Bankruptcy law is designed both to assist creditors and protect debtors. In the absence of insolvency law, a creditor who is first to obtain a judgment/court order and enforce against a debtor could potentially take and keep all the debtor’s assets to the exclusion of all other unsecured creditors. This would lead to a race to enforce and would leave many creditors with nothing.
Bankruptcy also protects the debtor, but at the price of surrendering all of assets, with limited exceptions. Since 2013, the legislation has sought to facilitate a structured arrangement with creditors as an alternative to bankruptcy.
The essence of bankruptcy is that the debtor’s assets are transferred to an official who administers them for the benefit of all creditors. The purpose is to treat all creditors equally (although certain types of creditor enjoy priority). The debtor’s unsecured assets are made available and shared between all of his creditors proportionately.
Bankruptcy may be of limited value for creditors, where most assets are mortgaged. With mortgaged assets, each secured creditor is entitled to the benefit of security, where the security is worth less than the debt. The effect of bankruptcy will generally be to remove the personal liability for the balance of the debt.
Bankruptcy is commenced on the application of the debtor himself or a creditor. There are a number of grounds on which a creditor can apply They are called acts of bankruptcy. An application for a bankruptcy order is made by way of a petition based on an act of bankruptcy within the previous three months. The most common act of bankruptcy is that the debtor has failed to satisfy a bankruptcy summons. There need not be a court order for the debt.
The petition is a particular type of court application. Ultimately, a person may be made bankrupt by court order or “adjudication” on foot of the petition. In practice the court is likely to grant several adjournments to facilitate alternative and sometime in relief of the debtor. A bankruptcy order will only be granted where absolutely necessary and where there is no alternative
The Bankruptcy process is more formal and court based than the revised personal insolvency provisions introduced in 2012. While the Personal Insolvency legislation facilitates extra-judicial (non-court) arrangements with creditors, they are essentially voluntary in nature except as regards minority creditors who do not accept the majority decision. Even in the latter case, the non-consenting creditors have the right to apply to the court on the basis of procedural impropriety or manifest unfairness.
Acts of Bankruptcy
Bankruptcy proceedings are commenced by way of a petition made in the High Court. It is founded on a so-called “act of bankruptcy” committed by the debtor concerned within the previous three months. The petition may be made by a creditor or by the debtor himself.
The failure to satisfy a demand under a Bankruptcy Summons, (even without a judgment / court order for payment) is an act of bankruptcy.
It is an act of bankruptcy where execution is made by the seizure of the debtor’s goods under a court order. Formerly it was common to base an application on a return by the sheriff, indicating that there are no goods available for seizure. In Harrahill v. Cuddy, in 2009 the Supreme Court stated that the practice which had developed in the High Court whereby an unsatisfied judgment and a return of no goods was required before a bankruptcy summons would issue, was incompatible with the Bankruptcy Act.
A petition may be based any of a number of other defined acts of bankruptcy, each of which is an indication of insolvency. They include such matters as the bankrupt making fraudulent transfers of his assets, evading creditors by leaving the jurisdiction, absconding, making transfers for the benefit of his creditors, i.e. a voluntary arrangement. Each is a sufficient basis for an application for an adjudication of bankruptcy
Debtor’s Petition or Declaration
The debtor himself may also file a declaration of insolvency in Court in order to initiate his own bankruptcy. In most cases, the better course would be to seek a debt settlement arrangement or personal insolvency arrangement. The petition for bankruptcy may made where the protective certificate is refused, is not available or expires.
A debtor may make a declaration of his own insolvency, before a solicitor in a particular format. This may be used to facilitate a creditor making an application for bankruptcy on the basis of this declaration of insolvency.
If the petitioning debtor himself seeks his own bankruptcy, this is a declaration of insolvency and is itself basis for a bankruptcy application. The debtor’s petition may enable him to obtain immediate protection from creditors and an ultimate discharge where an arrangement cannot be negotiated. This possibility itself forms the context for negotiation of an arrangement. Bankruptcy is also the “default” position when an arrangement fails.
Debtor’s Petition Requirements
The debtor must be insolvent (unable to pay his debts in full as they fall due.). He must qualify on residence and centre of main interest grounds.
