This is an HTML version of an attachment to the Freedom of Information request 'E&Y's Alan Bloom - DTI Advice - 2000'.

Credit is an essential element of everyday life. Business involves taking risks and all 
who invest recognise that businesses may fail for a variety of reasons from bad luck to 
incompetence and fraud. Over the last century the level of personal indebtedness has been 
rising; and more people have entered business on their own account or using a limited 
company.  Most people are in debt one way or another whether by having a mortgage, paying 
for essential services in arrears, using credit cards or taking out specific loans; and most 
businesses are funded at least in part by bank overdrafts and loans, hire and hire purchase and 
supplier credit.  In most cases these debts are paid off but problems such as unemployment, 
divorce or illness or bad debts or loss of market can affect ability to pay. Only a small 
proportion of debtors whether businesses or individuals set out deliberately to defraud. 
Insolvency legislation provides a means of dealing with financial failure. It enables debtors to 
draw a line under the experience and start again; gives creditors a route for getting some 
return; and protects the public in general by identifying and punishing those who have 
committed offences or have acted irresponsibly.  
However as the Chief Executive of The Service explains in his introduction to the 
Corporate Plan, there is a balance to be struck:- 
 "…   insolvency has the ability to affect the interests, and rights, of a broad group 
directly involved in it  – creditors, and not only suppliers and banks and financial 
institutions but also consumers where they have  paid in advance for goods and 
services; employees; customers and users; shareholders and other providers of capital; 
and the debtors themselves. Its impact and outcome will certainly be of local interest; 
perhaps because of its nature and extent, of regional, national or even international 
interest; or of particular industry or institutional interest. And there is a broader 
government and public (society) interest in insolvency because it involves, or is likely 
to involve, financial loss  – an interest in seeing that economic (as well as potential 
social) damage, in terms for example of loss of direct and indirect jobs, is limited and 
resources are efficiently re-allocated to more productive use where there is no 
prospect of reconstruction or reorganisation;  that any risk of systemic failure is 
contained; that confidence in the working of a fair and competitive market is 
maintained; that genuine risk-taking is not penalised and there are provisions for a 
fresh start for honest debtors; but that misconduct in causing or contributing to the 
insolvency and unfair trading is uncovered and pursued." 
There is a similar balance in DTI's overall objectives, 3 of which impinge on The 
Service's activities. Within the overall aim of "increasing competitiveness and scientific 
excellence in order to generate higher levels of sustainable growth and productivity in a 
modern economy", these are:-  
 Promote enterprise, innovation and increased productivity  
in particular by encouraging successful business start-ups, and by increasing the 
capacity of business, including SMEs, to grow, to invest, to develop skills, to adopt 
best practice, and to exploit opportunities abroad, recognising the development of the 
knowledge economy and taking account of regional differences.  

 Create strong and competitive markets  
in particular by taking action to improve the openness, efficiency and effectiveness of 
markets at home, in Europe and across the world, and to ensure the provision of 
secure, diverse and sustainable supplies of energy at competitive prices.  
       Develop a fair and effective legal and regulatory framework  
in particular by improving and enforcing a framework for commercial activity which 
encourages enterprise and avoids unnecessary burdens on business, while providing a 
fair deal for consumers, and by developing a framework for employers and employees 
which promotes a skilled and flexible labour market founded on principles of 
The general principle applying to regulation and enforcement is that the degree should be 
commensurate with the risks and consequences of abuse. 
Insolvency Legislation 
3.4  Before the Bankruptcy Act 1883, insolvency was largely treated as a criminal offence. 
With the Victorian expansion of commerce and with it commercial credit, it was recognised 
that the "dire and uncertain" consequences of failure in business were a barrier to enterprise. 
The administration of bankrupt estates was privately run, somewhat haphazard and open to 
abuse. The 1883 Act sought to modernise the law and codify it into a single regime that 
provided for: 
•  An independent examination of the causes of the bankruptcy and of the bankrupt's 
conduct by a public official, the Official Receiver (OR). 
•  A range of offences to deal with misconduct identified in the OR's report. 
•  Restrictions on bankrupts engaging in some aspects of public life and activities that 
required a degree of trust. 
•  Proceedings to be supervised by the Courts of Bankruptcy. 
•  A public examination of the bankrupt in open court before an application could be made 
for discharge. 
•  Those administering insolvent estates to pay the proceeds from realisation of assets into a 
bank account held at the Bank of England until such time as they were needed.  
The Companies Act 1890 extended the role of the OR to companies wound up by the Court. 
3.5  In effect, the Acts recognised that although insolvency was not a crime, it required public 
explanation and investigation. Subsequent Acts made limited changes but no significant 
change in the approach. The banking requirement was an early form of regulation in the wake 
of financial scandals in which creditors were defrauded by trustees and liquidators.  
3.6  In 1977 the Government commissioned a major review of the law on insolvency, 
bankruptcy, liquidations and receivership chaired by Sir Kenneth Cork. The report, published 
in 1982, was comprehensive and seen as far-reaching in its recommendations. It looked at the  
social and financial implications of insolvency, making the point that the insolvency of a  
business person had much wider implications than that of an individual. It suggested that the 
‘stigma’ associated with bankruptcy was motivated in the 19th century by a desire to maintain 
acceptable standards of conduct in the commercial community. The consequences of the 
collapse of a business and the dislocation that could ensue was sufficiently serious to require 
a means of deterring other traders. The insolvency laws were in large measure used as a 

