Bankruptcy is the ultimate insolvency procedure for individuals who can either petition the Court for their own bankruptcy or, alternatively, are made bankrupt upon the petition of a creditor.
Bankruptcy arises in similar circumstances to company insolvency where an individual cannot manage payments to some or all of his/her creditors or where the pressures of debt and the lack of assets or income lead to a need for such circumstances to be brought to an end, often resulting in the cycle of “borrowing from Peter to pay Paul”.
Events preceding bankruptcy
Bankruptcy can be a straightforward process where an individual decides that s/he has too much debt and files a short form application to Court (a “petition”) requesting that a Bankruptcy Order be made. This is a straightforward process often carried out on paper.
Alternatively, a debtor may have been subject to an Individual Voluntary Arrangement or similar compromise with creditors where the proposed payments have not been achieved and, as a result, the arrangement is brought to an end by the individual being declared bankrupt.
To be declared bankrupt on a creditor’s petition, the creditor will often have to obtain a County Court judgment, which can take time and be costly in legal fees, especially where bankruptcy is the eventual outcome. Alternatively, where a debt is undisputed, a creditor may serve a statutory demand upon the individual and, if it is not paid or set aside within 21 days, they can then petition for bankruptcy based on the Statutory Demand (a more cost effective process).
Disqualification as a result of bankruptcy
Once a Bankruptcy Order has been made against you, under the Company Director’s Disqualification Act 1986 you are automatically disqualified from acting as a director of a limited company, a partner of a Limited Liability Partnership and various other types of charitable organisation.
Disqualification as a director also encompasses a prohibition from acting in the promotion, formation or management of any such entities, and this includes acting as a director (even though not recorded as one at Companies House), often referred to as shadow directors or de facto directors.
How long is a bankrupt individual disqualified as a director?
A bankrupt individual is disqualified from acting as a director until s/he is discharged from bankruptcy in accordance with the Insolvency Act 1986 (as amended). For all Bankruptcy Orders made after 1 October 2013, discharge from bankruptcy happens automatically 1 year after the date of the Bankruptcy Order.
No application to Court is necessary in such circumstances, the discharge is automatic. As a result, a debtor who is made bankrupt must resign as a director immediately but is able to be reappointed 1 year later.
Exceptions to discharge from bankruptcy
Where an individual has not cooperated with the Official Receiver or his/her trustee in bankruptcy, or is considered to be liable for misconduct leading up to bankruptcy (for example borrowing money you knew would not be repaid) then they may be made subject to a Bankruptcy Restriction Order or, with their agreement, a Bankruptcy Restriction Undertaking.
This may last for a period of time during which the bankrupt will not be discharged from bankruptcy. Accordingly, during the period of a Bankruptcy Restriction Order or a Bankruptcy Restriction Undertaking, disqualification as a director will continue.
Only once this undertaking/order comes to an end, which may be some years later, will the bankrupt individual be discharged from bankruptcy and be released from disqualification as a director.
Acting as a director earlier (whether recorded at Companies House or not) will comprise a criminal offence, which could lead to prosecution.
At Francis Wilks & Jones we are able to advise on any risk you or your business may face as a result of bankruptcy or any threatened bankruptcy restriction proceedings.
Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.