CONTINUING PROFESSIONAL DEVELOPMENT BANKRUPTCY LAW PAPER. Mark Sanfey SC Edward Farrelly BL

Transcription

1 CONTINUING PROFESSIONAL DEVELOPMENT BANKRUPTCY LAW PAPER Mark Sanfey SC Edward Farrelly BL 27 th April Introduction & Acts of Bankruptcy 2. Procedures Pre Bankruptcy a. Petition b. Bankruptcy Summons c. Arrangements 3. Being Bankrupt a. Summary of effects (family home, restrictions etc.) b. European Insolvency Regulations and the centre of main interests 4. Coming Out of Bankruptcy a. Composition b. Discharge and Annulment Thanks are due, for the use of his notes, to Bill Holohan, Solicitor, who is the author with Mark Sanfey SC of Bankruptcy Law and Practice in Ireland, Round Hall 1991 INTRODUCTION 1. The word bankruptcy apparently comes from the phrase banca rupta meaning broken bench. The original meaning was when a market trader was deemed to be 1

2 insolvent by fellow traders and no longer allowed trade from his bench which was then broken. With the advent of the limited liability Company personal, as distinct from corporate, insolvency has become a less central part of commercial life. Unfortunately, in the current economic climate, and having regard to the large number of personal guarantees given over corporate debts it seems inevitable that the number of bankruptcies will rise in the future. 2. Bankruptcy law seeks to provide a means whereby creditors can recover ratably or equally among themselves, it also grants a measure of protection to the bankrupt, and ensures that the bankrupt cannot be proceeded against to the benefit of one creditor and to the detriment of another. In this jurisdiction, on a person being adjudicated bankrupt, their property vests by operation of law in the Official Assignee in Bankruptcy, which office is created by statute, to be realised for the benefit of his creditors. The bankrupt loses his capacity to deal with that property and the creditors lose the right of independent remedy to recover their debts. The bankruptcy legislation in this jurisdiction is the Bankruptcy Act The main objects of bankruptcy legislation was summarised in 1962 in the Bankruptcy Law Committee Report (the Budd Report), para as follows: (1) To secure equality of distribution and to prevent any one creditor obtaining an unfair advantage over the others, (2) To protect bankrupts from vindictive creditors by freeing them from the balance of their debts where they are unable to pay them in full, and to help to rehabilitate them, (3) To protect creditors, not alone from debtors who, prior to bankruptcy, prefer one or more creditors to others, but from the actions of fraudulent bankrupts, (4) To punish fraudulent debtors. 3. Bankruptcy law has never been high on the list of political priorities and the Budd Report was not acted upon for 26 years. The Bankruptcy Act 1988 came into force on 1 January 1989 and encompasses all of the main statutory provisions governing bankruptcy in the Republic of Ireland. The Act essentially reflects a view of debt, business failure and commerce that is lodged somewhere between 1962 and This view may be coming back into fashion but our bankruptcy legislation is certainly out of step with equivalent legislation in the common law world. The most significant change has arisen from the EU Insolvency Regulation (Council Regulation (EC) No 1346 / 2000 of 29 th May 2000) For the purpose of giving this full effect the Government enacted SI 334 0f 2002 the European Communities (Personal Insolvency) Regulations There is a further amendment, in respect of applications for discharge under Section 85 of the 1988 Act only, made by S65 of the Civil Law (Miscellaneous Provisions) Act Acts of Bankruptcy 4. In the normal course of events a bankrupt is insolvent. However, an inability to pay ones debts as they fall due is not the test for adjudication in bankruptcy. One can be made a bankrupt only if one has committed an act of bankruptcy. The Budd Committee (para ) defined an act of bankruptcy as an act or default, voluntary or involuntary, committed by a debtor which is either evidence of an intent to deprive creditors of their rights through fraudulent assignment or is an implication of insolvency. 2

3 5. Eight acts of bankruptcy are set out in s. 7 of the 1988 Act which states that an individual (referred to in the Act as a debtor) commits an act of bankruptcy in each of the seven cases enumerated in s. 7(1) i,. (1) An individual (in this Act called a debtor ) commits an act of bankruptcy in each of the following cases (a) if in the State or elsewhere he makes a conveyance or assignment of all or substantially all of his property to a trustee or trustees for the benefit of his creditors generally; (b) if in the State or elsewhere he makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof; c) if in the State or elsewhere he makes any conveyance or transfer of his property or any part thereof, or creates any charge thereon, which would under this or any other Act be void as a fraudulent preference if he were adjudicated bankrupt; (d) if with intent to defeat or delay his creditors he leaves the State or being out of the State remains out of the State or departs from his dwelling- house or otherwise absents himself or evades his creditors; (e) if he files in Court a declaration of insolvency; (f) 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 whether by endorsement on the order or otherwise; (g) if the creditor presenting a petition has served upon the debtor in the prescribed manner a bankruptcy summons, and he does not within fourteen days after service of the summons pay the sum referred to in the summons or secure or compound for it to the satisfaction of the creditor. 6. The acts of bankruptcy set out in s. 7(1) are substantially re-enactments of previous provisions in the Irish Bankrupt and Insolvent Act 1857, Debtors Ireland Act 1872 and the Bankruptcy Ireland Amendment Act While all of them can potentially be used the two subsections which are of most use to practitioners are Section 7 (1) (f) and (g) and these will be dealt with briefly as they are of importance in respect of the Petition and Bankruptcy Summons which will be dealt with further below. ii Execution against goods. 7. A debtor commits an act of bankruptcy under s. 7(1)(f) 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 whether by endorsement on the order or otherwise. The object of this act of bankruptcy was to prevent a single creditor, by means of an execution under a Fi.Fa., sweeping away any personal property whatever which would otherwise have been distributable among all of [the bankrupt's] creditors equally in the event of his bankruptcy (In re i The eighth is S 7(2) where the debtor fails to comply with a debtor's summons issued under s. 21(6) of the 1872 Act and is not likely to trouble practitioners. ii In respect of the other Acts of Bankruptcy, which are likely to be used only in special circumstances, see Sanfey and Holohan Bankruptcy Law and Practice in Ireland, 1991 Round Hall. 3

4 Morris (1879) 3 LR IR 451, per Miller J). This provision is in two parts, the first dealing with the situations where execution has been levied by seizure of the debtor's goods and the second where a return of nulla bona has been made. 8. For the law relating to Sheriffs see Dixon and Gilliland, The Law Relating to Sheriffs in Ireland. It was thought to be the case that if a return of no goods has been made by a sheriff or county registrar, and they have done nothing to ascertain whether the debtor has in fact any goods to seize, this would not be a return upon which an adjudication should be grounded. In In re Alexander (QBD) [1966] NI 128. a Northern Ireland case, it was held that a return, in such circumstances, was not a return within the meaning of the 1872 Act and adjudication grounded upon such a return could be annulled. That should not arise, but if it does it is not necessarily a useful Defence in this jurisdiction because, as Laffoy J pointed out in Mehigan v Duignan IR 593, a County Registrar will require to give evidence before a Court could accept this case from a debtor. However, it is appropriate to make a reasonable effort to secure goods at the time of execution. In the case of Wymes v Teahon 1988 IR it was argued that renewed FiFas could not be used to ground a seizure where partial seizure had been made previously but the injunction to restrain the new FiFas was refused. Failure to satisfy a Bankruptcy Summons. 9. A bankruptcy summons is essentially a summons served on a debtor requiring him to pay a sum of money which is due by the debtor and informing them that should he fail to comply within fourteen days with the demand, he may then be adjudicated a bankrupt. (Rule 10). Under s. 7(1)(g), a debtor has 14 days after service of the summons to pay the sum referred to in the summons or secure or compound for it to the satisfaction of the creditor and failure to do so constitutes an act of bankruptcy. The Budd Committee did not recommend following the English system of requiring that one had to have a judgment before one could obtain a bankruptcy summons and decided that a bankruptcy summons should be available to a creditor before the creditor had taken any other steps to recover the debt. In practice most bankruptcy summonses are taken out by creditors who hold unsatisfied judgments and a practice had developed in the High Court from the mid 1980 s onwards of requiring both an unsatisfied judgment and a nulla bona before the Court would issue a Summons. However the Supreme Court declared that practice to be incompatible with the Act in an ex tempore judgment in the case of Harrahill v Cuddy [2008] IEHC 250 on the 20 th February 2009 which may have a significant impact on practice as is set out below. THE PETITION 10. Under s. 11, a creditor is entitled to present a petition if: (1) the debt owing by the debtor to the petitioning creditor (or, if two or more creditors join in presenting the petition, the aggregate amount of debts owing to them) amounts to 1, iii or more, (2) the debt is a liquidated sum, iii The original amount was IRP but the various statutory amounts in the 1988 Act were amended by the Bankruptcy Act (Alteration of Money Limits) Order 2001 which should be checked wherever a money limit is likely to be contested. 4

5 (3) the act of bankruptcy on which the petition is founded has occurred within three months before the presentation of the petition, and (4) the debtor (whether a citizen or not) is domiciled in the State or, within a year before the date of the presentation of the petition, has ordinarily resided or had a dwelling- house or place of business in the State or has carried on business in the State personally or by means of an agent or manager, or is or within the said period has been a member of a partnership which has carried on business in the State by means of a partner, agent or manager. 11. Where the creditor is a secured creditor, usually a lending institution with a mortgage, it will have three options in the ordinary course of events. The first, and by far the most common is that it will want its security to remain outside of the Bankruptcy process. If for any reason it chooses to initiate the bankruptcy process it must set out particulars of the security in the Petition and either (a) state that it is willing to give up the security for the benefit of creditors in the event of the debtor being adjudicated a bankrupt, or (b) give an estimate of the value of the security. If the secured creditor gives an estimate of the value of the security, he may be admitted as petitioning creditor to the extent of the balance of the debt due after deducting the value so estimated. On application being made by the Official Assignee after the date of adjudication, the creditor must give up his security to the Official Assignee for the benefit of the creditors upon payment of the estimated value. (S. 11(2)). 12. Up until recently there has not been much benefit to secured creditors in petitioning for bankruptcy and they would generally stay out of the bankruptcy and realize their asset in the normal way. However, in circumstances where loan values vastly exceed the asset values upon which they are secured, as is likely to be the case in Ireland for some time to come, this may well change. Jurisdiction 13. S. 11 requires that for a petition to be brought on foot of an act of bankruptcy the debtor must be domiciled in, or have ordinarily resided, have a dwelling-house or place of business in the State or have carried on business in the State within a year prior to the presentation of the petition. The questions of domicile and ordinary residence are substantially dealt with in tax and family law cases and it is not proposed to go into them here. The most beneficial authority from the creditors point of view is Deutsche Bank v Murtagh 1995 IR This is not a tax or family matter and the Court held that in relation to some matters domicile can mean ordinarily resident. In relation to changing domicile / domicile of origin / domicile of choice the cases of Proes v Revenue Commissioners IR 174 Costello J and K (P) orse C v K (T) unreported Murphy J 14/4/2000 and W v W IR 476 are of some assistance. 14. In the case of a foreign resident who is not domiciled here but whose centre of main interests, within the meaning of Article 3 of the EU Insolvency Regulations, is in Ireland it would be possible to rely on their carrying on business within the state. It can be assumed that in cases where there is a transnational element the question of domicile will now recede and the question of where the centre of main interest, (e.g. where business is done) is will come to the fore. In the UK personal insolvency case of Shierson v Vlieland-Boddy [2005] EWCA Civ 974 / WLR 3966 it was held that the centre of main interests is determined at the time the court opens 5