medium for carrying out these disciplinary functions and the discharge period was seen as a 
period to allow for the rehabilitation of the bankrupt, although in practice only a small 
proportion of bankrupts ever applied for discharge and then usually some years after the 
The report also looked at the Insolvency Profession. Although many IPs were members of 
accountancy bodies and subject to their rules, at that time there was no guarantee that 
insolvency processes would be administered by persons with practical experience and 
professional skills. ORs were therefore frequently asked by creditors to remain as 
trustee/liquidator in large complex cases.  
3. 7 For limited companies, before the Insolvency Act 1986, the insolvency procedures 
available were one of three forms of liquidation procedure, members’ (for solvent 
companies), creditors’ or compulsory (where the company was insolvent) - and a highly 
complex, expensive and therefore rarely used scheme of arrangement procedure under the 
Companies Act.  While a liquidator could continue the business of a company insofar as it 
was beneficial for the overall purposes of the winding up, the ultimate goal was the winding 
up and dissolution of the legal entity, the company. The Cork Committee favoured 
encouraging rescue where possible, pointing to the benefits to both secured creditors and the 
community at large in terms of businesses and jobs preserved as evidenced by the 
appointment of administrative receivers by secured creditors, usually banks, which supported 
trading or disposal as a going concern. 
3.8  In its response to the Report, the Government took the view that "… in a modern society 
the emphasis should be on the rehabilitation of debtors."  It did not accept all of the 
recommendations including one which would have reserved bankruptcy to more serious cases 
where there was misconduct with a process of liquidation of assets to deal with less serious 
3.9 The 1986 Insolvency Act introduced changes in relation to personal insolvency including: 
•  Introducing an automatic discharge for first time bankrupts after three years. 
•  Provision for the protection for a limited period of the rights of occupation of the 
bankrupt’s spouse in the matrimonial home. 
•  Allowing the bankrupt to keep a greater range of personal assets than permitted by 
the 1914 Act. 
•  Introducing a procedure to enable debtors to enter into individual voluntary 
arrangements (IVAs) with their creditors, and thus avoid bankruptcy and its 
limitations and restrictions, effectively replacing the cumbersome and little used  
Deeds of Arrangement Act 1914.  
Apart from the introduction of the automatic discharge, sanctions and restrictions imposed by 
bankruptcy remained essentially the same. Another change relevant to this review was that  
the creditors could no longer nominate the OR to administer the insolvent estate. In effect the 
OR could act only in cases where no private sector insolvency practitioner was prepared to 
take on the work. 
3.10 For companies, the 1986 Act provided for: 

•  Administration which it was envisaged would be used in cases where companies 
had not granted a floating charge to a lender and whose business could not 
therefore be rescued by the conventional means of receivership: in fact, it has been 
used even where there is a floating charge, but subject to the charge holder’s 
•  Company Voluntary Arrangements (CVAs) which brought within the legislative 
framework the existing ability of a company to come to a contractual arrangement 
with its creditors to pay less than 100p in the £ and, with the exception of a 
moratorium, mirrored the arrangements put in place for individual debtors.  
•  The take up of CVAs has been relatively low and the absence of a moratorium has 
been identified as the reason why the procedure is infrequently used. The 
Insolvency Bill currently before Parliament provides for an optional moratorium 
in CVAs for small companies. Its operation will be kept under review and it is left 
open to extend the moratorium provision to larger companies.  
•  Radically revised provisions for the disqualification of directors, personal liability 
for wrongful trading and restrictions on the re-use of failed companies’ names. 
3.11 Generally, the Act looked to apply parallel procedures to bankruptcies and liquidations,  
to streamline and simplify the processes and to reduce the involvement of the court in  
procedural matters.  And it introduced the system of regulation of insolvency practitioners. 
3.12 The legislation provides for the investigation of the affairs and conduct of insolvents: 
•  By the Official Receiver in compulsory insolvencies which may lead to criminal 
proceedings and/or for directors, civil disqualification and/or recovery proceedings. 
•  By The Service’s Disqualification Unit in voluntary liquidations, administrations and 
administrative receiverships leading to civil disqualification proceedings. 
•  By the Crown Prosecution Service (CPS) in voluntary liquidations leading to criminal 
proceedings (to be transferred to The Service by the current Insolvency Bill to enable 
prosecution and/or disqualification to be considered together). 
Criminal offences are prosecuted by DTI Legal Services, by the CPS or by other prosecuting 
The Companies Directors Disqualification Act 1986 consolidated disqualification in 
successive Companies Acts (essentially relating to criminal convictions) and re-wrote the 
civil disqualification provisions in the 1976 Insolvency Act which had been little used 
because of perceived legal complexities and problems and, it has been suggested, a lack of 
political and Service will and allocation of resources.   Proceedings under the new civil 
disqualification provisions may be based on a single failure (where previously it had required 
2 in five years); there are definitions of unfit conduct (extended by case law); and courts are 
required to disqualify for 2-15 years where unfitness is found (where previously it had a 
discretion even if the case was proved). Director includes anyone who acts as a director, by 
whatever name called, including shadow directors. The Act applies in England, Wales and 
Scotland. Disqualification proceedings are authorised by the Disqualification Unit and taken 
by Official Receivers or solicitors instructed by the Unit (mainly private sector, but major 
complex cases continue to be handled by the Treasury Solicitor). 

