Bankruptcy can cause people to lose their marbles along with their assets. But the whole process can be made less miserable, says David Marks QC
INSOLVENCY DOES STRANGE things to people. Charles Dickens could sit in today’s Bankruptcy Registry in the High Court and it is doubtful that he would find that anything had changed. Celebrities and HNWs are certainly no exceptions to the trials and tribulations of the system, which plays tricks on everybody. The problem with the court-related insolvency process (and indeed non-court-related procedures) is that they tend to take over your life to such an extent that some people become obsessive and lose all sense of reality when enmeshed in the system. It is a complaint that can be called bankruptcyitis.
These strange things often play out in the bankruptcy court. I have seen on one occasion the wife of a formerly wealthy bankrupt have the diamond rings removed from her fingers during the course of a private examination before the bankruptcy registrars. Another gentleman who suffered from an acute weight problem and had previously been the manager of a hedge-fund operation in the West Indies became so large that he had to be lifted by four men into the bankruptcy court and then supplied with oxygen during the course of his private examination in the front of the court. Not unnaturally, when things got too hot for him in the course of questioning by his trustee in bankruptcy, whom I happened to represent, he had to reach for the oxygen as an excuse not to answer the question.
Bankruptcy does have a habit of uncovering secrets. On one occasion many years ago a sports personality who was the director of a leading football club and, during the summer, the chairman of a well-known county cricket side was discovered to have had two wives. He kept one for the football season and the other for the cricket season, living in different locations. Each of them was totally oblivious to the existence of the other during their respective off-seasons.
This had been going on for ten years until his secret was unearthed during the course of his public examination in bankruptcy. He, too, had to lose his watch (made by a very well-known Swiss manufacturer) during the course of his public examination in the Derby County Court.
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Bankruptcyitis can assume many forms. In its worst manifestation it consists of devoting your life to hanging around the Bankruptcy Registry in the High Court, dragging around your plastic bags full of papers in a vain attempt to extricate yourself from the complexities of the system with one application being superseded by another. Although things are perhaps not as bad today as they once were even twenty years ago, it is a fair guess that most litigants in person are bankrupts, making good the old adage that your worst lawyer is yourself.
On the other hand, some people seem to relish the experience. The cases are littered with examples of people who continue to lead the life of Riley despite being bankrupt. They live in the same luxurious premises they had before bankruptcy, when they were either living off their creditors or spending extravagantly, and they drive the same cars and wear the same jewellery. However, time does have a habit of catching up with these people and there are not many cases when sooner or later such characters do not meet their financial Maker. There are few cases of people bouncing back in any meaningful way after they have been bankrupted by the courts.
HNWs ARE IN no way exempt from bankruptcy: it is just that their fall is so much further. Although the stigma in a bankruptcy is not as dark as it once was, there are various ways round it for HNWs, especially the use of voluntary arrangements and, in the case of individuals, individual voluntary arrangements (IVAs), useful for persons of some means who can pay part, but not all, of their debts.
Without getting too technical, an IVA is a contract between a debtor and his creditors. It enables an individual to arrange the management of his debts over a period of time, very often five years, without incurring further interest. The debtor, with the aid of an insolvency professional, puts forward a written proposal which is in effect a plan to the creditors, who vote on it. At least 75 per cent of the value of the creditors have to vote in favour of the plan for it to be adopted and to be binding, even with regard to creditors who have not signed up to it.
Once approved, the insolvency professional will adopt a subsequent role to administer the plan and will be known as the Supervisor. The Supervisor will get his remuneration from the IVA, in respect of which he administers the IVA in accordance with its terms. Over the past few years, there has been developed a series of specimen proposals which are used as templates for most, if not all, such arrangements.
THE REGULAR COMPLAINT in connection with all forms of insolvency procedures, and not just IVAs, is that the debtors are not ‘talked through’ alternative options. This may be partly due to forgetfulness on the part of insolvency professionals, but it also seems to point to a more than occasional lack of care.
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One clear suspicion that arises from these matters is that rather than giving ‘advice’ on debt matters, those who administer the system are in fact promoting their own interests. There is much to be said for thinking about having financially distressed individuals seek recourse or some kind of help from the court, although the system is not quite set up for that. At the moment, all the court does with regard to an IVA is approve it formally after the proposal has been signed off.
Cartoon by George Leigh
DESPITE THE AVAILABILITY of the other regimes where the strictness of bankruptcy does not apply (it imposes a ban on credit and on acting as a director), debtors still feel attracted to bankruptcy for a number of reasons. This is largely due to the normal one-year discharge period which follows after a bankruptcy, after which in effect all debts are discharged. Indeed, this particular feature is something of a magnet for overseas debtors who come over here from mainland Europe to avoid the more draconian periods of discharge which apply to their own personal European regimes. This is sometimes called ‘bankruptcy tourism’.
It is true that English bankruptcies are generally automatically terminated after twelve months, and sometimes even earlier. The reasons for this shortened period brought in 2002 may now seem to be somewhat unsound. As indicated above, most bankrupts are consumers. The short period was designed to provide an incentive by which entrepreneurs could be re-engaged in the market. It is difficult to see how extravagant consumers released back into the marketplace are at all subject to the same philosophy.
An IVA, if abided by until its termination, may result in a release of all debts. This is not the case in a bankruptcy, despite the popular belief that discharge puts paid to all liability. Some debts survive bankruptcy, notably student debts. Yet again, bad advice may well contribute towards misconceptions on this point. An IVA should be recognised for what it is, namely a lengthy and concerted effort to repay debts against the harsh fact that bankruptcy, on the other hand, is really no more than a debt write-off.
There are, however, some non-legalistic considerations. Although an IVA does not entail the same statutory restraints on the debtor’s ability to obtain credit etc, entering into an IVA still has an adverse affect on credit rating. Steps should be taken to lessen that burden.
The matters mentioned above are hot issues: more and more, people are suffering from an early and sometimes irrepressible surge of debt. There is no easy cure. It all depends on the facts, as lawyers constantly say. A wealthier individual is just as likely to succumb to bankruptcy and suffer the attendant restrictions as much as anyone else, perhaps more so. On the other hand, good general advice might stop that event happening and encourage early contact with the major creditors so that the better option will very often be to go into an IVA. At least life of a sort can then continue without the inevitable strains and distress that most court processes can bring.