6 insolvency proceedings, which would be the presentation of the petition. There is also a necessary subjective element to the determination by the Court insofar as it should take into account the likely perception of third parties as to where the centre of main interests is. In adopting this approach the Court referred to, and followed, the Irish corporate insolvency decision Supreme Court decision In Re Eurofoods IFSC Limited 2004 [IESC] 45 so it is likely that Irish Bankruptcy Courts will follow this line of authority. Presenting a Petition 15. If the Creditor decides to go ahead with the Petition then it and the Affidavit must be filed with the Examiner s office. The Petition (Form No. 11) must be signed by the Petitioner. Where the Petitioner is a company it must be sealed by the Company and signed by two directors or by one director and the secretary. It must be signed first. It must include notice of the date for the hearing of the petition. On the back of the petition there is an Affidavit verifying the details in the Petition (also Form 11). An Affidavit for proof of debt (Form 12) must be signed in the normal way giving details of the debt due to the creditor. The Examiner s office will then allocate a date for the hearing of the Petition. A copy of the Petition is served on the Debtor personally at least seven days before the hearing. An Affidavit of service must be filed at least two days before the hearing of the petition. The case of Bank of Ireland v- DH IR 315 established that service of the Petition may be effected by substituted service by advertisement. This is important as, unlike the summons, Order 76 makes no provision for sub service of a petition. As we have seen, if the debtor has committed an act of bankruptcy, and fulfils the other requirements which are specified in s. 11, a creditor may present a petition for the adjudication of the debtor as a bankrupt, within three months of the date of the act of bankruptcy. (S. 11(1)(c)). Format of the Petition. 16. The format of the petition is specified in the Rules, Form 11. Rule 19 requires that it must (1) contain a statement showing the nature and amount of the debt and showing that the debt has not been paid, secured or compounded, (2) recite the specific act of bankruptcy on foot of which the petition is founded, (3) contain an undertaking by the creditor to advertise notice of the adjudication and the statutory sitting in the manner directed by the Court and to bear the expenses of such advertisement, (4) contain a statement that the debtor is domiciled in the State or that within a year before the date of the presentation of the petition, he has ordinarily resided, or had a dwelling-house or place of business in the State, or that he has carried on business in the State personally or by means of an agent or manager, or that he is or within the same period has been a member of a partnership which has carried on business in the State by means of a partner, agent or manager, (S. 11(1)(d)). (5) contain an indemnity indemnifying the Official Assignee as to his costs, fees and expenses as allowed by the Court up to and including the statutory sitting and also must contain an indemnity as to such further costs, fees and expenses of 6

7 the Official Assignee as the Court may on the application of the Official Assignee direct, and (6) contain notice of the date for the hearing of the petition. 17. The petition must be signed by the creditor, or, if there is more than one, by all of the petitioning creditors, unless the petitioners are partners, in which case one partner can sign on behalf of all partners. Any petitioner may sign the petition by an attorney who has been appointed by power of attorney for that purpose. (R. 20(1)). In the case of a limited company or a body corporate, the petition must be sealed with the seal of the company or the body corporate and it must be signed by (a) two directors or (b) one director and secretary. In each such case the seal and the signature must be attested. (R. 20(1)). 18. In In re Hussey, a bankrupt, No. 1964, per Hamilton P. 23 rd September 1987 an application was made to annul the bankruptcy where the petition had been presented by a limited company. The petition had been presented on 9 September 1985 and the debtor was adjudicated on 13 September. The debtor filed notice of intention to show cause and on 25 November 1985 the show cause application was dismissed. Public sittings were held in February and March 1986 and on 1 December 1986 a first dividend was declared. A stay was granted to the debtor in February In May 1987 he brought his application to set aside the adjudication on the grounds that: (1) misleading and inaccurate statements had been made by the petitioning company in its petition, (2) the seal of the company had not been fixed to the petition in accordance with the articles of association of the company. 19. The relevant articles of association of the company provided that the seal of the company was to be affixed to any instrument in the presence of at least two directors and the secretary or acting secretary and in pursuance of a resolution of the board. The company contended that its seal had been affixed to the petition in the presence of two directors and the secretary since one of the two directors present was also secretary of the company. There had however been no prior resolution of the board. The application was dismissed, but inter alia it was held that the then Rules of the Superior Courts, which were similar to the 1988 Rules, could not confer on the company powers which it did not possess under its own articles of association. It was held that that the seal of the company had not been affixed to the petition in accordance with the company's articles of association since the director/secretary had signed the petition solely in his capacity as secretary of the company. It was also held that there had not been a prior relevant resolution of the board of the company and that the seals and signatures on the petition had not been attested in accordance with the Rules. This would have been enough to dismiss the petition but it was held that, as the bankrupt had failed to make his objection on the motion to show cause and had allowed the proceedings to continue for such a long time, he was now estopped from disputing the validity of the adjudication. The Bankrupt s appeal was dismissed by the Supreme Court. 20. While Hussey is authority for the proposition that a petitioner must comply with its own Articles of Association and the Rules of the Superior Courts in executing its petition, a more lenient approach to non-compliance with the Rules was taken by Finlay Geoghegan J in Society of Lloyds v Loughran, unreported, High Court, 2 nd February In that case, the Applicant, which was a body corporate, had sealed the petition with its seal, but the petition was signed only by one person who was 7

8 described as an authorised signatory. The sealing and the signature were witnessed, but the respondent debtor objected that the petition ought to have been signed by two directors or a director and company secretary, as required by Order 76, R 20(2) of the Rules of the Superior Courts. 21. The petitioner accepted that it had not complied with the Rules, but asked the Court to exercise its discretion under Order 124(1) to permit the petition to proceed, notwithstanding the failure to comply with Order 76, R 20(2). Order 124(1) is as follows: Non-compliance with these Rules shall not render any proceeding void unless the Court shall so direct, but such proceedings may be set aside either wholly or in part as irregular, or amended, or otherwise dealt with in such manner and upon such terms as the Court shall think fit. 22. Finlay Geoghegan J accepted that, in general, there ought to be compliance with the Rules of Court on a petition but that there was nothing in the authorities cited to her to preclude the Court from exercising its discretion in a proper case under Order 124 of the Rules where there was a failure to comply with the Rules on a petition. The Court referred to the fact that no prejudice was asserted on behalf of the debtor by reason of the failure of Lloyds to seal and sign the petition in accordance with the Rules. The Court was also satisfied that the petition had been sealed and signed in accordance with the United Kingdom Statues and Bye-laws relating to the Society of Lloyds. There was no denial of debt by the debtor. The Court also had regard to the prior history in relation to the service of the bankruptcy summons and the petition, and Finlay Geoghegan J alluded to the fact that she had formed the view that the debtor was avoiding service of the documents, and accordingly permitted substituted service. The Judge therefore concluded that it was a proper case for the Court to exercise its discretion under Order 124 to permit the petition to proceed notwithstanding the non-compliance with the Rules. An appeal to the Supreme Court against this decision was subsequently compromised. 22. Once the petition has been filed, the Examiner will appoint a time at which the petition is to be heard and notice of the time is written on the petition and the sealed copy. The sealed copy of the petition is taken out by the petitioner or the petitioner's solicitor and it can then be used as if it were an original. (R. 24). The petition must then be served not less than seven days before the date fixed for hearing, and must be served on the debtor personally. Service is effected by serving the debtor with a copy of the petition and showing the sealed original at the time of service. The petitioner must then file an affidavit of service of the petition not less than two days before the hearing. (R. 25). Debtor s Petition 23. A debtor may petition for adjudication against himself and the form of a debtor's petition is also prescribed by the Rules. (S. 11(3). Form 13). The petition must contain an undertaking by the debtor to attend in person at the statutory sitting, to advertise notice of the adjudication and the statutory sitting as directed by the Court and to carry the expenses of such advertisement. He must also undertake to lodge such sums as the Court from time to time directs to cover the costs, fees and expenses incurred or to be incurred by the Official Assignee. The debtor must file an affidavit setting forth particulars of his assets, where same are located and their estimated value, in order to show to the satisfaction of the Court that the available estate is sufficient to produce at least 1, If required, the debtor must 8

9 produce satisfactory evidence of value of the assets specified in his affidavit. (See rr ). Multiple Petitions 24. If two or more petitions are presented against the same debtor, or against debtors who are partners, the petition which is first in time has priority and is entitled to be heard first. If this petition is not proceeded with or if the debtor successfully shows cause against an adjudication based on it, or where delay will be avoided, the second or subsequent petition may then proceed. Once the debtor is adjudicated and any show cause is dismissed, all other petitions are dismissed with such orders as to costs as the Court thinks fit. (R. 33). There is an advantage in ensuring that one's own petition is the successful one, as the costs of the petitioning creditor on whose petition the debtor is adjudicated gain priority in the distribution of the debtor's estate. A petitioner whose petition is dismissed will ordinarily have to carry the costs of his petition. The Official Assignee s Costs and Expenses 25. Once the petition has been presented, either by a creditor or by the debtor, the petitioner must lodge the equivalent of with the Official Assignee, either in cash or by way of draft, and afterwards such further sums as the Court may direct, in order to cover the costs, fees and expenses incurred by the Official Assignee. iv No petition is accepted unless the receipt of the Official Assignee for the money payable on the presentation of the petition is produced to the Examiner. (R. 29(1)). The Official Assignee must account for the money which is deposited, either to the creditor or to the debtor's estate. Any sum paid by a petitioning creditor must be repaid to the creditor out of the proceeds of the estate and in the same priority as the creditor's costs (except in so far as the deposit may be required by reason of the insufficiency of assets, for the payment of costs, fees and expenses incurred by the Official Assignee). (R. 29(2)). 26. The petitioning creditor must prosecute the petition at his own expense until the statutory sitting and the Court, either at the statutory sitting or after it, may make an order for the payment of the costs out of the estate of the bankrupt. (S. 12). A statutory sitting now takes place within three weeks after publication of the notice of adjudication, (S. 17(3)), if no cause is shown. (S. 16). A petition for adjudication is not to be dismissed or the adjudication annulled simply by reason of the fact that the petition or act of bankruptcy was concerted or agreed upon between the bankrupt or his solicitor and any creditor or any other person. (S. 13). Issue THE BANKRUPTCY SUMMONS 27. S. 8 of the 1988 Act governs the issue of a bankruptcy summons and it is appropriate to quote the Section in full: iv There used to be a direction that in the case of a foreign based Petitioner the Court require the equivalent of 5,000 to be lodged and maintained at a minimum at all times but it could not affect an EU citizen and no longer seems to apply. 9

