DEBTS

An insolvent's debts, also known as liabilities, are all the money owed by the insolvent to other people at the date of the insolvency order. The people who are owed the money are known as creditors.

Generally, the effect of an insolvency order is that creditors cannot commence or continue legal proceedings against the insolvent for recovery of money owed. The creditors have to rely on the liquidation/bankruptcy for recovery of any money. However, there are some exceptions to this - in particular, a landlord has certain rights to seize goods of the insolvent in respect of rent owing after the date of the bankruptcy order, but there are statutory rules governing how this can be done and limits imposed on what can be claimed.

After the making of the insolvency order, the insolvent is generally not allowed to pay any of the creditors.

When an insolvency order is made, all creditors have to formally register their claim in the insolvency, which is done by notifying the OR (or trustee or liquidator other than the OR) of their claim in writing, backed by evidence if required.  The notification can be by letter or anything else in writing.

In liquidations, generally all debts are provable. This means that the liquidator will 'admit' the claim in the liquidation (as long as he is satisfied that the debt is owed).

In bankruptcy, there are certain debts of the bankrupt which are not provable in the bankruptcy, which means that the Trustee will not admit the claim. Such debts include CSA assessments, fines and maintenance. Therefore, the bankrupt will still be liable to pay these debts notwithstanding the bankruptcy order. 

Since 1 September 2004 all outstanding student loans cannot be claimed in bankruptcy. They remain the responsibility of the (former) student to repay within the terms of the loan arrangement.

If a bankruptcy order was made before 1 September 2004 the student loan may still have to be repaid. Clarification should be requested from the Official Receiver who is dealing with the bankruptcy.

 What debts are excluded from bankruptcy/liquidation?

No debts incurred in the company’s name are excluded from liquidation. However, it may be that an individual, usually a director has personally guaranteed a debt, and so if the company cannot pay the debt, the director has to pay instead.

Certain debts are excluded in a bankruptcy. The most common examples are fines, maintenance and money owed under a CSA assessment. 

In what order are debts paid?

Generally, the assets are sold and the sale proceeds paid in this order:

1. Any creditor holding a fixed charge over the asset, e.g. a mortgage
2. The expenses of the liquidation/bankruptcy
3. Preferential debts, principally wages owed in the 4 months before the insolvency order, up to a maximum of £800
4. Any creditor holding a floating charge over an asset, e.g. a debenture
5. All unsecured creditors
6. In company cases, the shareholders

EFFECTS OF THE ENTERPRISE ACT 2002 ON PREFERENTIAL DEBTS

From 15 September 2003, as a result of the Enterprise Act 2002, the Crown’s preferential rights to recover unpaid taxes ahead of other creditors were abolished. This hopefully has brought real benefits to unsecured creditors, including many small firms.

In any insolvency proceedings where the petition was presented before 15 September 2003, the Crown’s preferential rights still stand.

In any insolvency proceedings where the petition is presented after 15 September 2003, there are no longer any Crown preferential rights.

The Enterprise Act does not affect the preferential claims of employees.