The trustee in bankruptcy (TIB) has the duty to pay as much of the bankruptcy debts as is possible by converting the bankrupt estate into money. The fact that a bankruptcy order was granted indicates that there will most likely not be enough money in the 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:
And then in order of priority ranking:
A creditor is secured if they hold the right to sell a specific asset in which the debtor has an interest and take the net proceeds of that sale in or towards payment of a particular debt that the debtor has failed to pay. A secured creditor retains their security even if the debtor is declared bankrupt.
If the secured creditor decides to sell the asset over which they hold the security and the proceeds of the sale are:
If the secured creditor decides not to sell the asset over which they hold 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 the bankrupt's estate.
Cost of bankruptcy
The costs of bankruptcy include the expenses incurred to convert the bankrupt estate into money and the professional charges of the trustee in bankruptcy (TIB) to administer the bankrupt's 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 that 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 under 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:
These costs will be paid in full before any of the insolvency debts listed below is paid.
The preferential creditor, although without security for the debt owed them, gets paid before any unsecured creditors.
Preferential debts are mostly relevant if the bankrupt was an employer as it includes certain employee claims and contributions to pension schemes.
A creditor is unsecured if they do not have the right to sell an asset (the security) of the debtor if the debtor fails to pay the debt in full and on time. These unsecured creditors could, for example, include:
Providers of certain essential services such as water, gas, electricity, communication services and IT supplies, are by law prohibited from requiring payment of outstanding charges for services that were supplied prior to the date of a bankruptcy order, the approval of a voluntary arrangement or a deed of arrangement, as a condition for the continued supply to a business of that debtor. 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 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 the debtor. This allows the debtor to start afresh free from any debts after their discharge from bankruptcy.