The debtor’s petition must undertake to advertise the adjudication. This may now be done online on the Insolvency Service website at no cost. The debtor’s net liabilities must be at least €20,0000. He must lodge €200 toward costs.
He must swear an Affidavit stating that he has made reasonable efforts to make use of the alternative arrangements to bankruptcy such as DSA or PIA. He must present a Statement of Affairs and disclose that debts exceed assets by more than €20,000.
Before making an adjudication, the Court shall consider the nature and value of the assets available to the debtor, the extent of his liabilities, and whether the debtor’s inability to meet his engagements could, having regard to those matters and the contents of the debtor’s statement of affairs filed with the Court, be more appropriately dealt with by means of a Debt Settlement Arrangement, or a Personal Insolvency Arrangement.
Where the Court forms such an opinion the court may adjourn the hearing of the petition to allow the debtor an opportunity to enter into such of those arrangements as is specified by the Court in adjourning the hearing.
The most common basis for a bankruptcy petition is an unanswered Bankruptcy Summons. Where a Bankruptcy Summons has been served, and the debtor does not pay a fixed undisputed debt within 14 days, there is an act of bankruptcy. A bankruptcy summons is based on an unsatisfied liquidated debt, for at least €20,000.
There is a two-step procedure. The debt must be first demanded. The debt must be immediately due and owing. It must be for a fixed or liquidated sum. A claim for a sum due for goods where there is no dispute on the underlying sale is a liquidated sum. In contrast, a general claim for compensation is not fixed or liquidated until a court order is made adjudicating the level of liability.
Where the dispute relates only to the amount claimed, the Court may allow the bankruptcy to proceed provided there is sufficient amount which is uncontested, which exceeds the minimum required amount.
Issue of Bankruptcy Summons
The Bankruptcy Summons may issue on foot of an application to the court (offices) where it is shown that the debtor has not paid an undisputed fixed sum debt on foot of the demand / bankruptcy notice in the prescribed form. The debt must be for at least €20,000. The Summons does not issue as of right. There is a discretion to refuse it. A debtor may apply to have a summons dismissed.
The requirements for the issue of a Bankruptcy Summons are strict. This is rationalised on the basis of the serious legal consequences, which may follow for the debtor. The failure to pay or settle a bankruptcy summons within 14 days is act of bankruptcy order.
The creditor who applies for a Bankruptcy Summons is obliged to disclose all relevant information relating to the debt, including any possible grounds of dispute. The courts must be satisfied that the bankruptcy procedure is being used bona fide for the purpose of securing the payment of the debt. It there is an ulterior motive or the procedure is undertaken vindictively or to secure some other purpose, the court may not allow it.
Bankruptcy Summons Requirements
The bankruptcy summons is in a prescribed form. Details of the demand must be endorsed on the bankruptcy summons. It ontains specified information including, in particular, the consequences if it is not paid, the debtors entitlement to dispute the debt by filing an in affidavit within 14 days and the debtor’s option to apply for court protection.
The bankruptcy summons must be served personally on the debtor within 28 days of its date. Where personal service cannot be achieved within this time limit, an application may be made to Court to allow service in some other way. An affidavit or service must be made in relation to service.
A debtor may apply to have a summons dismissed. The court may dismiss the Summons if satisfied that there is a bonafide issue, which is properly, the subject of a court dispute.
The debtor may apply to have the Bankruptcy Summons set aside. This may happen because the money has been paid or where there is a dispute about the monies being due in the first place.
Other Acts of Bankruptcy
A fraudulent conveyance or fraudulent preference is itself an act of bankruptcy. A fraudulent conveyance arises where there is an intention to delay or defeat creditors by putting assets, which might be the subject of enforcement by creditors, out of their reach.
A fraudulent conveyance will almost always be at undervalue, but it need not necessarily be so, where there is an intention to liquidate or make the assets difficult to trace. The legislation provides for the reversal of such pre-bankruptcy transfers so that assets are brought in the benefit of creditors generally.
A fraudulent preference involves a transfer to a creditor in such a way as to defeat the proportionate distribution of an insolvent debtor’s assets amongst creditors. As with a fraudulent conveyance, a fraudulent preference of itself is an act of bankruptcy. Each will immediately form a basis for a bankruptcy petition in itself.
