INSOLVENCY SERVICE REFORM OF THE PROCESS FOR BANKRUPTCY & COMPULSORY WINDING UP CONSULTATION PAPER. Response by the Money Advice Trust (January 2012)

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1 INSOLVENCY SERVICE REFORM OF THE PROCESS FOR BANKRUPTCY & COMPULSORY WINDING UP CONSULTATION PAPER Response by the Money Advice Trust (January 2012)

2 CONTENTS Introduction About the Money Advice Trust 2 A partnership approach who we have consulted 2 Responses to individual questions 3 MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 1

3 INTRODUCTION About the Money Advice Trust The Money Advice Trust (MAT) is a charity formed in 1991 to increase the quality and availability of money advice in the UK. We work with the UK s leading money advice agencies, government and the private sector to increase the availability of money advice, improve its quality, and enhance the efficiency and effectiveness of its delivery. MAT s vision is to help people across the UK to tackle their debts and manage their money wisely. MAT aims to support individuals and micro-businesses in the UK through their debts and into financial health, and to improve the capability, quality and efficient delivery of free independent money advice by: Delivering advice to the public via National Debtline, Business Debtline and My Money Steps; Supporting advisers; Making the case for free money advice; Co-ordinating initiatives to improve money advice; Sharing research and information to shape and influence policy. How we have drawn up this response In preparing this response, we have consulted our partner agencies in the freeto-client money advice sector in order to achieve a consensus view. These partners include: Advice NI Advice UK Citizens Advice Citizens Advice Northern Ireland Citizens Advice Scotland Institute of Money Advisers Money Advice Scotland National Debtline and Business Debtline (where relevant) Payplan. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 2

4 Some of these partner agencies will also submit their own separate responses to this consultation paper. These submissions may include issues not covered below. Please note, our partner agencies may not have provided views on this response where this consultation paper does not cover their specific jurisdiction. Please note that we consent to public disclosure of this response. Introductory comment We are broadly in agreement with the coherent set of proposals set out in the consultation to remove the role of the court in debtor and creditor bankruptcy petitions that are not subject to a dispute between parties. We welcome the decision to allow applications to be made to an Adjudicator within the Insolvency Service. We also welcome the proposals to allow payment of the application fee and deposit in instalments for debtor petitions. One of the main concerns raised by people going through the bankruptcy court process has been the substantial delays in obtaining bankruptcy hearings which varies widely depending upon the capacity of local courts. Delays have an extremely detrimental effect on applicants who must continue to suffer the unmitigated stress of their debt situation and continued attempts by creditors to enforce outstanding debts against them. The delays may also lead to increased risk of enforcement action by creditors in the interim period, reducing the effectiveness of bankruptcy as a debt strategy. We urge the Insolvency Service to ensure that there are sufficient resources provided to the Adjudicator to ensure that bankruptcy applications are processed without undue delay even where large volumes are received. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 3

5 Responses to individual questions Question 1 Should documents relating to a bankruptcy or winding up case remain with the party who created them, and be open to inspection there by persons so entitled? If not, please explain your answer. We understand that there is little point in continuing the requirement to file various bankruptcy-related documents at court. However, we are not comfortable with the proposals that Insolvency Practitioner firms will be required to hold important court documents as there is a risk that sensitive and confidential individual records could be lost where an insolvency practitioner was to cease trading or leave the profession? We would favour a central coordinating role carried out by the official receiver with stringent requirements in relation to recording and filing documents to ensure that such risks are minimised. It is important that documents relating to the bankruptcy are readily available to the bankrupt or their legal representative at no charge or a nominal fee. Question 2 Do you think that a debtor should be able to pay instalments within a specified period of time after submission of his/her application, or that there should be no such time constraints but only when full payment has been made would a debtor be able to complete and submit an application form? Whilst we welcome proposals to reduce the overall application fee for bankruptcy and are strongly in favour of allowing payment of the fee by instalments, we are disappointed that the proposals as they currently stand will remove the ability of low-income applicants to apply for fee remission. We suggest that some sort of financial assistance should be provided with the application fee for those on low incomes and benefits. This decision should therefore be reconsidered. The proposed bankruptcy application fee and deposit remain extremely costly, particularly for those on a low income, and this creates a formidable barrier to accessing debt relief through bankruptcy for the most vulnerable. We do not agree that allowing the applicant to pay instalments for a period of time after submission is practical and there is a risk that the information on their application would become out-of-date and need to be resubmitted further down the line. This would waste time and resources to process. We favour the second option of allowing the applicant as much time as they need to make the payments in instalments and only then to submit the application form. This will allow those on low and benefit-level income to make the payments over a time frame that suits them, but also acts as a piggy bank incentive for them to do so. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 4

