Bankruptcy and Insolvency: Estate, Claims, and Priorities
Core concepts
Insolvency law addresses two questions: who controls the debtor, and how assets are distributed. Bankruptcy (liquidation) vests the debtor's property in a trustee and imposes a stay on creditors. Proposals/arrangements restructure debt while the debtor retains control. Key concepts include acts of bankruptcy, preferential transfers, transfers at undervalue, fraudulent preferences, and reviewable transactions within statutory look-back periods. Priority schemes determine distribution: secured creditors, preferred creditors (employees, taxes in some jurisdictions), ordinary unsecured, and shareholders. Proof of claim procedures and set-off rules matter. Discharge releases the debtor from provable claims but not from certain debts (fraud, some family support, fines).
Traps
- Confusing the stay in bankruptcy with the stay in a proposal; scope and timing differ.
- Missing that secured creditors may realize outside the estate, subject to notice and valuation rules.
- Overlooking look-back periods for preferences and undervalue transfers.
- Assuming all debts are discharged; fraud and family support survive.
- Forgetting that directors can face personal liability for unpaid wages or taxes.
Worked rule of thumb
Apply the S-P-P sequence: Stay (what is frozen), Property (what enters the estate), Priority (who gets paid and in what order). Then test any pre-bankruptcy transaction against preference and undervalue rules.