It is an act of bankruptcy, where a person with the intention to defeat or delay his creditors, leaves the State, remains outside the State or otherwise absents himself or evades his creditors. The requisite intention must be shown.
Failure of Insolvency Arrangement
An arrangement with creditors which involves the assignment of assets for the benefit of creditors generally, outside of judicial bankruptcy process, is itself an act of bankruptcy. There prescribed types of arrangements with creditors which are binding. Where the requirements for a binding arrangement are not fulfilled, for example by the failure to achieve the requisite majority, there is an act of bankruptcy.
Where the debtor enters a formal personal insolvency arrangement under the 2012 personal insolvency legislation, those creditors who are bound by the arrangement may not seek bankruptcy. However, there is deemed to be an act of bankruptcy
- where a debtor has been subject to a Debt Settlement Arrangement which has been terminated or which is deemed to have failed
- where a debtor has been subject to a Personal Insolvency Arrangement which has been terminated or which has failed
Petition for Bankruptcy
The petition for Bankruptcy must be presented within three months of the act of bankruptcy. Strictly speaking, the court has no discretion to refuse an adjudication of bankruptcy where the requisite conditions are complied with. The adjudication may be challenged by the debtor on the grounds of validity within a set period.
The application for issue of the Petition is made to the Examiner’s office. The Examiner’s office fixes the date for a court hearing. The date for the hearing is fixed and endorsed on the Petition. The petitioner must also lodge €200 towards the costs and outlays of the bankruptcy with the Bankruptcy Division of the ISI and give an undertaking to the Official Assignee to cover any further costs and outlays which may be incurred. The court may require him to lodge additional funds.
When the petition is filed, the petitioning creditor undertakes to the court to advertise notice of the bankruptcy in the Iris Oifigiúil and a national daily newspaper. There is an alternative to the requirement to advertise details of the petition by publishing details of the bankruptcy on the ISI website.
Petition Requirements I
A petition may be made for bankruptcy within three months of the date of an “act of bankruptcy,” i.e. one of the above grounds of bankruptcy. The petition is an application to the court which sets out certain requirements in the bankruptcy rules. The petition is made to the High Court.
The petition is a formal court document prepared by the creditor’s solicitor, certified and issued by the Court Offices. Once a petition is filed, the Examiner (a court official) appoints a time at which the petition is to be heard.
The Petition must contain certain information including confirmation that the debt is still outstanding and the basis of the defendant’s connection with the State. It must incorporate an agreement to advertise or publicise notices of the adjudication. A secured creditor must disclose his security. The petitioner must indemnify the Official Assignee in relation to costs and expenses allowed by the court.
Petition Requirements II
A Bankruptcy Petition must not be used for an ulterior purpose. It must not be issued without reasonable and probable cause. If this was to occur and the process was to be abused, the debtor may have a civil action against the petitioning creditor.
The petition seeking bankruptcy must be grounded on an affidavit, setting out the basis on which it is made. The affidavit supports the petition. It must be in a form that is prescribed. It must prove the act of bankruptcy which is relied on. Where the act of bankruptcy is the failure to pay a Bankruptcy Summons, this must be recited. It must be confirmed that the debt has not been paid or otherwise settled. The Petitioner must swear the truth of the matters set out in his affidavit.
Since commencement of the personal insolvency arrangement legislation in 2013, a debtor may not present a petition for adjudication unless the petition is accompanied by an affidavit sworn by the debtor that he has, prior to presenting the petition, made reasonable efforts to reach an appropriate arrangement with his creditors relating to his debts by making a proposal for a Debt Settlement Arrangement or a Personal Insolvency Arrangement to the extent that the circumstances of the debtor would permit him to enter into such an arrangement.
Residence and Connection to Ireland
The bankruptcy legislation provides that a debtor (whether a citizen or not) who is domiciled in Ireland or who is or has within three years been, ordinarily resident, has carried on business in the State, either as a sole trader or a partner or who has or has had a home or place of business in the State, may be adjudicated bankrupt in Ireland.
The EU Regulation on Cross-Border Insolvency requires that the debtor’s “centre of main interests” are in Ireland. If the centre of mains interest is elsewhere in the European Union, that is the proper place to commence bankruptcy proceedings. See the chapter on the EU Regulation on cross border insolvency.
