Order of Entitlement
In bankruptcy, the trustee in bankruptcy or Official Assignee takes control of all of the debtor’s assets, except a limited number of excluded assets, and sells or realises them for the benefit of the creditors.
In distributing the proceeds of the sale of the bankrupt’s assets, the fees and expense of the bankruptcy official are first deducted. Certain creditors including the Revenue Commissioners and certain employee payments have a right to prior payment, as so-called “preferential” or preferred creditors. They rank equally as between themselves, so that if there is not enough left to pay their claims in full they are each paid the same proportion of their claims
Secured creditors’ securities do not fall within the scope of bankruptcy. Unsecured creditors will only receive any remaining assets after payment of preferential creditors in full. Frequently, the unsecured creditors will receive little or nothing, because they rank behind the costs of bankruptcy and the Revenue Commissioners, who are frequently a significant creditor.
Unsecured creditors are treated equally. The principle is that they should receive proportionate payment from the available monies, it any. Unsecured creditors will usually constitute the majority in value of creditors. They will receive payment only if there is a surplus after payment of liquidation costs and expenses and those with a statutory preference.
Clauses in contracts and leases that attempt to reverse the usual insolvency rules, may be held to be void.
Each creditor of the bankrupt must prove his debt. The Official Assignee requests proof of debts by way of Affidavit. The Official Assignee is required to give notice by advertisement in Iris Oifiguil and in such newspapers as he thinks fit, of the time fixed for proving the debt. The proof will usually be by way of statement of account, Affidavit or other such means.
Debts include cover present and future liabilities including tax, penalties and fines. Debts range for sums acknowledged to be due such as the agreed unpaid price for goods sold to contingent liabilities and disputed sums.
The Bankruptcy Court may consider whether debts are or are not validly due. The court will examine the validity of the debts as required. In the case of a liability for an uncertain amount, such as a claim for breach of contract or for a civil wrong, it is usually necessary to have a court ascertain the extent of the liability concerned. The courts may make an assessment of the extent of liability.
Contingent Liabilities and Guarantors
A contingent liability is one which may or may not occur in the future. Its extent may be uncertain. Present and future liabilities, whether or not contingent may be proved in the bankruptcy. The court may, if necessary, make an estimate of the liability.
In the case of a contingent liability, an estimate of the amount due is made. If the liability occurs during the bankruptcy, the creditor may revise his claim, provided that this does not affect prior distributions of monies.
A guarantor may prove in the bankruptcy if he has paid the principal liability. Debts which are void and unenforceable may not be proved in the bankruptcy in accordance with the principles of unlawful and unenforceable contracts.
Interest may be due on the debt in accordance with the terms of the underlying contract, for the period prior to adjudication. Interest is due on unpaid judgment debts at a rate prescribed by law, which may be varied from time to time. There is a statutory right to interest on late payments of debts, both against governmental bodies and against private individuals.
There is a procedure under Victorian legislation by which notice can be given that interest will be claimed on overdue monies from a particular date of demand. Upon all debts or sums certain, payable at a certain time or otherwise, interest may be allowed at a rate not exceeding the current rate of interest, from the time when such. The interest shall not be so allowed for any period exceeding six years. It becomes payable notwithstanding that there is no contractual or another statutory right to interest.
The Bankruptcy Act (as amended in 2011) provides that where interest or any pecuniary consideration in lieu of interest is reserved or agreed for on a debt which is overdue at the date of adjudication or order for protection, the creditor shall be entitled to prove or to be admitted as a creditor for such interest or consideration up to the date of adjudication or order for protection. There is no provision for interest after adjudication of bankruptcy.
There is no explicit provision for discounting future liabilities to a present-day sum. However, the court has a discretion in relation to sums due in the future, so that discounting in principle be allowed.
Proof of Debt
The Assignee or trustee will fix a time limit for submitting proofs of debt. Notice is published in Iris Ofigiul and in newspapers. It is sent by post to known creditors, at least 10 days before the closing date. Notices may be given electronically under the amended a Court rules.
A debt is proved by completing a form setting out prescribed particulars and submitting it to the Official Assignee. An affidavit may be required. The Official Assignee may require additional information. He may require the creditor to attend to prove the debt.
The creditor may be examined in court. A creditor must disclose any counterclaim or defence of which he is aware. He must declare whether or not he has security for his debt. Failure to do this may constitute a waiver of the security.
The Official Assignee takes the bankrupt’s assets subject to such charges, mortgages and liens over the bankrupt’s assets as exist. In some cases, the bankrupt will appear to hold assets, which are in fact subject to third party rights. Third party’s rights survive in the bankruptcy so that the assignee can take no better title than that which the bankrupt held.
Secured creditors are entitled to the proceeds of the sale of the secured assets. Secured assets do not vest in the Official Assignee or trustee to any greater extent than applies to the bankrupt person. The security comprises proprietary rights in the assets (which belong to the security holder) and are not available to the creditors generally. Any equity of the bankrupt in the secured asset vests in the Official Assignee or trustee.