6 Another suggestion may be to consider a cap on the fee for personal bankruptcy at 90 (in line with the DRO application fee) for low or benefit-level income applicants. Question 3 If you favour a limit on the period of time during which instalments could be paid, what do you think should be the maximum period? Less than 3 months? 3 months? Or more than 3 months? We do not favour a limit on the period of time during which instalments could be paid. Any such limits will arbitrarily reduce access for vulnerable low-income applicants to debt relief. All free-to-client advice providers can report many cases where clients are unable to raise the money to pay for the bankruptcy deposit and are left with their debt problems unresolved. Even approaches to charitable trusts for assistance may not be successful. Many charitable trusts have had to restrict the criteria for applications for help with bankruptcy fees or stop offering help altogether in an attempt to manage the demand. A very restrictive time period for allowing the fees to be paid will do little to assist in these cases. We considered the suggestion that there should be a time limit on the period allowable for payment of the fee by instalments. However, on current fee and deposit levels, even payment over 12 months would work out at a month. This would be an extremely challenging amount to find out of benefit-level income. We therefore believe that there should be assistance available with payment of the fees as outlined above. We recognise that there are drawbacks to this approach, whereby the person in debt is likely to be subject to pressure and enforcement action by their creditors whilst saving up to go bankrupt. Clearly there should be warnings given that the longer an applicant takes to pay, the more difficult their debt situation could become. Question 4 Should instalment payments be non-refundable? We believe that payments made in instalments should be refunded where the applicant decides not to go ahead with their application as the estimated costs of the application fee (at up to 121) still represents a substantial sum of money, particularly if the applicant is on benefit level income. We recognise that the Insolvency Service may wish to deduct an element of the money paid in to cover the administrative costs incurred. However, we suggest that these costs will be minimal if no formal bankruptcy petition has been completed at this stage. The costs will merely be of setting up the online account to pay in the instalments. We would urge the Insolvency Service to do further work on the actual costs incurred and of processing the refund and make sure that any deduction should reflect these costs alone. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 5

7 We note from the paper that any payments towards the deposit element of the fee will be refunded in full. Failure to refund any instalments paid will undoubtedly hit the poorest hardest as it is low income applicants who will be more likely to take advantage of the arrangement. In addition, it could act as a disincentive to low income applicants from coming to alternative mutually agreeable arrangements with their creditors if their circumstances change. Question 5 If not, how should the administrative costs of handling the refund be recouped? A small element of the fee should be retained to cover the costs of processing the refund itself. This should reflect the real costs of this process only. Question 6 Should there be any additional requirements for registration in order to deter abuse? If yes, please outline what you think those requirements should be. We find it unlikely that applicants will register with the intention of requesting a refund as a way of laundering money. However, it is clearly important that where a refund is due, this should be sent to the correct name and address. We would suggest that when the applicant signs up to pay in instalments that they are required to sign up to agree to refund rules. Where the applicant is paying from their bank account they should agree that a refund will go into that account unless they proactively contact the Adjudicator with new bank account details. Where the applicant is using a different payment method, they would need to acknowledge that the refund will be sent to their registered address, unless they proactively contact the Adjudicator with new address details. Question 7 Do you think it would be useful for the Post Office Ltd (or another business that provides a similar service) to offer a check and send service? We can see that this idea is worth exploring but we are not sure how valuable such a service would be. However, we are concerned that a check and send service would only make sure that all the questions are answered. There would be no way for Post Office staff to know if the applicants answers were appropriate or that the applicant is choosing the best option for dealing with their debts, by going bankrupt. Presumably it will also attract a fee for the service. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 6

