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Insolvency Service cracks down on spendthrifts – but will it make a difference? - news article image

Insolvency Service cracks down on spendthrifts – but will it make a difference?

25 Jul 2017

3 minute read

According to recent reports, the Insolvency Service is looking to clamp down on bankrupts who spent their money on luxurious and unnecessary goods instead of paying their debts and other inappropriate conduct that many would consider as failing to put the interests of their creditors first. In 2016/17, the Insolvency Service handed out 97 penalty notices, rising from 78 the previous year. With the number of personal insolvencies reaching their highest level since 2014, it would appear that The Service is trying to use this as an opportunity to send a message to those ignoring their credit obligations. 

The Government clamping down on spendthrifts does appear great in theory, however, I can’t help but think, ‘so what?’ Would this increased Government action really make a difference for creditors? Does the punishment fit the crime? Does it achieve anything for the victims? 

Firstly, let’s assess what ‘clamping down’ would actually entail and secondly what are the ‘punishments’ for those who fail to act in the interests of their creditors? ‘Clamping down ‘in this context means that the Government will obtain what is known as a Bankruptcy Restrictions Order or Bankruptcy Restriction Undertaking (BRO/BRU) against the relevant person. The BRO or BRU sets out a number of restrictions that a person must abide by once they have been declared bankrupt and for how long the restrictions remain in place. The order restricts bankrupts on the following areas: 

  • Managing, promoting, or being made a director of a company without the court’s permission
  •  Carrying on the business in which they were made bankrupt under a different name 
  • Borrowing more than £500 without telling the creditor about the BRO/BRU 
  • Taking certain positions within a charity or an educational institution

Are the restrictions really equal to the offences in question committed in the lead up to bankruptcy? Offences such as; borrowing money that you know you can’t pay back; giving certain creditors preferential treatment such as family members; giving away assets or selling them for less than their value; letting your debts increase by neglecting a business? My personal view - no. If the offences are committed in the lead up to bankruptcy and are deliberate none of the penalties actually address the issue. Normal commercial practice as regards the granting of credit acts as a block to credit for up to six years after bankruptcy, the articles of association and educational institutions often have a general bar on bankrupts and few companies allow ex bankrupts to sit on their boards. I would prefer to see some form of prolonged financial penalty similar to the provision that debts incurred as a consequence of fraud or criminal activity are not expunged by bankruptcy.

 If you are a creditor who is looking to recover assets from someone under a Bankruptcy Restrictions Order you may be thinking the same. For such creditors, there are a number of sections in the Insolvency Act that are specifically designed to enable a trustee in bankruptcy to recover money in cases such as selling assets undervalue or paying creditors in priority. However, to achieve a favourable conclusion for the creditor, a trustee in bankruptcy must be appointed to take action. Under the Insolvency Rules of 2016, to appoint an independent trustee, creditors must apply to the Insolvency Service for a meeting of creditors to be convened and in turn, for an appointment to be facilitated. Here at Shaw Gibbs, we have acted in many cases to recover assets for creditors. If you – or a client/contact – are involved in a case as a creditor and think there has been misconduct by a bankrupt then do get in touch to see if we can help.

Insolvency Service cracks down on spendthrifts – but will it make a difference? - news article image


Clive Everitt

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