The Department of Business Innovation and Skills has published a new consultation entitled “Reform of the process to apply for Bankruptcy and Compulsory Winding Up”.

The proposals look to reform the way debtor’s petition for their own bankruptcy, while still providing necessary safeguards for all creditors.

The executive summary of the paper refers to the statement “clearly if a debtor is applying for his/her own bankruptcy, there are only one party’s interests to consider”. There is a clear and correct directive given to all creditors that when considering bankruptcy or winding up proceedings, in those proceedings should be a last resort and all other options should have been considered before commencing such action, including mediation. Could this lead to bankruptcy for debtors not being a last resort, but a first resort if these proposals are applied? Over the last two years we have seen the discharge period for bankruptcy being reduced to 12 months and the introduction of DRO’s, both resulting in an increase in debtor’s petitions and DRO applications over this period of time. The stigma of bankruptcy appears to have been removed and may allow debtors to go into a process, whereby debts do not require repayment to the detriment of the creditors. This is an issue, particularly to small businesses, who cannot carry any debt write-off provisions. At a time when the Chancellor is looking to invigorate the economy and try to encourage growth and lending in the SME sector, another department of the government appear to be implementing proposals to affect this growth of business and potential put businesses at risk.

The executive summary also refers to the electronic notification of both bankruptcy and winding up orders to the official receivers office.  This is a positive move and one that creditors should welcome, ensuring that such cases are referred to the official receiver as quickly as possible and any further investigation is conducted swiftly to the benefit of all creditors concerned. However, the issue of official receivers offices being under resourced needs to be addressed.

The court’s role

There are detailed proposal contained in the consultation paper, which look at the courts role to resolve any disputes in both bankruptcy and winding up proceedings and where the parties cannot resolve those issues, the court will still have a crucial part to play.  Creditors are required to serve a Statutory Demand setting out their intention to issue a petition, which gives the opportunity for debtors to raise any objections and enter into dialogue.  Where necessary, if disputes are still unresolved, the debtor has the right to issue an application to set aside the demand, therefore ensuring the courts still have a crucial part.

The Adjudicator

The Insolvency Service states that the Adjudcator is a “responsible role” and clearly any appointed Adjudicator’s should have the requisite knowledge of both bankruptcy and winding up proceedings.

If the proposals are to be implemented and an applicant is to complete an on-line form, what will this application form look like, what questions will be asked of the applicant and what evidence will be required by the applicant?

Application Fees

The proposals suggest that the application fees will be lower than the current level of court fees. Will this reduction in fee produce a greater number of bankruptcy applications? Should fees be set at a level to deter individuals from making themselves Bankrupt and ensure that debtors give serious consideration before entering such a process – “last resort?” 

If debtors are allowed to pay any fee by instalments, could this be sending out the wrong message?  If such an application will only be considered by the adjudicator when payment of the full fee is made, what happens in the interim? Will creditors receive notice and be precluded from pursuing their debts by other methods, particularly Enforcement of any Judgment order.

Creditors may feel there will be a real risk of debtors simply entering into this process, without any intention of paying the full fee but simply delaying any action which creditors are taking at the point of application.

Pre- application process

There is a pre-application process for creditors already in place in the form of a statutory demand. As the proposals set out, the current document needs to be modified to emphasise what steps the debtor can take to attempt to resolve the matter.  Creditors should ensure that the debtor is fully aware of the implications of not engaging with them or their legal representatives.  Such a pre-application process is mandatory for creditors, but there doesn’t seem to be the same obligation on the debtor. The proposal only sets out that “a creditor will not be able to submit an application”.

The Insolvency Service will be actively engaging with interested parties throughout the 12 week consultation period. The consultation will close on 31st January 2012.

As members of the CCUA, we will be expressing our own views through their lobbying committee and welcome any feedback on these reforms.

For further information, please contact Mark Taylor, Client Services Director.