10 8. (1) A Summons (in this Act referred to as a bankruptcy summons ) may be granted by the Court to a person (in this section referred to as the creditor ) who proves that (a) a debt of 1, or more is due to him by the person against whom the summons is sought, (b) the debt is a liquidated sum, and (c) a notice in the prescribed form, requiring payment of the debt, has been served on the debtor. (2) A bankruptcy summons may be granted to two or more creditors who are not partners and whose debts amount together to 1, or more. In such a case, to comply with the requisitions contained in the summons a debtor must pay or compound for the debts or give security for them to all the creditors who are parties to the summons, unless they otherwise agree. (3) The notice requiring payment of the debt shall set out the particulars of the debt due and shall require payment within four days after service thereof on the debtor. (4) The bankruptcy summons shall be in the prescribed form. (5) A debtor served with a bankruptcy summons may apply to the Court in the prescribed manner and within the prescribed time to dismiss the summons. (6) The Court (a) may dismiss the summons with or without costs, and (b) shall dismiss the summons if satisfied that an issue would arise for trial. 28. The first step is sending a form of demand called Particulars of Demand and Notice Requiring Payment prior to the issue of a Bankruptcy Summons. The format of the particulars of demand and notice requiring payment prior to the issue of bankruptcy summons mentioned in Section 8 (1) (c) are given at Form 4 in the Rules. This form can be sent to the Debtor by ordinary post, although a posting voucher must be issued by the Post Office for production at a later stage. An Affidavit of Posting may be requested. The Debtor has four clear days during which he can respond to the Particular of Demand. If there is no response, then the Creditor is entitled to proceed. The next step is taken by having a Bankruptcy Summons issued and served on the Debtor. The Summons is issued by the Court. The form of Bankruptcy Summons is in the Rules Form No. 1. To have a Bankruptcy Summons issued, you must first attend at the Examiner s office with the following papers: i. Two copies of the Particulars of Demand. The posting voucher should be attached to one copy of the Particulars. ii. Affidavit for Bankruptcy Summons sworn by the Creditor. This is Form No. 5 (Rules). This includes a statement that no form of execution has issued in respect of such debt and remains to be proceeded upon. iii. The original and at least two copies of the Bankruptcy Summons. iv. The judgment which is relied upon. If it is particulars of debt they should be set out. 29. Then you must apply ex parte to the Court to have the Summons granted. From the late 1980s onwards, a practice was followed by the High Court in bankruptcy whereby an applicant creditor would not be permitted to apply for leave to issue and serve a bankruptcy summons unless he had obtained a judgment in respect of the debt, and unless there was evidence to show that the Plaintiff had sought to execute that judgment and been unsuccessful as demonstrated by a return of nulla bona. 10

11 30. Anecdotally, the practice appears to have evolved due to a perception by the High Court that bankruptcy should be a remedy of last resort, rather than the first port of call by a creditor who is unable to extract payment from his debtor. The practice was applied by successive High Court Judges notwithstanding that neither the 1988 Act nor the Rules contain any requirement for a creditor to have a judgment before applying for leave to issue and serve a bankruptcy summons, much less that that creditor has attempted unsuccessfully to execute a judgment. Indeed, the Bankruptcy Law Committee report considered the question of whether a judgment should be a prerequisite of proceeding to bankruptcy, and at paragraph of their report commented as follows: we considered whether or not a bankruptcy summons should be granted if all normal methods of collecting a debt had not been tried, e.g. if a judgment had not been obtained by the creditor against the debtor. We can see no objections to creditors using this severe method of procedure at an early stage, even though it means that a debtor deals with his creditors on the basis of first come first served. Indeed the Courts have decided that, where prior to bankruptcy a payment is made to a creditor following pressure by him, he may retain what he has extracted. Despite protests made to us of the precipitate use of debtor s summons we have decided not to recommend any change in procedure so that a bankruptcy summons may be issued by a creditor before he has taken any other steps to recover his debt 31. In Harrahill v Cuddy [2008] IEHC 250, the applicant, who is the Collector General, applied for liberty to issue and serve a bankruptcy summons. A number of judgments had been obtained by the Collector General against the Defendant, but no attempt had been made to execute on foot of these judgments, and accordingly there was no return of nulla bona. Notwithstanding this, the applicant pressed his application for leave to issue and serve a bankruptcy summons and argued that the production of a nulla bona was not necessary. In effect, the applicant was inviting the High Court to set aside the practice, and advanced a number of grounds for doing so. However, the High Court in a substantial written judgment refused the application. 32. The matter was appealed to the Supreme Court, and was heard on 20 th February In a brief ex tempore judgment, the text of which is now available, the Supreme Court allowed the appeal. The Court made particular reference to the fact that, as a return of no goods in respect of a debtor is an act of bankruptcy under section 7(1)(f) of the 1988 Act, the practice adopted by the Court effectively rendered the bankruptcy summons procedure redundant: if a creditor was obliged by the practice to get a judgment and a decree of nulla bona, there would then be no point in applying for a bankruptcy summons, given that a return of nulla bona is an act of bankruptcy in itself. The Supreme Court rejected a submission by the applicant that, where an applicant for a bankruptcy summons has complied with the detailed requirement of the Act and Rules, the Court has no discretion to refuse a bankruptcy summons, although Geoghegan J in giving judgment on behalf of the Court remarked that it is only fair to say the Court would consider that in the ordinary way, it is hard to see that the Court could exercise its discretion in similar circumstances against making the Order, but there may be circumstances that the Court cannot now envisage insofar as it has always been understood that there was some discretion. The Court is satisfied that it should not interfere with that principle but on the other hand, it will hold that there is no rule of practice, as alleged, and, therefore, the appeal will be allowed. 11

12 33. While it is a little early to say definitively in what way the High Court will interpret the ruling of the Supreme Court, it is submitted that the appropriate course for the High Court is to grant liberty to issue and serve a bankruptcy summons to any applicant who can show that he has complied with the requirements of the Act and Rules in this regard, notwithstanding that he has not obtained a judgment or obtained a return of nulla bona. This is an extremely important development, as access to the remedy of bankruptcy is now far easier than when the High Court applied the practice. A creditor who has an undisputed debt can now serve his notice and particulars of demand and, assuming that there is no response from the debtor, apply ex parte to the High Court for liberty to issue and serve a bankruptcy summons. Once he serves the summons, a failure to discharge the sum notified within 14 days creates an act of bankruptcy. The creditor can then issue his petition in bankruptcy, thereby exerting the maximum amount of pressure on a debtor with far less delay and expense than was the case when the practice was operated. It goes without saying that the debt must be undisputed i. A debtor who disputes the debt may avail of section 8(6) to apply to Court to dismiss the summons. It is thought that the Court would have jurisdiction to assess whether or not the application to dismiss the summons was bona fide or not. However, it appears from the wording of section 8(6)(b) that the Court must dismiss the summons if satisfied that an issue would arise for trial. It is suggested therefore that a creditor should only apply for liberty to issue and serve a bankruptcy summons where it can clearly be demonstrated that, notwithstanding that the creditor has not yet obtained a judgment, the debt is undisputed. However, there will be many circumstances in which this does not present a difficulty for the creditor. For instance, if a debtor has specifically acknowledged a debt in writing, it will be difficult for that debtor to show that he in fact disputes the debt. Debts to financial institutions or to the Revenue Commissioners may also be debts in respect of which it is difficult to demonstrate a bona fide dispute. The fact that the nuclear option of bankruptcy is now far more readily available in respect of undisputed debts due to the Harrahill v Cuddy decision is something that must be at the forefront of the minds of Counsel advising creditors and debtors. Where such debts are concerned, bankruptcy is now a much more immediate threat than heretofore. Creditors will look to use the bankruptcy option as an in terrorem weapon with a view to exercising maximum pressure on the debtor to come up with at least part satisfaction of the debt. Debtors may have to prioritise the payment of creditors who are in a position to proceed to bankruptcy and have the debtor adjudicated over other creditors. It will be interesting to see how, in the current economic climate, creditors and debtors approach the question of bankruptcy as a means of extracting payment from recalcitrant debtors. Advising the Creditor in Bankruptcy situations 34. The debt must be for a liquidated (or determined) sum. The Creditor should be absolutely certain that the Debtor cannot dispute the debt involved. In practice the Court routinely points out that the Bankruptcy procedure is not primarily supposed to be a debt collection procedure, which has two implications for creditors. Firstly, the number of adjournments given on a Petition is limited and a Petitioner may find themselves proceeding with a bankruptcy where they only wanted to get a repayment. Secondly, if there is any dispute of the debt it will be construed in favour 12

