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Lord Freeman: I support my noble friend's amendment and I shall speak to Amendment No. 364 standing in my name. The principle of a national set period appears desirable as long as it is not oppressive because it would set national standards and would avoid the problem of local variations. I do not believe that it would be in the public interest for those seeking discharge from a bankruptcy order to be aware that some seeking discharge were, because of constraints of resource or different procedures or different practices in different parts of the country, favoured compared with those in other parts of the country. That is not good administrative procedure and it would not encourage the efforts of those who get into financial difficulties to avoid the ultimate which is a bankruptcy order.
My amendment sets a one-year period, which I do not believe to be unreasonable, bearing in mind the procedures that have to be gone through, including the amount of extra work that will be necessary to seek a discharge earlier than 12 months. That issue strongly concerned the CBI and in the other place a comparable amendment was tabled at Committee stage. I hope that the Minister has had a chance to reflect on the debate in the House of Commons and that he will be able to balance the argument for a shorter set period, which is proposed under the Bill—one year as opposed to three—but will agree to remove that part of the Bill that provides for an even earlier discharge than 12 months.
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Lord Sainsbury of Turville: Amendments Nos. 362, 365 and 366 seek to create a separate discharge period for those bankrupts who have been carrying on a business. In answer to the point made by the noble Lord, Lord Kingsland, this part of the Bill is intended not to make life easier for bankrupts, whether consumers or businesses, but to make it easier for those who have not behaved recklessly or dishonestly to make a fresh start. That is an important point.
Amendment No. 362 was debated at length in Committee and at Report stage in the other place. It seeks to introduce a distinction for discharge purposes between what have been termed "business" and "consumer" bankrupts. I remain unconvinced of the case for drawing such a distinction. It has been suggested that such a distinction is needed because if it is not introduced there is likely to be an increase in consumer bankrupts who will seek to take advantage of what they perceive to be an easy ride.
I find it hard to believe that consumers would react in that way. Bankruptcy is not an easy option, and in some respects our proposals make it more, not less severe. The proposals make no change to the assets that will be available to creditors on the making of the bankruptcy order nor do they shorten the period over
which the bankrupt is liable to make payments out of surplus income. The proposals will make it easier for the trustee to ensure that the bankrupt makes such payments by introducing income payments agreements. Consumers who have behaved recklessly or dishonestly (including incurring debts that they knew they would be unable to pay off) would run the risk of being subject to a bankruptcy restrictions order for up to 15 years; they would suffer damage to their credit rating and have great trouble in getting credit, including mortgages in the future. I do not believe that the majority of consumers are blinkered to those very real effects as some might suggest.The individual insolvency proposals seek to encourage more entrepreneurs either to start up or to restart in business. However, the aim of reducing stigma should apply to the majority of bankrupts, whether in business or not, where no misconduct or criminal behaviour has been identified. People can be subject to bad luck in their personal lives. An unexpected loss of a job or the breakdown in a personal relationship often leads to financial problems. Those individuals are as entitled to a fresh start just as much as a business person. It would not be fair or equitable to subject them to a tougher regime. The thinking behind this part of the Bill is that people should not incur any less financial penalties from going bankrupt but should, where they have not behaved recklessly or dishonestly, have the opportunity more easily to make a fresh start and rebuild their lives quickly.
The distinction suggested in the amendment is entirely artificial and in practice would be unworkable. The experience of the Official Receiver shows that those who are self-employed do not operate their personal and business affairs in conveniently separate compartments; they are often inextricably interlinked.
The current bankruptcy regime is the same whether a bankrupt was a consumer, in business, or a mix of the two. The system that the amendment would lead to would be a radical change in a basic principle of our insolvency law, and none of the arguments produced in Committee or at Report stage in the other place supports that. I would also point out that all of the various consultations have shown a majority being in favour of a reduction in the discharge period for all bankrupts and that the proposals advocated in the amendment, which, as I have already said, would be a massive change in the way we approach individual insolvency, have not been consulted upon at all.
The noble Lord mentioned three areas where there have been changes: Scotland, the United States and Hong Kong. There are special conditions that relate to all those cases, particularly in the case of Hong Kong where there was a change in the bankruptcy law—the first for over a century. I do not believe that one can make easy transfers from that situation to what would happen in this country. In that case the discharge procedure was so difficult and cumbersome that in the period from 1983 to 1992, while there were about 2,600 bankruptcies, only 25 bankrupts were discharged. The circumstances are quite different.
Amendment No. 365 is, by its nature, consequential to Amendment No. 362 as it seeks to apply early discharge provisions solely to business bankrupts.