8 Furthermore, county courts frequently have dedicated counter staff who can assist with checking the statement of affairs. This can be a challenging task, and it is not appropriate for Post Office (or similar) counter staff with no experience of insolvency to be expected to undertake it. An accurate and complete statement of affairs can reduce the time taken to check and investigate the bankruptcy, so it is in everyone s interest to ensure it is accurate when submitted. We suggest that it is more important to build in a requirement for applicants to be signposted to free, independent debt advice before they submit their application. This would ensure that applicants were aware of their options and that they had chosen appropriately for their circumstances. We suggest a declaration that would need to be completed, so that applicants could confirm that they had been alerted to the opportunity to seek advice and had chosen either to take it up or confirm that they were making the application regardless. Question 8 Do you think that there should be a fully electronic process for third parties who submit applications for individuals bankruptcy or for companies to be wound up? If you think not, can you explain why not? We are extremely pleased to see that it has been accepted that debtor petition applications will continue to be allowed to be submitted on paper. In general we would suggest that introduction of the electronic online application process should be devised with a generous lead-in time and the provision of full application testing by various groups of people including people in debt applying to make themselves bankrupt and creditor applicants to ensure that the system is functional and user-friendly. We can see no reason why third-party creditor petitions should not be submitted electronically by those who have access to the internet. However, we have identified that there will be a small group of individuals who may wish to initiate bankruptcy procedures against other individuals in personal disputes who could be disadvantaged. This may also affect micro-businesses with limited technological resources who wish to take action against a supplier and so on. We would also suggest that further thought be given to the needs of blind and partially-sighted applicants to ensure full access to both the online and written application processes. Rules regarding service of the demand and petition should remain unchanged that is to say they should be served by hand at the individual s address unless the court makes an order for substituted service where appropriate. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 7

9 Question 9 Do you think that there should be differential pricing according to whether an application is submitted by a third party in paper form or electronically? Please explain your answer. Given our concerns in our response above, we would be content to see access to paper applications retained for third-parties with a slightly differential pricing structure to reflect the additional costs. Question 10 Do you think that third parties should only be able to pay application fees electronically? If not, can you say why not and suggest alternative or additional means of payment? In general, we expect that third parties would wish to pay application fees electronically. However, for the groups of creditor petition applicants identified above, this might be difficult for some to manage. One way round this would be to allow the use of a cheque or cash for a third-party creditor application in return for payment of a small additional fee. Question 11 Do you think that there is scope for a pre-action process to encourage greater settlement of debt claims before a creditor resorts to bankruptcy or compulsory liquidation? We do support the concept of a pre-action process. We would welcome further consultation with the free-to-client debt advice sector to work on the detailed content of this process. Whilst we support a settlement stage in theory, we have some concerns as to whether there is a level playing field for people in debt when negotiating a settlement as they will not be familiar with the law, the strength of their case, and have less access to legal advice than their creditors. We are also concerned with how vulnerable people in debt will be protected under these proposals. How will anyone know if the deal that has been reached is fair to all parties? There would need to be rules as to what forms of legal or advice representation would be allowed at such sessions for both parties and who would have to pay for such representation. There would also need to be consideration given to whether the person in debt could be agreeing to something that could cause them detriment where they have not sought advice. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 8