13 of the debtor. It seems probable that a difference will develop in respect of the use of a Bankruptcy Summons and a Petition in this regard. Failure to satisfy a Bankruptcy Summons is an Act of Bankruptcy of itself and a mistake in the amount is probably going to be viewed as a full defence to same. Therefore even a mistake in interest calculation or similar is possibly fatal. Having regard to Section 11(1) of the 1988 Act, which provides that the debt must be in excess of 1,900.00, and the fact that the Act of Bankruptcy on a Petition is usually the return of the nulla bona, an error in the amount may be construed in line with Section 214(a) of the Companies Acts In those circumstances a small error in the amount due should not be fatal on a Petition. This would be consonant with the corporate insolvency side, see for example In Re Pageboy Couriers 1983 ILRM Instructions should be obtained as to the name, description and address of the person who will swear any affidavits in the case on behalf of the Creditor. In relation to the outlay involved, aside form standard stamping serving and professional fees the Creditors will have to lodge an amount with the Official Assignee and place an advertisement in two National Newspapers. In the Petition, the creditor undertakes to advertise and bear the expense of advertising. The petitioner must also indemnify the Official Assignee as to his costs, fees and expenses. 36. The Solicitor should discuss with his client the benefits of instituting the bankruptcy proceedings. If the Creditor is only interested in collecting money which is due to him, then it is critical to ascertain whether or not the Debtor has any money to pay the debt. Sometimes the threat of bankruptcy will ensure that the Debtor will get the money one way or another but clients should be warned that, in practice, sometimes the bankruptcy proceedings do not result in any payment of the debt and the costs of instituting the proceedings might be lost. 37. Great care should be taken where the creditor has security for the repayment of his debt. Any creditor who holds security of any nature should be warned that ultimately he might be asked to value his security and adjudicate the debtor bankrupt for an unsecured amount. It is possible for a secured creditor to lose his security if he proceeds with the adjudication. A Judgment Mortgage is not valid as against the property of a bankruptcy until three months or more pass before the date of adjudication of the debtor as a bankrupt. Section 51 B. Act The petitioning creditor gains no priority in relation to the payment of his debt if he makes the debtor bankrupt. However, the costs of the petitioner are paid next after the costs, fees and expenses of the Official Assignee. (S.12.B. Act, 1988). In general, the preferential claims in a bankruptcy are similar to those in a liquidation (S.81.B.Act 1988). If the Debtor is a trader it is often the case that the Revenue will scoop the pot, he will never come out of bankruptcy and the debt will not be recovered. When a debtor has committed an act of bankruptcy, then the client has three months from the date of the committing of the act of bankruptcy to file the Petition to adjudicate the debtor bankrupt S.11. (1) (c).) Advising the Debtor in Bankruptcy situations. 39. Before anyone is adjudicated bankrupt, there is no doubt that he will have received many warnings. In fact, in a number of cases, the creditor will have obtained a judgment in one of the Courts against the debtor and the debtor would have received independent warnings about the judgment. As soon as the bankruptcy proceedings are threatened, the debtor should immediately approach the creditor who is threatening bankruptcy. This should be done because it is possible to remove 13

14 the threat of bankruptcy by satisfying this creditor at this stage in the proceedings but, if the debtor is adjudicated bankrupt then he must deal with all his creditors and the Court will insist that all creditors have been satisfied before allowing the bankruptcy to be annulled. If the money is available, then the debtor should pay the debt straight away, but in normal situations, it is advisable that a statement of affairs of the debtor be produced so that this can be handed to the creditor to disclose the true financial position of the debtor and to persuade the creditor to accept a realistic settlement. This is also a good time to point out to the creditor that the return to him in financial terms in a bankruptcy is likely to be unsatisfactory. The realisation process can be slow, and because the petitioning creditor will gain no priority over the other creditors, then the creditor may receive nothing at the end of the day and, by settling immediately, then the creditor is avoiding the very heavy costs in pursuing the adjudication. Obviously the debtor should examine the amount claimed by the creditor and if there is any dispute about the figures, then this dispute should be communicated immediately to the creditor. If there is clear evidence of a dispute and this has been pointed out in writing to the creditor then it would be unwise for the creditor to proceed further without first resolving the dispute. If a disputed debt is used as the basis for bankruptcy proceedings, the Court will certainly dismiss the bankruptcy summons and most likely award the costs against the creditor. (see S.8.B. Act, 1988) It is unlikely a Court would approve of the use of a disputed debt on the Petition either but, as set out above it may not prove fatal if there is an undisputed amount over IRP 1, The Debt 40. The creditor must file an affidavit in the prescribed form (Form No. 5), which must set out the truth of his debt made by himself or by any other person who can swear positively to the facts verifying the truth of his debt and that no form of execution has issued in respect of such debt and remains to be proceeded upon. (R. 11(1)). The creditor must also lodge any bills, notes, guarantees, contracts, judgments or orders referred to in the affidavit together with the summons. The format of the affidavit is quite short. It recites the nature of the debt, the fact of the service of the demand, the particulars of demand and notice requiring payment. It also recites whatever security the creditor holds, and states that no form of execution has issued and remains to be proceeded upon. Where the debt, or any part of it, is for money lent by a moneylender or interest or charges in connection with it, the affidavit must also contain (a) a statement of the date on which a copy of the note or memorandum in writing of the contract made pursuant to s. 11 of the Moneylenders Act 1933 was delivered, or sent, to the borrower; (b) a statement showing in detail the particulars mentioned in s. 16(2) of that act; and (c) a copy of the note or memorandum. (R. 11(2)). In In re K. & McN., Bankrupts (HC unreported judgment of Hamilton P, 23 Sept. 1987), a debtor's summons which did not contain the necessary endorsements required in the case of a debtor's summons issued by a money-lender, notwithstanding that the moneylender already had judgments in respect of the money due, was set aside. 14

15 41. Detailed particulars of demand must also be endorsed on, or annexed to, the bankruptcy summons. There is case law dealing with the question of whether it is necessary to follow strictly the forms specified by the Rules. In Pimm Bros v. Shiel (In the matter of a Debtor's Summons by Pimm Bros Ltd v. Shiel [1910] 2 IR 399) it was held that it was not necessary to the validity of a debtor summons that the prescribed forms should be literally followed. It was sufficient if they had been complied with in substance and the debtor had not in fact been misled and knew of the indebtedness alleged against him. However, you have to get the figures exactly right. In re Debtor's Summons against Moore [1907] 2 IR 151 Sir Samuel Walker said that having regard to the effect of a debtor's summons, it is right that the procedure prescribed for obtaining it should be strictly followed. A creditor passes by the ordinary procedure of bringing an action, and adopts this summary process, fraught with great consequences to the debtor, and also involving important consequences to all creditors or debtors of the debtor. The actual amount of debt must be specified and it is not open to the creditor to claim an unascertained sum. A creditor cannot claim that he should not have to specify the amount of his claim because it would have cost money, time, and trouble to do so. (Per Fitzgibbon LJ at page 158). 42. Bankruptcy Summonses have been dismissed because of a failure to credit an amount of IRP 1,000 on a debt of in excess of IRP 160,000 (See In Re Sherlock ILRM. There is also an ex tempore Supreme Court judgment to the effect that any dispute means a Court should not even investigate the merits but simply dismiss the summons. St Kevins Company (Against a Debtor) 27 th January This judgment is unavailable but an article by Micheal P O Higgins in the Commercial Law Practitioner 1995 page 173 sets out the facts. Practitioners should bear in mind that these cases do not even relate to disputable debt simpliciter they both relate to disputes raised over judgments already obtained. 43. At least four days before filing for the bankruptcy summons, the creditor must serve on the debtor particulars of demand and a notice requiring payment. As with all documents used in bankruptcy proceedings, this has to be headed The High Court Bankruptcy. (Rule 2). Endorsements 44. Every bankruptcy summons must be endorsed with the name and registered place of business of the solicitor acting for the summoning creditor. If no solicitor is employed, an endorsement must be put on the summons stating that it is granted to the creditor in person and the residence of the creditor and an address within the jurisdiction at which a notice to dismiss the summons or any other notice or proceedings can be served, must also be endorsed on the summons. (R. 13(1)). Where the summoning creditor is ordinarily resident outside the jurisdiction (or is a company or other body corporate which has its registered office or principal place of business outside the jurisdiction), an address within the jurisdiction where payment can be made must be endorsed on the front of the bankruptcy summons. (R. 13(3)). 45. The creditor must also endorse on the front of the summons an intimation of the consequences of neglect (R. 13(2)), that is, he must endorse a notice on the summons specifying what will happen if the debtor fails to comply with the bankruptcy summons and informs the debtor that should he dispute the debt or wish to have the summons dismissed he (the debtor) must file an affidavit within fourteen days after service stating one of the following (R. 13(2): 15

16 (a) that the debtor is not so indebted or is only so indebted to an amount less than 1,500 or, (b) that before the service of the summons the debtor had obtained the protection of the Court or, (c) that the debtor has secured or compounded the debt to the satisfaction of the creditor. Service 46. The bankruptcy summons must be served on the debtor personally within twentyeight days of the date of the summons, though substituted service is permitted by order of the Court. Service is effected by giving the debtor a sealed copy of the summons with endorsed or annexed particulars of the demand, together with a copy of the affidavit which has been filed in accordance with Rule 11. If the creditor cannot serve the debtor within the twenty-eight-day period, the Court may grant an extension of time for service. It is important that the application for the extension of time be made within the 28 days as it will not be granted later. If the Court is satisfied (as a result of an application on affidavit) that the debtor is evading service or that from any other cause the debtor cannot be served personally, the Court may order service on the debtor's wife or some adult member of the debtor's family, or adult employee or partner at the debtor's usual or last known place of residence or business. It is interesting to note that the Rules specifically provide for service on a debtor's wife, but not a debtor's husband, presumably reflecting the fact that the vast majority of bankrupts are male. 47. The Court may order substituted or other service or substitution for service of notice by letter, public advertisement or otherwise as may be just. Rule 14(1). See In re a Debtor [1984] 1 WLR 353. It is important that the bankruptcy summons be served in accordance with the Rules or the mode of service ordered by the Court. It has been held that, when one considers the consequences of adjudication... penal in nature, the requirements of the statute must be complied with strictly. The debtor's summons... must be served in the prescribed manner. (In re O'Maoleoin v. the Offical Assignee (unreported), No. 2046, Hamilton P, 21 September 1988). The person who serves the bankruptcy summons must, within three days, endorse on the summons the day and the date of service and every affidavit of service of such summons shall mention the date on which such endorsement was made. (R. 14(2)). The format of the affidavit of service is prescribed by the Rules, Form No. 3. Applying to dismiss the summons 48. Once the debtor has been served with the summons he may apply to the Court to dismiss it. The Court may dismiss the summons with or without costs. If the Court is satisfied that an issue for trial arises, the Court must dismiss the summons. (S. 8(5) and (6)). Irregularities, if any, usually arise in the form of the creditor's affidavit or in the bankruptcy summons itself in that it may lack one of the necessary endorsements. Aside from that the Court has a discretion and an inherent jurisdiction to stay any proceedings which it may regard as being oppressive or an abuse of the process of the Court. In McGinn v. Beagan, [1962] IR 364 the Court was satisfied that the purpose for which the summons was issued was not to secure payment of debts due (which were in fact due) but to ensure that the debtor was adjudicated bankrupt, thereby rendering him ineligible for election to a local Urban District Council. Budd J, having reviewed all the circumstances said at p. 369 the proper purpose of bankruptcy proceedings is to make assets available to creditors. 16

