Business booming or busting

According to the DTI the number of individuals declared bankrupt in the 3rd quarter of this year (2004) rose to 9,156, 28.8% more than for the same period in 2003. It is forecast that there will be about 50,000 bankruptcies next year, compared to an annual total of about 32,000 in the last major recession. Some of this rise will inevitably be due to increases in interest rates but the majority is likely to be as a result of the changes made to bankruptcy law in April by the implementation of the Enterprise Act.

Gone are the days when bankruptcy was strung out for years. Now, simple bankruptcies, where the financial situation is straightforward, are being finalised within 3 to 6 months. Even in more complex cases, the bankrupt will generally be discharged after 1 year unless they have failed to comply with one of the obligations placed upon them by the bankruptcy.

So this will certainly account for the increases reported by the DTI.

Although the Enterprise Act has made things more straightforward in many ways they have also introduced some changes which it’s wise to be aware of.

Bankruptcy Restriction Orders (BROs)

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In cases, where the court believes the conduct of a bankrupt has been irresponsible or reckless, the DTI can apply to the court for a Bankruptcy Restriction Order – a “BRO” – which effect place restrictions on the bankrupt: he can still be liable for bankruptcy offences and cannot, without the court’s permission take part or be concerned in the promotion, formation or management of a company. Given that the period of a BRO is anything from 2 to 15 years – you can see how serious this could be.

BROs have been slow to take off but there is every indication that they are on the increase. Their equivalent, as far as companies are concerned, is the power of the court to disqualify company directors. These too started off slowly but have become more and more frequent over the last few years.

Anyone facing the threat of a BRO should take legal advice as soon as possible. You may be able to challenge the BRO, reducing its period of operation or obtain permission to run your company even though you are subject to a BRO.

Trustees Rights over a Bankrupt’s Home

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Another main feature of bankruptcies since April has been their effects on a bankrupt’s home.

The problem is that the bankrupt’s interest in their home automatically becomes part of the bankruptcy estate and the home can be sold to pay creditors. Although trustees have always had the right to demand the bankrupt’s share in the equity of the home or enforce its sale it rarely happened. This was especially true in times when the housing market was flat and there was little or no equity available. However there was nothing to prevent the trustee coming along years later, when the home had acquired significant amounts of equity, to demand their share.

The new law offers more protection for the bankrupt. Changes made by the Enterprise Act mean that the Official Receiver or the trustee must take active steps to realise their interest in the home, enter into an agreement with the bankrupt regarding the interest, or apply to the court within 3 years of the bankruptcy. The bad news for old bankruptcy cases is that their 3-year period started on 1 April 2004 and trustees therefore have until 31 March 2007 to make their claims.

It is estimated that there are about 50,000 such homes that have not been dealt with. And the bad news is that the DTI have decided to take an aggressive policy and have started making claims in relation to homes in old bankruptcies, even where the bankrupt was discharged years ago and significant amounts of equity have accrued in recent years.

Faced with such a claim there is little you can do. You may be able to argue that your share of the equity is less than 100%, if the house is in your sole name, or less than 50%, if it is in joint names. In such cases you may be able to argue that the trustee in bankruptcy is not entitled to his usual share but something less. The law is complicated in this area and again it is important to take legal advice as soon as possible if you think that this situation might apply to you.

Overall, the changes to bankruptcy law have been favourable to people in debt. You can generally be expected to be discharged within 1 year and, in simple cases, far sooner than that.

However there is still the threat of BROs and you may be one of the unfortunate ones who have been made bankrupt in the past where you never purchased back your share in your home.

Article written by Gary Cousins specialist insolvency and dispute resolution solicitor with Cousins Business Law.

Contact Cousins Business Law for advice on this topic.


Article added September 2004

 

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