Individuals
Sections 256 and 269 & Schedules 19 and 23: Duration of bankruptcy & Minor and consequential amendments
734.Currently, bankrupts are discharged from bankruptcy three years after the making of the bankruptcy order, although there are exceptions to this rule; for example: in cases where the court has made an order for summary administration; where the bankrupt does not comply with his or her obligations and the court suspends automatic discharge; and where the debtor has been an undischarged bankrupt within the previous fifteen years or remains subject to an existing criminal bankruptcy order. However, in general, the duration of the bankruptcy is the same for bankrupts regardless of culpability or the level of their assets or liabilities.
735.Section 256 replaces the existing section 279 Insolvency Act 1986 on duration of bankruptcy. It provides for bankrupts to be automatically discharged one year after the bankruptcy order was made, but the period may be reduced if the Official Receiver files a notice stating that further investigation into the bankrupt’s conduct and affairs is unnecessary, or has been concluded. The ability to suspend discharge where the bankrupt fails to comply with an obligation remains (see new subsections (3) and (4)). At present, where a bankruptcy order is made upon a debtor’s own petition and, at that time, the debt is less than the small bankruptcies level (currently £20,000), and in the preceding five years the debtor has not been made bankrupt or entered into an individual voluntary arrangement, the court may issue a certificate of summary administration. One of the effects of this certificate is to reduce the discharge period from three to two years.
736.In order to reduce the discharge period to one year, it will be necessary to make amendments to current bankruptcy legislation, for example repealing those provisions in the Insolvency Act 1986 dealing with summary administration. These amendments are made in Schedule 23 to the Act, which is given effect by section 269.
737.As the discharge period is being altered, transitional provision needs to be made to deal with individuals who have already been made bankrupt on commencement but have not yet been discharged. This is done in Schedule 19. In this case, neither the existing nor the new section 279 Insolvency Act 1986 will apply. Instead, Schedule 19 provides that the date of discharge will be one year from the date of commencement of section 256 or earlier if the three-year discharge period is due to end before that date.
738.The position is different for those individuals who have been undischarged bankrupts more than once in the previous fifteen years and who are still undischarged at the time section 256 commences. In this case, the bankrupt is discharged five years from the date of commencement or earlier if an order under section 280(2) Insolvency Act 1986 is made or comes into effect. Section 280(2) allows the court to refuse discharge, conditionally discharge or absolutely discharge a bankrupt on his or her application. An application can be made any time after five years from the date of bankruptcy so that, for example, a person made bankrupt for the second time one year before the date of commencement of section 256 would be eligible to apply for discharge under section 280 four years after. If the court grants discharge on such an application, it will have effect from that date. If he or she makes no such application, or an application is refused, discharge will occur automatically five years after commencement.
739.Those persons made bankrupt under section 264(1)(d) (criminal bankruptcy) can only be discharged by order of the court under section 280 Insolvency Act 1986.
Sections 257 and 263 & Schedules 20 and 21: Post-discharge restrictions & Repeal of certain bankruptcy offences
740.The provisions of the Act remove some of the unnecessary restrictions that automatically apply as a result of bankruptcy (such as disqualification from holding certain offices (see further notes on sections 265, 266, 267 and 268)) and repeal two offences (section 263).
741.They also provide protection to the public and business community against the minority of bankrupts who abuse the system or whose conduct has been dishonest or otherwise culpable, either before or after bankruptcy. The Act introduces bankruptcy restrictions orders (BROs) that will have the effect of imposing restrictions on such bankrupts. BROs will run for a minimum period of two years and a maximum of fifteen years.
742.These restrictions are currently only triggered by the existence of a bankruptcy order (such as the obligation to declare your status as an undischarged bankrupt when obtaining credit of more than £250 (section 360(1) of insolvency legislation and the Insolvency Proceedings (Monetary Limits) Order 1986). By amending the discharge period, these restrictions will fall away for non-culpable bankrupts after a maximum of one year. Schedule 21 amends those provisions of the Insolvency Act 1986 that contain restrictions by adding references to BROs and interim BROs. These include section 31, which makes it an offence for a person to act as receiver or manager of a company’s property if he or she is an undischarged bankrupt. In this way, such restrictions will continue to apply to persons whose bankruptcy has been discharged but who are subject to a BRO.