The Revenue Commission may issue a Summons and present a bankruptcy petition for taxes owed in Ireland. Notwithstanding the historic norm that States did not enforce each other’s revenue debts, an EU revenue authority may present petitions for bankruptcy under EU law.
Suspension of Proceedings and Enforcement
Once a bankruptcy petition issues, all uncompleted legal enforcement against the debtor is stopped. No enforcement action can be taken. Litigation and claims against the debtor are suspended. Generally, claims for money owed must be brought through a claim in the bankruptcy.
The Official Assignee can apply to have proceedings stopped or restrained. Legal proceedings will generally be stopped on such terms, as the court thinks appropriate. Some assets such as leases and legal agreements terminate automatically by their terms if the holder is made bankupt.
The proceeds of execution of a Court order must be retained by the Sheriff for 21 days. If bankruptcy commences in this period, the proceeds are sent to the bankruptcy official rather than the creditors. For example, if a sheriff has taken goods in satisfaction of a court order and given them to be a creditor, the creditor may keep them. However, if the process has not been completed, then bankruptcy will freeze enforcement and the assets collected by the sheriff must be turned over to the bankruptcy trustee or Official Assignee.
On adjudication of bankruptcy, creditors may not take action against the bankrupt’s person or property without Court consent. However, a secured creditor can realise its security separately from the bankruptcy. The options in respect of secured creditors are set out in another chapter.
Where a petition of bankruptcy or a petition for arrangement is presented, the Registrar of the court shall furnish the Proeprty Registation Authority with notice of the presenting of the petition and Land Registry or Registry of deeds shall cause an entry to be made in the register inhibiting, for a period of three months from the date of the petition, any dealing with any registered land or charge which appears to be affected.
Where, after a bankruptcy summons has been granted against a debtor and before a petition to adjudicate him bankrupt can be presented against him, it appears to the Court that there is probable cause for believing that he is about to leave the State or to otherwise abscond with a view to avoiding payment of the debt for which the bankruptcy summons was issued or avoiding examination in respect of his affairs or otherwise avoiding or delaying proceedings in bankruptcy, the Court may cause such debtor to be arrested and brought before the Court.
No arrest under this section shall be lawful unless the debtor, before or at the time of his arrest, is served with the bankruptcy summons.On the debtor offering such security, or making such payment or composition as the Court thinks reasonable, he shall be discharged from custody unless the Court otherwise orders.
Hearing of Petition I
The petition is listed and heard before the High Court. A copy of the Petition must be served at least seven days before the bankruptcy hearing. It must be served personally on the debtor. The court may order substituted service if personal service cannot be effected. Proof of service must be lodged prior to the hearing.
The debtor may appear and object at the hearing of the petition. He may challenge the grounds or procedure. He may seek relief by way of adjournment, where there are no grounds to refuse the petition. The courts have been always willing to the debtor one or more opportunities to pay or enter an agreement with the creditors.
Since the Personal Insolvency arrangement, they must now consider whether an insolvency arrangement is more appropriate.
Hearing of Petition II
The Court must consider in a creditor’s petition having regard to the debtor’s assets and liabilities, consider whether the debtor’s inability to pay his/her debts could be more appropriately dealt with by a Debt Settlement Arrangement or a Personal Insolvency Arrangement. Where the Court considers either of these alternatives to be more appropriate, it may adjourn the hearing of the petition to allow the debtor the chance to enter one of these alternative arrangements.
If the Court is satisfied that the relevant act of bankruptcy has occurred, that an arrangement is not appropriate or available and that the procedural and other requirements have been complied with, it must (in principle) adjudicate the debtor bankrupt. In practice, the Courts are reluctant to lightly adjudicate a person bankrupt on foot of a creditor’s petition. They are likely to grant several adjournments either in relief of the debtor.
The petitioning creditor must present his petition and prosecute it at his own cost. The court shall, after the hearing of the creditor’s petition, make an order for payment of costs out of the estate of the bankruptcy, in accordance with the priority set out in the court rules.
Upon an adjudication of bankruptcy, all of the debtor’s assets vest in the Official Assignee. If assets are subject to a risk of dissipation, the petitioner may apply to the court which may appoint a receiver or manager over part or all of the debtor’s assets. The receiver or manager may take possession of those assets and manage them on a temporary basis.