The issue here, investigated by the National Audit Office in 1993 and 1999, is how 
much resource should be devoted to enforcement to ensure that it is effective in picking up 
misconduct and deterring it in future, while not deterring beneficial enterprise.  
Competitiveness White Paper 
In December 1998 the Government published its Competitiveness White Paper "Our 
Competitive Future - Building the Knowledge Driven Economy"(Cm 4176), a comprehensive 
study of the factors which could contribute to competitiveness together with an 
implementation programme. Of particular relevance to The Service were paragraphs 2.12 - 
•  "We are too afraid of failure. People worry that business failure will create a lasting 
stigma. Investors are too rarely willing to back those who have failed and want to try 
again. Fear of failure is lower in the US, where entrepreneurs who learn from their 
honest mistakes are more easily able to launch other ventures. (2.12) 
•  "Changing attitudes will take time, the government can start this process by ensuring 
that a business in trouble has a fair chance to pull itself round and making sure that 
the law does not contribute to the stigma of failure. The government proposes to: 
•  legislate for a stay on creditors action to allow a business in difficulties up to three 
months to come to an arrangement with its creditors 
•  review arrangements for business rescues and reassess the relative rights of creditors 
in insolvencies, including the costs and benefits of any changes to the Crown's 
preferential status 
•  consider whether our bankruptcy laws and insolvency laws need to be changed to 
ensure that they support enterprise, including whether any of the current restrictions 
on bankrupts could be eased. (2.13) 
•  "These changes will not create a rogue’s charter. On the contrary, the Government 
will legislate so that it can get quicker results against directors guilty of misconduct." 
The new Small Business Service (SBS) announced in the Budget the following year, 
will be a key component in promoting entrepreneurial attitudes. As Patricia Hewitt, Minister 
for Small Firms, explained in her foreword to the bidding document for franchises to run 
local outlets, the SBS will, 
"…   be a strong voice for small business at the heart of Government - helping us streamline 
business support and simplify regulation. Above all it will deliver first-class services to our 
customers - the small businesses whose success means success for all of us”. 
"We all want more small businesses to survive, more to succeed and grow, and more to 
become world-class; so we need world-class business support. That is why we are creating 
the Small Business Service - not on our own but in partnership with the private sector - and 
inviting proposals for the new Business Link franchises”.  
The mission of the SBS is: 
"To help build an enterprise society in which more small firms start, survive and succeed.  
It will aim to provide world-class business support services that 

•  Identify and meet the needs of all SME customers, enabling them to overcome 
barriers to realise their potential and thrive; 
•  Boost the performance of small and medium-sized businesses with growth 
The Competitiveness White Paper announced two major policy reviews by The 
Service implementing paras 2.12 - 2.14. The reviews are well advanced  – one looking at 
company rescue and business reconstruction mechanisms and the penalties (jointly with H M 
Treasury) and the other at the stigma of and restrictions imposed on those who fail, whatever 
the circumstances. The aims are to further improve the system and operation of rescue so that 
viable businesses with shorter-term difficulties (and their creditors and employees) have  
better alternatives to bankruptcy or liquidation, break-up sale of assets and job losses; that 
individuals are not inhibited from starting or expanding their business, and taking risks in 
that, by the fear of failure and its consequences where they have acted responsibly; and hence 
encouraging entrepreneurialism. 
The Review of Bankruptcy 
“Bankruptcy - A Fresh Start” published in March 2000 made proposals for changes to 
personal insolvency and invited comments from a wide variety of stakeholders including 
staff, the professions, bankrupts, academics and the judiciary. The consultation period ended 
on 30 June and responses are being analysed with a view to Ministers being able to consider 
policy options in the Autumn. The main proposals are: 
•  Whether all bankrupts should be treated in the same way irrespective of their    
•  A shorter (6 months ) period before discharge for the majority of bankrupts. 
•  Encouraging entrepreneurs and fostering rehabilitation by reducing the stigma of 
failure and removing consequential restrictions. 
•  That bankrupts might be able to claim an exemption from their interest in the 
matrimonial home equivalent to capital introduced into their (failed) business to a 
maximum of £20,000 to encourage investment and re-starts. 
•  Seek to maximise returns to creditors by enabling The Service to administer “post-
bankruptcy IVAs” and thus, by the operation of economies of scale, improve on the 
returns that creditors enjoy under the current IVA system. 
•  Civil sanctions analogous to the director disqualification provisions with the real 
deterrent of the extension of bankruptcy restrictions for a period of up to 15 years  
including obtaining credit and acting in the management of limited companies. (At 
present the only sanctions available against irresponsible or reckless bankrupts are 
criminal ones with high evidential requirements which mean that some bankrupts 
whose behaviour falls just short of criminal are subject to no sanctions other than the 
restrictions imposed on all bankrupts). 
•  Financial management counselling for bankrupts.  
There is some common ground between these proposals and a review of County Court  
Administration Orders (CCAOs) being carried out by the Lord Chancellor's Department 

