A bankrupt's activities before and after the making of an order will have a bearing on whether or not he will be placed under a Bankruptcy Restrictions Order, reports District Judge Julie Exton

On 1 April 2004, section 257 and schedules 20 and 21 of the Enterprise Act 2002 brought into force a creature hitherto unknown - the bankruptcy restrictions order (BRO).


As its name implies, it is an order that restricts certain activities of a bankrupt. For example, he is forbidden from acting as a receiver or manager or insolvency practitioner or from being involved in a company. However, he is not precluded from trading.


Who applies and when? Only the Secretary of State for Trade and Industry or, more commonly in practice, the Official Receiver acting on the secretary of state's direction, can make the application. It must normally be made within one year from the making of the bankruptcy order. The Insolvency (Amendment) Rules 2003 (rule 6.241 onwards) set out the relevant procedure.


A court shall grant an application for a BRO if it thinks it appropriate having regard to the bankrupt's conduct before or after the bankruptcy. Only conduct after 1 April 2004 (that is, post-commencement) may be taken into account (hence the provision's increasing relevance now).


In particular, a non-exhaustive list requires the court to take into account any of the following kinds of behaviour on the part of the bankrupt:


  • Failing to keep records that account for a loss of property by the bankrupt, or by a business carried on by him, where the loss has occurred in the period beginning two years before petition and ending with the application;



  • Failing to produce records of that kind on demand by the Official Receiver or the trustee;



  • Entering into a transaction at an undervalue;



  • Giving a preference;



  • Making an excessive pension contribution;



  • Failing to supply goods and services that were wholly or partly paid for which gave rise to a claim provable in the bankruptcy;



  • Trading at a time before the commencement of the bankruptcy when the bankrupt knew or ought to have known that he was himself to be unable to pay his debts;



  • Incurring, before the commencement of the bankruptcy, a debt that the bankrupt had no reasonable expectation of being able to pay;



  • Failing to account satisfactorily to the court, the Official Receiver or the trustee for a loss of property or for an insufficiency of property to meet bankruptcy debts;



  • Carrying on any gambling, rash and hazardous speculation or unreasonable extravagance that may have materially contributed to or increased the extent of the bankruptcy or that took place between presentation of the petition and commencement of the bankruptcy;



  • Neglecting of business affairs of a kind that may have materially contributed to or increased the extent of the bankruptcy;



  • Committing fraud or fraudulent breach of trust;



  • Failing to co-operate with the Official Receiver or the trustee.



    • The court must also take into account whether there was an earlier bankruptcy order within the previous six years.


    The trend running through this list appears to be the effect on the creditors and whether the (mis)conduct increased or materially affected the deficiency.


    Can anything be done to protect the position in the short term? The court can make an interim BRO if it thinks that there are prima facie grounds to suggest that the application for the BRO will be successful and it is in the public interest to make an interim order. Such applications are likely to be made where there will be a gap between the bankrupt being discharged and the substantive application being heard.


    A BRO shall not last less than two years or more than 15 years. In line with directors' disqualification cases, it seems that the 'Sevenoaks brackets' (Re Sevenoaks Stationers [1990] 3 WLR 1165) will be applied. So, cases of incompetence rather than dishonesty will fall within a two-to-five-year range. On the other hand, particularly serious cases involving serious dishonesty such as to merit a criminal conviction may attract an order in excess of ten years.


    Can a culpable bankrupt avoid a BRO? Yes, by offering the secretary of state a bankruptcy restrictions undertaking (BRU). It has a similar effect as a BRO but the advantage from the bankrupt's point of view is that, unlike a BRO, it can be brought to an end on the application of the bankrupt. It is, at present, unclear in what circumstances a court would grant such an application.


    If a bankruptcy order is annulled, then so too is any BRO or BRU. And it is a criminal offence if the order or undertaking is breached.


    It is anticipated that the provisions are likely to apply to no more than 10% of cases. Applications will be made only if it is in the public interest to do so, for example if an order will act as a deterrent or affords protection to business and consumers from potential future loss or damage. Although there are likely to be regional variations, most cases will be dealt with by undertakings, rather than formal orders.


    Although a register of BROs and BRUs will be kept by the secretary of state, doubt has been expressed as to whether this new regime can be effectively policed. There is concern that, like directors' disqualification cases, the Official Receiver will be reliant on complaints from the public or the accident of second bankruptcies. How effective it is all likely to be may also, to a large extent, depend on how seriously the criminal courts treat breaches of BROs.


    Public funding to defend applications is unlikely to be available, raising possible concerns about the possibility of a fair trial. But perhaps of more concern is the present format of form 6.28, the debtor's petition.


    At section 11.2, the debtor is asked to give reasons for his inability to pay his debts. What he says will be a factor in any decision to apply for a BRO.


    Given the potential for a criminal prosecution, the warning at section 12 that he may be committing a criminal offence if he deliberately gives false information arguably does not go far enough. What, too, of the court staff's role in assisting with the completion of the forms, a common enough occurrence with debtor's petitions?


    Until the courts have resolved these issues, there are likely to be as many questions as answers.


    District Judge Julie Exton sits at Bristol County Court