17 The debtor in this case has very big debts and I am quite satisfied that he has no assets to meet them. Judgments remain unsatisfied and creditors have failed to obtain Instalment Orders. In my view Mr McGinn brought this (debtor's) summons for improper reasons, and I am satisfied that proceedings were not taken to get payment but to make Mr Beagan a bankrupt and unseat him. Hence the purchase of the debt and the issue of a summons was to enable Mr McGinn to commence proceedings for a collateral purpose. It seems to me that I should not allow the Court's processes to be used for an ulterior and collateral purpose, and I will therefore stay all further proceedings on the (debtor's) summons. v ARRANGEMENTS 49. Under Part IV of the Act, Ss , a debtor may seek the protection of the Court from any action or other process with a view to making an arrangement with his creditors. This will become binding on all creditors who have notice of the proceedings, if a statutory majority of those creditors votes to accept the proposal. An application for a Court-supervised arrangement must involve provision being made for the full amount due to preferential creditors - a requirement which might prove an insurmountable obstacle to many insolvent traders. A debtor may also, with the consent of all the creditors, make a conveyance or assignment of his property to a trustee for the benefit of his creditors generally. Such a transaction is an act of bankruptcy, and a non-assenting creditor may take steps to have the debtor adjudicated bankrupt and thus prevent implementation of the terms of the deed. 50. A debtor unable to meet his engagements and wishing to place the state of his affairs before his creditors with a view to making a proposal for the composition of his debts, under the control of the Court, may present a petition to the Court setting out the reasons for his inability to pay his debts and requesting that his person and property be protected until further order from any action or other process. S. 87(1). The petition must be in the Form No. 26, Appendix O. 76, r. 90. The petition must be presented to the Examiner and filed in the Examiner's office, R. 90(1), and must be supported by a further affidavit of the debtor, setting forth particulars of his assets together with the estimated value of such assets and the amount of his liabilities, and whether any and which of his creditors have instituted any and what proceedings for the recovery of their debts, and whether his solicitor has received any and if so what sums on account of the costs of the proceedings. R. 90(2). 51. The Court, on hearing the petition, may by order grant such protection and renew the same from time to time as it thinks fit, S. 87(2), and the debtor is protected from any action or other process for the duration of the protection. Process for these purposes includes a bankruptcy summons and registration of a judgment mortgage. S. 87(4), (5). When the order for protection has been granted, the arranging debtor must not dispose of his property or any part thereof, save in the ordinary course of trade or business, and this applies so long as the order is in force. S. 88. The order protects the debtor from execution against his assets, even where there is an execution order in the hands of the sheriff or country registrar, but the order does not affect an execution order on foot of which the sheriff or county registrar has v This case was considered more recently, and the same principles applied, by Dunne J in D.v. D, Unreported High Court, 3 rd December 2008 in the context of a costs order in family law proceedings. 17

18 made a seizure or gone into possession. See generally s. 89; also In the matter of K, an Arranging Debtor [1927] IR On the granting of an order for protection, the Court directs that the arranging debtor call a preliminary meeting of his creditors at which the arranging debtor presents a statement of his assets and liabilities and keeps a minute of the proceedings; it directs that a private sitting be held subsequently before the Court to consider the arranging debtor's proposal; and that the arranging debtor deliver forthwith to the Official Assignee a memorandum containing (1) the date of the order for protection, (2) his name and address, (3) the amount of liabilities secured, partly secured and unsecured, (4) the amount of assets; and a duplicate of this memorandum must be delivered to the Central Office and the Examiner. The Preliminary Meeting. 53. The preliminary meeting is held at the office of the arranging debtor's solicitor or other fit place to consider the affairs of the debtor, at such time as would enable the Official Assignee beforehand to fix a time for sending to him of proofs of debt and to ascertain the liabilities of the debtor. For this purpose the Official Assignee may communicate with any person whom he considers may be a creditor of the debtor or may be capable of furnishing information as to the debtor's liabilities. The debtor must make himself personally available at the meeting and must give four days notice by pre-paid post to each of his creditors and to the solicitor of any creditor who shall have taken proceedings against him. The purpose of the meeting is to allow the arranging debtor to meet his creditors and explain his failure to meet his engagements and outline any proposal he intends to make to his creditors. The creditors have the opportunity to question the debtor on any aspect of his affairs and to discuss any proposal which the debtor may make. The Private Sitting. 54. Having had the opportunity to meet his creditors and to get an idea of whether or not his proposal would be acceptable to them, the arranging debtor must file in the Official Assignee's office at least two days before the private sitting a statement of affairs in the Form 23, Appendix O: r. 95(3), which has endorsed on it such proposal as he is able to make for the future payment or compromise of the debts or engagements set out therein, together with a copy of the statement submitted at the preliminary meeting and of the minute of the proceedings with any proposal made thereat or at any adjournment thereof. S. 91. Notice of the private sitting must be sent by post to each of the creditors. The arranging debtor must attend the sitting and the Court has power to examine him on oath or any witness produced by him or any creditor or person claiming to be a creditor. S. 92(3). Debts may be proved at the sitting. S. 92(5). 55. If, at the private sitting or any adjournment thereof, three-fifths in number and value of the creditors voting at such sitting either in person or by an agent authorised in writing in that behalf accept the proposal or any modification thereof, it shall be deemed to be accepted by the creditors, subject to the approval of the Court. A creditor may not vote without proving his debt, even though listed in the arranging debtor's statement of affairs: In re W. (1874) 8 ILTSJ 565. If approved by the Court, the proposal or any modification thereof is binding on the arranging debtor and on all persons who are creditors at the date of the petition and who had notice of the sitting. S. 92(1). The Court may if it thinks fit adjudicate the debtor bankrupt 18

19 if he does not file these documents in the prescribed manner and within the time specified. S. 105(1)(a). 56. The composition may be expressed to be payable in cash within one month from the date of the approval of the offer by the Court or such further time as the Court may allow, or by bills or promissory notes in part which must be secured to the satisfaction of the creditors. The amounts lodged should include an amount sufficient to pay the preferential creditors and cost fees and expenses of the OA. Approval 57. Before the arrangement can come into effect, the Court must approve the proposal. There is much case law concerning the grounds on which the Court should approve or not approve a proposal. vi The principles to be applied by the Court were examined extensively in two Supreme Court decisions, In re C., an arranging debtor, [1926] IR 14, and In re J.H., an arranging debtor, [1962] IR 232; 97 ILTR 112. In In re C., Kennedy CJ set out the relevant principles thus at p. 18.: I accept it is clear and settled that there must be some specific ground for depriving a debtor, under the clause in s. 353 (i.e., of the 1857 Act, which set out the former grounds for refusing the Court's approval) relied on here, of the benefit of the statutory provisions which allow him to carry an arrangement with his creditors. I think that such specific ground must be either that the arrangement would work a gross injustice upon the opposing creditors, as in In re Beck (1867) IR I Eq 68 so that it would be unreasonable or improper to force them to accept it, or that it offends against the public policy to which the Court should look in exercising discretion in its bankruptcy jurisdiction, that is to say, that the Court should not lend its countenance to a transaction shown to be actually characterised by commercial immorality or dishonesty. Misfortune or imprudence must make the bulk of the ordinary cases for which the system of arrangement has been given statutory sanction. There must be special facts not merely possibilities or even suspicions constituting some specific ground upon which the opposing creditors are entitled to rely, or upon which the Court in the interests of the public, and especially the commercial community, should intervene, to justify the refusal to a debtor and the statutory majority of his creditors of the benefit of an arrangement to be carried out in accordance with the statute. In that case the Supreme Court reversed the finding of Johnston J in the High Court that the arrangement in question was not reasonable and proper to be executed under the direction of the Court ; Johnston J had held that there was evidence of reckless, not to say dishonest, trading on the arranging debtor's part. 58. In In re J.H., [1962] IR 232; 97 ILTR 112 the arranging debtor offered his creditors 4 schillings in the pound. The statutory majority of the creditors accepted the offer but the majority was obtained by the debtor's wife, who had proved a substantial debt, voting for the arrangement. Without her support the debtor would vi Proposals not approved: In re Beck (1867) IR 1 Eq 68; In re an arranging trader (1867) 1 ILTR 262; In re Maclure (1873) IR 7 Eq 176; In re Heslop & Son (1897) 31 ILTSJ 332; In re C. (1898) 32 ILTR 40; In re Max Schroeder (1901) I NIJR 195; In re A. and B. (1912) 46 ILTR 142; In re Molesworth (1912) 47 ILTR 17; In re Gaston [1922] 2 IR 179. Proposals approved: In re M. [1901] 2 IR 51; In re A. (1904) 4 NIJR 181; In re M. (1912) 47 ILTR 26; In re Fry [1913] 2 IR 273; In re B. [1914] 48 ILTR 99; In re C. [1926] IR 14; In re J.H. [1962] IR 232. See John M. Hunter, Northern Ireland Bankruptcy Law and Practice, at p

20 have failed to obtain the statutory majority in value, although he would have had the necessary majority in number. Budd J refused to approve the arrangement on the ground that it was not reasonable and proper to be executed under the direction of the Court in that the majority of the creditors in supporting the offer were activated by motives of benevolence to the debtor rather than by motives of a strictly businesslike nature; an injustice would be done to the opposing creditors if the offer were to be confirmed. 59. J.H. appealed to the Supreme Court, which allowed the appeal. Maguire CJ (with whom Maguire J concurred) approved the principles laid down in In re C. as stated above, and further stated that the question of whether the creditors would fare better in bankruptcy than if they accepted the offer was:... to my mind primarily for businessmen to solve. They are in a better position to do so than the Court where, as here, all the cards are on the table nothing being concealed and it is surely a matter of speculation as to whether estimates of value honestly put forward are below the mark. If the creditors by the requisite majority accept the figures and the estimates it seems to me that their judgment ought normally to be accepted that is of course, provided that the debtor's conduct has been unimpeachable and that it is not proved that he is guilty of immoral, reckless or dishonest conduct. 60. The Court has been reluctant to substitute its own discretion for that of the statutory majority save in circumstances of dishonesty or impropriety. The creditors will take into account a range of circumstances in deciding whether or not to approve the offer. For instance, the dividend ultimately received in bankruptcy proceedings may not justify the cost and length of bankruptcy proceedings, particularly as the dividend may not be much greater than that offered in the proposed agreement. The creditors also will often have an interest in the arranging debtor continuing a viable business, and effectively making a fresh start, rather than being damned in commercial terms by the stigma of bankruptcy. Certificate of arranging debtor 61. Where the proposal of the arranging debtor has been carried into effect, the Court shall, on the report of the Official Assignee and in the absence of fraud, grant to the arranging debtor a certificate under the seal of the Court and the certificate shall operate as a discharge to the arranging debtor from the claims of creditors who received notice of the arrangement. S. 98. This certificate however does not release the debtor from debts due to creditors who did not receive notice of the proceedings. Carey v Harper [1897] 2 IR 92.. Adjudication of arranging debtor. 62. In advising on an arrangement the first piece of advice to the debtor must be that if an arrangement is unsuccessful it is likely the debtor will be adjudicated bankrupt. S. 105 of the Act states that the Court may, if it thinks fit, adjudicate the debtor bankrupt if (a) (b) (c) he does not, in the prescribed manner and within the time specified in section 91, file the documents required by that section, or at the private sitting referred to in section 90 or any adjournment thereof his proposal or any modification thereof is not accepted or approved, or his proposal is annulled under section 95(2), or 20