The Court shall cause notice of the adjudication to be given as soon as may be in the prescribed manner in Iris Oifigiúil, and in at least one daily newspaper circulating in the State, or by the publication of the notice on the website of the Insolvency Service of Ireland.
The Court, on adjourning an application to show cause against adjudication by the debtor, may stay publication of notice of the adjudication on security being given by the bankrupt or on such other conditions as the Court.
Post Adjudication Cause
The bankrupt may, within three days or such extended time not exceeding fourteen days as the Court thinks fit from the service of the copy of the order of adjudication on him, show cause to the Court against the validity of the adjudication.
On an application to show cause the Court shall, if within such time the bankrupt shows to its satisfaction that any of the requirements for a petition have not been complied with, annul the adjudication and may, in any other case, dismiss the application or adjourn it on such conditions as the Court thinks fit, having regard to the interests of the bankrupt, his creditors and any persons who might advance further credit to him.
Annulment or Release
Apart from the general right to show cause within 14 days, a person who has been adjudicated bankrupt, may challenge the bankruptcy at any time by showing that the bankruptcy proceedings were invalid. A person is entitled to an annulment of his adjudication where he has shown cause or where in the opinion of the Court, he ought not to have been adjudicated bankrupt.
An annulment is effectively a declaration that the original adjudication was invalid. Upon annulment, the effect of the adjudication is reversed. An order of annulment provides that any property of the bankrupt then vested in the Official Assignee shall be revested in or returned to the bankrupt. The court may impose conditions, as to steps taken in the meantime in reliance on the adjudication.
The procedure undertaken may have been fundamentally flawed. The alleged debt may be contested and the subject of dispute. The court may not have had jurisdiction. For example, the debtor’s centre of main interest may be such that the court did not have jurisdiction to make the bankruptcy adjudication.
Exceptionally a bankruptcy itself may be released or varied. This is different to the annulment procedure, which implies invalidity from the outset. A release of bankruptcy has been allowed in exceptional cases, as for example, where all the relevant creditors consent to the release.
References and Sources
Burke & Comyn Personal Insolvency Law 2014
Bracken Practioner’s Personal Insolvency Handbook 2013
Law Society (Wright) Insolvency Law 2009
Sanfey & Holohan Bankruptcy Law & Practice2nd Ed 2010
Farry, Holohan Consolidated Bankruptcy & Personal Insolvency Legislation2013
Forde & Simms Bankruptcy Law 2nd Ed 2009
Insolvency Law and Practice (Report of the review committee chaired by Sir Kenneth Cork CBE, 1982, Cmnd 8558) (the Cork report)
V Finch, Corporate Insolvency Law: Perspectives and Principles 3rd Ed 2017
A Keay and P Walton, Insolvency law: corporate and personal (4rd Ed, 2017)
Marsh Bankruptcy Insolvency and the Law 2016
WW McBryde, Bankruptcy 2nd Ed, 1995
Butterworths Insolvency Law Handbook 14th Ed 2012
Core Statutes on Insolvency Law and Corporate Rescue (annual editions)
Bankruptcy Act 1988
Personal Insolvency Act 2012
Personal Insolvency (Amendment) Act 2015
Bankruptcy (Amendment) Act 2015
Bankruptcy Act 1988 (Commencement) Order 1988, S.I. No. 348 of 1988
Bankruptcy Act, 1988 (Alteration of Monetary Limits) Order 2001, S.I. No. 595 of 2001
Bankruptcy Act 1988 (Official Assignee Accounts and Related Matters) Regulations 2013, S.I. No. 464 of 2013
Bankruptcy (Amendment) Act 2015 (Commencement) Order2016, S.I. No. 34 of 2016
Rules of the Superior Courts (Bankruptcy) 2013, S.I. No. 461 of 2013
Rules of the Superior Courts (Bankruptcy) 2016, S.I. No. 232 of 2016
Rules of the Superior Courts (Bankruptcy) 2012, S.I. No. 120 of 2012
Bankruptcy (Amendment) Act 2015 (Commencement) (No. 2) Order 2016, S.I. No. 253 of 2016