Julie Exton outlines when and why it is appropriate for the court to make a bankruptcy restrictions order
The power of the court to make a bankruptcy restrictions order (BRO) is conferred by section 281A of and schedule 4A to the Insolvency Act 1986, introduced on 1 April 2004 by the Enterprise Act 2002.
It enables the court, in appropriate cases, having regard to conduct (and there is an long list of factors in this respect for the court to consider), to impose restrictions on a bankrupt following discharge. The period during which, if made, a BRO may run is between two and 15 years. The restrictions are numerous and not set out in the Act. They include restrictions on acting as a company director or insolvency practitioner, restrictions on obtaining credit above a certain amount (currently £500) without disclosing status, and disqualification from holding certain public offices.
Between April 2005 and July 2006, 275 BROs were made (as well as 1,111 bankruptcy restrictions undertakings given). Most commonly, orders have been made for between three and seven years' duration. By far the most common reasons for making orders are: trading when the bankrupt knew, or ought to have known, that he was himself to be unable to pay his debts; incurring a debt that the bankrupt had no reasonable expectation of being able to pay; and carrying on any gambling, rash and hazardous speculation or unreasonable extravagance. None of this is perhaps unduly surprising.
Randhawa v Official Receiver [2006] All ER (D) 02 (Jul) is the first High Court judgment relating to a BRO and sets out some useful principles. Mr Randhawa and his wife were proprietors of an unsuccessful restaurant business called Simply Delish. A bankruptcy petition was presented on 24 March 2004. On 7 May, Mr Randhawa put forward proposals for an individual voluntary arrangement. His proposal disclosed liabilities of £454,193 and no assets.
Mr Randhawa's proposal was rejected by creditors on 16 June. He was made bankrupt on 5 July 2004.
Meanwhile, between 11 and 29 June, Mr Randhawa made cash withdrawals totalling £9,500 using his wife's HSBC credit card. He made no mention of these withdrawals when he was first interviewed by the Official Receiver's examiner; nor had he mentioned in his preliminary information questionnaire that he had lost any money by betting, gambling or similar activities in the last two years.
When the withdrawals came to light, he gave a variety of explanations: the money was used for living expenses; it was used for a combination of living expenses and school fees; he had gambled it all away at the Rainbow Casino. His sworn evidence at the hearing before the district judge was that he had handed it over under duress to a disgruntled (and unpaid) Chinese chef who had himself lost it all at the Rainbow Casino.
The Official Receiver's application for a BRO relied on the following alleged misconduct that would justify its making: 'That at a time when he knew that both he and his wife were insolvent, the bankrupt caused a debt to be incurred on his wife's credit card which he had no reasonable expectation would be repaid, thereby causing a loss to creditors in her bankruptcy.'
Mr Randhawa appealed against a BRO of three years imposed by the district judge. Dismissing the appeal, Launcelot Henderson QC, sitting as a deputy High Court judge, held that:
If these conditions are satisfied, the court is required to make a BRO of between two and 15 years.
The court will focus on the specific allegations of misconduct and decide whether they are made out on the evidence. The court will not carry out a 'roving enquiry'.
An element of culpability or irresponsibility will usually, if not always, need to be present. Mitigating circumstances may be taken into account and need not be confined either to matters directly related to the allegations of misconduct or to events after 1 April 2004.
Although the main object of making a BRO is the protection of the public, the jurisdiction is also intended to have a deterrent effect (so, in this instance, it did not matter that Mr Randhawa was already subject to a ten-year disqualification from acting as a director pursuant to an undertaking he had given in 2003 following the failure of another business).
Normally, but subject to limited exceptions, written evidence can only be disbelieved where the witness in question has been cross-examined.
As for the period of the BRO, it is appropriate to adopt the same three brackets that the court routinely applies in the context of directors' disqualifications, namely: particularly serious cases - 11 to 15 years; serious cases - six to 10 years; less serious cases - two to five years (see Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164). The appropriate period for a BRO was to be fixed by reference to the gravity of the misconduct that is alleged and proved against the bankrupt, taken in conjunction with any aggravating or mitigating factors that may properly be taken into account.
The length of time that has elapsed since the making of the bankruptcy order is not in itself a mitigating factor, and it was wrong to allow credit for the period of the bankruptcy itself when the bankrupt is, in any event, subject to restrictions.
Parliament had allowed a period of one year in which an application for a BRO could be made without the permission of the court. That was not a long period, and it would normally be wrong to have regard to when the application was made within that period in deciding the length of the BRO, especially if there was no evidence of any undue delay on the part of the Official Receiver in making the application.
District Judge Julie Exton sits at Bristol County Court
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