743.Schedule 20 inserts a new Schedule 4A into the Insolvency Act 1986 that sets out the details regarding BROs and bankruptcy restrictions undertakings (BRUs). BROs are made by the court on the application of the Secretary of State or the Official Receiver acting on the direction of the Secretary of State (paragraph 1 of new Schedule 4A).
744.Under paragraphs 7-9 of new Schedule 4A any reference to a person against whom a BRO has been made includes a reference to a person who is the subject of a BRU (paragraph 8). This will allow the bankrupt to agree to be bound by such restrictions without the need for an application to court. The minimum and maximum duration of a BRU will be the same as a BRO.
745.Paragraph 2 of Schedule 4A sets out the kinds of conduct to which the court will have particular regard in making a BRO. Failure to keep proper accounting records, and gambling and rash and hazardous speculation are types of conduct already covered by criminal offences in sections 361 and 362 Insolvency Act 1986. Section 263 repeals those two offences. In future, matters that would have been dealt with under those two offences will, provided the misconduct is material having regard to the circumstances of the case, be dealt with under the new bankruptcy restrictions regime.
746.Paragraph 3 provides that an application for a BRO must be made within one year of the making of the bankruptcy order. It also provides that proceedings may be brought outside this time scale but only with the permission of the court. The order will come into force when it is made and will last until the date specified in the order, which will be a minimum of two years and a maximum of fifteen years (paragraph 4).
747.It is unlikely in many cases that a substantive decision will be made by the court in relation to an application for a BRO before the defendant’s discharge. Thus, there is likely to be a gap in time between the discharge of the bankrupt and the making of the BRO in those cases where a BRO is being sought. Paragraphs 5 and 6 make provision for the court to make an interim order that can be made when issuing proceedings. The court may make an interim BRO where the Official Receiver or Secretary of State has made out a prima facie case and the court is of the view that the misconduct is so serious that it is in the public interest to make such an order. The restrictions then apply on the making of the interim order, by virtue of paragraph 5(4).
748.Paragraphs 10 and 11 set out the effects of annulment of the bankruptcy on any BRO. Where a bankruptcy order is annulled under section 282(1)(a) Insolvency Act 1986 on the grounds that it ought not have been made, any BRO, either substantive or interim, that is in force will be annulled.
749.A bankruptcy order annulled because an individual voluntary arrangement has been approved by the creditors (sections 261 and 263D of the Insolvency Act 1986), or because the bankruptcy debts and expenses have been paid in full, will not affect whether a BRO or interim order remains in force. Where an application has been made, then those proceedings can be continued notwithstanding the annulment of the bankruptcy. This permits the making of BROs against culpable bankrupts who have managed to have their bankruptcy order annulled solely because they are now able, for whatever reason, to pay off their debts either in full or partially to the satisfaction of their creditors. Where a BRU has been offered, the undertaking can be finalised notwithstanding any annulment under sections 261 and 263D Insolvency Act 1986.
750.Paragraph 12 requires the Secretary of State to maintain a public register of BROs, interim BROs and BRUs. Paragraph 16 of Schedule 23 inserts a new paragraph 29A into Schedule 9 of the Insolvency Act 1986. This allows, amongst other things, Rules to be made about the inspection of the register.