Note:  CCAOs are available to debtors with a judgement entered against them and total debts  
of no more than £5,000. A debtor makes an application to a Court which, having regard to the  
debtor’s circumstances, sets a repayment rate to creditors. The Court collects and distributes  
the money to creditors.  There is no set term for CCAOs but they are usually run for up to  
3 years. In 1999 the County Courts made 8,720 CCAOs. A revised county court  
administration order scheme, designed to increase its use, is prescribed by section 13 of  
the Courts & Legal Services Act 1990. This removes the requirement for a judgement  
debt and the upper limit on indebtedness and introduces the strict composition of debts  
to ensure the order is discharged at the end of three years. Primary legislation does not 
define a debt for the purposes of an administration order. This has caused uncertainty for 
court users in the operation of the current scheme. Section 13 does not address this lacuna. 
This is one of the reasons why section 13 has not been implemented. LCD is examining 
proposals for change in the context of a Review of the Enforcement of civil judgments. 
The Service is in preliminary discussions with LCD and the judiciary about the 
potential for harmonising the CCAO and the bankruptcy systems. Against a background of 
rising consumer debt, the objectives are primarily social in making available a remedy to 
those who cannot afford to petition for bankruptcy or to set up an IVA. 
The Review of Company Rescue and Business Reconstruction Mechanisms 
A report, making a series of recommendations on the issues covered in a consultation 
carried out in 1999, is to be published shortly. Views on the recommendations will be invited, 
after which Ministers will consider policy options. The recommendations in the report / 
issues addressed are designed to promote the use of collective insolvency procedures and to 
enhance the rescue culture in the UK. They include: 
•  The right of a floating charge holder to veto the making of an administration order should 
be removed. 
•  The government, the banks and the insolvency profession should support a programme of 
research into the impact of CVAs, administrations and administrative receivership and 
establish an Advisory Committee to consider this research and to continue the process of 
review of insolvency law and practice. 
•  The revenue departments changing their practices when dealing with companies in 
financial difficulty, in particular adopting a more commercial approach to CVA 
•  The Service and the insolvency profession considering ways in which the reporting of 
directors’ conduct and the issue of proceedings can be speeded up. 
A number of other suggestions canvass the possibility of more radical change. Some touching 
on the Crown’s preferential status in insolvencies and the rights of floating charge holders 
will need to await the outcome of the Competition Commission’s enquiry into the provision 
of banking services. 
Regulation of Insolvency Practitioners 

