the court to advertise notice of the bankruptcy in various newspapers.

The advertisement must also contain details of the place, date and time the matter will next come before the court (called the statutory court sitting).

The petitioner must also lodge €650 towards the costs and outlays of the bankruptcy in the Official Assignee’s Office and give an undertaking to the Official Assignee as to the further costs and outlays which may be incurred.

Petition by a debtor:

A debtor may bring a petition for his/her own bankruptcy where he/she is unable to pay debts to creditors and where his/her available estate (for example assets and property) is sufficient to produce at least €1,900.

Petition by a creditor:

A creditor may petition for bankruptcy against a debtor where the debtor has committed an act of bankruptcy within the previous three months.

The acts of bankruptcy relied upon by a creditor are:

(1) An individual (in this Act called a “debtor”) commits an act of bankruptcy in each of the following cases—

(a) if in the State or elsewhere he makes a conveyance or assignment of all or substantially all of his property to a trustee or trustees for the benefit of his creditors generally;

(b) if in the State or elsewhere he makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof;

c) if in the State or elsewhere he makes any conveyance or transfer of his property or any part thereof, or creates any charge thereon, which would under this or any other Act be void as a fraudulent preference if he were adjudicated bankrupt;

(d) if with intent to defeat or delay his creditors he leaves the State or being out of the State remains out of the State or departs from his dwelling- house or otherwise absents himself or evades his creditors;

(e) if he files in Court a declaration of insolvency;

(f) if execution against him has been levied by the seizure of his goods under an order of any court or if a return of no goods has been made by the sheriff or county registrar whether by endorsement on the order or otherwise;

(g) if the creditor presenting a petition has served upon the debtor in the prescribed manner a Bankruptcy Summons, and he does not within fourteen days after service of the Summons pay the sum referred to in the summons or secure or compound for it to the satisfaction of the creditor.

For a creditor to be entitled to petition the court to make a debtor bankrupt, a number of conditions must be met.

These include:

• the petition must be presented within three months of the act of bankruptcy,
• the amount of debt owed must be set out in an affidavit,
• the debt owed must be at least €1,900.
• the debtor must be either resident in the State or within a year prior to presentation of the petition, have ordinarily resided, had a dwelling house or place of business, or
• carried on business within the State.

The creditor’s petition must state whether any security (for example, a mortgage or a charge) is held by them in respect of the debt.

If so, the creditor must indicate whether he/she intends to give up the security for the benefit of other creditors or put a value on their security.

1. THE CONSEQUENCES OF BANKRUPTCY

Bankruptcy impacts not only on the person made bankrupt, but also on their creditors, as well as others, including their family members or people who have a commercial relationship with the bankrupt.

1. THE BANKRUPT

Will others know that I have been made bankrupt?

Following adjudication (the court order making you bankrupt) a notice of this is published by the petitioning creditor or you (if you have made yourself bankrupt) in one national and one local newspaper.

This notice will also contain information about the next statutory court sitting.  (A local newspaper is one which is published in the area where you live or carry on business.)

Other creditors may appear at the statutory court sitting and may make a claim under the bankruptcy.

Other notices are also published at various stages of the bankruptcy, such as advertising for creditors and notice of discharge of bankruptcy.

A Bankruptcy Register is maintained in the Office of the Examiner of the High Court and searches can be made against this register.

Can I stop the Bankruptcy?

You may apply to the High Court within 3 days of the service of the bankruptcy order on you, giving reasons why you should not have been made bankrupt.

This is called a ‘show cause’ application.

What am I required to do when I am made bankrupt?

You must co-operate fully with the Official Assignee’s office in all matters relating to your bankruptcy.

• You must inform the Official Assignee if you change address.

• Initially you must attend for interview with the Official Assignee.

• You must also file a Statement of Affairs in the Office of the Examiner of the High Court.

• This document sets out all of your financial details including assets held and all amounts owed by you.

• The statutory court sitting will only be passed in the High Court when your Statement of Affairs has been filed.

You also have other legal obligations in connection with the administration of your estate and assets.