751.Schedule 21 deals with the effect of BROs, interim BROs and BRUs. It amends certain provisions that make particular conduct an offence while an undischarged bankrupt and extends them to cover individuals subject to BROs, interim BROs and BRUs (incorporated by virtue of paragraphs 5(4) and 8 of new Schedule 4A of the Insolvency Act 1986 respectively). The conduct includes:
acting as receiver or manager of a company’s property on behalf of a debenture holder (section 31 Insolvency Act 1986);
obtaining credit above the prescribed limit without disclosing that you are the subject of a Bankruptcy Restrictions Order (section 360 Insolvency Act 1986);
trading in a name other than that under which a person was made bankrupt (section 360 Insolvency Act 1986);
disqualification from acting as an insolvency practitioner (section 390 Insolvency Act 1986); and
disqualification from acting as a company director (section 11(1) CDDA1986).
752.Section 350(3) of the Insolvency Act 1986 limits the liability of a bankrupt for offences under Part VI of that Act to acts committed prior to his discharge. Paragraph 2 of Schedule 21 qualifies that provision so that a person subject to a BRO who commits an offence extended to BROs after discharge can still be prosecuted.
Section 258: Investigation by official receiver
753.Currently, under section 289 Insolvency Act 1986, there is a duty on the Official Receiver to investigate the conduct and affairs of every bankrupt and to make any report to the court that he or she thinks fit, except in summary cases when the Official Receiver will only investigate if he or she deems it necessary. This distinction is made on the basis that cases with relatively small unsecured liabilities (summary cases with unsecured liabilities of less than £20,000 – often consumer bankruptcies) do not require as extensive a use of the Official Receiver’s resources as those involving large debts with greater losses to the creditors. However, there are cases where the bankrupt’s debts are large (for example, where the liabilities of a limited company are guaranteed) in which no investigation is required or some small, yet complex, cases that require extensive investigation.
754.Section 258 inserts a new section 289 into the Insolvency Act 1986 that removes this automatic obligation to investigate every case and provides that the Official Receiver is only required to investigate the conduct and affairs of any bankrupt where he or she think it necessary). Subsections (3) and (4) of the new provision merely re-enact the old section 289(2) and (3).
Sections 259 and 260: Income payments order & Income payments agreement
755.The current income payments order regime is designed to ensure bankrupts make an affordable contribution towards their debt from their income for up to three years, but in most cases they cease on discharge (see section 310(6)). Against the background of a reduced period of bankruptcy for non-culpable bankrupts, income payments orders will now last for a term of up to three years from the date of the order, irrespective of discharge (see new section 310(6) inserted by section 259).
756.Income payments orders are made by the courts on the application of the trustee in bankruptcy. In practice most are not usually contested. Income payments orders can be varied on the application of the trustee or the bankrupt.
757.In order to remove the need for court involvement in non-contentious cases, section 260 introduces the concept of the income payments agreement by inserting a new Section 310A into the Insolvency Act 1986.
758.Income payments agreements will provide a legally-binding written agreement between the bankrupt and the Official Receiver or trustee that requires the bankrupt (or a third party) to make specified payments to his trustee for a specified period. This will be enforceable as if it were an income payments order made by the court. Whilst in force, an income payments agreement may be varied on an application to the court by the bankrupt, trustee or the Official Receiver or by written agreement between the parties. A court may not vary an income payments agreement to include a provision that could not be included in an income payments order and must grant a variation if it takes the view that the variation is necessary to enable the bankrupt to retain sufficient funds to meet the reasonable domestic needs of the bankrupt and his or her family.
759.An income payments agreement must specify the period in which it is to have effect and that period can apply after a bankrupt is discharged but cannot extend to a date more than three years after the date of the income payments agreement.
760.Paragraph 7 of Schedule 19 sets out the transitional provisions as they relate to income payments orders in existence at the time of commencement.
Section 261: Bankrupt's Home
761.Section 261 makes provision in relation to the sole or principal residence of the bankrupt, the bankrupt’s spouse or the former spouse of a bankrupt, and where the bankrupt has an interest that is comprised in the bankrupt’s estate. The section (subsection (1)) inserts section 283A into the Insolvency Act 1986. This new section provides that where a bankrupt’s estate comprises an interest in such a residence, that interest reverts back to the bankrupt unless within the three year period following the date of the bankruptcy the trustee:
realises the interest;
applies for an order of sale or possession in respect of the premises in which the interest subsists;
applies for a charging order over the premises in respect of the value of the interest; or
enters into an agreement with the bankrupt regarding the interest.