Insolvency Practitioners (IPs) are appointed to act in a range of insolvency 
proceedings e.g. trustees in bankruptcies, liquidators in compulsory and voluntary company 
liquidations, administrators and administrative receivers. They also handle individual and 
company voluntary arrangements. 
As mentioned above, the administration of insolvency procedures before 1883 was 
somewhat haphazard. The banking requirement introduced then provided some protection but 
as the Cork Committee recognised there was no requirement for insolvency specific training 
or professional standards for those administering the estates. Regulation of IPs was therefore 
introduced in the 1986 Act under which only authorised persons may act as IPs.   
Authorisation may be granted by the Secretary of State or by a professional body recognised 
by the Secretary of State (Recognised Professional Body - RPB) which regulates the conduct 
of its members and issues and withdraws licenses.  
The Government did not see the need to impose a full statutory regulation scheme and 
opted for self regulation within a statutory framework. The RPBs have to satisfy the 
Secretary of State that their own internal rules for the supervision of their own members are 
sufficient to ensure that such members meet standards of fitness and probity.  The legislation 
reduced the involvement of the court and The Service in individual cases and left more to the 
discretion of IPs (and ORs) and the control of creditors. 
The arrangements were reviewed in 1996/7 by the authorising bodies with terms of 
" to review the current state of regulation in the insolvency profession and, in the light 
of that review, to consider whether there are ways in which, in the public interest and 
in the interest of all of those affected by insolvency proceedings, such as regulation 
could be made more efficient and effective".    
Following public consultation, the report was published in 1999. The key conclusion was that 
an Insolvency Practices Council (IPC) including members drawn from outside the profession 
be established as a new high level body, whose role would be to provide a public interest 
dimension and improve transparency in setting standards for insolvency practice. IPC was set 
up in 2000. Among other recommendations was that The Service be relieved so far as 
possible from its present duties in relation to those IPs directly authorised by the Secretary of 
State, so that it could concentrate on its functions as regulator of regulators within the system. 
Human rights  
The Act will come into force in England and Wales on 2 October 2000. From that  
date the rights and freedoms guaranteed under the European Convention on Human Rights 
will be incorporated into domestic law so that they may be relied on directly in UK courts. 
Legislation was introduced in Scotland last year.  The articles of particular relevance are: 
•  Article 6(2) which provides that "everyone charged with a criminal offence shall be  
presumed innocent until proven guilty according to law" 
•  Article 7(1) which provides that "no-one shall be guilty of a criminal offence on account 
of any act which did not constitute a criminal offence under national or international law 
at the time when it was committed". 

This is not a new issue as several challenges have been made in the past to the 
European Court of Human Rights (ECHR) on matters directly related to insolvency 
legislation (re-direction orders and disqualification proceedings) or impacting on The 
Service's work (use of compelled evidence in criminal proceedings). Already human rights 
are being raised and taken in UK lower courts without having to go through the lengthy 
process of securing admission to the ECHR and there are uncertainties about how these 
courts will apply the Act. Action has already been taken to address some of the perceived 
problems but some areas of potential conflict remain. 
A recent decision in St Albans Crown Court has for example thrown doubt on previous views 
about the use of accounting records, papers and other documentation such as has to be given 
to the OR under compulsory powers. If upheld on appeal, the judgement could have major 
implications for the way The Service operates.  
International Policy  
3.27  Nowadays insolvencies are less and less likely to be confined to operations in a  
single country. Insolvency procedures have to keep pace with new methods of doing business 
and of accessing credit. The Service represents the UK in several international fora aimed at  
providing a framework for handling cross-border insolvencies and advising developing 
countries on appropriate regimes. These include the EU Council Regulation on Insolvency 
Proceedings; the UNCITRAL model law on cross-border insolvency; and various projects in 
developing countries to help them establish a framework for handling insolvency. Confidence 
in their systems contributes to developing international trade. 
Other Countries Attitudes to Insolvency 
Neither time nor budget permitted us to visit other countries (apart from Scotland, 
which is an interesting comparator). A note of our discussions with the Accountant in 
Bankruptcy for Scotland and information on relevant aspects of other countries’ policies was 
collected by The Service and Treasury in the course of the policy reviews of insolvency and 
company rescue and extracts from their reports are at annexes 3.1 to 3.3 

Annex 3.1 
The Office of the Accountant in Bankruptcy, Scotland  
Note based on discussions with the accountant and his staff. 
1. The Accountant in Bankruptcy (AIB) is a statutory officer appointed under the  
Bankruptcy (Scotland) Act (1985) to administer in Scotland personal bankruptcies 
(sequestrations), which includes sole traders and partnerships but does not extend to limited 
companies or plcs. 
2. Until 1985, OAIB supervised private sector IPs who carried out all insolvency work.  In 
practice if there were no assets in a case, the case was never finished and there was no 
discharge for the bankrupt.  The 1985 Act provided for public funding of administration to 
enable these to be cleared up.  At the time there were around 300 pa and the estimated cost 
was put at £10,000.  Over the years this built up to 12,000 cases a year costing £26 million.   
3,  In 1990 the then AIB negotiated with the Institute of Chartered Accountants for Scotland a 
block administration payment scheme, which cut back the costs for a basic case from an 
average of £2,000 to £1,000.  In 1993 legislation was introduced to allow the AIB to be 
appointed as trustee.   
4.  The AIB is appointed as trustee in some 90% of cases i.e. those where creditors do not 
appoint a trustee. Case Management Branch (CMB) of OAIB deals direct in about 25% of the 
cases and appoints outside agents in 75%.  The work is done under agreed arrangements at 
scale fees.  The major accountancy firms have largely dropped out of doing this work, which 
is now mostly done by smaller firms.  
5. Since 1993 the number of cases has fallen back from 12,000 to 3,000 at an average cost of 
£931 for CMB and £1262 for Agents. Performance data in the annual report shows that the 
costs of the OAIB are lower and the outcome for the creditors better.  To some extent this is 
because there is no profit factor but there is also scope for economies of scale and a more 
effective use of IT to cut the administrative costs.  The choice of agent is area-based from the 
IP register and dealt out equitably between firms against a rota.  CMB do not take all of the 
Edinburgh cases but try to take a similar number of cases from each area and a variety of 
types. There is an agreement as to the number of cases that CMB will take. Both trading and 
non-trading cases are handled. This accounted for around a third of all cases concluded in 
1999/2000. Others include high profile cases, cases where assets are not realisable in the 
short term, cases where the agent is performing badly and second bankruptcies which are 
open at the same time as the first e.g. from different courts in the system. 
6. All offences are reported to the Scottish Crown Office who then decide whether to 
investigate further.  If directors of limited companies are involved in a personal capacity, the 
Crown Office would pass them on to the Disqualification Unit.  There is no direct contact 
between Disqualification Unit of The Insolvency Service in Edinburgh and OAIB. 
7. Under the 1985 Act, a permanent trustee may not retain in his hands more than £200 and is 
obliged to deposit all other monies received in the exercise of his functions in an appropriate 
bank or institution. The AIB banks with the Royal Bank of Scotland and holds the assets of 
the 90% of cases for which he is responsible in separate accounts (4,000) with any interest 
credited to that account and available towards payments of fees and to creditors.   

