Although the government insists it will ‘do more to identify those whose failure is irresponsible, negligent, or dishonest’, the reality is the Official Receiver’s offices do not have the resources to investigate in depth more than a tiny proportion of cases.
Given the opportunity to escape paying consumer debt, student loans, or a struggling business by submitting yourself to a short interview and a few months’ bankruptcy, what debtor would consider a three or four-year individual voluntary arrangement?
Already lenders are blamed for making credit too easy but it requires a lack of responsibility on the part of the borrower too. This will encourage people to borrow today and let tomorrow be taken care of by a spell of bankruptcy.
In the USA, it became standard practice for graduates to declare themselves bankrupt on graduation to escape from having to repay tens of thousands of dollars in student loans. The pendulum there has swung back with proposed legislation to make it harder to escape debts through bankruptcy.
The government also needs to understand that to apply appropriate penalties to irresponsible debtors is a vital part of the protection that small businesses need from the risk of bad debts.
One of the most depressing things we see as insolvency practitioners is honest, hard-working entrepreneurs finding their businesses ruined because unscrupulous or incompetent customers do not pay their debts.
Entrepreneurs need to be confident there is a regulatory framework in place discouraging customers from ripping them off in this way.
According to the government, many individuals also go bankrupt because they are unable to keep up with paperwork or keep their business and domestic affairs separate. These will be equally entitled to early release. But, if an individual is not capable of running a business now, it is not likely they will suddenly be competent a few months later.
The government is keen to reduce the stigma attached to bankruptcy.
Today there is little more stigma attached to bankruptcy than to illegitimacy.
This proposal will encourage financial irresponsibility and risks trivialising bankruptcy.
– Phillip Sykes is a partner at Moore Stephens Corporate Recovery
WHY DISCHARGE IS DRACONIAN
The majority of bankruptcies currently last for three years after which a bankrupt is discharged. The term discharge is something of a misnomer.
The Insolvency Act 1986 definition of discharge is ‘discharge of a bankrupt frees him of all debts and liabilities provable under the bankruptcy, subject to certain exceptions’.
These exceptions cover everything from a creditor’s ability to enforce a security to liability for fraudulent debts. Reading the relevant section of the Insolvency Act 1986, section 281, makes it clear that these exceptions are comprehensive and the discharge is by no means unconditional.
In addition, the main realisable asset for any individual is their home.
Trustees are able to sell a bankrupt’s home at any time after 12 months regardless of discharge. One other possible concern is that a short bankruptcy period would affect the amount of money realised under the acquired property rule. The Insolvency Service now believes that ‘in practice any such effect is unlikely to be material as few bankrupts currently acquire property after bankruptcy’.
Much the same is said of income payment orders where the Insolvency Service concludes ‘90% of bankrupts do not have sufficient income to justify an income payment order’, and that extending the maximum duration of income payment orders past the current three years ‘would undermine the concept of a fresh start’.
Undischarged bankrupts are restricted from holding certain positions.
These are many and diverse some are simply bizarre and are a good example of how our bankruptcy laws are fundamentally flawed. For example, the restriction of an undischarged bankrupt being the director of a company is clearly an attempt to prevent criminals from ‘phoenixing’ companies.
In a survey of official receivers by the Insolvency Service the two main reasons for business failure were the loss of market or main customer, and lack of working capital or poor cashflow – not criminal activities.
In reality, this restriction only serves to stifle our country’s entrepreneurs, who are still able and willing to have another go and generate wealth and employment.
There are many reasons why discharge is an irrelevant, draconian concept in today’s economic environment. Extending or keeping long periods of bankruptcy is a punitive measure, not all that far removed from the concept of debtor’s prisons, that seriously, and wrongly, affects the majority of honest, decent people bankrupted each year.
– John McQueen is chief executive of the Bankruptcy Association.
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