762.The section (subsection (3)) also inserts a new section 313A into the Insolvency Act 1986 which provides for the dismissal of applications for orders for sale, possession or a charging order in respect of the bankrupt’s residence where the value of the bankrupt’s interest is below a level prescribed in secondary legislation.
Section 264 & Schedule 22: Individual voluntary arrangement
763.Individual voluntary arrangements are an alternative to bankruptcy, without the same automatic restrictions, where the debtor comes to an arrangement with his or her creditors about the repayment of his or her debts. They generally provide a better return to creditors. Currently there are around 7,000 individual voluntary arrangements made each year, of which a very small minority are entered into after a bankruptcy order has been made.
764.At present, a debtor can make a proposal for an individual voluntary arrangement (see Part VIII of the Insolvency Act 1986). Those proposals also put forward a person to supervise the implementation of that arrangement, the nominee (on approval of an arrangement the nominee becomes supervisor). To act as the nominee (from 1 January 2003, as a result of the relevant amendments introduced by the Insolvency Act 2000) or supervisor, a person must be a qualified insolvency practitioner. In practice, the debtor sends the nominee a copy of the proposal and a statement of his or her affairs. He or she can then apply for an interim order that has the effect of staying any actions against them or their property (see sections 252–255 of the Insolvency Act 1986). The nominee reports to the court, stating whether a meeting of creditors should be called to consider the proposal. If a meeting is called and the creditors approve the individual voluntary arrangement, the interim order can be discharged and any bankruptcy order may be annulled. Modifications can be made to the proposal if the debtor so consents.
765.In order to encourage greater use of individual voluntary arrangements, this section makes two changes to the current individual voluntary arrangements regime.
766.First, it enables Official Receivers to act as nominees and supervisors for post-bankruptcy individual voluntary arrangements (see paragraph 3 of Schedule 22, which inserts a new Section 389B into the Insolvency Act 1986). This provides debtors and creditors with a choice of who should administer the arrangement: either a private sector insolvency practitioner or an Official Receiver. There is also an order-making power to extend the ability for the Official Receiver to act as nominee and supervisor to all cases.
767.Second, it introduces a new fast-track scheme for post-bankruptcy individual voluntary arrangements where the Official Receiver is the proposed nominee (see paragraph 2 of Schedule 22, which inserts a new section 263A – 263G into the Insolvency Act 1986). Under this regime, the proposal will be agreed with the Official Receiver and filed with the Court. No meeting of the creditors will be called and it will not be possible to modify the proposal. The Official Receiver will send out the proposal to the creditors on a ‘take it or leave it’ basis and the creditors will either agree to or disagree with the proposal by correspondence. If the individual voluntary arrangement is approved, the Official Receiver will notify the court and the court can then annul the bankruptcy order. It is proposed that the majority required for approval will remain unchanged (the provision on majority is set out in Rule 5.18 of the Insolvency Rules 1986 (SI1986/1925)), which majority is three quarters in value. From 1 January 2003, as a result of changes introduced by SI 2002/2712, that provision will be found at Rule 5.23.
Sections 265, 266, 267 and 268: Disqualification from office: Justice of the Peace, Parliament, Local government & General
768.Currently bankrupts are subject to a wide range of statutory restrictions, prohibitions or disqualifications irrespective of the level of their assets and liabilities, or culpability. These restrictions prevent the bankrupt from being elected to or holding specified positions or offices, or becoming or remaining a member of specified bodies or groups. Generally, these restrictions are in place for the duration of the bankruptcy (currently three years in most cases). While in some cases these restrictions can be justified in the public interest, there is little justification for others (e.g. serving as a Justice of the Peace or member of a Local Authority).
