New Bankruptcy Regime

On 1 April 2004 the bankruptcy and individual voluntary arrangement provisions set out within the Enterprise Act 2002 will come into force. The Enterprise Act 2002 revises many of the provisions of the Insolvency Act 1986 and adds certain new schedules to that Act. This Newsletter highlights the most significant changes which are being introduced.

 

The most significant change is the reduction of the period for most bankruptcies from 3 years to 1 year. The new Section 279 of the Insolvency Act 1986 states that the standard period will be one year unless the Official Receiver considers that there is no need to investigate the affairs of the bankrupt or he has completed his enquiries and he considers that there is no need to impose any bankruptcy restrictions.

 

It is open for the trustee in bankruptcy or the Official Receiver (as is currently the case) to apply for an extension of the bankruptcy period by seeking a postponement of the date of discharge.

 

The period in relation to criminal bankruptcies (5 years) will stay the same.

 

There is a new Schedule 4A to the Insolvency Act 1986 which sets out the procedure for applying for a new form of orders known as a bankruptcy restriction order.

 

Only the Secretary of State or the Official Receiver can apply for a bankruptcy restriction order. The restriction order procedure and content mirrors the procedure which currently exists in relation to director's disqualification. The idea being only to impose restrictions on culpable bankrupts rather than in each and every case.

 

Rather than applying for a bankruptcy restriction order it is now possible for the bankrupt to give an undertaking in relation to his future conduct. These provisions are also contained in Schedule 4A to the Insolvency Act 1986.

 

As it is the Official Receiver who will be applying for a bankruptcy restriction order it is important that they properly investigate the conduct of the bankrupt. There is a new Section 289 of the Insolvency Act 1986 which imposes obligations upon the Official Receiver to undertake investigations into the conduct of the bankrupt. Surprisingly this new provision makes it a matter of discretion as to whether the Official Receiver investigates the affairs of the bankrupt.

 

Prior to 1 April 2004, the trustee in bankruptcy could issue proceedings to set aside a transaction at an undervalue or a preference, or a transaction to defraud creditors (under Sections 339, 340 and 423 of the Insolvency Act 1986) without the consent of the creditor's committee. Such consent is now required. The good news, however, is that any costs incurred in instigating such proceedings (where they have been sanctioned) are now expenses of the bankruptcy within the meaning of Rule 6.224 and therefore, are recoverable. This overcomes the problems caused by the decision in Floor Fourteen Limited (2001) 2 BCLC 392.

 

Section 310 has been amended so that an income payment order can be made for a period greater than that of the bankruptcy itself. The maximum period is now 3 years. It is also possible for a bankrupt to give a binding undertaking in relation to income payments as provided for in the new Section 310A.

 

Section 335 has now been amended so that it will now be a bankruptcy offence to destroy documents in the 2 year period prior to the bankruptcy. Previously the period was 1 year. The bankruptcy offences of failing to keep proper accounts and gambling as contained in Section 361 and 362 of the 1986 Insolvency Act have been revoked.

 

There is no longer any automatic disqualification on bankruptcy from being a JP, MP or local Council official. Significantly, one still cannot, however, act as a director while a bankrupt, and of interest to our readers, cannot act as an insolvency practitioner or receiver or manager.

 

There is now power for the Official Receiver to act as a Supervisor in relation to a voluntary arrangement and the Official Receiver is able to propose to the debtor that he apply for a voluntary arrangement after the making of a bankruptcy order.

 

There is a new Section 283A of the Insolvency Act 1986 named "A Bankrupt's Home Ceasing to form part of the Estate". As the name of the new section suggests, there is in fact, now a cut off point where the matrimonial home will revert to the trustee. This is usually 3 years after the commencement of the bankruptcy. Although this will be longer if the trustee in bankruptcy was not aware of the property (the 3 years running from the date that he became aware).

 

During the period of vesting, the trustee must either sell the property and realise his interest or apply for a charge under Section 313 of the Insolvency Act 1986.It should be noted that the amount caught by that charge will be fixed at the time of the application and therefore it will not increase even if property prices rise.

 

There is a new Section 313A which states that a Court will not grant a charge to secure the trustee's interest in the property if that interest is valued below a prescribed figure of £1,000. (The Insolvency Proceedings (Monetary Limits) (Amendments) Order 2004).

 

Of particular significance is the fact that all existing bankruptcies will be subject to the transitional provisions. In terms of the period of bankruptcy, all existing bankruptcies would either end on date of discharge calculated on the old basis or if it is later, 1 year from 1 April 2004. This is significant in that all involved within this field will need to ensure that where we are working on existing bankruptcy cases, that these are progressed as swiftly as possible.

 

Any existing case, i.e. pre 1 April 2004 will also be subject to the transitional provisions of Schedule 19 to the Enterprise Act 2002 in relation to income payment orders and restriction orders or undertakings as referred to above. In particular these options will be available to the Official Receiver in relation to pr-existing cases.

 

Many of the above changes are predicated on the assumption that the Official Receiver will have sufficient resource to take on a far more proactive role in all bankruptcy cases. Our recent experience has been that the Official Receiver has already started to adopt such an approach in certain cases. Only time will tell if this can be replicated across the board as envisaged and required by the new provisions.

 
Key Contact