This includes:

• the delivery of your accounts or papers to the Official Assignee when requested,
• the delivery of your title deeds to property and any other possessions to the Official Assignee,
• assisting the Official Assignee in the administration of your estate, and
• disclosing any property acquired by you since the date of your Bankruptcy Order to the Official Assignee

Where you fail to co-operate with the Official Assignee, the High Court may summon you to examine you under oath.

What happens to my property when I am made bankrupt?

All property held by you when you are made bankrupt vests in the Official Assignee for the benefit of your creditors.

The role of the Official Assignee is to sell or otherwise dispose of this property (called realisation) and distribute the proceeds to your creditors.

A vesting certificate is lodged in the Office of the Examiner of the High Court and with the Property Registration Authority.

This document records the interest of the Official Assignee in any property held by you at the date of adjudication.

It means that you cannot sell or use this interest in the property as security to take out a loan.

The only property that does not vest in the Official Assignee is essentially up to a value of €3,100 (or more if the High Court allows).

Any property you acquire after you are made bankrupt transfers to the Official Assignee, if and when the Official Assignee claims it.

What about property I own abroad?

Under EU legislation, (EU Insolvency Regulations 2002) bankruptcy proceedings in Ireland may be recognised as proceedings in most other EU member states.

In most cases, this should allow the Official Assignee to realise such property for the benefit of your creditors.

Does it have implications for my salary and pension?

Yes, the High Court may appropriate your salary or pension for the benefit of your creditors.

However this is subject to any provision the High Court may make to meet your family responsibilities and your personal situation.

Can I operate a bank account while I am bankrupt?

Yes, you can operate a bank account.

However if you obtain credit of €650 or more without disclosing your bankruptcy, you are guilty of an offence.

Can I still trade while I am bankrupt?

Yes, as long as you trade in your own name.

If you trade in a name other than that in which you were made bankrupt without disclosing this name, you are guilty of an offence.

You must notify the Official Assignee of any business or trade in which you engage.

Can I manage a company or become a director of a company?

No, under the Companies Acts it is an offence for a bankrupt to act in various capacities in relation to a company.

These include director, auditor, manager, liquidator or receiver of a company.

Can I seek employment while bankrupt?

Yes, and you can continue in current employment or seek employment.

Bankruptcy & the Official Assignee

Can I travel outside the jurisdiction?

There is no outright prohibition on you travelling abroad but you should inform the Official Assignee if you intend to do so.

You may be arrested if it appears to the High Court that you may be leaving the State in order to avoid the consequences of your bankruptcy.

Are there other consequences?

Yes, bankrupt persons are not entitled to hold elected representative office, in local authorities, in the Dáil or the Seanad.

Are there alternatives to being made a bankrupt?

Yes, a debtor may enter a voluntary arrangement with their creditors to settle debts due to them and to avoid bankruptcy or other proceedings against them.

Arrangements made outside of the control of the High Court tend to be less costly in the long run.

Alternatively, a debtor can apply for an arrangement under the protection of the High Court.

This is where a debtor asks the High Court for protection against proceedings to give them time to present a proposal to their creditors.

This proposal could be to pay a dividend (normally a percentage of the amount owed) on their debts or to transfer property to the Official Assignee to be sold and the proceeds distributed among their creditors.

The proposal must receive the support of at least sixty per cent in number and value of the unsecured creditors voting on it to succeed.

The costs, court fees, expenses and preferential debts must also be paid in full.

(The matter of a High Court Scheme of Arrangement is dealt with in more detail below – see 10)

I have been discharged from bankruptcy; will my name be removed from

the Register?

No, the Register is a record of all bankruptcies, including those that have been discharged.

A person searching the Register is told the status of the bankruptcy (discharged) and the date it was discharged.

No information is given about the address of the former bankrupt.

tcy & the Official Assignee

1. THE FAMILY OF A BANKRUPT

Can the family home be sold?

The bankrupt’s interest in the family home vests in the Official Assignee as with all other property.

However the Official Assignee may not sell the family home without obtaining permission from the High Court.

