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Joshua
Joshua, Lawyer
Category: UK Bankruptcy Law
Satisfied Customers: 59
Experience:  LL.B (Hons), Higher Prof. Dip. Law & Practice
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Good Afternoon I have a question concerning a client, who is

Customer Question

Good Afternoon I have a question concerning a client, who is currently negotiating his discharge from Bankruptcy. He is self employed and he is looking at ways of limiting the IPA to what he has agreed to pay for the 3 years and what is the process. Our current questions are;

1) After discharge his earnings may fluctuate up and down, does he have to furnish accounts periodically to the Trustees after discharge so they can access the level of the agreed IPA? If not what is the process is he responsible for informing them if his earns change up or down?

2) He does not currently have a pension, I have read that once he has been discharged he could make contributions to an authorised pension and this would reduce his assessable earnings for IPA assessment purposes. Is this the case?

3) If he incorporated and operated through a limited company and set his earnings to the level of those assessed by the trustee to calculate his IPA. Could he effectively protect any increase in earnings from being taken into the IPA by leaving them within the Limited company, until after the IPA has expired in 3 years time.

Information on these issues would be most appreciated.
Submitted: 1 year ago.
Category: UK Bankruptcy Law
Expert:  Alex J. replied 1 year ago.
Hi,

Thank you for your question.

I am happy to assist with this.

Is this definitely an IPA? It is not a court ordered one?

Is the IPA in order to stop the bankruptcy being extended?

Kind regards

AJ
Customer: replied 1 year ago.

Hi AJ,


 


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.


 


Thanks


Andy.

Expert:  Alex J. replied 1 year ago.
Hi,

Thank you.

I will go and write an answer and post it as soon as possible.

Kind regards

AJ
Expert:  Alex J. replied 1 year ago.
Hi,

Thank you.

The IPA is a private agreement, what is surprising to me is that his trustee has not included something to prevent excessive pension contributions.

The danger is from making these pension contributions if he is put back into bankruptcy the trustee will be able to claw these contributions back if they are excessive.

Presumably the IPA has a definition of excess income? Can you tell me what it is?

Kind regards

AJ

Customer: replied 1 year ago.

Morning AJ,


 


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


http://www.bis.gov.uk/assets/insolvency/docs/publication-pdfs/pension.pdf


 


 


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.


 


Thanks


Andy

Expert:  Alex J. replied 1 year ago.
Hi,

Thank you.

I understand option (b) to be the preferred option as well, however how will he transfer his trade to the limited company? Are there assets etc that would need to be transferred for good value?

Kind regards

AJ
Customer: replied 1 year ago.

Afternoon AJ,


 


no there are no assets, he is a freelance graphic designer, it is all just man hours and a bit of software.


 


Thanks

Expert:  Alex J. replied 1 year ago.
Hi,

Thank you.

In order for that arrangement to work he would have to have a proper consultancy or employment agreement in place with his company to show how he pays himself under this new structure.

What are the default provisions of the IPA?

Kind regards

AJ
Customer: replied 1 year ago.

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.


 


Regards


Andy Greem

Expert:  Alex J. replied 1 year ago.
Hi,

Thank you.

How many months will the IPA last for?

Kind regards

AJ
Customer: replied 1 year ago.

It is a standard 3 year IPA request.

Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

I need to review the default provisions.

I will revert to you tomorrow.

Kind regards

AJ
Customer: replied 1 year ago.

Thanks AJ

 

This link seems to give the information you require

 

http://www.insolvencydirect.bis.gov.uk/freedomofinformation/technical/casehelpmanual/I/IPA%20(ISCIS).htm

 

 

And here is an interesting paragraph, it seems to exclude capital assets acquired after discharge

 

http://www.insolvencydirect.bis.gov.uk/freedomofinformation/technical/TechnicalManual/Ch25-36/Chapter31/part7/part3/part_3.htm#31.7.35

 

 

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.



 

Regards

 

XXXXX XXXXX

Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

Does your client have any customer lists or goodwill he would transfer?

If he forms a limited company it may be best to have some one else manage it until the IPA ends.

Has he been disqualified as a director as well?

Kind regards

AJ
Customer: replied 1 year ago.

HI AJ,


 


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.


 

Expert:  Alex J. replied 1 year ago.
Hi

Thank you.

To be honest everything you have said is completely consist with why you would form a limited company.

Also you are right any profits above the set amount in his IPA could be retained in the company.

I would say though the only way to properly vet this agreement is to obtain the advice of an Insolvency Practitioner.

Do not forget that trustees have very wide reaching powers to unwind arrangements that a bankrupt had made. That would be my main concern that the trustee may see this as a cynical ploy to avoid the IPA and seek bankruptcy again.

Ask yourself this is the trustee actually expecting more than £104 per month?

Kind regards

AJ

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