10 We have serious concerns as to how ADR or mediation would work for the ordinary consumer debt where there is no dispute as to liability or the amount of the debt unless creditors are required to consider accepting reasonable offers of payment using the structured and streamlined process as offered by the Common Financial Statement. There would have to be a very substantial reason for refusing proposals. This process would also require the ability for the person in debt to make alternative proposals to deal with their debts on a holistic basis such as taking out an Individual Voluntary Arrangement, debt management plan, Debt Relief Order, full and final settlement offers and so on. Where there are exceptional personal circumstances such as severe illness with no prospect of improvement, there should be a requirement to consider debt write off. There would also need to be a real undertaking by other types of creditor to be bound into the process. We refer to water, Council Tax and utility debt in particular. If such possible options are not made available, we see no particular advantage for the person in debt in submitting to the process. In addition, if there are no sanctions on creditors for not cooperating with the process then there may be little point for the person in debt participating. Question 12 Is 21 days an adequate time period within which debtors can respond to a pre-action notice? If not, please suggest a more suitable period and explain your reasoning. We have serious concerns that the plan to run the pre-action process concurrently alongside the statutory demand will mean that there is insufficient time built into the pre-action process to seek advice. We suggest that a longer period would be more appropriate especially where more vulnerable clients need face-to-face debt advice. This is not always available as fast as advice on the telephone may be, but telephone advice will not be suitable for all clients. Where a face-to-face appointment is required with a local advice agency, there may be some delay due to pressure of demand for the services. We suggest 28 days may be more suitable. In the alternative, the pre-action process should allow for an additional mandatory breathing space where it can be demonstrated that advice has been sought but that there is a wait for a suitable appointment. If it is decided that the pre-action notice and guidance will go out with the statutory demand as proposed, we suggest that this forms part of the suite of statutory demand documents to ensure that creditors send the required papers. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 9

11 Question 13 Can you suggest any additional matters that you think ought to be included in the pre-action process? Is there anything listed that should not be included? Please give reasons for your answer. We would make it mandatory for a referral to an independent source of free debt advice. This should be by way of a prescribed list that forms part of the pre-action notice accompanying the statutory demand. It is not sufficient to leave this responsibility to the discretion of the creditors given the importance of advice in the bankruptcy process. As suggested in our response to question 12, the pre-action process should allow for an additional mandatory breathing space where it can be demonstrated that advice from a free debt advice provider has been sought but that there is a wait for a suitable appointment. Question 14 Do you think that the pre-action process should be mandatory or discretionary? We would support the pre-action process being made mandatory on creditors. We see no valid reason to make the process discretionary. This will only lead to less engagement by both creditors and those in debt. Also, as suggested in the paper, it is likely to lead to more applications for bankruptcy that could have been avoided by resolving the issue in the pre-action process. If it is not mandatory on creditors to demonstrate compliance with the pre-action process it will be tempting for less scrupulous creditors to avoid compliance altogether. Business Debtline point out that creditors of the self-employed and small limited companies often use the statutory demand in a punitive way of soliciting payment with no intention to actually go forward with bankruptcy or winding up proceedings. Making the pre-action notice mandatory should help to avoid statutory demands being used as a scare tactic. They go on to say that a discretionary process is in danger of creating a two-tier system whereby in personal cases it would be used by most of the bigger consumer creditors such as banks but it would not be used by creditors dealing with the self-employed. The final sanction for an individual in debt who does not engage is to be made bankrupt. We do not see that it is helpful to impose cost sanctions for failure to comply with a pre-action process. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 10

12 We would point out that not all types of creditor are covered by trade association codes of practice so this can not be relied upon as a substitute for a mandatory process. Even where this is the case, the codes will not be consistent with each other and some will have more onerous requirements on their members to deal with their customers when they are in financial difficulties. A pre-action process will allow a consistent approach to all cases and help people in debt and their advisers to resolve their debt situation. We would therefore dispute that most creditors and lenders operate under a code of practice. It is also not compulsory for companies to sign up to trade association codes of practice and therefore follow their rules. As an example, there is a commitment by credit card lenders to the breathing space initiative. 1 However, this is not binding as at present implementation of breathing space is not uniform across the board and is subject to varying voluntary agreements by trade bodies. We suggest that this commitment needs to be adopted by a wider range of creditors. The initiative could be extended to cover collections for priority debts such as collection of utilities, Council Tax, the Child Support Agency and by HMRC for tax collection. Question 15 Do you think that there should be sanctions for a creditor who indicates it has complied with the preaction process when it has not? Do you think those sanctions should be civil (such as costs or more onerous requirements for filing future applications) or criminal or do you think there should be the option of both? We support the proposals in the paper that sanctions could be taken against creditors who wrongly indicate that they have complied with the pre-action process. This should include costs penalties and evidence of compliance with the pre-action process. We also support allowing the option of both civil and criminal sanctions, in particular if a creditor submits false information in support of an application. It is often very difficult to encourage people in debt who are facing bankruptcy to engage with the process. We believe that it will be completely unhelpful to threaten the individual with costs sanctions if they fail to comply with the process. We disagree with the principle that if you threaten someone with costs that they are more likely to engage with the process. In our experience, the opposite is more likely to be the case and clients are less likely to engage in these circumstances. 1 MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 11