21 (d) (e) (f) (g) (h) (i) at any time after the presentation of his petition for arrangement it is shown that the affidavit filed with the petition is wilfully untrue or that he has not made a full disclosure of his property, assets and liabilities, or it appears that he does not wish to make a bona fide arrangement with all his creditors, or his proposal is not reasonable and proper to be executed under the direction of the Court, or he does not duly attend the private sitting or any adjournment thereof, or he fails to obey any order of the Court affecting him which may be made in the arrangement matter, or he is party to any corrupt agreement with his creditors to secure the acceptance of his proposal. The section allows the Court to adjudicate a petitioning debtor bankrupt where any of the above instances applies. If the arranging debtor is adjudicated bankrupt under s. 105, or if the Court directs, any debt proved and admitted at the sitting before the Court or by the Official Assignee may afterwards be expunged, either wholly or in part, by the Court upon such notice to the creditor as the Court may direct. Unless so expunged, all debts proved and claims entered in the arrangement matter shall be deemed to have been proved and entered in the bankruptcy. R. 99. When the arranging debtor is adjudicated bankrupt, the Official Assignee is at liberty to choose and appoint a solicitor to have carriage of the proceedings on his behalf and to advise him in the course of the proceedings. R.100. Voluntary Arrangements 63. As an alternative to availing of the system of Court arrangement under the Act, a debtor may come to an arrangement with his creditors outside the control of the Court. 1. Composition: A debtor who cannot pay his creditors in full may approach them with a view to inducing them to agree with himself and with each other to accept part-payment of their debts in full settlement of their claims. 2. A debtor may agree with his creditors that he will convey or assign his property to a trustee for the benefit of those creditors generally, so that his property may be wound up and distributed among them. vii A composition prior to bankruptcy, not to be confused with a composition after adjudication, will be offered by the debtor (and accepted by the creditors) for similar reasons to those that obtain in an arrangement under the control of the Court but would avoid the delay and extra costs of a Court arrangement, and could be carried out informally. It does not offer protection from any individual creditor instituting proceedings, including bankruptcy proceedings. vii This is an Act of bankruptcy which will ground a petition if any creditor does not consent. 21

22 CONSEQUENCES OF ADJUDICATION Effect on the Bankrupt 64. All property belonging to the bankrupt at the date of his adjudication automatically vests in the Official Assignee for the benefit of his creditors, (S. 44(1)), with certain exceptions. Excepted articles to the value of 2,500 or such further amount as the Court on an application by the bankrupt may allow: s. 45; the court may defer the sale of the family home: s. 61(5); the Court may make allowances to the bankrupt out of his estate as the Court thinks proper in the special circumstances of the case: s. 71. Haig.v. Aitken WLR 177 is the leading authority on what constitutes excepted articles and it relates to the diary of former UK Cabinet Minister, Jonathan Aitken. 65. All property (except certain payments in respect of personal injury or loss) acquired by the bankrupt subsequent to adjudication vests in the Official Assignee if and when the Official Assignee claims it. S. 44(5). The bankrupt has an obligation to notify the Official Assignee of all after-acquired property, S. 19(e) and failure to do so is an offence. S The bankrupt's salary or income is liable to be attached in favour of the Official Assignee under court order, and the Court will decide on the portion to be paid to the Official Assignee having regard to the family responsibilities and personal situation of the bankrupt. The Court may also vary such orders having regard to any changes in the family responsibilities or personal situation of the bankrupt. S A bankrupt cannot act as a director of or take part or be concerned in the management of a company without leave of the Court. S. 183, Companies Act If the bankrupt obtains credit of 500 or more without disclosing his status as a bankrupt, or if he trades under a name other than that under which he was made bankrupt, he commits an offence. S A bankrupt may be liable to be prosecuted for various types of criminal offence specified in the Act (for example, falsification of accounts, absconding with property, etc.). See ss A bankrupt is not entitled to hold elected representative office, and if he holds such office and is adjudicated bankrupt, he ceases to hold that office. See Electoral Act 1923, s. 51 (The Dáil), and s. 57 (The Seanad), and also s. 23 of the Seanad Electoral Panel Members Act In relation to members of corporations and county councils, see Article 12 (4) and (6) of the Local Government (Application of Enactments) Order 1898 (made under s. 104(1)(d) of the Local Government (Ireland) Act 1898). These are the provisions which were to be impugned as unconstitutional by Beverly Cooper Flynn TD although the case did not proceed. Effect of Adjudication from a Creditor s point of view. 69. On adjudication, the creditor shall not have any remedy against the property or person of the bankrupt in respect of the debt apart from his rights under the Act, and may not commence any proceedings in respect of such debt without the leave of the Court. S However, a secured creditor may realise his security outside the bankruptcy. 70. No distress may be levied on the goods of a bankrupt after the date of adjudication. S Proceeds of an execution over the debtor's goods, or money paid in order to 22

23 avoid seizure or sale under such execution, must be retained by the sheriff or county registrar or execution creditor for a period of twenty-one days, and if within that period that party receives notice of the adjudication of the debtor, he must surrender the property or proceeds to the Official Assignee. S All unsecured creditors must submit to the bankruptcy process and thereafter rank equally with each other (cf. s.82(1) which refers to a dividend to creditors). Unsecured creditors entitled in contract to interest on the debts due to them are not entitled to such interest unless a surplus (that is, more than one hundred pence in the pound) is realised. However, secured creditors may be entitled to interest beyond adjudication up to the date of realisation (or even to the date of payment) but this a matter of some uncertainty. Quartermaine's Case [1892] 1 Ch 639 which is another reason they tend to pursue the security outside the bankruptcy. 72. Unsecured creditors receive their dividend only after preferential payments (Revenue Commissioners) and the fees, costs and expenses of the bankruptcy have been discharged in full. See s. 81 for a list of preferential debts. The Family Home. 73. It is frequently the case that the most substantial asset a bankrupt has is the family home. It may, accordingly, be difficult to avoid the effects of bankruptcy on the family home by having a transfer to the other spouse by the Court. In a case of irretrievable insolvency it is certainly desirable, from the spouses point of view, to try and have the family home transferred by a Court under the family law legislation prior to adjudication. If such a transfer was made voluntarily it would be open to being question as a fraudulent conveyance. 74. The Official Assignee may convey the family home without obtaining the prior consent of the spouse, subject to obtaining the prior sanction of the Court required under s. 61(4) of the 1988 Act. Once adjudication takes place, the interest of the bankrupt vests in the Official Assignee by operation of law. If the bankrupt is the sole owner of the legal estate, that estate vests in the Official Assignee subject to existing proprietary rights of the spouse. The spouse may also be a co-owner at law, as where the house is held in the names of both spouses. Although the house is in the name of the bankrupt, a spouse may seek to establish a beneficial interest in the home on the basis that they either directly or indirectly contributed to the acquisition of the family home, and the size of that interest will usually be in direct proportion to the value of the contribution made to its acquisition unless there is proof of contrary agreement or contrary common intention between the parties. The relevant authorities are the various family law decisions in relation to gaining a beneficial interest by virtue of indirect contributions. 75. In the context of bankruptcy, as in family law, the level of a beneficial interest in the home will depend on the facts of the case (See Wall v. Wall, unreported, 10 September 1986, Hamilton P, for an example of a bankruptcy matter in which the wife was granted a 100% beneficial interest in the home or In re James Hickey, a Bankrupt, (1995) in which the wife was granted a 3% interest, but was granted a stay until the infant children of the family attained their majority). It is not possible for the spouse to initiate Family Law proceedings against the Official Assignee. If such proceedings were in being at the date of adjudication then the proceedings cannot proceed in so far as the bankrupt s property is concerned, including the family home. The Court, for the purposes of the Bankruptcy Act 1988 is the High Court. The 23

24 court decides all questions in relation to property which affects creditors as well as the family in the Bankruptcy List. Matters relating to the marital relationship and custody, maintenance, access etc. which do not concern property, can still proceed in whatever Court they were initiated in. 76. If the spouse succeeds in establishing a beneficial interest, or if it is not disputed that she has a beneficial interest, (that is, if she is a legal co- owner or if the Official Assignee concedes that she has a beneficial interest) the Official Assignee is faced with the difficulty of realising a share of an asset which he co-owns with the wife. If the property was the subject matter of a joint tenancy between the spouses prior to bankruptcy, the effect of adjudication is to sever the joint tenancy and convert it into a tenancy in common. The spouse and the Official Assignee then hold separate and undivided moieties of the property. However, in the absence of consent, the Official Assignee does not have the unfettered power to sell the home. He may only realise his own share in the property. The Official Assignee will almost always require an order for sale in lieu of partition, and he may seek this remedy under s. 4 of the Partition Act 1868, as amended by the Partition Act Application for Sale 77. S. 4 of the Partition Act 1868 states that the Court, in a suit where a decree for partition might have been made between interested parties, shall, unless it sees good reason to the contrary, direct a sale of the property accordingly, and give all necessary or proper consequential directions. The Court will be the Circuit Court if the rateable valuation is less than 200; otherwise the High Court, although a bankruptcy matter would probably be transferred on the application of the Official Assignee to the High Court in Bankruptcy, where the matter could be heard together with the application for the sanction of the Court of sale of the property required by s. 61(4). The section clearly leaves a discretion to the Court as to what constitutes a good reason to refuse an order for sale. However, assuming that the Official Assignee obtained an order for sale in lieu of partition, he would then be obliged to seek the sanction of the High Court in Bankruptcy for sale of the family home under s. 61(4) of the 1988 Act. S. 61 (5) gives the Court power to order postponement of the sale of the family home having regard to the interests of the creditors and of the spouse and dependants of the bankrupt as well as to all of the circumstances of the case. 78. In a number of cases the court has postponed the sale, for periods as short as two months, (In re Duffy, a bankrupt: where the order was made mid November, to allow for the Bankrupt and his spouse to remain in the property until after the Christmas following), and a period of years, (In re Hickey, a bankrupt: where the order was postponed until the children of the bankrupt attained their majority, the youngest being 13 at the time of the making of the order). In Rubotham v Young a stay of four months was given but this was in circumstances where the children were of full age and the proceedings did not come on until 7 years post adjudication. In Rubotham v Duddy a stay of 10 years was put on the sale where the bankrupts spouse was ill and 66 years of age having lived in the house for 48 years. It is worth noting that in the latter case that the debts were 20,000 to financial institutions and the house was worth 60,000 so ultimately a full settlement with interest would have been possible. European Insolvency Regulations (centre of main interests) 24

