On April 1 the provisions of the Enterprise Act 2002 and the Amended Insolvency Rules dealing with personal insolvency came into effect. Here we explore the main changes that have been brought about by the legislative provisions.
Reduction of bankruptcy period
Before April, once declared bankrupt, the period of bankruptcy generally lasted for three years. During this time, there are various restrictions on what a bankrupt can and cannot do.
The Enterprise Act has now reduced the period of bankruptcy so that in most cases the bankrupt will be automatically discharged after 12 months.
In many cases, the discharge may come even earlier because the Official Receiver can file a notice with the court indicating that the investigation of the bankrupt's affairs is unnecessary or concluded and consequently bringing an end to the bankruptcy.
The aim is to encourage enterprise and to lose the stigma which is currently attached to being a bankrupt.
For those made bankrupt before April 1, their bankruptcy will come to an end either on the date that they would, in the ordinary course under the old rules, have been discharged or, if earlier, April 1, 2005.
No automatic rules on second bankruptcy
The old rule that a person who is made bankrupt for a second time within a 15-year period will only be discharged upon application to the court has been abolished.
Anyone subject to the old rules will be discharged upon application to the court (which may be made at any time after five years for the date of the most recent bankruptcy order) or automatically on April 1, 2009.
Bankruptcy Restriction Orders (BRO)
The period of bankruptcy can be extended by an application by the Official Receiver or trustee. The bankruptcy can be extended for a period between two and 15 years.
The act provides a number of grounds upon which a BRO will be granted. These grounds are generally due to failure to co-operate during the bankruptcy or some misconduct leading up to the bankruptcy, for example, giving a preference or entering into a transaction at an undervalue.
The rules on second bankruptcy have gone but a second bankruptcy within a period of six years from the previous discharge will now be a good ground for a BRO.
Property interest can revert back to a bankrupt
Bankrupts are commonly under the impression that, on being discharged, their property belongs to them again. This is not the case. Unless the trustee transfers any interest in that property back to the discharged bankrupt, the interest remains with the trustee.
This has caused much consternation due to increases in house values. Discharged bankrupts who thought themselves as homeowners find this is not the case when they try to sell or remortgage the property or when their trustee shows renewed interest in the property.
The Enterprise Act will bring an end to this. Unless the trustee in bankruptcy takes steps to realise their interest within three years from the date of the bankruptcy (or by April 1, 2007 for pre-April 2004 bankruptcies), the interest will revert back to the bankrupt.
This may result in trustees in bankruptcy becoming more proactive in realising their share of the asset. If they are unable to reach an agreement with the bankrupt for the sale back of the interest in the property, the trustee may seek an order for the sale of the property or obtain a charging order over the property so that the bankrupt will acquire ownership of his interest the property but subject to the charge.
Individual Voluntary Arrangements (IVA)
The alternative that many debtors have turned to in the past in an attempt to avoid bankruptcy has been to put a proposal for an IVA to his or her creditors.
The rules introduced by the Enterprise Act do not greatly affect the provisions governing the working of an IVA although a new form of “fast-track” IVA administered by the Insolvency Service has been introduced.
The fast-track IVA will be available to individuals after bankruptcy and the IVA will be overseen by the Insolvency Service. The fact that the bankruptcy period has been greatly shortened may well mean that people are less likely to take the IVA route and that we see more bankruptcies.
During the three-month period before the new rules came into effect, the courts saw an increase in the level of bankruptcies.
Will these changes continue the upward trend? Why enter into a three-year arrangement when a bankruptcy could be over in 12 months or less?
Anecdotal evidence would suggest that many individuals have always been prepared to enter into an IVA when bankruptcy would logically be more appropriate.
It appears that the stigma of bankruptcy has, in the past, displaced logic. It is entirely possible that this will continue in the future no matter how much the Government considers that the new rules will do away with the stigma of bankruptcy.
The new rules embodied in the act and the amendments to the insolvency rules are based upon the American system. As stated above, the purpose is to encourage business activity by ensuring that failed enterprise does not bring with it a lengthy period of stigmatised bankruptcy.
Entrepreneurs are to be encouraged to take risks without the very significant penalties of the old system if things go wrong.
There is concern, however, that the system could be abused to accumulate and then wipe out unsecured debt. This would, to a degree, depend upon how often the Official Receiver and other trustees are prepared to resort to BROs and the courts' practice in granting them.