The Insolvency Service published on August 6th a consultation paper on two issues: the role of Debt Relief Orders and the amount of debt necessary for a creditor to commence a bankruptcy petition. These topics raise important issues about the role of English personal insolvency law. I will discuss debt relief orders in a subsequent post, and examine in this post the role of creditor petitions to enforce individual debts.
A threshold question is whether insolvency should be a proceeding available to a creditor to enforce an individual debt and my analysis draws on an excellent recent article on this topic by Jason Kilborn and Adrian Walters in the American Bankruptcy Law Journal (for open access see here) which deserves to be read by English policy makers.
Insolvency is a collective procedure providing a mechanism for distributing an individual’s available assets equally among his or her creditors. Historically in English law it did function as a debt collection measure given the limitation of common law remedies and English law continues to permit an individual to use bankruptcy to collect a single debt for over £750 through the statutory demand procedure. Under the procedure the creditor serves a demand for payment which if not paid within 21 days generally entitles the creditor to obtain a bankruptcy order. Twenty one percent of bankruptcy orders (5378) in 2013 represented creditor petitions and 11900 petitions were commenced during this period. This is a much higher rate than in Canada or the US where creditor petitions are extremely rare.
Evidence indicates that a small group of ‘Repeat Player’ creditors use this process–HMRC (tax), some local authorities for council tax and some professional debt collectors. Kilborn and Walters indicate that 34% of petitions were brought by HMRC in 2011. Why do these creditors use this remedy? After all in a bankruptcy they will have to share any assets with other creditors. HMRC no longer has a preferential priority. The reason seems to be primarily that bankruptcy is a powerful threat. Bankruptcy may not only be very costly for a debtor (loss of control over any property, high trustee fees, loss of professional status) but it continues to carry a stigma which can be exploited by the creditor. Under 50% of bankruptcy petitions result in court orders, suggesting that the threats do result in some settlements and an RP creditor such as HMRC may calculate that the benefits to it outweigh the costs. Kilborn and Walters also suggest that they may use bankruptcy as a way of ‘closing a file’, passing on the problem to the Insolvency Service who may have to administer the bankruptcy.
But this use of bankruptcy and its threat are problematic. Individuals may become further indebted in order to repay the individual debt or take some unwise action in response to the threat. Individual creditor action may disadvantage other creditors. Payment to the petitioning creditor is in substance a preference for one creditor at the expense of another violating the bankruptcy principle of equal treatment of all unsecured creditors (creditors try to avoid this by requiring payment from a third-party). Court time is wasted if the court has to dismiss the petition. The process deprives the debtor of the protection of the ordinary courts in individual debt collection where an instalment order may be made for payment. Disproportionate costs and fees may result for a bankrupt. A Newsnight investigation in 2014 documented an individual with council tax debts of £1350 which transformed into a debt of £80,000 through bankruptcy fees. The use of the threat of bankruptcy where there is no real intention of carrying through on the threat would constitute an unfair commercial practice under the CPUT regulations. The Office of Fair Trading in 2009 imposed conditions on the credit licence of Ist Credit, a debt collection agency, for its practice of indiscriminate use of statutory demands where it had no expectation of carrying through with the bankruptcy but used them as a draconian threat. See here and here .
Those English creditors who use bankruptcy most often to enforce individual debts already have a wide range of special enforcement powers including imprisonment in the case of Council Tax. Other countries place greater restrictions on the use of bankruptcy as a single creditor’s remedy. In Canada it is possible for an individual creditor to use bankruptcy to enforce an individual debt but the burden of proof is higher. A creditor will have to prove that a debtor has ceased to meet his liabilities generally and some courts require proof that there is some reason to invoke the machinery of bankruptcy investigation such as suspected fraud or concealment of assets. Only a small percentage of bankruptcy petitions are brought by creditors. In the US, involuntary petitions are possible but extremely rare. US law places several hurdles including a minimum requirement of three creditors for an involuntary petition. See here .
What ought to be the role therefore of bankruptcy as an individual creditor’s remedy in England? The following reform possibilities (either individually or in combination) exist:
- Abolish the statutory demand procedure and require an individual creditor to prove that a debtor has ceased to meet her liabilities generally as they become due .
- Increase the minimum amount of the statutory demand to a more realistic levels (at least over £10,000; Ireland recently revised its limit to €20,000).
- Permit an individual creditor to institute bankruptcy for a single debt where there is evidence that the powers of a bankruptcy trustee investigation would be desirable or that significant value exists.
- Provide greater scrutiny of the withdrawal of bankruptcy petitions and significant sanctions for bad faith withdrawals.
The Insolvency Service is unlikely to adopt bullet point one given the political opposition by creditors and lawyers embedded in English bankruptcy tradition. But this issue should stimulate debate about the role of personal insolvency in English law. Modern individual insolvency law is primarily about debtor relief rather than distribution of assets or investigation of an individual’s affairs. Few individual bankrupts have significant assets which would be worth realizing. An Insolvency Service study in 2008 indicates that over 66% have no or under £1000 in assets. A minority may be able to make some income contribution. Most European countries which have introduced procedures in recent decades for individuals to write down debt only accept filings by debtors (e.g. France, Sweden, Netherlands). The Debt Relief Order in England follows this approach but it has very restrictive entry conditions (which I will comment on in a subsequent blog). General commercial creditors have a variety of sanctions (credit bureau ratings) and monitoring mechanisms. The World Bank recognised this in its 2013 Report on the Insolvency of Natural Persons arguing that modern personal insolvency systems should control carefully the use of insolvency by creditors as an individual remedy.