13 Question 16 Do you think that these questions would be helpful to applicants in deciding whether they are entitled to make an application on the grounds of a debtor s COMI? We always welcome the inclusion of clear guidance to assist with the application process. It should be helpful to provide guidance with the application form in plain English to help applicants identify the debtor s Centre of Main Interest and to decide whether they are entitled to make an application. Question 17 Can you suggest any other matters that the guidance could usefully cover to further help applicants? We are not so familiar with the problems encountered by creditors in issuing bankruptcy proceedings so we are unable to identify what guidance would be helpful to creditors at this stage. We would suggest there will need to be detailed guidance on the pre-action process for both creditors and individuals to ensure that each party can be certain they have complied with the requirements. Question 18 How likely is it that a third party such as a creditor will know, or be able to find out with reasonable accuracy, a debtor s address and/or mobile telephone number? We are unable to answer this question. We would expect that many creditors would have such information on their files already. Question 19 Is it reasonable to require a creditor to re-serve a statutory demand if more than 4 months have elapsed between service of the demand and making the application? We support the new requirement that a statutory demand cannot form the basis of an application for bankruptcy if there has been a delay of more than 4 months between service of the demand and submission of the application. The free-to-client debt advice sector have seen many of our clients experiencing the negative effects of the trend for less scrupulous debt collectors to issue statutory demands as a form of harassment where there is no intention of following through with a bankruptcy petition. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 12

14 This behaviour has been recognised by the OFT in its revised Debt Collection Guidance 2 as constituting Physical/psychological harassment. The guidance states under 3.7n that examples of unfair or improper practices include: Making undue, excessive or otherwise inappropriate use of statutory demands when pursuing arrears or debts. Question 20 Who do you think should be responsible for sending a copy of the bankruptcy application to the debtor and eliciting his/her response? We support the recommendation in the paper that the Adjudicator rather than the creditor should be responsible for sending the application to the person in debt and to ensure that they respond. This seems to be a very sensible proposal and we would hope that the intervention of the Adjudicator will assist with persuading the person in debt to take it seriously that bankruptcy proceedings have been instigated. It may also encourage the person in debt to respond to an official approach rather than to the individual creditor where the relationship has deteriorated or if they feel intimidated. This will also serve to satisfy the Adjudicator that the person in debt has received the papers and knows that bankruptcy proceedings are underway. A robust system to make sure that service has been carried out and acknowledged needs to be built into the process. This will help to avoid the scenario raised in the paper under question 24 where the person does not respond to either give consent or oppose the application. A robust system at this stage will help satisfy the Adjudicator that the creditor has complied with all the pre-action requirements and that satisfactory service of the statutory demand was carried out. Question 21 Do you think that a prompt by text message (which would only be sent if a debtor consents to the use of his/her mobile telephone number in this way) would be an effective mechanism to help alert the debtor to the imminent arrival of further information by post and/or ? Please explain your answer. We would support any mechanism that helps enhance communication between the parties. However, this could have some issues with confidentiality. This mechanism for communication could also not be relied upon and would need to be backed up by paper communications. 2 MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 13

