Distribution of assets

Distribution of assets

Ranking of creditors

The trustee in bankruptcy (TIB) has the duty to pay as much of the bankruptcy debts as is possible by converting your bankrupt estate into money. The fact that a bankruptcy order was granted indicates that there will most likely not be enough money in your bankrupt estate to pay off the debt owed to the creditors in full. The insolvency rules determine which type of unsecured creditor gets paid first and this is referred to as the priority ranking of a creditor. A creditor that ranks lower cannot be paid until all higher-ranking creditors have been paid in full.

The following different types of creditors and debts are discussed below:

  • Secured creditor

And then in order of priority ranking:

  • Costs of the bankruptcy
  • Preferential creditors
  • Unsecured creditor
  • Interest payable on debts

Secured creditor

A creditor is secured if they hold the right to sell a specific asset (for example, your home) and take the net proceeds of that sale in or towards payment of a particular debt that you have failed to pay (for example, your home loan). A secured creditor retains their security even if you are declared bankrupt.

If the secured creditor decides to sell the asset they hold as security and the proceeds of the sale are:

  • more than the outstanding debt owed to them; they must pay the excess over to the TIB for distribution among the other creditors;
  • less than the outstanding debt owed to them; they can lodge a claim (this is referred to as 'proving' the debt) in your bankrupt estate as an unsecured creditor for the unpaid balance of the debt.

If the secured creditor decides not to sell the asset they hold as security, they can give up their security so that the asset can be sold for the benefit of all the unsecured creditors. They can then prove for their full debt as an unsecured creditor in your bankrupt estate.

Cost of bankruptcy

The costs of bankruptcy include the expenses incurred to convert your bankrupt estate into money and the professional charges of the trustee in bankruptcy (TIB) to administer your bankrupt estate.

The creditors who will get paid from what money is left over after the TIB's fees have been paid will want to make sure that those fees are not higher than they should be. The creditors may, except if the OR is the TIB, appoint a committee of up to 5 but not less than 3 members to monitor the administration of the bankruptcy and to approve the TIB's fees. If no committee is appointed, then the fees may be fixed by a decision of the creditors taken by following a decision procedure.

The TIB's fees must be fixed in accordance with prescribed Insolvency Rules that provide for 3 methods of fixing the fees. These methods can be used in combination or different ones can be used for the different tasks dealt with by the TIB.

The 3 methods that can be used to calculate the fees are:

  • fixing the fees as a percentage of the value of the assets sold or distributed or both;
  • determining the fees in accordance with the time spent by the TIB and their staff to attend to matters in the bankruptcy; and
  • agreeing to a set amount.

These costs will be paid in full before any of the insolvency debts listed below is paid.

Preferential creditors

The preferential creditor, although without security for the debt owed them, gets paid before any unsecured creditors.

Preferential debts are mostly relevant if you were an employer as it includes certain employee claims and contributions to pension schemes.

Unsecured creditors

A creditor is unsecured if they do not have the right to sell an asset (the security) of yours if you fail to pay the debt in full and on time. These unsecured creditors could, for example, include:

  • Her Majesties Revenue and Customs (HMRC) for any unpaid personal income tax and National Insurance contributions
  • Credit card companies
  • Suppliers of goods on credit such as on store cards
  • Personal loan companies
  • Payday loan companies
  • Service providers for unpaid service fees such as outstanding accounts for property maintenance, gas, electricity, mobile and broadband rentals

Providers of certain essential services such as water, gas, electricity, communication services and IT supplies, are by law prohibited from requiring you to make payment of outstanding charges for services that were supplied prior to the date of your bankruptcy order as a condition for continuing to supply to your business. However, the supplier may terminate the supply if the office-holder doesn't personally guarantee payment of the charges incurred after that date.

All the unsecured creditors rank equally among themselves and a percentage of each debt will be paid from available funds in proportion to how much is owed. Only if there are funds left over after all prior categories of debt have been paid in full will the unsecured creditors share the balance in proportion to their particular outstanding debt. An unsecured creditor will only be paid in full if all the unsecured creditors can be paid in full.

An unsecured creditor must accept whatever the TIB pays on the outstanding debt as full and final settlement, even if only a percentage of the debt was paid or nothing at all. The bankruptcy prevents the creditor from making any direct claims against you. This allows you to start afresh free from any debts after their discharge from bankruptcy.

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