Insolvency reform - don't cut out the courts

Nick Howard (Accountancy Age 18 January 2012) writes attractively about the Insolvency Service’s proposals to reform the process for dealing with bankruptcy and winding up petitions. What he says sounds fine. However, if one reads the full consultation document (it can be found here) one quickly spots that what is proposed is fundamentally flawed in a number of serious respects.

Let us begin with what is actually being proposed. Briefly, the proposal is that someone who will be called the adjudicator will in future make bankruptcy orders and winding up orders on creditors’ petitions where the petition is “undisputed”. Petitions will be presented and orders made online. If there is a dispute, then, it is said, the petition will go to a court.

In fact, however, the adjudicator will decide disputed petitions. The process by which an individual debtor may dispute a petition is set out on page 38. Five grounds on which the debtor may dispute the petition are set out. They are much more limited than those which could be advanced in court. The paper goes on,

“The adjudicator will consider all representations made by the debtor, whether they were made to the creditor during the pre-action process or to the adjudicator after the application was made.”

But,

“Where the adjudicator is satisfied that the criteria for making a bankruptcy order are nevertheless met, a bankruptcy order will be made unless the debtor makes an application to the court”.

In other words, the adjudicator decides whether a dispute raised by the debtor is a genuine dispute or not. Nothing is said about the test to be applied or the threshold a debtor must meet to convince the adjudicator of a dispute.

Quite often, even where the petition debt is not disputed the making of a bankruptcy or winding up is resisted or an adjournment is sought, e.g. for time to pay or to do an IVA or CVA. But the adjudicator cannot adjourn, and thus the debtor is deprived of a last chance to pay (as well as the chance to attend court) and the creditor is stuck with a bankruptcy order for which he might otherwise not have pressed; the worst possible result for both sides. No pre-action procedure will ever cater for the debtor who sticks his head in the sand until the day of a court hearing: the ostrich debtor is a plentiful species, as many of us know.

The proposed new procedure makes no provision for substitution or change of carriage; winding up petitions will not even be advertised. There is no room at all, it seems, for the voices of supporting or opposing creditors to be heard. So a bankruptcy or winding up is transformed from being a class remedy into a debt collection action involving only the debtor and a single creditor.

And what of the adjudicator? He/she will not be a judge and may well have no legal qualification at all, yet the role is plainly judicial. The making of a bankruptcy or winding up order involves the exercise of a discretion (unless the law is to be changed in that respect as well), and the exercise of a discretion is a matter for the courts. It also involves a knowledge of law beyond insolvency, for petitions raise a wide range of issues: contract, landlord and tenant, property, tax, trusts – in fact the whole gamut of the law. Such matters require the attention of a real judge. The online proceedings will also be secret. There will be no public scrutiny, and presumably there will be no proper judgment. And even the Insolvency Service accepts in the consultation document that the adjudicator is not independent (as a judge is) because he/she will be part of the Service.

What the Insolvency Service is offering is an inferior system that will operate in parallel with the courts, which will still be there (and will still have to be paid for) and which will, one suspects, be flooded with applications to dispute petitions and applications to annul and rescind and/or appeal the orders made by the unqualified adjudicator. So the proposals will not even save costs (the “anecdotal evidence” and figures relied on in the consultation do not bear scrutiny); they will add to them.

These proposals raise matters that go way beyond pure insolvency considerations. It is, of course, expensive to provide a system of justice that involves buildings to which people come to have their say and to have their cases disposed of by someone who knows the law; but it is the best system we have managed to come up with. Courts that do justice in public are one of the hallmarks of a civilised society. If petitions can be removed from their oversight, what next: property claims, commercial disputes, possession actions, matrimonial claims (but only, of course, where they are “undisputed” in the sense that a party has failed to respond on time to online proceedings)?

I supported (with caveats) the Insolvency Service’s proposal to remove debtors’ petitions from the courts (where a bankruptcy order is made at the debtor’s request), but wholly different considerations apply to dealing with creditors’ bankruptcy and winding up petitions where the order is being made without that consent.

The consultation paper asks 39 questions but avoids asking the one that really needs an answer, namely whether a bankruptcy order made against an individual or a winding up order made against a company on the application of a creditor should be made in secret by an unqualified adjudicator who is not independent of the government as opposed to by a legally qualified, independent judge whose decisions are open to public scrutiny. Plainly the question has not been put because the Insolvency Service fears the answer it is most likely to get.

Creditors and debtors alike should ask themselves that question and answer it with a resounding No.

Stephen Baister, chief bankruptcy registrar of the High Court

NB The consultation period closes on 31 January 2012