New Out of Court System For Bankruptcy Procedures

The Government has recently announced that the Enterprise and Regulatory Reform Bill (“ERRB”), which is currently at the report stage in the House of Commons, will contain proposals for a new out of court system for dealing with debtors’ bankruptcy petitions. Assuming the legislation survives in its current form, individuals wishing to make themselves bankrupt will no longer have to go through a court process, but will apply through a simplified adjudication process, probably to be administered by the Insolvency Service.

This step follows an extensive consultation exercise during which out of court procedures were also considered for creditors’ bankruptcy petitions and  compulsory winding up petitions against companies. Concerns were raised by interested groups that, given the potentially draconian economic consequences of bankruptcy and winding up, adjudication would provide inadequate protection for individuals’ rights. The announcement that the current proposals will be limited to debtors’ petitions is, therefore, a relief to many.

It is really too early to comment upon the proposals as detail at the moment is scarce so further updates will follow. In the meantime, there seems to be a consensus that whilst the move may relieve some pressure on the courts system and make bankruptcy cheaper for individuals, the public purse will still have to administer the adjudication process and that individuals will need to pay even more careful attention to the effects of bankruptcy on their personal situation. In an adjudication system there would be no judicial safety valve where individuals perhaps fail to appreciate the full legal ramifications of what they are doing.

There is a growing school of thought that the UK’s “favourable” automatic discharge period of 1 year from bankruptcy is too short, “early” (less than 1 year) discharge procedures are already set to be revoked under the ERBB, and it is not beyond likelihood that bankruptcy will become more onerous than it is now. Making bankruptcy easier to achieve, therefore, may become a trap for the unwary and if the Insolvency Service, which also polices and administers the bankruptcy system itself, is to serve as the gatekeeper to that system as well, it may be prudent for individuals to secure independent advice before embarking upon such an important step.