Bankruptcy may be reduced to one year
The default bankruptcy period may be reduced from three years to one year, under changes to bankruptcy and insolvency laws being considered by the Government.The Government's position, set out in a consultation paper, is that current insolvency law puts too much emphasis on penalising and stigmatising failure, and stifles innovation.Other proposals include the introduction of safe harbour arrangements for directors that would protect them from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company; and a crackdown on the use of ipso facto clauses, which have the purpose of allowing contracts to be terminated solely due to an insolvency event."The law needs to strike a better balance between encouraging entrepreneurship and protecting creditors," the paper said."Bankruptcy can be a result of necessary risk-taking or misfortune rather than misdeed."During the three-year bankruptcy period restrictions are placed on a bankrupt in respect of overseas travel and incurring further debt. There is a prohibition on being a company director and there may be other employment and licensing restrictions.Along with reducing the default bankruptcy period to one year, the Government would also reduce the period during which credit and travel restrictions apply.Where a trustee objects to the discharge of a bankrupt, the period of bankruptcy may be extended to five or eight years. Grounds for an objection include the bankrupt's failure to provide information about their income to the trustee, explain how money was spent or report all assets and creditors.The Government proposes to retain the trustee's right to object but it is open to changing the criteria for lodging an objection.The Government also proposes to maintain obligations on a bankrupt to assist in the administration of the bankruptcy even after they are discharged.According to the consultation paper, concerns over inadvertent breaches of insolvent trading laws are frequently cited as a reason professional directors and investors are reluctant to get involved in start-ups.Under the proposed safe harbour arrangements directors would retain control of the company while receiving formal advice, rather than surrendering control to an external administrator.The adviser would have to have access to the appropriate financial records and form a view that the company could be returned to solvency within a reasonable period of time.The safe harbour arrangement would only be a defence against insolvent trading. Directors would still be subject to all their other obligations.Ipso facto clauses may allow a party to terminate a contract solely due to the commencement of formal insolvency proceedings, regardless of continued performance. A company's trade creditors may refuse to provide goods even through they are still being paid.The paper said the lack of protection from such clauses has been a key criticism of the voluntary administration regime.The Government's proposal is that any term of a contract or agreement that terminates or amends any contract or agreement by reason only that an insolvency event has occurred would be void.Insolvency events include the appointment of an administrator, the undertaking of a scheme of arrangement or a receiver being