Bankruptcy and protected trust deeds
Bankruptcy and protected trust deeds (PTD) are discussed in Chapter 6. Bankruptcy may often be the most satisfactory way out of the large debts that can arise after the failure of a business. Bankruptcy does not necessarily mean a sole trader must cease trading, particularly if there are no assets of significant value. However, remember that although discharge from bankruptcy may occur after one year, a person’s credit rating is affected for considerably longer ( a notification of bankruptcy remains on an individual credit file with all credit reference agencies for six years unless they are subject to a Bankruptcy Restriction Order (BRO) and, if the client wishes to run a business that will require credit in the future, bankruptcy can be an obstacle to securing credit. Someone with an otherwise viable business but serious debts may be better advised to consider a PTD.
In most cases, if a partner in a business partnership applies for individual bankruptcy, the business partnership may be dissolved as this could be written into the partnership agreement.
If all partners wish to go bankrupt, then a joint partnership application may also have to be made.
The sequestration of the estate of a partnership is:
•by debtor application made by the partnership where the partnership is apparently insolvent; or
•by debtor application made by the partnership with the concurrence of a qualified creditor or qualified creditors, or
•on the petition of:
◦a trustee acting under a trust deed; or
◦a qualified creditor or qualified creditors, if the partnership is apparently insolvent.
A ‘qualified creditor’ means a creditor who, at the date of the presentation of the petition, or as the case may be at the date the debtor application is made, is a creditor of the debtor in respect of relevant debts which amount (or of one such debt which amounts) to not less than £5,000 and ’qualified creditors’ means creditors who, at the date in question, are creditors of the debtor in respect of relevant debts which amount in aggregate to not less than £5,000.1s7 B(S)A 2016 The whole point of joint and several liabilities of partners is to enable a creditor to pursue any one partner for the whole of the debt due by the firm to them. You should seek help and advice if this arises.
However, if the trustee finds that the bulk of assets revealed to them by the client are, in fact, ’partnership’ assets which, being assets of a separate legal person, do not vest in the trustee by virtue of their appointment.
When a trustee becomes aware of such a situation, they should send a notice to all creditors advising them:
•that as the trustee of the estate of the individual partner they cannot realise or otherwise deal with the partnership assets; and
•that they have no title to petition the courts for bankruptcy of the partnership to secure protection for those assets, but creditors of the partnership may; and
•point out that, unless action is taken by a partnership creditor, those partnership assets are at risk and may disappear.
The other partners, and the partnership itself, may then face recovery action from their creditors.
In these circumstances, it would then be open to the trustee(s) of the individual partners to petition for the bankruptcy of the partnership.
If the business is a limited company creditors can apply to have the company wound up, appoint an administrator or liquidate the company.
A client cannot act as a director of a limited company or member of a limited liability partnership while they are subject to a bankruptcy order unless they get permission from the court.