The Bankruptcy Act 1989 and the Bankruptcy Rules 1990 govern bankruptcy in Bermuda. Either the debtor or his creditor(s) normally begins the process with the filing of a petition at Court.

Creditors who start the process must show that the debt amounts to $5,000 or more.

The Court must be convinced that an ?act of bankruptcy? has been committed. Examples include:

The debtor has left the country to avoid paying creditor(s)

The debtor does not pay a final court judgment obtained by the creditor(s)

The debtor files a declaration at Court saying he is unable to pay the debts as they fall due

The debtor gives the creditor(s) notice that he has or will suspend payment of the debts owed

Once convinced, the Court issues a Receiving Order, which allows an Official Receiver (an appointee at the Registrar of Companies) to protect and preserve the debtor?s estate for the benefit of creditors.

Within three to seven days (depending upon whether the petition was commenced by the debtor or creditor) of the Receiving Order the debtor has to provide a Statement of his Affairs to the Official Receiver verified by affidavit detailing all of his assets, debts, liabilities and creditors.

The Court then holds a Public Examination, at which the Court, Official Receiver and creditor(s) may examine the debtor under oath as to his conduct, dealings, property and causes of his failure.

The Official Receiver also has the power to ask the Court to redirect the Bankrupt?s post to the Official Receiver and to ask the Court to summon before it the Bankrupt?s spouse or any other person known to have relevant information about the Bankrupt?s dealings and property.

The debtor has a duty to provide all the information necessary to aid the distribution of his assets among creditors.

Within 30 days of the Receiving Order, the creditor(s) meet with the debtor to decide whether an arrangement can be made (referred to as a ?Composition or Scheme of Arrangement?) in satisfaction of the debts, or, whether it is more beneficial to proceed with bankruptcy.

If the latter option is chosen, the Court may declare the debtor bankrupt. The Bankrupt?s property will then vest in a Trustee (possibly one of the creditor(s) or some other fit person), who has control and responsibility of the Bankrupt?s property and can sell and distribute the proceeds to the creditor(s) according to any priority rules.

Government taxes and employee salaries rank equally and are paid first if funds are available. Ordinary claims are paid in equal proportions to the extent of the available property of the Bankrupt.

The Trustee may unravel certain transactions made by the debtor prior to the adjudication of bankruptcy if they were carried out with a view to defeat creditor(s).

An example might include a gift to the Bankrupt?s spouse within two years prior to the commencement of bankruptcy. In such cases, that property becomes available to the Trustee.

Some assets and income must be left with the bankrupt including:

Property held by the bankrupt in trust for any other person

Books, tools, vehicles and other items of equipment necessary for use personally by him in his business (however, the Trustee can replace such articles with a cheaper substitute)

Clothing, bedding, furniture, household equipment and basis domestic needs of the family

During bankruptcy, should the Bankrupt wish to apply for credit, the Bankrupt must inform his bank that he is an undischarged bankrupt.

Likewise, the Bankrupt may not engage in another business without disclosing details of his bankruptcy. Failure to do so may result in a fine and/or imprisonment.

The Bankrupt can apply to the Court for early discharge from bankruptcy. The Court will consider a report from the Official Receiver as to the Bankrupt?s conduct and affairs.

The Bankrupt may be given an absolute or conditional discharge. Conditions may include an income payments order requiring payment of part of the discharged Bankrupt?s future earnings, or, an order to hand over the property acquired by the Bankrupt after his discharge (e.g. inheritance, windfalls, profit from the sale of a property).

Terms of discharge can be made more onerous, particularly where the Bankrupt continues his business after being declared bankrupt; or has not kept proper books of account for three years prior to the bankruptcy; or has brought about the bankruptcy by ?rash and hazardous speculations? or by ?unjustifiable extravagance in living or by gambling?; or has been adjudicated bankrupt before; or is guilty of fraud.

These circumstances may also result in criminal sanctions.

A Bankrupt may be automatically discharged after 15 years from the commencement of bankruptcy as long as he has not been convicted of any offence under the Act or has not been involved in certain circumstances identified by the Act, examples of which are noted above.

The Court may review, withdraw or vary such a discharge order.

While there are benefits to declaring bankruptcy, a debtor?s credit history will be severely damaged even after discharge.

Also, an order of discharge does not release a bankrupt from certain types of liabilities, including a debt or liability incurred by fraud or any claim in damages for negligence. A potential bankrupt should, therefore, consider all the ramifications before committing an act of bankruptcy.

@EDITRULE:

Fozeia Rana-Fahy is an attorney in the Litigation Department at Appleby Spurling Hunter. A copy of Ms. Rana-Fahy?s column can be found on the Appleby Spurling Hunter website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters described herein, persons are advised to consult with a lawyer.