8. Fees for statutory activities are controlled.  The accounts for each case are charged for the 
work.  CMB or the agent get their fees first before any payments to creditors.  Consignation 
receipts must be paid to OAIB by all trustees - for example, unpaid dividends (e.g. to 
disappeared people) and unapplied balances which are not enough to pay a dividend.  After 7 
years any funds remaining go to the Exchequer.   
9.  OAIB has 80.5 staff, of which 33 are engaged in registration and supervisory functions (of 
CMB and private sector agents and trustees), 20 on case work and 27.5 on finance and 
administration. They cope with fluctuations in caseload by varying the use of agents.  The 
number of petitions from creditors is fairly stable but the number of debtor petitions are 
increasing (5% per annum).  The costs of the office are £2m; £1.8 million is collected in fees; 
and £1.6 million paid in fees to trustees and agents.  The deficit is covered by the Scottish 
Executive. The agency work is funded from programme budgets. 
10.  OAIB are making use of IT and moving towards e-commerce.  The register is the most 
obvious use but there is also a comprehensive website which is under development.  OAIB 
are investigating the feasibility of allowing petitioners to fill in forms electronically and to 
transmit them by email but interviews will still take place. The AIB's Guidance Notes are 
available on CD ROM. Eventually they hope to move towards full electronic filing but there 
are issues to be sorted out in relation to public records.  They are also looking at scope for 
better links to the court.  However, a lot of the IPs are small and do not have full electronic 
access nor do most debtors.  Not all CABx and money advice bureaux have access let alone 
clients.  There is a 24 hour help line with an answerphone out of hours (office hours 7.30 – 

Annex 3.2 
Extract from Bankruptcy: A Fresh Start 
4. International comparisons 
In order to inform this review we have considered the insolvency procedures that  
exist in a number of foreign countries, concentrating on aspects of their regimes such as 
discharge periods, restrictions on bankrupts, assets which may be retained by a bankrupt, and 
actions that constitute criminal activity under bankruptcy legislation. 
One readily identifiable trend is the tendency of bankruptcy legislation in European  
countries to be conservative in its application to discharge from bankruptcy proceedings. 
4.3  In Italy for example, there is no formal bankruptcy regime for "small traders"  
(defined as "small farmers, artisans, small retailers and professional persons who carry on 
their business largely through the help of family members only") and consumer debtors. 
Effectively therefore, the position could exist where if the  creditors refuse to accept a 
consumer debtor’s proposals, or offer of compromise, a consumer could end up paying his 
creditors for the rest of his life. The bankruptcy period for individuals with businesses is 5 
years before discharge can be obtained. The discharge however is not automatic, and can only 
be secured by the bankrupt producing evidence as to good behaviour during the 5-year 
bankruptcy period. 
4.4  France does not appear to have a formal bankruptcy regime for consumers,  
although the position is different for sole traders, to whom a bankruptcy regime applies. 
Consumers can avail themselves of the remedies provided by law 89-1010, which provides 
for "the prevention of problems relating to the over indebtedness of individuals and families". 
This is not a formal bankruptcy procedure as we know it, as the application can only be made 
by the debtor, and it focuses essentially on a plan of rescheduling debt. 
4.5  Until very recently Germany and The Netherlands maintained a policy of not  
allowing discharge from bankruptcy at all, unless creditors were paid in full or settlement was 
reached. In late 1998 legislation was introduced in the Netherlands allowing a bankrupt his 
discharge after 3 years, and similar legislation was introduced in Germany at the beginning of 
1999, allowing for discharge of a bankrupt after 7 years. The introduction of this new 
legislation in Germany was controversial and sparked much debate. While these discharge 
periods are now automatic, there are qualifying criteria in the legislation,  allowing the 
discharge to be opposed. 
4.6  Other countries that impose long bankruptcy periods before automatic discharge  
include Ireland, where the period of bankruptcy is 12 years, and South Africa, where if no 
application for early discharge is made, the insolvent is discharged after the expiry of 10 
years from the date of the making of the final order for sequestration. (Reform of insolvency 
law is known to be imminent). 
4.7  New Zealand and Australia have formal discharge periods that are the same as the  
applicable period in England and Wales, although in Australia small bankruptcies dealt with 
administratively can lead to a much earlier discharge. In both countries the legislation 
provides for the automatic discharge to be opposed. If the court upholds the opposition, then 
the period of bankruptcy can be extended as the court sees fit. In Australia, this can be for 5 
or 8 years, depending on the circumstances. 