Where the Official Assignee seeks this permission, the High Court may postpone the sale of the family home having regard to the interests of the creditors and of any spouse and dependants of the Bankrupt

.

What if we already have a mortgage or have borrowed against this home?

Then this is a secured loan against the property and the Official Assignee’s interest only relates to the equity remaining in the property.

I jointly own the family home with the bankrupt, what about my interest?

Where the bankrupt owns property jointly with a spouse or partner, the bankruptcy causes the joint ownership to be split.

The Official Assignee and the non-bankrupt co-owner then hold separate interests in the property.

As a bankrupt can still earn a living, what about our income?

The Official Assignee may apply to court for the appropriation of part of the bankrupt’s salary, income or pension.

If the High Court directs any deduction to be made, it may have regard to the bankrupt’s family responsibilities and personal situation.

Social welfare and unemployment payments are not liable to appropriation.

1. COMMERCIAL RELATIONSHIP WITH A BANKRUPT

The following are some common examples of third parties dealing with a bankrupt:

Property owned jointly with a bankrupt

Where a person owns property jointly with a bankrupt, the bankruptcy splits the joint ownership.

The non-bankrupt co-owner and the Official Assignee then hold separate interests in the property.

Property transferred by the bankrupt

Bankruptcy has legal implications for property transfers and possibly sales where the bankrupt entered into such transactions within certain time limits prior to the bankruptcy.

Partnerships

A partnership where the bankrupt is a partner is dissolved by the bankruptcy.

This is unless the terms of the partnership provide for it to continue.

1. CREDITORS

What can I do if a bankrupt owes me money?

You cannot use normal remedies (for example, execution, instalment orders and registration of judgment mortgages) to secure payment of your debt if the money is owed at the date of bankruptcy.

You must make a claim in the bankruptcy for payment.

Will I automatically be paid the amount owed to me?

Only if funds are available to the Official Assignee to distribute.

In addition, all creditors must prove their debt.

This means they must provide evidence of their debt to the Official Assignee, for example, invoices, bank statements, judgment orders or affidavit of debt.

An advertisement for creditors will be placed in newspapers during the bankruptcy process.

This asks creditors to submit proof of their debt to the Official Assignee.

But creditors do not have to wait until the advertisement – they can send their proof to the Official Assignee before that date if they wish.

Dividends to creditors will only be paid after this advertisement appears and a proof of debt sitting is held by the Official Assignee.

This is where the Official Assignee decides if a debt (or the amount of a debt) is admitted.

All creditors are entitled to examine the proofs of other creditors.

Only debts owed on the date of adjudication are admitted under the bankruptcy.

The High Court decides on disputed debts.

This is where the bankrupt and the creditor do not agree on the amount owed or the amount admitted by the Official Assignee.

Once my debt is admitted will I be paid in full?

Not necessarily, this depends on a number of factors:

• the amount of funds available for distribution
• status of your debt
• value of the bankrupt’s estate
• method of discharge

Do all creditors have the same standing in the bankruptcy?

No, there are different categories of creditors and their standing in a bankruptcy depends on whether they hold security for their debt or not.

Once a debtor is made bankrupt, the petitioning creditor ranks equally along with all the other unsecured creditors.

However the costs of the petitioning creditor must be paid before a bankruptcy is discharged.

What is a secured creditor?

A secured creditor holds security such as a mortgage or judgment against a property owned by the bankrupt.

The secured creditor can rely upon this security and sell the asset comprising the security.

They must account to the Official Assignee in respect of the sale and may claim for any amount (if any) still owed following the sale.

After this and payment of any other secured claims, the secured creditor must pay any surplus to the Official Assignee and/or others having an equity in the property.

There can be a number of creditors holding security against a single property.

Alternatively, the secured creditor may abandon their security and make a claim as an unsecured creditor for the entire debt.

What is a preferential creditor?

A preferential creditor is a creditor whose debts have priority for payment before other creditors.

These include taxes, rates and certain kinds of employee claims and benefits.

These must be paid in full before a bankruptcy is discharged.

What is an unsecured creditor?

