Suspending a bankrupt’s automatic discharge from bankruptcy
What is a discharge from bankruptcy?
A discharge from bankruptcy is a statutory process which frees a bankrupt from:-
- the restrictions and disabilities of bankruptcy; and
- most of their bankruptcy debts.
A bankrupt is usually automatically discharged from bankruptcy on the 12-month anniversary of being made bankrupt. Once discharged from bankruptcy, a debtor generally has no further liability for their bankruptcy debts under section 281 of the Insolvency Act 1986 (the “Act”).
What are the usual reasons leading to an Official Receiver or Trustee suspending a Bankrupt’s discharge?
Given the burdensome consequences associated with the continuation of bankruptcy, only the court may suspend discharge from bankruptcy.
If the bankrupt has failed, or is failing, to comply with their obligations under Part IX of the Act, the Official receiver ('the OR') or trustee-in-bankruptcy may apply to court to suspend the automatic discharge under section 279(3) of the Act. Such application to the court must be made before the first anniversary of the making of the bankruptcy order.
The court must be satisfied that the bankrupt has failed or is failing to comply with their obligations (the threshold stage) before considering how it will exercise its discretion to make a suspension order (the discretion stage).
Suspension of discharge is penal in nature and may be ordered for a fixed period or the fulfilment of a specified condition in the suspension order.
A suspension of discharge order:-
- Protects the trustee in bankruptcy's ability to gather information to assess whether the bankrupt may contribute to their estate from their income (for example, seeking to enter into an income payment arrangement with the bankrupt etc). Note, income payment arrangements still have effect and can continue past the discharge date for up to three years;
- Preserves the trustee's ability to claim property acquired after the anniversary of the bankruptcy order, for the benefit of the bankruptcy estate;
- Extends the time for applying for a bankruptcy restrictions order or agreeing a bankruptcy restrictions undertaking;
- Extends the period of time for taking into account misconduct and the committing of bankruptcy offences (such as non-disclosure of his/her estate). One such example of this is if the bankrupt, throughout the course of their bankruptcy period, fails to respond to information requests and questions from the Trustee or OR and/or fails to attend at a public examination hearing. This situation is further detailed below.
Extending the duration of bankruptcy (by suspending a bankrupt’s automatic discharge from bankruptcy) is a balancing exercise and is designed to ensure that non-compliant bankrupts:-
- continue to suffer the restrictions and disabilities of bankruptcy; and
- comply with their statutory obligations under the Act.
Conversely, suspending discharge may also:-
- aid their trustee's performance of their statutory function (to collect in, realise and distribute the bankrupt's estate faster which may even lead to the bankrupt being discharged earlier than the usual 12 month period); and
- be in the public interest.
What is the court process that the OR or Trustee must undertake to apply for a suspension?
Rule 10.142 of the Insolvency (England and Wales) Rules 2016 (the “Rules”) applies where the OR or trustee apply to the court for a suspension order under section 279(3) of the Act.
Under this rule, the OR or trustee must file, with their application, evidence in support setting out the reasons why it appears that such an order should be made (for example, instances of a bankrupt’s lack of co-operation and/or concealment/non-disclosure of certain assets). The court must then fix a venue for the hearing of the application and deliver notice of it to the OR, the trustee and the bankrupt.
It is crucial that copies of the OR's report be delivered to the bankrupt and their trustee at least 21 days before the date fixed for the hearing and copies of the trustee’s evidence in support of their application must be delivered by the trustee to the OR and the bankrupt at least 21 days before the date fixed for the hearing.
If any of these deadlines are broken, this will create good cause for a bankrupt to contest the application as if the bankrupt has not received the OR’s report in time (which contains information concerning any unresolved matters in the estate), then, the bankrupt is very disadvantaged as he/she could have endeavoured to revolve any outstanding issues to avoid suspension. Such timings are put in place to ensure that suspension applications are not used and abused by privately funded trustees.
If the bankrupt intends to deny or dispute any statements in the OR’s or trustee’s evidence, they must not later than five business days before the date of the hearing file with the court a notice specifying the statements which they intend to deny or dispute.
Alternative route that the OR or Trustee may take to apply for a suspension
There is another avenue that an OR or trustee can take to suspend a bankrupt’s discharge with little to no notice at all. This avenue can sometime be used by a trustee inappropriately (especially if their actions are being driven by the petitioning creditor who is funding the bankruptcy investigations). Under, rule 10.104 of the Rules, on the adjournment of the bankrupt’s public examination, the OR, may there and then, make an oral application at the public examination hearing to suspend a bankrupt’s automatic discharge from bankruptcy without the need to file an application and supporting evidence in the usual course.
This situation can arise if a bankrupt has been served with a summons to attend at a public examination to answer questions of the OR and/or Trustee concerning the bankrupt’s affairs under oath at a court hearing. If the public examination has been adjourned once due to the bankrupt’s failed attendance or for some other reason, if the bankrupt again fails to attend at the adjourned hearing or otherwise attends but fails to cooperate (e.g. by not responding to the questions asked) then, an oral application can be made then and there by the OR to suspend the automatic discharge. One way to try to avoid such situation occurring is to ensure that you have engaged counsel to protect your interest at any public examination hearing.
Can a Bankrupt apply to lift suspension of a discharge order?
Where a bankrupt's discharge has been suspended, they may apply to court for an order lifting the suspension under rule 10.143(1) of the Rules. This may be the case if they assert they have complied with any conditions.
There is an inevitable tension between the desirability of a bankrupt knowing how to obtain discharge from their bankruptcy debts and preventing uncooperative or dishonest bankrupts from frustrating their trustee's legitimate enquiries. Where the balance is struck by the court will very much depend on the circumstances and must be justified on the facts of the case.
A bankrupt can avoid such action if, from the outset of being declared bankrupt, ensure full and frank disclosure of all their assets and affairs in the initial few months. That way, if there is any outstanding information required after the trustee’s initial investigations, this can be provided to them in sufficient time before the automatic discharge date.
If you require assistance in relation to a prospective discharge from bankruptcy click here to find out how our specialist insolvency solicitors can help.
Articles are intended as an introduction to the topic and do not constitute legal advice.