4.8  The most "liberal" countries in our survey were the United States and Canada. In  
Canada the bankruptcy period is 9 months before there is automatic discharge. However, this 
places quite an onerous duty on the trustee to ensure that notice is given to all the creditors of 
the impending discharge, in order that the creditors are able to oppose it if they so wish. This 
is to ensure that none of the creditors are prejudiced by the relatively quick discharge of the 
bankrupt. An absolute pre-condition of automatic discharge in Canada is the attendance of the 
bankrupt at counselling sessions aimed at improving his or her financial management skills. 
4.9  In the United States the most common form of bankruptcy procedure used by  
individuals is the Chapter 7 liquidation or bankruptcy. There is no specified period during 
which the bankrupt retains the status of "bankrupt" before being discharged and generally the 
Chapter 7 process takes 3 – 4 months to finalise. The safeguard employed to avoid multiple 
filings by the same individuals is the provision that a person cannot avail him/herself of the 
Chapter 7 procedure if they have already utilised it in the past 6 years. 
4.10  In most of the countries looked at it is possible to obtain an earlier discharge from  
bankruptcy where certain criteria are met. The most common is a form of voluntary 
arrangement with creditors or by payment of creditors in full. Such outcomes appear to be the 
exception rather than the norm with the typical bankrupt having to wait many years before 
being discharged from bankruptcy. 
4.11  There are certain restrictions common to most bankruptcy regimes, which  
circumscribe a bankrupt’s future conduct. The most prevalent include preventing a bankrupt 
from being a director of a company, preventing a bankrupt from being a trustee, and 
establishing some sort of credit limit for a bankrupt, above which the bankrupt has to disclose 
his status of undischarged bankrupt to a prospective lender. 
4.12 There are some more extreme restrictions imposed. In Italy for example, a bankrupt  
cannot pursue an occupation as a lawyer, stockbroker or even as a pharmacist. He also has to 
surrender his passport, and cannot be appointed the legal guardian of an infant
4.13  The New Zealand and Australia restrictions mirror fairly closely those of the  
English regime, except that there is the additional restriction of not being able to travel 
abroad without the consent of your trustee or assignee, as the case may be. This kind of 
restrictive legislation was prompted in Australia by a number of high profile entrepreneurs 
who went bankrupt and who left the jurisdiction in favour of other countries where they were 
believed to have placed much of their personal wealth beyond the reach of their trustees and 
 While the restrictions imposed by the English system may be described as comparatively 
moderate, the system is not as liberal as the United States where none of the more common 
restrictions apply. In fact, section 525 of the US Bankruptcy Code provides that an individual 
may not be discriminated against solely on the ground that they are or have been the subject 
of bankruptcy proceedings. 
4.15  In each of the countries that we looked at, there were further restrictions imposed  
on bankrupts by legislation other than insolvency legislation. The most common of these 
were the exclusion of a bankrupt from holding certain public and other  offices.  Other 
restrictions include the exclusion of bankrupts from becoming, or continuing to be, members 
of certain professional bodies and trade associations. For example, in certain Australian states 
bankruptcy may lead to loss of employment in the security industry or the police force. 

