Changes to Personal Bankruptcy Law

Originally published Summer 2004

Changes to Personal Bankruptcy Law

On 1 April 2004 the provisions of Part 10 of the Enterprise Act 2002 (the "Act") relating to personal bankruptcy came into force. The new regime is designed to reduce the stigma of bankruptcy for "innocent" (as opposed to "culpable") bankrupts and thus to encourage entrepreneurs to start new businesses and take risks, thereby promoting the growth of the economy.

It aims to strike a balance between, on the one hand, encouraging new businesses and providing a fresh start to those who have failed through no fault of their own and, on the other hand, protecting the public and the commercial community from those whose conduct of their financial affairs has been irresponsible or reckless.

Reduction in discharge period

Under the new regime, most bankrupts will be automatically discharged after a maximum of one year from the start of the bankruptcy - as compared with the 2 or 3- year period under the old regime. The Official Receiver will make an initial enquiry into the circumstances of each bankruptcy, including interviewing the bankrupt, and if the Official Receiver considers that no further investigation is necessary, the bankrupt may be discharged earlier than the expiry of the one-year period. However, if the bankrupt fails to comply with his obligations, a court may suspend the automatic discharge on an application by the Official Receiver or the trustee in bankruptcy, thereby extending the duration of the bankruptcy.

Bankruptcy restrictions

If, after his initial enquiry, the Official Receiver concludes that further investigation into the conduct of the bankrupt is necessary, the new regime enables him to carry out that investigation and make a report to the court, which may lead to the Secretary of State or the Official Receiver applying for a bankruptcy restriction order ("BRO"). The BRO will last for a minimum of 2 years and a maximum of 15 years, regardless of the intervening discharge of the bankrupt, and will restrict the activities of the bankrupt - for example, preventing him from acting as a director of a limited company or obtaining credit over a certain limit.

Examples of behaviour that could lead to a BRO include, but are not limited to:

failing to co-operate with the Official Receiver or trustee in bankruptcy;

failing to account for prior transactions causing loss;

entering into a transaction at an undervalue;

failing to supply goods or services which have...