Debt reform threatens to clog courts

Debtors could escape their obligations after just three years, under new plans to reform insolvency rules that have been slated as a ‘nightmare’ by practitioners.

The Ministry of Justice has unveiled proposals that would cut the time debt can be chased from six years to three.

Creditors would have to launch legal action before the three years to pursue the debt had expired.

The move may mean that creditors will be more likely to pursue legal action with IPs not being ‘fully prepared’ and the increased volume of cases ‘clogging’ up the court system, experts said.

Pat Boyden, insolvency partner at PwC, said: ‘It may force litigation before either side is ready and clog up the courts. Creditors could start issuing proceedings instead of negotiating because they want to start before the three years are up. This could prove unhelpful to both sides.’

The move would be likely to affect corporate insolvencies more than personal arrangements, since the former are more complex.

‘It does not allow enough time to gather evidence if the case needs to go to court,’ said Louise Brittain, insolvency practitioner at Baker Tilly. ‘Many high profile cases have international elements; it could take up to two years to process a case. If it needs to be sped up it could be a nightmare for IPs.’

IPs are hoping that the move will not make it past the consultation stage or at the very least is tweaked to take into account the various problems that will arise should the move go ahead.

Recovery and turnaround specialists could be left struggling to keep within the three year timeframe, particularly in complex and disputed claims.

Mark Sands, insolvency partner at KPMG, said: ‘When IPs are trying to negotiate a situation, especially complicated investigations, three years can fly by.’

This could result in creditors tightening their belts further, he said.

A Ministry of Justice spokesman said: ‘An announcement about the final legislative programme is expected to be made in the Queens Speech to Parliament in December.’