An unsecured creditor does not hold any security, for example, trade creditors and other business debts.

They rank equally with other unsecured creditors

1. DISCHARGE FROM BANKRUPTCY

How long does bankruptcy last?

Anyone who is made a bankrupt remains a bankrupt, even after death, unless or until they are discharged by the High Court.

There is no right to automatic discharge.

How is a person discharged from bankruptcy?

A bankrupt may be discharged from bankruptcy in a number of ways.

No bankrupt can be discharged unless there are enough funds to pay:

• The costs of the Official Assignee High Court fees
• The costs of the petitioning creditor
• The preferential debts of the bankrupt

Bankruptcy & the Official Assignee

When someone is discharged from bankruptcy, any funds or properties

remaining with the Official Assignee are returned to the former bankrupt.

(a) Discharge after payment of debts in full:

This is where the bankrupt’s creditors are paid in full. If the High Court so allows, interest may also be payable.

Normally, interest is only paid where surplus funds are available.

(b) Discharge with the creditors’ consent:

This is where all of the bankrupt’s unsecured creditors consent to the discharge.

(c) Discharge after making composition with the creditors:

This is where unsecured creditors agree to accept payment of a certain percentage of their debt in settlement of the full amount.

This must be supported by at least sixty per cent in number and value of those creditors who vote at a sitting of the High Court for this to be accepted.

The bankrupt must provide the Official Assignee with sufficient funds to make this settlement and pay his/her unsecured creditors.

This is called an Offer of Composition.

(d) Discharge after paying fifty cent in the Euro:

This is where all of the bankrupt’s property has been fully sold or disposed of and his/her creditors have received fifty cent in the Euro on their debts.

(e) Discharge after twelve years:

This is where the bankruptcy has lasted for twelve years and all of the bankrupt’s property has been fully sold or disposed of.

The court must be satisfied that the bankrupt has disclosed any property acquired since his/her bankruptcy and that it would be reasonable and proper to discharge the debtor from bankruptcy.

1. HIGH COURT SCHEME OF ARRANGEMENT

Sections 87 to 109 of the Bankruptcy Act allows a debtor who is unable to meet his commitments to his creditors to petition the court, setting out the reasons for his inability to pay his debts and requesting court protection from actions or processes, including bankruptcy proceedings.  An order for protection may be granted by the court, even if there is an execution order in the hands of a sheriff or county registrar.

Once a protection order is granted, the debtor must call a preliminary meeting with his creditors to present a statement of his assets and liabilities and set out his proposed scheme of arrangement.

It is important to note that, for as long s the order of protection is in force, the debtor cannot, without prior court sanction, pledge, part with or dispose of any property, save in the ordinary course of trade or business.  If the correct procedure is followed, the process culminates in a private sitting of the court at which the creditors vote on the proposed scheme.

If three-fifths in number and value vote in favour of it (or any modification of it) it is deemed to be accepted by the creditors.  Once approved by the court, the scheme is binding on the debtor and on all persons who were creditors at the date of the petition and who were notified of the private sitting.  If the proposal is rejected, the court may adjudicate the debtor bankrupt.  The procedure is costly and not without risks.

A debtor who makes an offer to his creditors runs a risk because the curt may adjudicate him bankrupt if, for example, it appears that he does not wish to make a bona fide arrangement with his creditors.

This may also happen if he fails to obey any court order affecting him, if his offer is not accepted or reasonable, or if he does not file the relevant court documents.

It is essential that the procedure is followed correctly.

Where a scheme has been implemented successfully, the court must, on the report of the Official Assignee and in the absence of fraud, give a certificate to the debtor that discharges him from the claims of creditors who received notice of the arrangement.  However, this does not release the debtor from debts owed to creditors who did not receive notice of the proceedings

1. LEGISLATION

The main provisions of bankruptcy law are contained in the Bankruptcy Act, 1988, the Bankruptcy Rules and Forms,

Order 76 and Appendix O of the Rules of the Superior Courts, the Deeds of Arrangement Act, 1887 and the decisions of the courts.