25 79. The only legislative change in the bankruptcy process since 1989 arises due to the EU Insolvency Regulation (Council Regulation (EC) No 1346 / 2000 of 29 th May 2000) For the purpose of giving this full effect the Government enacted SI 334 0f 2002 the European Communities (Personal Insolvency) Regulations In the case of a foreign resident (who is not domiciled here but whose centre of main interests, within the meaning of Article 3 of the EU Insolvency Regulations, is in Ireland) it would be possible to rely on their carrying on business within the state in order to commence bankruptcy proceedings. In cases where there is a transnational element the question of domicile will now give way to the question of where the centre of main interest, e.g. where business is done is will come to the fore. Equally an insolvent Irish citizen with business interests in the EU may be declared insolvent in accordance with the provisions applicable in another EU jurisdiction. Articles 3 and 4 of the Regulations provides as follows viii :- Article 3 International jurisdiction 1. The courts of the Member State within the territory of which the centre of a debtor's main interests is situated shall have jurisdiction to open insolvency proceedings. In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary. 2. Where the centre of a debtor's main interests is situated within the territory of a Member State, the courts of another Member State shall have jurisdiction to open insolvency proceedings against that debtor only if he possesses an establishment within the territory of that other Member State. The effects of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter Member State. 3. Where insolvency proceedings have been opened under paragraph 1, any proceedings opened subsequently under paragraph 2 shall be secondary proceedings. These latter proceedings must be winding-up proceedings. 4. Territorial insolvency proceedings referred to in paragraph 2 may be opened prior to the opening of main insolvency proceedings in accordance with paragraph 1 only: (a) where insolvency proceedings under paragraph 1 cannot be opened because of the conditions laid down by the law of the Member State within the territory of which the centre of the debtor's main interests is situated; or (b) where the opening of territorial insolvency proceedings is requested by a creditor who has his domicile, habitual residence or registered office in the Member State within the territory of which the establishment is situated, or whose claim arises from the operation of that establishment. Article 4 Law applicable viii Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings - Official Journal L 160, 30/06/2000 p

26 1. Save as otherwise provided in this Regulation, the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened, hereafter referred to as the "State of the opening of proceedings". 80. For Irish citizens who are insolvent and have significant overseas interests there has been speculation that this may actually prove to be beneficial as the system here is more severe than in many European states. In particular the UK Bankruptcy provisions in the Insolvency Act 1986 (as amended) are considerably more benign and the system operates more quickly. There has already been some public commentary on whether bankruptcy in the UK would be more attractive than Bankruptcy in this jurisdiction having regard to the different legislative regimes. iix Practitioners would clearly have to advise clients to seek the advice of a UK insolvency practitioner in respect of their personal situations but it is the norm in England for bankruptcies to be processed over the course of 1 to 3 years unless a Restriction Order is made. (Discharge in 12 months and Family Home processed within three years or not all) There is a possibility that this will lead to forum shopping in respect of bankruptcies and the aspect which practitioners might be required to advise on is where the debtors centre of main interests (COMI) is located. 81. Recital (13) of the Regulation states that the "centre of main interests" should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. In the case of a company there is a (rebuttable) presumption that the registered office is the centre of main interests but the same will not apply to a natural person. In the UK personal insolvency case of Shierson v Vlieland-Boddy [2005] EWCA Civ 974 / WLR 3966 it was held that the centre of main interests is determined at the time the court opens insolvency proceedings, which would be the presentation of the petition. There is a necessary subjective element to the determination by the Court insofar as it should take into account the likely perception of third parties as to where the centre of main interests is. The Court will also apparently ascribe importance to the degree of permanence attached to the centre of main interests. In adopting this approach the Court referred to, and followed, the Irish corporate insolvency decision of the Supreme Court, In Re Eurofoods IFSC Limited 2004 [IESC] 45 so it is likely that Irish Bankruptcy Courts will follow this line of authority. That decision involved a referral of the question (in the corporate insolvency context) to the ECJ In re Eurofood IFSC Ltd. (Case C-341/04) [2006] E.C.R. I In personal insolvency cases the leading authorities are UK cases and the following principles can be extracted: a. Where a debtor resides in one country but trades in another it is most probable that it is where he trades that is the centre of main interests. x b. If the person is not a trader than their habitual residence is likely to be the centre of main interests. xi c. The location of creditors and where debts are incurred are not material issues. xii ix See Irish Times Wed 8 th April 2009 Bankruptcy in England could be attractive option x Gerevan Trading Co Ltd v Skjevesland [2002] EWHC 2898 (Ch) xi Stojevic v Official Receiver [2007] BPIR

27 d. The centre of main interests is to be determined in the light of the facts as they are at date of presenting the petition but those facts include historical facts which have led to the position as it is at the time for determination. e. In making its determination the court must have regard to the need for the centre of main interests to be ascertainable by third party objective observers; in particular, creditors and potential creditors. f. A debtor is free to choose where he carries on those activities which fall within the concept of "administration of his interests". If he has altered the place at which he conducts the administration of his interests on a regular basis, by choosing to carry on the relevant activities (in a way which is ascertainable by third parties) at another place, the court must recognise and give effect to that. g. It is a necessary incident of the debtor's freedom to choose where he carries on those activities which fall within the concept of "administration of his interests", that he may choose to do so for a self-serving purpose. In particular, he may choose to do so at time when insolvency threatens. It appears that the test in this regard is whether the change is sufficiently permanent. xiii 83. Having regard to the large number of property related insolvencies which seem likely to occur in Ireland over the coming years issues will also arise as to what happens in respect of property situate in a jurisdiction where the primary insolvency proceedings do not open. There is provision made for secondary or territorial insolvency proceedings to deal with assets in another jurisdiction. However, it is likely that if the Creditor has security (rights in rem) then in accordance with Article 5 the creditor will wish to pursue that security in the normal way. In the Irish context it has usually been the case that the secured creditor would remain outside of any bankruptcy process and this remains possible under the new regime. Article 5 Third parties' rights in rem 1. The opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets - both specific assets and collections of indefinite assets as a whole which change from time to time - belonging to the debtor which are situated within the territory of another Member State at the time of the opening of proceedings. 2. The rights referred to in paragraph 1 shall in particular mean: (a) the right to dispose of assets or have them disposed of and to obtain satisfaction from the proceeds of or income from those assets, in particular by virtue of a lien or a mortgage; (b) the exclusive right to have a claim met, in particular a right guaranteed by a lien in respect of the claim or by assignment of the claim by way of a guarantee; xii Eichler.v. Official Receiver [2007] BPIR and Shierson v Vlieland-Boddy [2005] EWCA Civ 974 / WLR 3966 xiii D-G are all part of the judgment of Chadwick LJ in Shierson (ibid.) in which the debtor was an experienced insolvency practitioner and accountant who had very clearly switched his centre of main interests from the UK to Spain with an eye on impending insolvency proceedings. 27

28 (c) the right to demand the assets from, and/or to require restitution by, anyone having possession or use of them contrary to the wishes of the party so entitled; (d) a right in rem to the beneficial use of assets. 3. The right, recorded in a public register and enforceable against third parties, under which a right in rem within the meaning of paragraph 1 may be obtained, shall be considered a right in rem. 4. Paragraph 1 shall not preclude actions for voidness, voidability or unenforceability as referred to in Article 4(2)(m). 84. However, if an individual is bankrupted in another jurisdiction (e.g. the UK) then the question arises what happens to such property they have here if there is any equity in same. In that case it will most likely have to become the focus of secondary insolvency proceedings, e.g. a bankruptcy in the jurisdiction limited to the assets in this jurisdiction. There is anecdotal commentary on the corporate insolvency side of a practice developing where the extra territorial assets are deal with by way of negotiation for approval in the main proceedings. However that may not be possible, particularly for example in respect of the family home. COMPOSITION, DISCHARGE AND ANNULMENT Introduction. 85. While providing a means by which the bulk of a debtor's assets may be made available to the extent necessary to discharge his indebtedness in full, the bankruptcy regime also affords to a bankrupt an opportunity to compromise with his creditors for a lesser sum than is due, and to have his bankruptcy discharged. This postbankruptcy composition procedure, as it is known, carries obvious benefits for a debtor wishing to make a fresh start in business. It may be equally attractive to creditors, especially where the bankrupt's assets are such that a composition offer is unlikely to be exceeded by the dividend payable following a full realisation of the bankrupt's estate. The positive points in the Composition procedure are as follows: (1) A bankrupt who succeeds in carrying a composition after bankruptcy will secure the full and final discharge of his unsecured liabilities in return for payment of a portion of the debts, and will ordinarily obtain a discharge of his bankruptcy. (2) A stay on realisation of assets will accompany the composition procedure, thus giving the bankrupt a breathing space in which to obtain the necessary funds and assemble a suitable settlement proposal. (3) The bankrupt only requires the approval of three-fifths in number and value of unsecured creditors voting on the offer of composition to make it binding on all unsecured creditors. Thus he may be able to circumvent the opposition of any unsympathetic creditor, even the creditor who petitioned for his bankruptcy in the first instance. (4) The burden of stamp duty payable in a composition after bankruptcy is much less than that which arises where the bankruptcy proceeds to full realisation. 28

29 (5) Since carriage of the composition procedure is given to the solicitor for the bankrupt, some degree of initiative passes to the bankrupt. The negatives from the bankrupts point of view are: (1) A composition offer must involve payment in full of the costs, fees and expenses, and, most importantly, of the preferential debts, before providing for payment to the ordinary creditors. This will render the composition option impracticable for many insolvent traders. (2) The bankrupt cannot require secured creditors to be party to the composition, nor inhibit the realisation by them of their securities. (3) The composition offer will require to be gazetted by the bankrupt in Iris Oifigiúil and published in such newspaper or newspapers as the Examiner directs, the expense of which must be borne by the bankrupt, who must also provide a copy of his statement of affairs free of charge to any creditor requesting it. Procedure. 86. The bankrupt must firstly apply to the Court for a stay on realisation of his estate to enable an offer of composition to be made by him or on his behalf. Where a stay is granted, the Examiner will fix a date for a meeting before the Court at which creditors may vote on the offer. Creditors here refers to unsecured creditors only. Secured creditors may benefit from a composition offer only if they have abandoned their security or, where they have valued or realised it, in respect of the unsecured balance of their debt. 87. The Official Assignee will not have advertised for and adjudicated on creditors' claims unless sufficient funds have come to credit in the bankruptcy to enable him to discharge costs, fees and expenses of publication, and to pay a dividend of some kind. Realistically, therefore, funds of substance will require to have been realised or lodged before the bankrupt embarks on the procedure. This is generally carried out at the time of the application for a stay. 88. The meeting, when fixed by the Examiner, must be advertised by the bankrupt's solicitor in Iris Oifigiúil and in such newspaper or newspapers as the Examiner nominates, and notice of it must be served on each creditor. R. 85. The notice is in Form 24. Creditors are entitled to obtain from the bankrupt, free of charge, a copy of his sworn statement of affairs to enable them to appraise his offer. The offer must be endorsed on the statement of affairs. The creditors must be given an opportunity of forming a reliable opinion as to the true value of premises and chattels In re Fry [1913] 2 IR 273 at p. 278, and this would seem to require that the bankrupt should furnish up-to-date information should there have been any material change in, or omission from, the position as indicated by his statement of affairs. Should threefifths in number and value of creditors voting at the meeting, either personally or by proxy, accept the offer in its original or modified form, it is deemed to be accepted but it will require approval from the Court to be binding on the creditors. The Court s discretion. 89. Essentially, the Court will not refuse approval of an offer accepted by three- fifths in number and value of the creditors, unless it views the offer as unreasonable. In re Thomas Harris, a Bankrupt [1918] 2 IR 571. There is no specific rule or guideline as to the amount of a composition which might be accepted, except that the sum must not be so small that no reasonable creditor would accept it. Ex p. Cobb, In re Sedley, LR 8 Ch 727; Ex p. Page, 2 ChD 323; Ex p. Terrell, 4 ChD 293. However, the smallness of 29

