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
• 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
• 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
• 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
• 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.
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
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 –
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. Discharge
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
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
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
, 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
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.
The most "liberal" countries in our survey were the United States
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. Restrictions
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
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
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
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
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
EXTRACT FROM THE REPORT ON COMPANY RESCUE AND BUSINESS
1. In the UK there are five main options for companies experiencing financial distress:
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
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