Nelson Says: "Bankruptcy can relieve debt situations"


16 March 2004   Enterprise Act Reforms


On 1 April 2004 the provisions of the Enterprise Act 2002 relating to personal insolvency come into force. The business world is bracing itself for a significant increase in the numbers of people willing to declare themselves bankrupt, particularly in the area of consumer credit, given the possibility of the bankruptcy restrictions lasting for less than a year. What will it mean to go bankrupt under the new regime?


A number of the restrictions on the activities of a bankrupt continue, including the following:


A bankrupt cannot act as a director of a company or indirectly take part in or be concerned in the promotion, formation or management of a company without the permission of the Court.


A bankrupt cannot obtain credit in the sum of more than 250 without disclosing that they are an undischarged bankrupt.


A bankrupt may not engage in any business under a name other than the one in which they were made bankrupt without disclosing that name.


A bankrupt commits an offence if they leave or attempt to leave England and Wales with property of a value of more than 500.


Any property a bankrupt acquires may be claimed by the trustee in bankruptcy for the benefit of the bankrupt's creditors.


The bankrupt may be made subject to an income payments order.


Relaxation of existing rules:-

There are, however, also some relaxations of existing rules under the new Act. From 1 April 2004 a bankrupt will be automatically discharged a maximum of twelve months after being made bankrupt, unless the period is extended by the Court. This compares with the current period of three years.

The obligations of the Official Receiver (who has initial control over every bankruptcy case) to investigate a bankrupt's behaviour are also relaxed. A bankrupt may be discharged earlier than twelve months if the Official Receiver files a certificate at Court stating that he has concluded his investigation of the bankrupt's conduct and affairs, or that such an investigation is unnecessary. The bankrupt will then be automatically discharged on receipt of that certificate by the Court.


Bankruptcy Restriction Orders and Undertakings:

Under the new Act, Bankruptcy Restriction Orders and Undertakings (BROs/BRUs) are introduced. Procedures include:


An application for a BRO will usually have to be made within one year of the bankruptcy order

The BRO/BRU can last for a period of two to fifteen years.  During the operation of the BRO/BRU the prohibitions identified overleaf applying to undischarged bankrupts will continue to apply.


There are several areas of conduct which will be considered in assessing whether a BRO should be made and its duration, such as incurring debts without a reasonable prospect of repaying them, failing to co-operate with the Official Receiver or the trustee in bankruptcy, evidence of fraud etc.


It will no longer be an offence to fail to keep proper accounts for a business nor to gamble or engage in "rash and hazardous speculation". However, behaviour of this type will be taken into consideration in the context of considering whether a BRO/BRU is appropriate.


Amendments to bankruptcy procedures:

An important change is that the trustee in bankruptcy must commence any action to release any interest they claim in the bankrupt's home within three years of the Bankruptcy Order. At present there is no time limit. Some former bankrupts have undoubtedly been very surprised to be contacted by the Official Receiver or a newly appointed trustee in bankruptcy many years after they have been discharged from bankruptcy with a claim to realise their beneficial interest in the bankrupt's property for the benefit of creditors when significant equity has accrued in the property. This practice will be brought to an end by the introduction of the new legislation.

The trustee in bankruptcy will also not be able to claim an interest in the bankrupt's home if the value of that interest is below a certain amount (the current level prescribed is 1,000).


A new fast track procedure for Individual Voluntary Arrangements for un-discharged bankrupts is introduced.


It will be interesting to see how strictly the provisions regarding incurring debts without a reasonable prospect of repaying them are interpreted, resulting in the imposition of Bankruptcy Restriction Orders.


What is clear, is that provided you have no substantial assets which could be absorbed by the official receiver or any appointed trustee, declaring yourself bankrupt is now a more positive step to a financial recovery.


Insolvency Act 2000

2000 Chapter 39



Voluntary arrangements
1. Moratorium where directors propose voluntary arrangement.
2. Company voluntary arrangements.
3. Individual voluntary arrangements.
4. Qualification or authorisation of nominees and supervisors.

Disqualification of company directors etc.
5. Disqualification orders.
6. Disqualification undertakings.
7. Effect of Northern Irish disqualifications.
8. Amendments.

9. Administration orders.
10. Investigation and prosecution of malpractice.
11. Restriction on use of answers obtained under compulsion.
12. Insolvent estates of deceased persons.
13. Bankruptcy: interest on sums held in Insolvency Services Account.
14. Model law on cross-border insolvency.

15. Amendments of Financial Services and Markets Act 2000 and repeals.
16. Commencement.
17. Extent.
18. Short title.

    Schedule 1 - Moratorium where directors propose voluntary arrangement.
     - Amendments of the Insolvency Act 1986
    Schedule 2 - Company voluntary arrangements.
    Part I - Amendments of the Insolvency Act 1986.
    Part II - Amendments of the Building Societies Act 1986.
    Schedule 3 - Individual voluntary arrangements.
    Schedule 4 - Minor and consequential amendments about disqualification of company directors etc..
    Part I - Amendments of the Company Directors Disqualification Act 1986.
    Part II - Consequential amendments of other enactments.
    Schedule 5 - Repeals.