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Individual Insolvency & Bankruptcy in England – an English Eccentricity

di - 5 Novembre 2013
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Throughout the nineteenth century it is possible to see a trend emerging towards the protection of individual debtors or potential debtors who engage in business; limited liability companies were, in deference to the individuals who own them, given the legal liability for debts, which previously would have been the personal responsibility of those owners. Owners are only liable to the extent of their shareholding. At the same time, individuals who do not enjoy such protection, were given ever widening rights by statute, as we have seen.
Passing reluctantly (through lack of time) over developments during the first seventy years or so of the twentieth century, we arrive at a era of considerable economic crisis for Great Britain; but we also pick up in a real sense where the 1883 Act, with its notion of being fair and “diminishing wrecks”, left off. In January 1977, the British Government commissioned a “comprehensive review of the law of insolvency”[16] in England & Wales. A review committee was established under the Chairmanship of Kenneth Cork, which published a Report in April 1981[17].
The Cork Report (as it became quickly known), was published amid widespread praise. Expressing a need for reform of British insolvency law, it made a number of recommendations. Specifically on the subject of individual insolvency, it recommended that: (a) the emphasis on “selling up” the individual debtor (in effect, reducing him to ruin and poverty) should be diminished, and instead, attention should be increased on the possibility of meeting the claims of creditors out of the debtor’s future wages or income. The rehabilitation of the debtor was encouraged; (b) the excessive severity of the law towards the individual insolvent should be relaxed, particularly when the insolvent is incompetent rather than dishonest[18].
The Government’s response to the Cork Report was a White Paper in 1984 called A Revised Framework for Insolvency Law. The Insolvency Act 1985 followed shortly thereafter, and then the Insolvency Act 1986 (which largely repealed the 1985 Act) and the accompanying Insolvency Rules.
The Insolvency Act of 1986 was and remains the most significant expression of modern individual insolvency law for a century. It has been complimented by the Insolvency Act 2000 and the Enterprise Act 2002. The EU Regulation on Insolvency Proceedings came into force in England in 2002[19].

A Brief Description of Modern English Personal Insolvency Procedures[20]
The process for making someone bankrupt begins by presenting a legal document, called a petition, to the Court. No person can be adjudicated bankrupt in England or Wales unless, at the time that the petition for his bankruptcy was presented: (i) he was domiciled in England or Wales; (b) was personally present in England and Wales on the date that the petition was presented to the Court; or (c) within three years before that had ordinarily resided or had a residence in England or Wales, or was carrying on business in England or Wales either personally, in partnership or by an agent or manager[21]. This qualification for who can, and cannot, be made bankrupt, is subject to EC Regulation on Insolvency Proceedings 2000 where the debtor has his main interest in an EU member state.
However, bankruptcy in modern Britain is a last resort. There are ways in which people in serious debt may avoid bankruptcy. The 1986 legislation introduced the concept of the Individual Voluntary Arrangement, commonly called an IVA, which is available to individuals and not to companies[22]. It is intended to prevent a person becoming bankrupt, while enabling creditors to recover realistic sums of money. It is a statutory creature, but relies on the old common law concepts of agreement and complying with the terms of an agreement, to be workable and effective.
An IVA is a legally binding agreement between the debtor and his creditors whereby the creditors are repaid an agreed amount, in an agreed period of time. Often, the IVA comprises the debts of unsecured creditors, leaving secured creditors to pursue their own rights. IVAs are attractive to individuals who may own significant assets but, for whatever reason, cannot manage repayment of their debts at a particular time. Once a creditor has agreed to be bound by an IVA, he cannot then sue the debtor and, for example, seize those assets to recover the debt. The creditors receive repayment of what they agree is reasonable and realistic and the debtor avoids bankruptcy and its related constraints and social stigma. He is also protected from legal action by other creditors. An IVA can be of any length of time.
From April 2009, another method that a (modest) debtor can obtain legal relief without becoming bankrupt is by obtaining a Debt Relief Order from the Official Receiver. They are only available if the debtor owes less than £15,000, has less than £50 spare income per month and does not own his own home. They are very helpful in that creditors cannot recover money without permission from the Court (which includes suing for it) and any unpaid debts are discharged after twelve months.
Debtors who have entered into either and IVA or Debt Relief Order must have their names placed on the Individual Insolvency Register, which is a public record.
Creditors and debtors are not obliged voluntarily to seek such relief under statute. It is possible for the to reach agreement under common law contract as well as negotiate informal moratoria, under which debts can repaid and the debtor is free to find the money to do so without the fear of being sued. These techniques of course, rely entirely on the ability of the parties to agree and to honour them. Furthermore, if a debtor does not take steps, then a creditor can do so instead.
IVAs or common law contracts will not be suitable where a debtor has debts he cannot realistically pay, or pay within a sensible period of time. A Debt Relief Order, of course, is unavailable for debts exceeding £15,000. In those circumstances, pure, Court adjudicated bankruptcy is the most likely option.

Note

16.  Terms of reference of the review committee. See footnote 17 below.

17.  “Insolvency Law and Practice – Report of the Review Committee” HMSO Cmnd 8558.

18.  The Cork Report Chapter 52 para. 1980

19.  Council Regulation (EC) No. 1346/2000 of 29 May 2000

20.  I have relied in this part of the essay upon the useful British Government website www.insolvencydirect.bis.gov.uk

21.  Insolvency Act 1986 s.265

22.  Insolvency Act 1986 Part VII

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