Assets capable of being retained by the bankrupt 
  There is a fair degree of uniformity between countries with regard to what assets the  
bankrupt may retain. The most common are household furniture and personal effects, as well 
as the bankrupt’s tools of trade (where applicable) up to a stipulated cash value, which tends 
to be a modest rather than generous figure. The bankrupt can also generally retain income 
necessary for day-to-day living. The bankrupt’s house is not generally immune from the 
bankruptcy process, and can be sold if there will be equity in the sale for creditors. In 
Australia the bankrupt is also entitled to keep his/her primary  means of transport, up to a 
maximum cash value of $ Aus 5000, as well as life insurance and superannuation policies. 
4.17   The one country that stands out is the United States, which is unique in the sense that 
its legislation comprises a combination of Federal and State law. Federal Law stipulates 
permissible exemptions with regard to the bankrupt’s property. For example, the bankrupt is 
entitled to retain interests in real or personal property that the debtor or a dependent uses as a 
residence, as well as maintaining interests in household goods, books, and clothes. He or she 
is also entitled to retain an interest in a motor vehicle, and even in jewellery, up to a certain 
4.18   While the exemptions under federal law may be seen to be fairly generous, they do not 
compare with the exemptions afforded by some of the individual states for example Texas, 
where the homestead exemption is US $ 1 million, and Florida, where there is no limit on the 
value of the exemption that can be claimed in this respect. This has led to claims of abuse and 
the Bankruptcy Reform Bill passed recently by Congress seeks to limit the extent of the state-
determined "homestead" exemptions. 
Criminal conduct by bankrupts 
 As far as criminal offences under bankruptcy law go, there is a large degree of 
uniformity across almost all the countries we have studied. The most common forms of 
criminal conduct by the bankrupt, in terms of insolvency legislation, tend to include the 
concealment or removal of property by the bankrupt, destroying or falsifying documentation 
relating to the bankrupts affairs, absconding, and obtaining credit in excess of the permissible 
limit, or at all. The sanctions that accompany such conduct vary from country to country, but 
the legislation usually provides for the imposition of a fine and/or imprisonment of anywhere 
between 6 months and 6 years. 

Changes to the US Bankruptcy Code 
4.20    As a result of recent legislation passed by the US Congress it is likely that the "no 
questions asked" (regarding the debtor’s ability to pay from current or future earnings) 
approach of US bankruptcy legislation towards debtors wishing to file for bankruptcy under 
Chapter 7 of the Code, will be modified. Debtors with an income above a determined level 
will be required to agree to a repayment 


Annex 3.3 
1.  In the UK there are five main options for companies experiencing financial distress: 
•  Administration. 
•  CVA. 
•  Receivership. 
•  Liquidation. 
•  Dissolution. 
2.  This range of options, which can be perceived as unnecessarily complex, can also be seen 
as one of the system’s strengths.  It permits a variety of approaches to complex problems.  
But it requires that companies and advisers are aware of the options available and which is 
the most appropriate.  One way to address the issue of perceived complexity is to ensure that 
all parties - company directors, banks, accountants, insolvency practitioners – can be made 
fully aware, and make other parties fully aware, of the range of options available and how to 
access the different procedures. In practice this is largely achieved at present through the 
expertise of insolvency practitioners who can be said to provide an informal “single gateway” 
into much of the system once they have been consulted. 
3.  An alternative approach is to make access to insolvency procedures simpler but to retain  
the range of possible outcomes. This is the approach adopted by other jurisdictions that 
typically have a simpler system of entry, e.g. the ‘Single Gateway’ in Germany and France. 
Or there may be simply fewer options available, e.g. in the US where, under federal law, 
there are effectively only two, Chapter 11 (for rescue / reconstruction) or Chapter 7 (for 
4.  Faced with similar issues, different jurisdictions have pursued different approaches.   
Germany introduced radical reform, for example abolishing creditor preferences and the right 
of veto by a single (secured) creditor of the rescue/reconstruction process, in an attempt to 
promote more collective rescue procedures.  Other jurisdictions, such as Sweden and Ireland, 
have introduced collective procedures, akin to administration in the UK but where the ability 
of a single creditor to veto the procedure is removed or at least significantly limited, and an 
independent agent (a court appointed insolvency practitioner) proposes a reconstruction plan. 

How much can we learn from international comparisons? 
5.  We think it unwise to draw firm conclusions from the (perceived) success or otherwise of  
other regimes’ approaches to these issues, not least because of the absence of reliable 
comparative data.  There are complex interactions between insolvency law and the wider 
1  There are of course state bankruptcy – even receivership – regimes in the US 

economy, in particular with financial markets, which make any comparisons extremely 
difficult.  The different institutional and cultural make-up of the UK means that it would not 
be possible to “parachute” insolvency laws from another country and expect them to work in 
the same way.   
6.  A further note of caution is that reforms may not always have the effect or impact  
7.  For example the introduction of administration in the UK in 1986 was primarily intended  
to cover those instances where a floating charge did not exist, and hence an administrative 
receiver could not be appointed.  However today some 50% of administrations occur where 
there is a floating charge.  Another example may be the reforms introduced in Germany on 1 
January 1999 (after a lead-in period of some five years). These reforms aim to produce a 
more collective corporate rescue procedure, in part by abolishing creditor preferences and 
allowing creditors to determine collectively the reorganisation of the business in financial 
distress.  The intention is to align incentives so that all parties have a stake in outcome of the 
process, and therefore work together to maximise the value of the debtor’s estate.  However 
these reforms have been introduced against the background of a proliferation of secured 
lending, with more creditors being able to enforce their claims outside the rescue mechanism 
so that, in practice, there may prove to be fewer rather than more “collective” procedures.  
8.  Despite these (significant) caveats the review group believes that international  
comparisons can provide useful insights when considering possible changes to our domestic 
insolvency arrangements.