Section 266: Disqualification from office: Parliament
769.Section 427 of the Insolvency Act 1986 imposes a number of restrictions on a member of either House at Westminster if he or she is adjudged bankrupt (or sequestrated in Scotland). In the House of Lords, a member is not allowed to sit or vote in either the House or Committee. In the Commons, a member cannot be elected to, sit or vote in the House (or the devolved equivalent) or on Committee. The restrictions on being elected to and sitting and voting in the devolved assemblies on the ground of bankruptcy feed through from section 427 by virtue of the Government of Wales Act 1998, the Scotland Act 1998 and the Northern Ireland Act 1998.
770.With the exception of a peer in Westminster, in all legislatures a bankrupt is given six months in order to have their bankruptcy order annulled or their bankruptcy discharged. If this has not happened by the end of that period, then their seat is vacated.
771.Section 266 inserts new sections into the Insolvency Act 1986 to deal with disqualification from Parliament, the Scottish Parliament, the Northern Ireland Assembly or the National Assembly for Wales where a BRO is made against a member of any of those Assemblies. It also amends section 427 Insolvency Act 1986 to remove references to England and Wales from that section and to change its title.
England and Wales
772.The new section 426A disqualifies an MP against whom a BRO is made from membership of the House of Commons. On disqualification under this section, an MP must immediately vacate his or her seat. This differs from the current position under section 427 Insolvency Act 1986, which disqualifies a person on the making of a bankruptcy order but then gives a period of six months for an MP to have the bankruptcy order annulled. Under the new section, an MP is no longer automatically disqualified on the making of a bankruptcy order. Those MPs where some form of culpability can be shown through the making of a BRO will be disqualified automatically and there will be no six months grace period.
773.A member of the House of Lords subject to a BRO will be disqualified from sitting or voting in the House of Lords or from sitting or voting in a committee of the House of Lords or a joint committee of both Houses. No writ of summons can be issued to a lord of Parliament who is subject to a BRO. These are the same restrictions as are currently in place for a bankruptcy order but, again, by replacing bankruptcy with BRO as the trigger to disqualification, only culpable peers will be disqualified.
The Devolved Assemblies
774.The new section 426A will feed through to the devolved Assemblies by virtue of the devolution legislation. A member of the Scottish Parliament against whom a BRO is made will be disqualified from the Scottish Parliament by virtue of section 15(1)(b) Scotland Act 1998 and will have to vacate his or her seat under sections 17(1) and (2) of that Act.
775.The position is the same for a member of the National Assembly for Wales by virtue of sections 12(2) and 14(1) and (2) Government of Wales Act 1998 and for a member of the Northern Ireland Assembly by virtue of sections 36(4) and 37(1) Northern Ireland Act 1998 and Article 370 of the Insolvency (Northern Ireland) Order 1989.
MPs, Peers and Members of the Devolved Assemblies made bankrupt in Northern Ireland or sequestrated in Scotland
776.There is no equivalent regime to BROs in either Scotland or Northern Ireland. Insolvency law in Wales is the same as in England and will be modified by this Act.
777.Therefore, the existing regime for disqualification where an MP, peer or a member of a devolved Assembly is made bankrupt in Northern Ireland or sequestrated in Scotland is being retained. However, section 427 is being amended by section 266(1) and (2) so that it will then only cover those made bankrupt in Northern Ireland or sequestrated in Scotland.
778.For example, an MSP who is sequestrated in Scotland will be disqualified and will have six months to have that order annulled before having to vacate his or her seat.
Two regimes
779.Therefore, two different regimes will be in operation at the same time in Parliament and all the devolved Assemblies, depending on the jurisdiction in which the bankruptcy occurs:
where a member of Parliament or a member of the devolved Assemblies is made bankrupt in England and Wales, these persons will not be automatically disqualified. Disqualification will be triggered if a BRO is made against him or her and he or she will have to vacate their seat immediately. A peer will be disqualified on the making of a BRO order from sitting and voting in the House of Lords or in Committee;
where a member of Parliament or a member of the devolved Assemblies is made bankrupt in Northern Ireland or sequestrated in Scotland, they will be automatically disqualified on being made bankrupt or sequestrated and will have six months to have the order annulled. A peer who is a member of a devolved Assembly would be disqualified from the devolved Assembly and have six months to have the order annulled or his or her bankruptcy discharged and would be disqualified in Westminster from sitting and voting in the House of Lords or in Committee.
