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Reform of the process to apply for bankruptcy and compulsory winding up

Earlier this year, Mr Edward Davey MP, Minister for Consumer Affairs at BIS, announced the launch of a 12 week consultation regarding the reform of the application process for bankruptcy and company winding up. The Insolvency Service noted that: “The consultation sets out proposals that aim to provide the most appropriate and efficient route into bankruptcy and winding up, and to ensure that the Court’s focus is on dispute resolution.”

The core proposal of the Government’s reforms is that undisputed applications, where brought by a creditor, debtor or third party, would be determined in a more streamlined way by an Adjudicator, making use of a new pre-action process. Petitions would therefore be granted without the need for the Court, whilst ensuring that parties’ interests are protected by the intervention of the Court where there is a dispute.

The Government's proposals have proved to be highly contentious; the proposed changes are likely to have a huge impact on the nature and function of the insolvency jurisdiction. What has proved to be the most controversial proposition is the Government’s plan to appoint an Adjudicator with the power to decide whether bankruptcy or winding up should be granted; decisions which have serious consequences. 

The Government has proposed that the Adjudicator sits within The Insolvency Service, which begs the question as to whether a bankruptcy or a winding up order, particularly on the application of a creditor, should be made by an office which is not independent of the Government as opposed to a legally qualified, independent judge whose decisions are open to public scrutiny.

This is the nettle grasped firmly by Chief Bankruptcy Registrar Stephen Baister in his Response Paper to the Government’s proposals. The proposals have significantly wider implications for the entire legal system:  if a bankruptcy or winding up order can be made by an unqualified Adjudicator, other than with the debtor’s consent, why should not a range of other legal cases be similarly disposed of? Registrar Baister asks “Judges and lawyers practicing in areas of law other than insolvency… [to question] whether this proposal is the thin end of the wedge, or rather the sharp end of a potentially very large stake, that is to be driven through the whole of our legal system and the values that have informed that system for a considerable time”.

Furthermore, the Government proposals also seem to ignore the fact that the blurring of the roles of the Insolvency Service between this judicial function and as an investigator and prosecuting authority could lead to conflicts of interest.

The Adjudicator process will simply not be sufficient for all cases. The Government’s proposals blatantly ignore the matter that a determination of whether there is a "dispute" is not always a simple one in any event. There is a convincing argument that all creditor bankruptcy petitions should be treated as potential disputes and therefore remain in the jurisdiction of the court, whose role is crucial, not least because most bankruptcies are undefended.  A judge has the opportunity to satisfy himself regarding service of the demand and petition, including verifying witness evidence, ensuring that the grounds of the creditor’s petition are made out, identifying any potential disputes and gathering any information regarding the personal circumstances of the debtor, for example whether they have capacity to defend proceedings, as acknowledged in the CAB Response Paper to the consultation.

In light of the role the court has played in bankruptcy proceedings, it is concerning that the Adjudicator is expected to leave it to self-declaration that the creditor has carried out satisfactory service of the statutory demand and has complied with the pre-action process. Sanctions for non-compliance may be imposed at a stage where it is too late for the person in debt who will already have been made bankrupt.

It is also concerning that The Insolvency Service suggests that where the Adjudicator is satisfied that the criteria for making a bankruptcy order are met, an order will be made unless the debtor makes an application to the court. Not only does this pre-suppose that the debtor has the knowledge, confidence and resources to make such an application to the court, it also appears to suggest that the debtor would have to pay a court fee to make the application. It is possible that some debtors simply would not be able to afford such an application.

As well as creating the office of an Adjudicator, the Government also intends to create a specific pre-application protocol to encourage debtor and creditor to engage at an early stage wherever possible to resolve debt issues; this will run alongside the pre-petition requirements (i.e. the requirement to serve a statutory demand). The current proposals envisage a 21 day time period within which debtors can respond to a pre-action notice. There is a concern that the plan to run the pre-action process concurrently alongside the statutory demand will mean there is insufficient time built into the pre-action process to seek advice.

Furthermore, whilst the concept of a pre-action process is encouraged in theory, this raises concerns as to whether there would be an equality of arms for people in debt when negotiating a settlement. Debtors are unlikely to be familiar with the law, unlikely to have the same level of access to legal advice as creditors and therefore unable to determine the strength of their case when it comes to a negotiation.

Whilst the process of obtaining a winding up or bankruptcy order is unnecessarily bureaucratic and expensive as it currently stands, introduction of determination by an administrative process is not the answer when such a process is under the control of The Insolvency Service’s Adjudicator. The current problems could be solved by making the court system simpler by determining such matters without the need for a formal hearing, not by taking away important decisions from the court and public scrutiny, particularly in circumstances where a proposed administrative process fails to give sufficient safeguards to protect potentially vulnerable debtors.