15 Question 22 Do you agree that the only dialogue between the debtor and the Adjudicator should be to confirm correct contact details, and to establish whether the criteria for making a bankruptcy order are met. e.g. whether the application process has been complied with by the creditor; whether there is a debt that exceeds the bankruptcy level; and whether the jurisdiction criteria are satisfied. If not, can you suggest what other dialogue might need to take place and why? The paper suggests that the person in debt should be asked to complete a statement. The statement could require the debtor to indicate either that he/she has had an opportunity to take advice, understands the consequences of bankruptcy, and consents to bankruptcy or does not otherwise oppose the bankruptcy application; or alternatively that he/she opposes the application. In order for the person in debt to have the best chance to get advice and understand the consequences of bankruptcy, we would suggest that the petition papers should be accompanied by a guidance leaflet signposting to sources of free, independent debt advice. It should also enclose either a copy of the Insolvency Service In debt-dealing with your creditors guide or at least a link to the guide and details of how to obtain it. It would be beneficial for the Adjudicator to have the power to use their discretion to extend the period of time that the person in debt should be required to complete the [re-printed statement provide further information. This could be done on a case-by-case basis, and only where the applicant has substantial reasons why the information cannot be provided within the set timescale. It would also be vital that the Adjudicator has the discretion to suspend the process where it comes to their attention that the person in debt is extremely vulnerable, particularly through mental health problems or reasons of mental capacity. We would draw your attention to the work the Local Government Ombudsman has carried out in relation to local authorities using bankruptcy to recover Council Tax which sets out how the Ombudsman expects local authorities to make decisions about whether to use bankruptcy powers. 3 3 Can t pay? Won t pay? Using bankruptcy for Council Tax debts MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 14

16 This report states: People with mental illness tend to have higher levels of debt than those who are well 24% of people with depression and anxiety (a common mental disorder) and 33% with psychosis experience higher levels of debt. The link between debt and mental health is recognised by the private consumer finance industry, the Royal College of Psychiatrists, the Royal College of General Practitioners, the Money Advice Trust, MIND and other charities. Advice and guidance to the industry, social care and health professionals have been published, including Good Practice Awareness Guidelines for Consumers with Mental Health Problems and Debt published by the Money Advice Liaison Group that brings these interest groups together. We know from earlier research4 that there is a high incidence of people in debt with mental health problems with nearly one in every two adults with debt who may have a mental disorder. We would therefore suggest that there will be a proportion of people being made bankrupt who are experiencing mental health problems that will make it very hard for them to respond to creditor or to the Adjudicator. Where the Adjudicator becomes aware of such a situation, there should be provision to suspend the action to enable the appropriate help and assistance to be sought. Question 23 Is there any other way in which a dispute might be resolved before the court becomes involved? Or do you think that it is appropriate that a judicial decision is given at this stage in the proceedings? We would suggest that it may be difficult to resolve the dispute without involving the court unless a new structure for dispute resolution is put in place that would become involved before referral to the court. We would imagine that this would add a layer of complexity to the process that may not be merited. Alternatively this structure could substitute for a judicial decision by the court if it was set up as an independent tribunal system. However, we can see that this would need a fundamental restructuring. 4 MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 15

17 Questions 24 Do you agree with the way we suggest that applications to which there is neither consent nor opposition should be handled? If not, can you explain why not and suggest an alternative solution? We are concerned that the Adjudicator process will not be sufficient for such cases. All creditor bankruptcy petitions should be treated as a potential dispute unless the petition relates to a judgment of the court. Most bankruptcies are undefended, and it is because of this that the role of the court is crucial. A district judge has the opportunity to satisfy himself regarding service of the demand and petition (including verifying witness evidence), ensure that the grounds of the creditor s petition are made out, identify any potential disputes and, perhaps most importantly, gather any information regarding the personal circumstances of the debtor, for example whether they have capacity to defend proceedings, or whether they may have a protected characteristic as defined in the Equality Act Because the consequences of bankruptcy on a creditor s petition can be so severe (including loss of the family home, business failure, loss of transport, significant disruption to children and family) it is vital that the protection for defendants is as robust as possible. There may be a place for an adjudicator in this process, but the making of bankruptcy orders on creditors petitions should remain a function of the court in every case. It is important that the process is fair to all parties. As the paper says: It clearly would not be right if bankruptcy proceedings could be taken where there is a risk that the debtor is unaware of the proceedings. The paper proposes that if there is no response to the bankruptcy application that there should be no further delay in making the order. If this is the case, then it is vital that the pre-action process is robust. It is concerning that the Adjudicator is expected to leave it to self-declaration that the creditor has carried out satisfactory service of the statutory demand and has complied with the pre-action process. Sanctions for non-compliance may be imposed at a stage where it is too late for the person in debt, who will already have been made bankrupt. It is clearly much more difficult to go through the process of annulment of a bankruptcy order once it has been made due to the extra costs added than to prevent its being made in the first place. Perhaps the best place for the Adjudicator to intervene would be at the stage where the bankruptcy application is sent out. As indicated in our response to question 20, a robust system of checking by the Adjudicator at that stage would help avoid doubt as to whether the process has been carried out correctly and the person in debt is aware of the bankruptcy application. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 16

