Government Consultation On Bankruptcy

On 7 November 2011 Business Minister Edward Davey announced proposals which he claims are aimed at streamlining the system for company Winding up and Bankruptcy Petitions, where there is no dispute between the parties.

The full proposals are set out in the consultation document which can be found at The proposals suggest replacing the current Court route with an entirely administrative process for undisputed cases. The stated aim is to remove perceived inefficiencies in the current process with the goal of saving costs and improving returns to creditors.

In the consultation, the Government relies on anecdotal evidence provided to the Ministry of Justice by the Association of HM District Judges (who deal with the majority of such Petitions). This suggests that only around 5% of all creditor bankruptcy and company liquidation Petitions that progress to a hearing are opposed. The implication is that very few cases involve a dispute which requires a court decision.

The proposals include a new system of electronic Applications to an “Adjudicator” which would be a new role with an office at the Insolvency Service; part of the Department for Business, Innovation and Skills. Where there is no disagreement, the Adjudicator would decide the outcome of the Application, thereby removing it from the remit of the court which would deal with any bankruptcy or Winding up process that involved a dispute. It is not entirely clear how it would be shown that there is no disagreement other than by representations made in the application.

Creditors who intend to start proceedings would have to take all reasonable steps towards reaching a mutually satisfactory solution to the debt problem, and debtors will be encouraged to seek early, free, independent debt advice although again details are limited and in many instances this is already the case.

The proposal seeks to assuage any concerns over the lack of Court involvement by suggesting that debtors would have the right to respond to an Application by a creditor and be able to refer any dispute to the Court. This would extend to the right to request a review of an Adjudicator’s decision and an appeal to the Court. They suggest that the penalties for submitting false information in support of an Application should, in certain circumstances, be criminal.

The proposed changes appear to relate to the procedural aspects of Bankruptcy and Winding up. However, there is likely to be a significant effect on broader aspects of the insolvency process. Many agreements refer to the onset of insolvency in terms of the current Court process and legal documentation, and this is often of direct relevance to termination of an agreement and the ability to take enforcement action pursuant to an agreement.

There is therefore likely to be a significant impact on companies, lenders and credit institutions, and the Government has stated its intention to actively engage with interested parties. The consultation will conclude on 31 January 2012.

Andrew Charvill, Solicitor, Sheffield