Bankruptcy – What does it mean for Debtors

Question: I am a Director of a wholesale cash and carry company. We employ in excess of 200 people and we have been badly hit by the downturn in the economy. We recently had to seek an extension of our overdraft with our bankers who refused to extend any further credit to the company unless I personally guaranteed the new loan facilities.

I had no choice but to agree to this or the company would have gone into liquidation. I am worried that we could run into more financial trouble in 2009 and as a result I am very concerned about my own personal assets particularly if the company cannot meet the repayments to the Bank. This could even lead to me being made a Bankrupt. Can you advise me further about what exposure I have and what exactly bankruptcy entails?

Answer: In recent months there has been a steady increase in corporate insolvency with growing numbers of receiverships, liquidations and examinerships.  You are not alone in having to give Banks guarantees over your own personal assets to ensure the survival of your company. Unfortunately this situation arises more and more where Banks are not satisfied to simply secure their loans on the company’s assets but they also want Director’s personal assets as further security.

It may be possible for you to secure from the Bank a review period after which the personal guarantee would no longer be applicable. Sometimes it is perhaps wise to consider, before personal guarantees are given, the long term future of the company. If it appears that the company faces a very uncertain future it may be a wiser course of action to consider placing the company into examinership rather than prop up the company yourself.

If the company goes into receivership the Bank will have a call on your own personal assets and could seek an Order for sale of any properties that you own or seek attachment Orders in relation to any other sources of income that you have.

Bankruptcy is a law for the benefit and the relief of creditors and their debtors in cases in which the latter are unable or unwilling to pay their debts. Bankruptcy law applies only to debtors who are individuals. The principal legislation in Ireland is contained in the Bankruptcy Act, 1988.  To be adjudicated a Bankrupt the Debtor must have committed an act for bankruptcy. The Act of Bankruptcy most commonly cited in bankruptcy proceedings is Section 7(1) F of the Act which provides that the debtor has committed an Act of bankruptcy

“if execution against him has been levied by the seizure of his goods under an Order of any Court or if a return of no goods has been made by the Sheriff or County Registrar”.

Essentially bankruptcy is a procedure whereby the assets of an individual debtor are distributed equitably among his creditors. The procedure is instigated either by the debtor himself filing for his own bankruptcy or more commonly by a creditor making an application to the Courts.  The majority of businesses today are operating as limited companies with the Shareholders being insulated from insolvency.

In your case however if you provide the personal guarantee you will not be able to avail of the protection of limited liability.  To make application to the Court a debt must be a liquidated amount and not less than €2,000.00.  When someone is adjudicated bankrupt their property vests in the Official Assignee in Bankruptcy.

The Official Assignee deals with all practical aspects of the day to day running of the Bankruptcy – such as disposing of the Bankrupt’s assets and certifying to the Court who the creditors of the Bankrupt are for the purposes of Irish Bankruptcy Law. The Official Assignees powers are set out in detail in the Bankruptcy Act, 1988. The Bankrupt is then required to disclose all property to the Court, to deliver up to the Official Assignee all of his property and there are criminal sanctions in the Act for failure to co-operate with the Court in the administration of the Bankrupt’s estate.

The Official Assignee is a legal officer who is a public servant. The assets which can be appropriated include the Family Home. Normally a Court will take into account the requirements and financial resources of the spouse and children but the interest of the creditors take priority at the end of the day.  Another restriction that is placed on the Bankrupt party is his/her ability to obtain credit and thereby continue in business. He/she cannot obtain credit over €630.00 without disclosing his/her bankrupt status. He/she cannot act as a Director or take part in the management of a company.

If the Bankrupt is in some form of employment his salary is likely to be attached in favour of the Official Assignee and any property or assets acquired subsequent to adjudication must be handed over to the Official Assignee. The Bankrupt will not be discharged until twelve years has elapsed since the date of the Bankruptcy Order.

Alternatives to Bankruptcy

The Act provides for an alternative to the Bankruptcy process known as Court Supervised Arrangement.  Under this process the insolvent debtor must petition the Court for protection against his creditors. If it agrees to grant protection the Court will direct the debtor to call a preliminary meeting of creditors to consider his circumstances which is then followed by a number of Court sittings.

This procedure is somewhat complex and expensive and really is not a suitable commercial option for insolvent debts for the following reasons:

• The debtor will require legal advice and Court representation which will be cost prohibitive.

• It’s a complex procedure which excessive Court involvement.

• The prospects of examination in Court of the debtor.

• In the current economic climate this alternative procedure really is not helpful to the survival of unincorporated small businesses nor does it offer a real alternative to bankruptcy for private individuals.

To be discharged from Bankruptcy the Bankrupt must pay off all debts and costs plus interest and the consent of all creditors have to be obtained.

On discharge of the Bankruptcy any property remaining in the hands of the Official Assignee automatically revests in the discharged Bankrupt. A discharged Bankrupt can then set up a business in the same way as anybody else and can also act a company director or manage a company. However a discharged Bankrupt will usually have great difficulty in getting future credit.