18 Question 25 What period of time would it be appropriate to allow the debtor to communicate his/her response to the Adjudicator? 14 days? Less? Or more? We support the provision of a reasonable time period for the person in debt to respond to the application in order to be fair to all parties. This should take into account the likelihood that the person affected will need to seek independent advice. As it can be difficult to obtain advice, especially if the client needs to see a local face-to-face debt adviser, we would suggest that a period of 28 days to respond to the Adjudicator would be reasonable. We would also suggest that this amount of time may help more vulnerable individuals take action and seek advice. As we have previously highlighted, it is not uncommon for people with severe mental health problems to fail to deal with their debts. Question 26 Do you think a third party applicant should be able to request to withdraw its application at any time up to the point at which it is determined? We agree that a third party applicant should be able to request to withdraw the application at any time up to the point at which it is determined. We have concerns that there is no post-bankruptcy mechanism to withdraw the petition apart from annulment. This can have a serious impact on the person in debt if they are wrongly made bankrupt but have to go through an entire annulment process, pay off the debts, fees and costs of bankruptcy incurred in order to resolve the issue. We would suggest that it is also important to allow a review where there has been an administrative error or error in procedure. A scenario might be where paperwork has not been received by the applicant as it has been sent in error to the wrong address, or misaddressed. Question 27 Should any appeal against the decision of the Adjudicator be made in the first instance to the county court, or is there a benefit in retaining the existing provision that allows an appeal to be made in the first instance, in certain circumstances, to the High Court? We support the proposal that any appeal against the decision of the Adjudicator should be made in the county court. The county court is generally a less intimidating forum for appeal than using the High Court which has both higher costs and formality which can be extremely inaccessible to an individual litigant. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 17

19 Question 28 How important is it for the reforms proposed in this document that there is a Liquidator of Last Resort for Scotland? The Liquidator of Last Resort would be appointed to fill the role of instructing a suitable insolvency practitioner (IP) to oversee the liquidation of the company. This appointment is currently done by the court. We propose that IPs would still oversee the liquidation of the company. In order to ensure that there IPs in this position would be accountable, a Liquidator of Last Resort would need to be appointed. We suggest that the Adjudicator would not have the skills to fulfil this role. Question 29 If you think that it is important that there is a Liquidator of Last Resort, which organisation do you think should provide that office and how should it be funded? The Accountant in Bankruptcy should provide this office. The Liquidator of Last Resort and the Adjudicator fees should be covered by the fee charged to submit the application. This is currently 100. In England and Wales this fee is much higher so there is scope to raise the fee in Scotland in proportion to the actual costs of the process. Question 30 Do you think that the Adjudicator s role should be limited to determining applications for winding up on the grounds that the company is unable to pay its debts or where the company has passed a valid special resolution that it be wound up? If not, would you please explain your reasoning. Yes we agree that the Adjudicator s role should be limited to cases where the grounds are that the company is unable to pay its debts or where the company has passed a valid special resolution. Question 31 Are you able to suggest the proportion of petitions that are currently presented to the courts on grounds other than the company s inability to pay its debts; the company having passed a valid special resolution that it be wound up; and that winding up is just and equitable? Although Business Debtline have no concrete figures for this, they can go as far as to say that it is rare for Business Debtline to advise on petitions that are presented on grounds other than the company s inability to pay its debts. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 18