30 the dividend in itself would not be evidence of a lack of bona fides. Ex p. Hudson, in Re Walton, 22 ChD 773; Ex p. Russell, in Re Robins, 22 ChD 778. The Court will take into consideration all the circumstances of the case. In re Armstrong a Bankrupt, 55 ILTR 189. It has been held that where an application is made to the Court, the Court has a duty to take into consideration the conduct of the debtor and the interests of the general public as well as the wishes of the creditor and the Court will, where appropriate, refuse to approve a composition even though all of the creditors support the proposal, if it would not, in the opinion of the Court, be in the interests of commercial morality and public interest to do so. If the debtor does not make full disclosure of all assets and more particularly of the value of them, to the creditors and the Court, an aggrieved creditor may feel entitled to ask the Court to refuse to approve. Methods of payment. 90. S. 40(1) allows the composition to be paid in one of three ways. Firstly, it can be paid in cash, within one month from the approval by the Court... or within such further time period as the Court may allow. Secondly, it can be paid by instalments, all of which shall be secured to the satisfaction of the creditors. Thirdly, it can be paid partly in cash and partly by instalments payable or secured to the satisfaction of the creditors. S. 40(2) provides that no instalment shall be secured by a bill, note or other security enforceable against the bankrupt alone. In a case where a composition was payable by instalments, and the last of the instalments was secured, where an earlier instalment had not been paid, it was held that the creditors had to either give up the bills or securities which they held for the composition and prove for the full amount of their debts less any instalments received, or hold the bills/securities and then stand outside the bankruptcy. In re Larmour and husband, Bankrupts, 44ILTR 87, applying In re R., 23 LR Irl 22. The report of the Official Assignee. 91. Where an offer of composition has been accepted by the creditors and approved by the Court, then before an application can be made to the Court for a discharge from bankruptcy, a report must be obtained by the bankrupt from the Official Assignee confirming that all costs ordered by the Court to be paid have been paid. It must also confirm that all of the preferential debts have been paid, and that the composition has been paid to all of the creditors entitled to such payments. In the case of creditors who cannot be found or who have declined to accept the composition, the report must show that the relevant payments have been lodged with the Official Assignee. R. 88. The Court will not entertain the application by the bankrupt until such time as this report has been obtained from the Official Assignee. The format of the report is set out at Form No. 25 of the rules. Discharge following composition. 92. Following the report of the Official Assignee, and in the absence of fraud, the Court will, pursuant to s. 41, discharge the adjudication order on the bankrupt's application. In the case of a composition payable in cash, the discharge is granted once the amount necessary to pay the composition, expenses, fees, costs, such further sums as the Court may direct and the preferential payments, have been lodged with the Official Assignee. S. 41(a). In the case of a composition which is payable by instalments which are to be secured to the satisfaction of the creditors, upon lodgment with the Official Assignee of the completed bills, notes or other securities, to the necessary amount to pay the expenses, fees, costs, such further sums as the Court may direct and the preferential payments the Court will discharge the adjudication order. S. 41(b). In the case of a composition payable partly in cash and partly by instalments which are secured to the satisfaction of the creditors, the Court 30

31 will discharge the adjudication order once the completed bills, notes or other securities, the amount necessary to pay the cash composition, expenses, fees, costs, such further sums as the Court may direct and the preferential payments, have been lodged with the Official Assignee. S. 41(c). 93. Where the composition fails, the bankruptcy will proceed after the expiry of the term of the stay on realisation granted under s. 36, or earlier if the Court removes the stay. Where the composition offer is not accepted by the creditors or has not been approved by the Court or where the Court has refused to discharge the adjudication order and has ordered the bankruptcy to continue, or where the bankrupt has failed to pay the composition agreed on, or where the Court so directs, any debt proved or admitted at the composition meeting, or admitted by the Official Assignee, may afterwards be expunged either wholly or partly upon such notice to the creditor as the Court directs. R. 89. Discharge and annulment. 94. The bankruptcy process may be brought to an end in one of two ways, i.e., discharge or annulment. Discharge involves the release of a bankrupt following the completion of the bankruptcy process whereas annulment is a process where the Order of Adjudication is nullified on the grounds that the bankrupt ought not to have been adjudicated in the first instance. The Budd Committee (Chapter 38) felt that the procedures set out in the 1857 and 1872 Acts dealing with composition after bankruptcy, certificates of conformity (a certificate granted to a bankrupt when he had conformed with the bankruptcy, the effect of which was to release him from certain of his debts) and the practice of annulling bankruptcies with the consent of creditors had fulfilled the purposes for which they were originally intended, namely, the release of bankrupts from their disabilities. The Committee felt however that a new system should be evolved to enable bankrupts to be discharged. They considered (at para ) the possibility of providing for an automatic discharge after a number of years but decided against it. The Committee also felt that to remove the odium of bankruptcy too easily or to relax the conditions under which bankruptcies could be annulled or bankrupts discharged would not be in the general interests of the community, particularly the business community. The Committee stated (para ) that such a relaxation would : (1) encourage a bankrupt to withhold information regarding assets, (2) involve a reduction in the sums recovered by creditors, (3) provide an incentive not to pay debts as, if the debtor could hold out long enough, he would be automatically discharged, and (4) lead to an increase in the number of bankruptcy petitions brought by debtors who hoped to terminate their obligations to their creditors at the end of a fixed time period. 95. The position in England has now been for many years that there was an automatic discharge, which used to occur after three years, and following the Enterprise Act 2002 it occurs in many cases after one year. The trustee in bankruptcy is entitled to apply to Court to disallow the discharge if it is believed that any assets have not been disclosed or realized at that stage. While it may be that a three or one year period is too short there is no benefit to any parties in allowing bankruptcies which occurred in the 1980 s to subsist which is currently the case here. It is submitted that there should be an automatic discharge after 12 years unless a Court holds other wise. 96. S. 85(3) and (4) set out the statutory grounds on which a bankrupt, other than a bankrupt to whom s. 85(1) applies, is entitled to a discharge from bankruptcy. Firstly, 31

32 the bankrupt is entitled to a discharge as a result of a post-bankruptcy composition which has been successfully carried through. S. 85(3)(b). Secondly, under s. 85(3)(a) a bankrupt shall be entitled to a discharge from bankruptcy when provision has been made for the payment of the expenses, fees and costs due in the bankruptcy, as well as the preferential payments, and (i) (ii) he has paid one pound in the pound, with such interest as the Court may allow, or he or she has obtained the consent of all of his or her creditors who have proved and been admitted in the bankruptcy (I) to his or her discharge, and (II) to the waiver of their rights to the amounts for which they have respectively so proved and been admitted, as evidenced by the creditors having executed the form prescribed for the purposes of such consent, or. xiv 97. Thirdly, in accordance with Section 85(4) a bankrupt whose estate has, in the opinion of the Court, been fully realised shall be entitled to a discharge from bankruptcy when provision has been made for the payment of expenses, fees and costs due in the bankruptcy, as well as the preferential payments, and ( a ) his creditors have received fifty pence or more in the pound, or ( b ) he or his friends have paid to his creditors such additional sums as will together with the dividend paid make up fifty pence in the pound, or ( c ) the bankruptcy has subsisted for twelve years: provided that in any application under paragraph (c) the Court shall be satisfied that all after-acquired property has been disclosed and that it is reasonable and proper to grant the application. 98. Where a bankrupt applies for discharge under para. (c) above the Court must be satisfied that all after-acquired property of the bankrupt has been disclosed and that it is reasonable and proper to grant the application. S. 85(4). S. 85(5) sets out the bases on which the bankrupt is entitled to an annulment of his bankruptcy. These are, firstly, where he has shown cause pursuant to section 16, and, in any other case where in the opinion of the Court he ought not to have been adjudicated bankrupt in the first instance. This latter provision appears to give the Court an unfettered discretion in relation to the grounds for annulment. Any applications made under this section have generally been defeated on the grounds of the bankrupts delay. 99. Where, at a sitting for distribution, it is shown to the satisfaction of the Court that provision has been made for all of the various expenses and the preferential debts, and that the bankrupt has paid one pound in the pound with such interest as the xiv Section 85 (3)(a) (ii) was amended by Section 65 of the Civil Law (Miscellaneous Provisions) Act 2008 which came into effect on the 20 th July It appears to be designed to close off the possibility opened up in the judgment of McCracken J in Re John Gill, High Court, unreported 4 th February 2002 which seemed to imply that in certain defined circumstances the Court might approve an application for discharge where creditors had been settled with on an individual and not pro rata basis. 32

33 Court may allow or has obtained the consent of creditors or an offer of composition has been accepted, the Court may order the bankruptcy to be discharged. R Where an application is based on the ground that the bankrupt obtained the consent of all of his creditors under s.85(3)(a)(ii), the bankrupt will require to apply on affidavit exhibiting a consent signed by each of his creditors and ten days notice and a copy of the affidavit must be given to the Official Assignee. R The difficulty for many bankrupts is the requirement to pay the preferential (usually Revenue) debts in full prior to discharge. This requirement has been removed in the UK so as to facilitate people getting out of bankruptcy. In circumstances where many people who fall into debt will have significant liabilities to Revenue it often presents an insurmountable obstacle to getting out of bankruptcy leading to many bankruptcies becoming stale and frequently having to be dealt with after the bankrupts death. That is not a state of affairs which is of benefit to the State, the bankrupt or his creditors