Bankruptcy: Is it worth it? A Creditor’s Perspective
Posted by Shirley Moore on 21st November 2011
The latest insolvency statistics (for the 3rd quarter of the year) were published at the beginning of the month. Although the number of people being made bankrupt has been reasonably steady over the year and in fact is down on last year’s figure, the statistics show a greater than 400% increase on the numbers 10 years ago.
So for a business owed money by an individual or indeed by a company where you have a personal guarantee from a director, is it worth making them bankrupt?
Historically bankruptcy has been a favoured route for businesses in sectors where it is important to ensure that word doesn’t get around amongst the customer base that you’re a soft touch e.g. building supplies. However, since 2004 when the changes to the personal insolvency regime brought in by the Enterprise Act (there’s a misnomer if ever there was one) came into effect, bankruptcy has been a more attractive option for debtors and the enormous increase in personal insolvency since then has largely been debtor rather than creditor led: in the last quarter of the year, 79% all petitions were presented by debtors themselves.
Essentially, bankruptcy acts as a kind of bolting of the stable door. With a few notable exceptions, the debtor’s existing liabilities and assets are contained within the bankruptcy and the task of the Trustee is to realise the assets to pay a pro rata amount to creditors by way of a dividend. The debtor is generally discharged from bankruptcy and released from the debts a year after the bankruptcy order.
Apart from having to hand over his affairs to a third party and losing most of his assets, the main limitations faced by an un-discharged bankrupt are that he cannot obtain more than £500 credit without disclosing his bankrupt status and if he carries on a business in a name other than that in which he was adjudged bankrupt, he must disclose that name. Furthermore, an un-discharged bankrupt cannot act as a Company Director or take part in the promotion, formation or management of a company without permission of the court.
So when might it be a good idea? Bankruptcy is the most severe form of action a creditor can take and if the debtor is stalling or creditor juggling, it is the action which is most likely to bring you to the top of the list of people to pay. So as with any litigation, ask yourself first and foremost if they might be good for the money: have they got anything anyway?
As a general rule, the following are most likely to fit the profile of appropriate debtors:
- Company directors.
- Professionals whose ability to practice might be impacted: Certain professional bodies impose limitations on their members’ right to practice if they are made bankrupt, e.g. as lawyers and accountants.
- Those with known assets and few if any other creditors.
- Debtors who have been trying make themselves and/or their family creditor-proof, e.g. by transferring assets or giving preferences (making sure their associates are OK at the expense of the general body of creditors).
Attempts at “creditor-proofing” and other kinds of culpable behaviour which warrant sanction might also lead to a Bankruptcy Restriction Order being made, the effect of which is to prolong the period for which the debtor is subject to the disabilities of being an un-discharged bankrupt, for between two to fifteen years. Examples of such behaviour are:-
- Failing to keep proper financial records in relation to his business.
- Trading at a time before commencement of the bankruptcy when the bankrupt knew or ought to have known that he was unable to pay his debts.
- Incurring a debt which he had no reasonable expectation of being able to pay.
- Fraud or fraudulent breach of trust.
Tread cautiously however when:
- The debtor has few assets or those he has have a low value: the recession has obviously hit asset values and this will impact on how much a trustee can realise them for and therefore what dividend if any creditors can expect.
- The debtor has a lot of other creditors as you will have to share the spoils with them.
Furthermore, bankruptcy should never be used for disputed debts.
Ultimately, be guided by the maxim: If the debtor has nothing to lose, you have nothing to gain. As tempting as it might be to punish the debtor using bankruptcy, commerciality is needed. It does still have its place but you could end up doing them a favour by saving them the expense of making themselves bankrupt and that really would be a pyrrhic victory.