Sometimes there are disputes between the Official Assignee or trustee regarding the validity of charges and security. There are procedures by which the validity of security may be challenged and determined by court on the initiative of an interested party.
A judgment mortgagee is not a secured creditor and has no priority, unless his judgment mortgage is registered for at least three months prior to bankruptcy.
Options for Security Holder
The secured asset is not included in the assets available for distribution to the borrower’s unsecured creditors. The basic rule is that a secured creditor cannot claim against the insolvent person’s assets and claim its security at the same time. The secured creditor may do the following:
- retain its security and rely on it only;
- release its security and claim in bankruptcy for the entire debt;
- realise or value the security and prove for the balance.
It may be that the security is sufficient. If the security yields a surplus, then the surplus must be paid to th OA / bankruptcy trustee. If the security is insufficient, then the creditor /lender should consider what course of action is to its best advantage.
The secured creditor may abandon his security and prove for the full amount. If the secured creditor proves for his whole debt and does not mention the security, then he abandons it.
Proof and Valuation Issues
The secured creditor may give notice and require the Official Assignee to decide whether to redeem or offer the security for sale. The Official Assignee has three months within which to decide whether he will exercise his options. If the Official Assignee exercises his options he must still account to the secured creditor for its rights to the proceeds of sale of the secured asset.
Secured creditors may value their security and prove for the shortfall. It is not generally possible to amend a valuation. The value can only be later changed on approval by the court where there is shown to have been a bona fide mistake in valuation.
If the value subsequently realised is different, the secured creditor is required to adjust his claim. The Official Assignee may redeem the security at the value declared. This gives the secured lender an incentive not to undervalue.
Creditors with a proprietary claim, such as a lien or equitable mortgage or equitable charge are secured creditors, even if they lack a formal charge. Liens can arise by contract or custom. A creditor may have a flawed security which was agreed to be given but was not executed or registered. Generally, this will comprise an equitable mortgage or charge.
Where a creditor holds a judgment, the rules on execution provide in effect that the creditor may keep the debtor’s asset which have been seized or attached, once execution has been completed or completed for a set period.
Where the sheriff has seized the debtor’s goods by way of enforcement / execution of a judgment on behalf of a creditor more than 21 days before bankruptcy, they fall outside the bankrupt’s estate and may be retained by the creditor concerned. The holder of a judgment mortgage which has been registered for three months before bankruptcy retains its benefit in the same way as a secured creditor.
In some more unusual cases, the right to seize unsecured goods may arise without a judgment Where a landlord distrains for rent arrears within three months of bankruptcy, he has preference and a lien on the proceeds of the distrained goods sold. The Revenue may recover by sheriff’s seizure without a judgment.
Goods and movable property generally may be leased or hired. The bankrupt’s estate takes only the rights and entitlements of the bankrupt under the hiring or lease.
Large or high value plant and equipment is commonly leased. In the case of leased property, the superior title may be retained by the lessor, who can terminate the lease upon default so that it is not available to the lessee’s creditors.
Where there has been no default, the continuing obligations to pay the rent and hire charges remain. The Official Assignee may be content allow the leased asset to be retaken so as to terminate the lease or hire purchase.
Alternatively, the Assignee may seek to disclaim the leased asset as onerous, if the lessor or hirer does not terminate.
Under hire-purchase, there is a lease or letting of the goods, with an option to acquire the goods on termination. Consumer hire-purchase agreements and arrangements are regulated under the Consumer Credit Act. The conditions in hiring and lease agreements, which allow the hirer or lessor to enter premises in order to retake goods are declared void, other than in respect of vehicles. In the case of vehicles, premises other than dwelling houses and their curtilage.
Once one-third of the hire-purchase price has been paid, court proceedings are required to retake the goods. If the hirer breaches his provision, the contract may be terminated and the lessee/hiree may recover sums paid. Where more than one-third of the price has been paid, the court may order the return of the goods to the owner, on such terms as may be ordered.
A stay may be placed on the order, allowing the hiree time to purchase. An order may be made in respect to parts of the goods only.
Retention of Title to Goods
Title to goods passes on making a contract for sale, under default rules, irrespective of whether the price is unpaid. If the buyer becomes bankrupt after the title has passed, the seller will be an unsecured creditor only, in respect of the price. It is often provided that title will not pass until the price has been paid, under a retention of title clause.
If title has passed to the insolvent person or company when insolvency commences, then in the absence of effective security, the asset will be available to its creditors, irrespective of whether the purchase price has been held. This may lead to arbitrary results in some cases. Questions may arise in some cases as to whether title to the asset has been transferred.