20 Question 32 Who do you think should be responsible for communicating notice of the winding up application to the company and eliciting its response to the proceedings? As it is proposed that the application is submitted to the Adjudicator, it should be the Adjudicator who is responsible for communicating notice of the winding up application to the company. This would help the process run more smoothly as only one person is responsible for taking this action. It should help eradicate complaints by people in debt that they have not received the application as the Adjudicator should be required to make all reasonable efforts to check it has been. It should be noted that some smaller and micro-companies will not have a website from which contact details can be obtained. We have some concern over the use of registered addresses at Companies House to make contact. In the experience of Business Debtline, these are often accountant s addresses rather than business addresses and there are examples of cases where information has been sent to the accountant and not passed on to the director of the company concerned. Question 33 Who should send notice to specified interested parties? We think that when the Adjudicator sends notice of the winding up application they should also send notice to specified interested parties. This should further eradicate claims that notices have not been received as the Adjudicator will be fully responsible. This will be enhanced by the proposed process to deal with disputes about the Adjudicator s actions. Question 34 When should notice be sent to these interested parties? We agree with the proposal that the notice should be sent as soon as the application is successfully submitted. Question 35 Do you think that a winding up application should be advertised under these new proposals? If yes, please provide reasons for your answer. No, we do not feel that the winding up application should need to be advertised as long as the account-holding bank is a specified interested party. The bank would need to freeze the account as soon as possible once the winding up application is received to avoid further use of the account. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 19

21 Question 36 Can you foresee any circumstances in which it would be appropriate for the Adjudicator to seek further information from the applicant? If yes, please provide details and suggest how frequently this might occur. No, we cannot foresee circumstances in which it would be appropriate for the Adjudicator to seek further information. The Adjudicator s role is an administrative one in winding up proceedings. They will return any incomplete applications to the creditor so the onus is on the originator to provide all the correct information. Question 37 What period of time should be sufficient for a company to communicate to the Adjudicator its opposition? 14 days? More? Or less? We would suggest that 14 days will not be sufficient for a company to communicate opposition to the Adjudicator. We propose 28 days as a more realistic an appropriate amount of time. Although all attempts should be made by both parties to negotiate prior to the point of application, it is still possible and acknowledged in the consultation that this stage may be the first time the company or person in debt has engaged with the situation. When considering the timescales in place in relation to defending other actions, currently in the county court, we note that defendants can have up to 28 days to submit a defence. If the company or person in debt is engaged in the process and does not oppose the application, as envisaged under the new process, the Adjudicator should get notice of this quickly and the case could proceed. If the company or person wants to defend the case, we would suggest 14 days is not long enough to seek specialist advice and fully explore other debt options. As an example, the debtor may want to consider putting forward a Company Voluntary Arrangement as a way of dealing with the company debts instead. Question 38 Do you think that a creditor should be able to request to withdraw its application at any time up to the point at which it is determined? Yes, we would agree that it is important that this right is retained within the new process. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 20

22 Question 39 Should any appeal against the decision of the Adjudicator be made in the first instance to the county court, or is there a benefit in retaining the existing provision that allows an appeal to be made in the first instance, in certain circumstances, to the High Court? We suggest that appeals should be made in the first instance to the county court as this is cheaper and more accessible to the person in debt. A creditor would also be able to keep their costs low if they needed to appeal. The right should still be retained to transfer hearings to the High Court if this expertise is needed for complex cases. Impact Assessment: Question 40IA Is the proposed pre-action process likely to result in any additional costs for creditor petitioners or debtors? If so, how much and why? We envisage that the process is likely to result in additional costs in time and resources for free-to-client debt advice agencies as they are likely to be dealing with a higher demand for assistance from those clients threatened with bankruptcy who have been directed to seek advice. There may also be an additional time and resources cost for assisting with the mediation/adr process and possibly accompanying clients to such meetings. We would suggest that there will be fewer costs for people in debt as they will not be required to attend court hearings. However, for some there will be mediation/adr hearings to attend, although many such cases are conducted over the telephone. The main cost for people in debt will be for those on low and benefit level incomes who will be faced with having to find the application fee with the removal of fee remission. The issue of whether additional legal costs will be incurred by both parties for advice before mediation or the ADR process needs to be resolved. We are unable to comment on potential for additional costs for creditor petitioners. Question 41IA If you are a creditor, how often do you need to engage solicitors and/or barristers when petitioning for bankruptcy and company winding up? How much does this cost? As the free-to-client advice sector, we do not act as creditors so are not able to answer this question. MAT RESPONSE TO INSOLVENCY SERVICE REFORM TO PROCESS FOR BANKRUPTCY CONSULTATION Page 21

23 The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: Fax: