Who can be made bankrupt?
Only individuals can be made bankrupt. Bankruptcy does not apply
to companies or partnerships, although individual members of a
partnership can be made bankrupt.
How is an individual made bankrupt?
An individual is made bankrupt as a result of a
petition presented to the court, usually because
he cannot pay his debts.
The debtor, one or more of his creditors or the supervisor of a
voluntary arrangement, amongst others, may present a bankruptcy
The purpose of the bankruptcy order is to appoint a responsible
person who has a duty to collect the bankrupt’s assets and
distribute them to his creditors in accordance with the law.
Who is appointed to deal with the bankrupt’s estate?
Once a bankruptcy order is made, the court will usually appoint the
Official Receiver to administer a bankrupt’s estate. The Official
Receiver is a civil servant and an officer of the court. The Official
Receiver must then decide within twelve weeks of the bankruptcy
order whether to call a meeting of creditors to appoint a licensed
insolvency practitioner to act as trustee in bankruptcy (trustee). In
certain circumstances the Department of Trade & Industry (DTI) or
the court may make such an appointment.
This guide assumes that a licensed insolvency practitioner has
been appointed trustee.
What is the effect of the bankruptcy
order on the individual?
The bankrupt’s property vests in the trustee. The
bankrupt loses any rights to his property apart
from any equipment needed by him for use in his
business, and basic domestic equipment such as
clothes, bedding and furniture, and certain
There are special rules regarding the bankrupt’s home. Generally
speaking, if the bankrupt has equity in a house, it may have to be
sold. However, the law discourages a trustee from taking steps to
force a sale through the court during the first 12 months of the
bankruptcy where the bankrupt is married or has young children
living with him. The trustee has three years from the date of the
bankruptcy order to sell the house or otherwise deal with the
bankrupt’s interest in it. If he does not do so within that time, the
property will revert to the bankrupt. And if the value of the equity is
less than £1,000 the trustee will not be able to sell it at all.
If the bankrupt has surplus income above his needs and those of
his dependants, he may be required to make contributions to his
creditors for up to three years.
after the bankruptcy order, such as assets left to him in a will.
The bankrupt can carry on in business but with
the following restrictions:
The bankrupt must not obtain credit of more
than £500 from anyone without telling that
person that he is an undischarged bankrupt.
The bankrupt must not carry on business
under a name different from that under which he was declared
bankrupt without disclosing the fact that he is an undischarged
The bankrupt must not act as a director of a company or be
involved in its management without the court’s consent.
What are the powers of the trustee?
The trustee’s powers are wide and include powers to sell the
bankrupt’s assets, to carry on the bankrupt’s business, to bring and
defend legal proceedings, and to pay dividends to the bankrupt’s
creditors. He also has wide investigatory powers. Some of the
trustee’s powers can only be exercised with the agreement of the
creditors’ committee (or if none the DTI) or the court.
Does the trustee pay unsecured creditors
the money owed to them?
Secured and preferential creditors’ debts are paid
before unsecured creditors. Secured creditors are
those that have some form of security over a
bankrupt’s property (for instance a building
society where a bankrupt has a mortgage).
Secured creditors are entitled to be repaid their
debt out of the proceeds of sale of the secured
asset in priority to other creditors.
Preferential creditors are a special category of unsecured creditor.
They consist mainly of certain debts due to employees and the
Redundancy Payments Service and are paid in priority to all other
The trustee will pay a dividend to unsecured creditors if enough
funds have been realised from the bankrupt’s assets after paying
costs, secured creditors and preferential creditors.
When all claims have been adjudicated or provided for, the
trustee will declare a dividend. The dividend will be a percentage
(pence in the pound) of each creditor’s total admitted claim, based
on the total cash available for distribution to the creditors and the
total of all creditors’ claims. All unsecured creditors are treated
Six months after writing off the debt in your accounts you can
claim Bad Debt Relief from HM Customs and Excise for VAT you
How do I make a claim in the bankruptcy?
The trustee will write to all known creditors
asking them to submit their claims. You should
submit your claim to the trustee in writing within
the specified time limit. You should also send
enough supporting evidence of your claim, e.g.
copy statements, invoices, correspondence etc. to
allow the trustee to decide whether or not your
claim is valid. The trustee will not necessarily
acknowledge receipt of your claim, but will advise
you when he has adjudicated your claim. Any
costs incurred in submitting your claim will not be reimbursed.
You may claim interest on your outstanding debt up to the date
of the bankruptcy order if your debt bore interest, if it was payable
at a previous date under a written instrument, or if you had
previously demanded it in writing with notice that you would claim
interest. You will not get interest on your claim accruing after the
date of the bankruptcy order unless all creditors can be paid in full.
If you believe that you own something in the bankrupt’s
possession, you should contact the trustee as soon as possible with
full proof of ownership and be prepared to identify what you are
claiming. The trustee will examine your claim carefully before
deciding whether to release the goods in question, pay you for
them, or otherwise.
How will the trustee adjudicate my claim?
The trustee will consider your claim and any supporting information.
He will compare your claim to the bankrupt’s records and any other
available information, and may discuss the claim with the bankrupt.
The trustee may ask you for additional information or evidence if he
thinks you have not sufficiently proved your claim. For example, if
you have supplied goods to the bankrupt, the trustee may ask you
to provide copies of signed delivery notes.
The trustee may agree your claim in full, or in part, or he may
reject your claim if he does not think it is valid.
What can I do if I believe the trustee has unfairly rejected
You should first discuss the matter with the trustee. If you cannot
reach agreement you can, within 21 days of rejection, appeal to
court. After 21 days, if you do not apply to the court, the
adjudication is final.
Does the trustee have to fulfil contracts
entered into by the bankrupt prior to his
A trustee has a general duty to maximise the level
of dividend to creditors. The trustee may decide
not to fulfil a contract if it does not benefit
creditors as a whole. If the trustee chooses not to fulfil a contract,
the other party may have an unsecured claim in the bankruptcy for
breach of contract.
Is the trustee liable for sums due under contracts entered
into by the bankrupt after the bankruptcy?
No. The bankrupt can continue to trade after the bankruptcy order
(with the conditions noted above). Any new debts created cannot be
claimed in the bankruptcy.
As an unsecured creditor, what information am I entitled
The Official Receiver must send at least one report to creditors after
his appointment. This will usually contain a statement of affairs
completed by the bankrupt showing details of his assets and
The trustee has no duty to report to creditors on the progress of
the bankruptcy until the bankruptcy is complete or until he plans to
pay a dividend. The trustee may call meetings of creditors or send
written reports to creditors if there are any major developments in
the bankruptcy. If you would like information on progress at any
time you should contact the trustee.
You may also require the trustee to hold a meeting of creditors if
you have the support of 10% of creditors (by value of debt).
When the bankruptcy has been completed, the trustee will call a
final meeting of creditors and present a report on the bankruptcy.
How can I help the trustee to achieve the best possible
outcome for creditors?
The unsecured creditors can form a creditors’ committee to help the
trustee (see below). You should also tell the trustee if you believe the
bankrupt has assets, income or business interests he has not
disclosed, or if you think you have any information that might be
useful to the trustee.
Can the unsecured creditors form a creditors’ committee?
Yes. A creditors’ committee may be appointed at a meeting of
creditors and must consist of at least three and not more than five
The creditors’ committee receives reports from the trustee and
may meet periodically. It assists the trustee, approves his
remuneration and sanctions the exercise of certain of his powers.
Creditors’ committee members are not paid, but will receive their
reasonable travelling expenses as a cost of the bankruptcy.
How is the trustee’s fee determined?
The creditors’ committee (if there is one) or the creditors agree the
trustee’s fee, failing which it will be determined in accordance with a
statutory scale or fixed by the court. The fee can be fixed as apercentage of the assets realised or distributed (or both), or by
the time properly spent by the trustee and his staff;
the complexity of the case;
any exceptional responsibility borne by the trustee;
the effectiveness with which the trustee carries out his duties; and
the value and nature of the bankrupt’s assets.
R3 has produced a separate guide explaining insolvency office
holders’ remuneration, which is available from the person who gave
you this guide.
When will the bankrupt be discharged
The bankrupt will usually be discharged from
bankruptcy automatically after one year, or
sooner if the Official Receiver decides to close
his file early. Once discharged, the bankrupt is
released from his bankruptcy debts, and can
begin to trade again or be a company director
without the restrictions mentioned above.
However, if the bankrupt’s conduct has been
irresponsible or culpable in some way he may
have restrictions imposed on him for up to 15
years, notwithstanding his discharge.
After he has been discharged, the bankrupt does not have any
right to take back from the trustee any property that was part of his
estate in the bankruptcy. However, if there is a surplus after
payment of all creditors in full plus interest, then this is returned to
the bankrupt. In the meantime, the trustee will continue to hold
these assets and apply them to the bankrupt’s creditors.
When does the trustee cease to act?
The trustee may continue to act after the
bankrupt has been discharged if he needs to
continue in office, for example if there are still
assets to realise or creditors’ claims to be
Also, the trustee may cease to act before the
bankrupt has been discharged if he has
completed his work by that time.
What should I do if I am dissatisfied with the trustee’s
handling of the case?
You should first contact the trustee to try to resolve the problem. If
you are still not satisfied, you may be able to make an application to
If you think that the trustee is guilty of professional misconduct,
you should contact his regulatory body.