Would you know what to do if one of your employees was made bankrupt?

Are they still entitled to receive their salary direct or should it be paid to their trustee in bankruptcy? Can you continue to make any deductions? What about their pension contributions? This article outlines some of the key points to bear in mind.

What is bankruptcy and who has made the individual bankrupt?

Bankruptcy is an insolvency procedure that is used for an individual (as opposed to a body corporate) who owes a creditor at least £750 (the minimum limit is set to rise to £5k in October).

Once bankrupt, an individual’s estate vests automatically in the Official Receiver. The Official Receiver may deal with the estate themselves or appoint a trustee in bankruptcy. The bankruptcy estate includes all assets in which the bankrupt had an interest at the date of the bankruptcy order. This may include, amongst other things, money, property and land.

Bankruptcy generally only lasts for one year unless the bankrupt has had their discharge suspended by the court for some reason.

What property will a bankrupt retain after being adjudged bankrupt? 

• Salary - A bankrupt is entitled to retain their salary unless this is claimed by their trustee in bankruptcy or the official receiver pursuant to an income payments order. An income payments order is an order from the court that the Bankrupt must give up some of their salary which will go back into the bankruptcy estate.
• Property acquired after the date of the bankruptcy - A bankrupt will also retain any property which they have acquired after being adjudged bankrupt.
• Tools for work – if the bankrupt has a specialised profession, for example a plumber they may be able to retain their tools in order to keep on working. A bankrupt may also be able to retain their car if it is needed to continue with their role.
• Pension benefits – Bankrupts are usually entitled to retain their pension fund provided the pension scheme is one ‘approved’ in accordance with HMRC rules.

Yes, unless they are restricted from doing so in accordance with the bankruptcy restrictions. For example, an individual cannot act as a director of a company.

Some professional bodies do not permit a person who has been adjudged bankrupt from practising without specific authority, for example lawyers.

Care should be given if the bankrupt’s role has an element of financial responsibility or if the role needs FCA approval to be carried out.

Loans to an employee who has been adjudged bankrupt

If an employee has a loan as part of their benefits package the employer will almost probably become an unsecured creditor for this sum. A common example is a season ticket loan for travelling. Generally, an employer will be required to stop making loan deductions from salary and instead submit details of their debt to the relevant trustee in bankruptcy.

Post-bankruptcy loans

One of the main restrictions for a bankrupt is that during their period of bankruptcy it is an offence for a bankrupt to take credit of more than £500 without disclosing this fact to the relevant lender. If an employer makes a loan whilst an employee is still bankrupt they should contact the employee’s trustee in bankruptcy for guidance.

Please note that this article is not intended to be a comprehensive guide and specific legal advice should be sought in every situation.

Ortolan has a specialist insolvency and restructuring lawyer who is able to provide bankruptcy advice. If you have any queries please contact Beverley Lambert.