The order-making power
780.Section 266 provides for an order-making power to amend sections 426A and 426B, should equivalent regimes be introduced in Northern Ireland and Scotland. The order-making power would be subject to affirmative resolution.
781.Section 265 will remove the automatic disqualification on a bankrupt acting as a justice of the peace. The removal of bankrupt justices of the peace will be left to the Lord Chancellor's general power to appoint and remove justices of the peace where it is thought appropriate.
782.Section 267 will replace the automatic restriction on bankrupts serving as a member of a Local Authority with one disqualifying those subject to a BRO.
783.Section 268 will provide a wide order-making power for any Secretary of State or the National Assembly for Wales, to review legislation under his or her policy control and to maintain, repeal, amend or abolish such restrictions on bankrupts as they deem appropriate. Amendments can include reducing the class of bankrupts to whom a disqualification applies, applying the restrictions to those people who are subject to BROs or undertakings as well as bankrupts or providing that the disqualification is subject to the discretion of a specified person, body or group. Such orders will be subject to affirmative resolution.
Section 269 & Schedule 23: Minor and consequential amendments
784.Section 269 gives effect to Schedule 23, which makes minor and consequential amendments to the Insolvency Act 1986 as a result of the changes being made in the Act. Some of these amendments, such as those made because of the removal of summary bankruptcy, have been mentioned elsewhere. Paragraph 14 reflects the fact that the Official Receiver can act as a nominee and supervisor in an individual voluntary arrangement. Therefore the appointment provisions for Official Receivers in section 399 and the rules-making provisions in Schedule 23 have been amended accordingly.
785.Paragraph 12 extends the offence of concealment of property to section 354 Insolvency Act 1986 to include any failure to account for the loss of any substantial property to the trustee. Currently, the provisions in section 354(3) set out the scope of the offence of a bankrupt failing – without reasonable excuse – either to account to the Official Receiver or the court for substantial losses or give satisfactory explanation for how such a loss came about. However, the realisation of assets is often administered by a trustee other than the Official Receiver.
786.Paragraph 13 adds subsections (4) and (5) to section 355 (concealment and falsification of accounting records) Insolvency Act 1986. The current provisions of section 355(2) and (3) detail offences relating to bankrupts who destroy, conceal, alter or dispose of books, papers or records in the twelve months prior to a bankruptcy petition being presented, or between the petition and order. In the case of ‘trading records’, that period is extended to two years (section 361 of the Insolvency Act 1986). The Act also repeals the current provisions of section 361, which will be dealt with by the new bankruptcy restrictions regime. As the availability of adequate records is crucial to the examination of the bankrupt’s estates and enquiries into the bankrupt’s affairs, subsection (4) extends the period from twelve months to two years. Subsection (5) provides a definition of the term ‘trading record’.
787.County Court Administration Orders (‘CCAOs’) are made in the county courts and fall outside the insolvency regime. They are mechanisms for dealing with individuals with multiple debts and give the debtor respite from enforcement proceedings while they pay off their debts. Only those who have a county court judgment against them, at least one other debt, and total debts of less than £5,000, can apply for a CCAO. Currently, section 429 Insolvency Act 1986 allows a court to make an order placing restrictions on acquiring credit and the use of a trading name for up to two years where a debtor has failed to pay under a CCAO. Paragraph 15 amends section 429 County Courts Act 1984 to reflect the fact that restrictions flowing from the making of a bankruptcy order will only be for one year following the change to the discharge period. Therefore restrictions flowing from a CCAO will be similarly limited.