UK Bankruptcy Law
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thanks yep it is definitely an IPA and yes it is so the client can be discharged at the end of the 12 months without it being extended.
The client is happy with the IPA that is agreed, but because IPA's take 100% of the excess earnings.. there is no incentive for him to work harder than to earn anything more than the agreed IPA amount.Once he has agreed the IPA and been discharged, I am inclined to offer that if he made additional income over and above the IPA then he could put it into an authorised pension (this would maintain the assessable earnings to the agreed level), he currently has no pension.
Or he could incorporate once discharged, set salary and dividends to the agreen level and leave any additional income un-drawn within the company until the IPA expires in 3 years time. This again would keep his earnings in line with the agreed IPA payments. 100% excess taken by the IPA seems a self defeating proportion as there is no incentive to work harder if you get no benefit.
the IPA has assessed his net monthly income at about £1,904 and his allowable living expenses as £1,800, with a monthly IPA of £104.
The IPA claims 100% of income over and above the allowable living expenses. (above are rough figures I don't have actual in front of me)
I am trying to allow my client to work more and retain the benefit, otherwise he has no incentive to do any additional work, in fact he may then decide to work enough just to make his allowable living expenses, claim reduced earnings and have the IPA reduced to zero.
With respect there seems to be two options;
a) Stay a sole trader, but make pension contributions reducing any earners to the net assessable income of £1904 so he can maintain the IPA payments, but at least he is benefiting by building a pension pot
this is a link to government information on pensions and insolvency that seems to suggest this would work
b) after 31/03/2013 he will be released from bankruptcy conditional on his agreeing to the IPA. However being out of bankruptcy, he could then incorporate his trade as a limited company. All earnings transfer to the company and he can limit his remuneration to the assessed level of £1,904, leaving any additional earnings inside the company to be drawn after the 3 year IPA expires. As this will be after his release from bankruptcy I don't see that the trustees will have any claim on the company and therefore this should safeguard any additional earnings over and above £1,904. This is the preferred option.
no there are no assets, he is a freelance graphic designer, it is all just man hours and a bit of software.
That's not a problem, we can draw up a proper employment contract stating salary.. etc.
Sorry I do not know what you mean by default provisions, we do not have a fully drafted IPA, we are currently just being asked to agree and IPA of £104 a month. I guess we won't see sight of a full document until we agree and one is drafted.
It is a standard 3 year IPA request.
This link seems to give the information you require
And here is an interesting paragraph, it seems to exclude capital assets acquired after discharge
31.7.56 Funds arising from capital property
Where the bankrupt has an interest in capital assets as at the date of bankruptcy, e.g. bank accounts, property, shares etc, these are vested assets and should be realized within the bankruptcy proceedings. Any income arising from the ownership of the vested asset (e.g. dividend income arising from shares held) will also be claimed as an asset which vests in the bankruptcy estate. In the same way if the bankrupt receives a capital asset post bankruptcy (but prior to discharge) the asset can be claimed as after acquired property and any income or payments arising from ownership of the asset (such as dividend income) will vest in the bankruptcy estate. For further information on realising monetary assets (including funds received from trusts) see Chapter 31.5, Part 2 and for further information on claiming shares as after acquired property see Chapter 31.8 Part 3, in particular paragraph 31.8.50 regarding shares.
he has a few customers, but there is virtually no way of assigning a value to them. Work can stop as easily as it starts, and without him there would be no work so there is no goodwill value.No he is not disqualified as a director. Well he could put someone else in as a director, but he would be the sole shareholder and therefore effectively have control of the company anyway so I am not sure how this would be viewed as any different from him being a director. .
As far as I can see this is a post bankruptcy release acquired asset, outside the bankruptcy therefore can be no claim on it. If his salary is set at the level required to meet his IPA then they will be being paid. The retained earnings will belong to the limited company as a separate legal entity so can not be taken into account post bankruptcy release, and if no distribution is made to the individual then they can not be taken to be earnings.
If legitimate arguments are needed as to why the company was incorporated, they can be along the lines of having just been made personally bankrupt it is seen as prudent to ring fence business and personal finances in the event that the business got into trouble there would not be the risk and putting the owner back into a personal bankruptcy. Also by ring fencing the business income and taking only a salary to ensure personal living expenses and financial commitments are met, ensures that any excesses are retained in the business mitigating the risk that any downturn in the business would have an adverse affect on the immediate to short term ability to maintain personal living expenses and financial commitments until remedial steps could be taken to source additional contracts.This latter is also a risk of taking 100% of the excess, the loss of one client could mean that the whole IPA is in jeopardy as the individual has no resources to fall back on to see them through.
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