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Bankruptcy Restrictions

Bankruptcy Restriction Orders and Bankruptcy Restriction Undertakings are relatively new additions to the bankruptcy legislation operating in England and Wales having been introduced under the Enterprise Act 2002 and brought into effect on 1 April 2004.

What is the difference between a Bankruptcy Restrictions Order and a Bankruptcy Restrictions Undertaking?

A bankruptcy restrictions order (BRO) is granted by the Court following an application by the Official Receiver. In circumstances where the Official Receiver thinks a bankrupt has acted dishonestly or recklessly in some way he may apply to the Court for an order that imposes restrictions on a bankrupt for a period of time between 2 and 15 years. Most bankrupts are subject to bankruptcy restrictions for just the standard one year period of bankruptcy. bankruptcy restrictions

The rationale behind extending the period of bankruptcy restrictions with a BRO is primarily to protect the public from the dishonest or improper behaviour of a small number of bankrupts.

The Official Receiver prepares a report for the Court detailing the actions of the bankrupt and the Judge considers the report when determining the length of the time for which the BRO will be imposed.

As an alternative to an order being made by the Court, a bankrupt is given the opportunity to agree to bankruptcy restrictions by way of a bankruptcy restrictions undertaking (BRU). The Official Receiver will write to the bankrupt advising him that he intends to apply for a BRO through the Court and asking the bankrupt whether, as an alternative, he will agree to sign a BRU. A BRU has exactly the same effect as a BRO but because the Official Receiver avoids the necessity, time and expense of making an application to Court he will offer the bankrupt a “discount” off the bankruptcy restrictions period. The usual discount offered is one year.

The Official Receiver will detail his reasons for seeking a BRO and if the bankrupt agress with the evidence provided he can sign the BRU which will then be binding upon him in the same way as a BRO. If the bankrupt doesn’t agree with the Official Receiver’s report he may choose to go to Court and defend himself against the evidence provided by the Official Receiver.

What are bankruptcy restrictions?

  • When a bankruptcy order is made the standard period of bankruptcy is one year. In the one year period of bankruptcy a bankrupt is subject to certain restrictions and has specific obligations in terms of his bankruptcy. In terms of the restrictions that can become extendable under a BRO or BRU (obligations are not extended beyone the period of bankruptcy) they include the following:
  • A bankrupt cannot obtain credit of more than £500 without disclosing to the lender his bamkrupt status.
  • Should you choose to carry on a business in a different name to the name in which you were made bankrupt you must disclose to all the people with whom you do business your name or trading style under which you were made bankrupt.
  • You cannot act as a director of a limited company or take part in the management, promotion or formation of a limited company without leave of the Court. It is important to realise here that it is not merely whether you are registered as a company director at Companies House but whether you are acting, or carrying out the functions, of a director that is important.
  • You cannot hold certain public offices or be trustee of a pension scheme or charity.

The list is not an exhaustive list of all the restrictions imposed during bankruptcy or under a BRO or BRU and you should seek advice if you are concerned about whether other restrictions may apply to you. The holding of public offices for example covers a wide range of posts and activities that may be restricted by bankruptcy.

What dishonest behaviour or misconduct might result in a BRO or BRU?

When the Official Receiver prepares his report detailing why he thinks a BRO should be made, he is looking at the actions and behaviour of a bankrupt both prior to bankruptcy and during bankruptcy.

It is impossible to provide an exhaustive list and the following examples are merely typical of the reasons why the Official Receiver would seek a BRO or invite a bankrupt to sign aBRU:

Preferences

If you have “preferred” to pay one or more creditors and not paid others knowing that you were insolvent then that might be considered a matter of misconduct. Typically, a bankrupt may owe a family member money and they repay that family member whilst not paying back any of his other creditors.

Transactions at an Undervalue

Should a bankrupt sell an asset for less than it is worth, prior to bankruptcy, that would be considered to be misconduct by the Official Receiver. A common example would be the sale or transfer of a motor vehicle to a spouse prior to bankruptcy for less than the true value of the vehicle. The reason it is seen as misconduct is that if the bankrupt had received the full value of the motor vehilce he could have used that money towards paying his creditors.

In such a scenario, as well as seeking a BRO, the Official Receiver would seek to recover the undervalue amount from the spouse for the benefit of the bankrupt estate.

Gambling

The Official Receiver does not like gamblers! There is a question towards the end of the bankruptcy forms that asks if a bankrupt  has gambled in the last 2 years. If a bankrupt has gambled and lost money the Official Receiver takes the view that the monies lost should otherwise have been used to repay creditors.

No realistic chance of repaying debts

If a bankrupt has borrowed money that, when he borrowed the money, he knew he had no realistic chance of repaying, then that would be grounds for the Official Receiver to seek a BRO.

Fraudulent credit applications

In instances where a bankrupt has given false or misleading information to a credit provider in order to enhance his chances of obtaining credit, then such actions maybe seen to be fraudulent and would likely result in a BRO.

Failing to cooperate with the Official Receiver or Trustee.

As we said earlier, bankruptcy imposes duties and obligations on a bankrupt as well as restrictions. A key duty of a bankrupt is to cooperate with the Official Receiver and Trustee in Bankruptcy in order that the Offical Receiver and Trustee can execute their duties in dealing with the bankrupt’s estate. In some cases failing to cooperate can lead to even more serious consequences and an arrest warrant can be issued to bring the bankrupt before the Court to explain their delinquent actions.

Failing to pay Crown debts

When the Official Receiver is looking at possible areas of misconduct he looks to see if monies are owed to HMRC in terms of VAT, income tax, NI, etc. Neglecting to pay Crown debts is often deemed to be a serious matter of misconduct and grounds for a BRO. It is not uncommon to have a situation where a bankrupt has caried on business by using monies he should be paying to the Crown to pay his trade creditors so that he can continue to trade.

What happens if a bankrupt breaches a BRO?

If a bankrupt breaches the terms of a Bankruptcy Restrictions Order or Undertaking there can be very serious consequences indeed. Prosecution may well ensue and that could lead to a fine or imprisonment. On top of that a further extension of the restrictions is likely as well.

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