Amendment No. 366 seeks to define a business bankrupt as someone who files a statement in court to that effect prior to being made bankrupt, and would make it a criminal offence to do so falsely. The motivation for doing so would, presumably, be to secure a shorter period of bankruptcy, because the set of amendments dealing with this issue require that discharge for non-business debtors be either two or three years, depending on the size of the debts incurred. The practical difficulties involved in making such a distinction between business and non-business bankrupts have already been rehearsed, both here and in the other place. If Amendments Nos. 362 and 365 were not accepted the amendment would fall as a matter of course.
A system as envisaged by these amendments would be ripe for abuse. It would seem to be enough for an individual to carry on business for one day prior to the petition. That cannot be right. It is not clear who, other than the courts, would act as arbiter in the many cases of dispute that would undoubtedly arise. This would therefore lead to further costs in the bankruptcy process, unnecessary delays and could potentially have a huge impact on the workload of the courts.
Amendment No. 363 seeks to replace the proposed one-year discharge period with one of two years. As I said earlier, the aims of the one-year discharge period are to reduce the stigma of bankruptcy, to enable those who have failed through no fault of their own to get a fresh start and to encourage entrepreneurs to start up, or restart, in business.
There was wide support for the one-year discharge period in responses to the White Paper Insolvency: A Second Chance. This period was arrived at after reacting to concerns raised as a response to the proposals in the Bankruptcy—A Fresh Start consultation that the then proposed six-month discharge period was too short. A widespread view taken by the respondents to the earlier consultation was that a one-year period for all bankrupts was acceptable.
Concerns have been raised that a year will not give the Official Receiver sufficient time to investigate cases. I think that that was the point being made by the noble Lord, Lord Freeman. Those concerns are ill-founded. All bankrupts will be interviewed. In the vast majority of cases the administrative work involved in a bankruptcy will have been completed well within the 12-month period being proposed, with most assets being identified within the first month or so. The realisation of those assets is not affected by discharge, whatever the discharge period. If a bankrupt does not co-operate, then a suspension of the bankrupt's discharge can be applied for. In fact, the proposals make it easier to apply for the suspension of discharge by allowing the trustee to make an application direct rather than having to ask the Official Receiver to do so.
Some are concerned that in reducing the discharge period, bankruptcy becomes a soft option. I fail to see how that conclusion can be drawn. I shall reiterate what I said earlier. Bankruptcy is, and will remain, the last option for those in financial trouble. To enter bankruptcy risks the loss of the bankrupt's home, the loss of virtually all his assets, substantial payments from future income for up to three years and real disadvantage in his financial affairs in the future, such as damage to credit ratings and problems in obtaining mortgages.
We recognise that there will be a minority who seek to abuse the system. The Bill puts in place bankruptcy restrictions orders to deal with those cases. Bankruptcy restrictions orders will have the effect of extending the period for which bankruptcy restrictions apply for up to 15 years. Criminal sanctions will also be available for the most serious cases.
The new proposals will not make bankruptcy an easier option. Reduction of the discharge period to one year will not reduce the assets that will vest in the estate or change the responsibility of bankrupts to provide information about their affairs and to give up their assets for the benefit of creditors.
I shall now turn to Amendment No. 364, which seeks to ensure that all bankrupts will remain undischarged for a minimum of one year with no facility for early discharge. It has been suggested that all bankrupts, regardless of their conduct, should have this minimum period imposed upon them and that to reduce that period would make bankruptcy too easy an option. We do not subscribe to that view. I will not repeat again the effects of being made bankrupt, but it is clear that under our proposals bankruptcy will not be painfree, and nor should it be. Our policy is to have a regime in which the period that bankrupts are subject to restrictions reflects the circumstances of the case, and to move away from the current "one size fits all" regime.
We are not expecting all bankrupts to be discharged before the automatic 12-month period. Discharge in less than one year will only happen in straightforward cases where the bankrupt was not at fault and poses no risk to the public or commercial community, where all investigative and administrative matters have been dealt with and where he or she has co-operated fully with the Official Receiver. Prior to filing any notice for early discharge at court, the Official Receiver will notify all creditors, and any other trustee, of the intention to do so. If the creditors raise any significant matters they will be investigated to the satisfaction of the Insolvency Service, and while they are being looked at no notice will be filed.
There is no obvious benefit in stopping those who have failed through no fault of their own getting through the process as quickly as possible. Such an approach will encourage prompt financial rehabilitation and furthermore will encourage potential entrepreneurs to restart or start up in business.
An important point that we should not forget is that nearly all assets or potential assets are identified in the first few months of a case and that the realisation of
those assets is not affected by discharge. Where people have not behaved recklessly or dishonestly, we want people to have the opportunity as soon as possible to rebuild their lives. On that basis, I ask the noble Lords and the noble Baroness to withdraw their amendment.
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