It is possible to provide under a sale contract, that title to goods will not pass until payment. The default presumption would cause the title to transfer at a much earlier date. Where title is retained, the seller has the effective priority and security in that he can usually terminated the contract and retain the goods
Preferential Debts and Other Creditors
The costs of the bankruptcy itself have a first claim on the bankruptcy assets. This includes expenses, fees and costs. If the bankruptcy results from a creditor’s petition, the cost of the petition is to be paid immediately after other administrative costs.
The priority for expenses, fees and costs in the bankruptcy include ongoing costs, taxation costs and the trustee’s remuneration. The taxation costs are those arising from ongoing activities and realisations.
After the fees and expenses of the bankruptcy and preferential creditors have been paid and secured creditors have taken their security, the ordinary unsecured creditors are paid rateably in proportion to their proved debt.
“Preferential” debts enjoy priority over unsecured creditors. Preferential payments also carry a preference for interest. The preference creditors rank equally as between themselves. If there is insufficient to pay them in full, they abate proportionately, so that each is paid the same proportion.
Preferential creditors do not have priority over secured creditors. The secured creditor has a proprietary interest in the secured asset to which he has an absolute claim. He may be an unsecured creditor for any shortfall between the sum due and that realized from the sale of a security.
Preferential Debts; Taxes
One year’s income tax and property tax assessed before the end of the tax year before adjudication and not exceeding the whole year’s liability assessable has preference. The Revenue or other authority can select the relevant year. The provisions extend to capital gains tax
Deductions for social insurance contributions enjoy super priority. There is no limit as to amount. They are effectively treated as held in trust for the social insurance fund.
One year’s rates which become due and payable within 12 months prior to bankruptcy has a preference. Unlike the position with income and capital gains, there is no choice as to which year of assessment to take.
Value-added tax in relation to periods ending within the 12 months prior to adjudication has priority.
Preferential Debts; Employees
Sums due to employees, whether by way of wages, salary or other compensation and unpaid PAYE contributions have preferential status to a limited extent.
Wages and salaries due to employees for services in the four months before adjuducation have preferred status to a maximum of €3,100 (IR£2,500) per employee. This does not apply to independent contractors.
Unpaid holiday pay, sick pay, pension contributions due by the employer are preferred. Compensation and redress, such as for breach of statutory employment rights, are preferred.
See the notes to S81 of the Act in the Legal Materials in respect of similar less commonly encountered statutory debts which are preferred.
Set Off I
Set-off may also arise to offset a claim by the claimant against the defendant, by way of a claim by a defendant against the claimant. Where both sums are immediately due, they may be set off under the default rules. The creditor may reduce all or a part of the debt which he owes the debtor, in satisfaction or in reduction of the debt owed to him.
Set-off may give some creditors effective priority, that would not otherwise apply. The principle is well established and it is justified by the notion that a party should not be obliged to pay a debt to a creditor, while foregoing a debt owed by that creditor to him.
The rules are particularly important in bankruptcy, as they may give the creditor who is owed a debt a proportionately higher payment than other creditors. The Bankruptcy Act provides that where there is a mutual credit or debit between a bankrupt and a creditor, one debt may be set off against the other and the balance remaining may be recovered by one side from or the other.
Set Off II
Set-off is only allowed if there are mutual obligations between the parties. If any factor exists, by which mutuality is not present, set-off at common law / equity is not available. Where, for example, debts have been charged or assigned, mutuality would not exist between the debtor and the assignee / chargee.
The debts need not be in any way connected. The persons entitled beneficially to the debt must be the same. Each debt must be immediately due. They must be owed by the same parties in the same capacities. Where the debts are owed in different capacities, for example, where one is owed as a trustee, and one is owed personally there is no sufficient “mutuality” for a set-off.
Joint and several liabilities may be set off as each is a creditor for the whole. Joint liabilities (which are not also several) may not usually be set off.
Each sum need not be liquidated. Therefore, it may not necessarily be ascertained as a fixed sum as of yet. However, the claims must be reducible to a money sum, and a court order may be required to determine the level of liability. An obligation to return goods is not capable of set off as a debt in itself. However, if the obligation can be reduced to money, as is the case in relation to certain orders in relation to goods, it may be offset.
The right of set-off under the default rules may expanded by the terms of a contract, which provide expressly set-off in a wider range of circumstances. Banks commonly provide for set-off or so-called combination of accounts, so that, for example, a loan may be off set against the deposit account in certain circumstances of default.
Under the Partnership Act, an investor in business who is to participate in the profits is not entitled to share with the unsecured creditors generally in its winding up. He is effectively a deferred creditor.
This principle which is reflected in the Partnership Act applies more generally at common law. Where a party is an investor under a contractual arrangement, he is presumed to be subordinated to other third-party creditors.
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, Kennedy & Simms Company Insolvency 2015
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
RM Goode, Principles of Corporate Insolvency Law (4th Ed, 2011)
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
Bankruptcy (Amendment) Act 2015
Personal Insolvency Act 2012
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