Bankruptcy exposed...or not?
A recent BBC programme investigated how the bankruptcy system works concluding that it allows criminal and dishonest debtors to keep hold of wealth and avoid punishment. David Menzies looks at whether the programme provides a fair representation of the system.
Many will have watched the BBC investigative programme ‘Millionaire Bankrupts Exposed’on BBC 1 (8 January 2018). The programme, aired in two slightly different versions (BBC Scotland Investigates in Scotland and Panorama in England & Wales), was trailed as exposing a bankruptcy system which allows criminal and dishonest debtors to keep hold of their wealth and assets, and in some instances, escape a system which punishes bankrupts who try to hide their assets or the extent of their wealth.
To those who don’t live and breathe the world of insolvency and bankruptcy daily, the programme provided a shocking view of the system. The twittersphere attracted comments with the hashtag #bankruptcyexposed in Scotland and #bbcpanorama elsewhere in the UK.
@lesleyfulford wrote ‘I don’t understand the regulations but still shocked by some of the things going on. #bankruptcyexposed #bbc #scotland’ while @Jacis69 tweeted ‘#bankruptcyexposed My blood is boiling…Well done #samanthapoling & team for naming and shaming.’
The exposé gained credibility with expert analysis from prominent UK insolvency practitioners.
However, perhaps not is all that it seems.
Before going further, I should perhaps emphasise that my comments below are not meant as an endorsement of any individual’s behaviour or lifestyle. Bankruptcy is not something which should be taken lightly. The legislative provisions to allow an individual to be free of debt are a social privilege and as a result rightly come with requirements and consequences which should be taken seriously.
The programme gave a rather distorted position of lifestyles. Individuals shown enjoying extravagant lifestyles had, by the apparent time of filming their lifestyle, been discharged from their bankruptcy, some by as much as two years. The programme makers did not seem to appreciate that the period of bankruptcy for an individual may (indeed will often) not be the same as the period in which the trustee remains in office.
The programme also seemed confused on the distinction between corporate failure and personal bankruptcy. It also seemed to lack distinction between bankruptcy and proceeds of crime proceedings as well as ignoring (or at least not understanding) the significant differences between bankruptcy law in Scotland and the rest of the UK.
This was perhaps most evident in the section dealing with Bankruptcy Restriction Orders (BROs). Viewers were told that BROs prevented individuals from becoming directors or being involved in the formation of a company when they are subject to a BRO. The programme featured undercover filming of an individual who was given a BRO in excess of five years in August 2015 and who had become a shareholder in a company at its formation during the period of his BRO.
When shown the company incorporation documents one expert concluded, “The Bankruptcy Restriction Order does not allow you to form a limited company. That is a breach of the terms of the Bankruptcy Restriction Order." When put to the Chief Executive of the Scottish Government Agency, the Accountant in Bankruptcy (AiB), this was a view which was concurred with.
The reality, however, is that this is only a recent development in Scotland. Section 11(1) of the Company Director Disqualification Act 1986 (CDDA), which has the effect of disqualifying an undischarged bankrupt or a bankrupt subject to a BRO, was introduced under the Enterprise Act 2002.
BROs were not introduced in Scotland until 2008 when the Bankruptcy and Diligence (Scotland) Act 2007 came in. The BROs referred to in section 11 CDDA as introduced by the Enterprise Act 2002 effectively related only to BROs made under the Insolvency Act 1986 in England & Wales. This anomaly perhaps went unnoticed for a long period.
The CDDA legislation was amended by section 113 of the Small Business Enterprise and Employment Act 2015 to give the same effect to BROs made in Scotland and Northern Ireland. These provisions only became effective on 1 October 2015 and in respect of any BROs made after that date. The BRO referred to in the programme was made on 31 August 2015 and as a result the CDDA provisions do not have the effect stated in the programme. As a result, the wrongdoing purportedly exposed by the programme is rather misleading.
Was the bankruptcy system exposed?
Despite the shortcomings of the programme’s production and research, there were important points made:
- The BRO regime is toothless and ineffective, something which many in the profession have said for a long time. The restrictions have little practical effect. Contrary to the position taken in the programme, bankruptcy and BROs are not meant as punishment for those who find themselves in debt. BROs are intended to encourage people to co-operate with the bankruptcy regime. They are great for the government agencies to point to and give the impression of consequence for individuals failing to take their bankruptcy responsibilities seriously but perhaps little else. The BRO regime, if it is to achieve its desired effect needs to have more teeth.
- The programme rightly called out the lack of effective monitoring of those under BROs, but perhaps this is simply symptomatic of a wider issue for the Insolvency Service and the Accountant in Bankruptcy. Resources are either stretched or deployed ineffectively. The programme (aired in England and Wales) highlighted the desk-bound approach of the Official Receiver (OR) and reliance on debtors telling the truth when disclosing assets. The lack of ability to verify what the OR is being told has a detrimental effect on creditors and allows the unscrupulous to benefit.
- There is a two-tier system operating between government departments and other providers. The programme highlighted the difference in anti-money laundering (AML) checks carried out between those in the commercial sector carrying out company formation and that of Companies House. ICAS, along with other professional bodies, have been vocal in our concerns about the new AML supervision regime where HMRC, the default AML supervisor, will not be subject to supervision by the new Office for Professional Body Anti-Money Laundering Supervision (OPBAS). Evidence is mounting that where government and non-governmental providers compete in the same space that the standards and level of work carried out by the government departments is not as robust as that carried out by others.
- On the insolvency side, there is a similar disparity between the regulation and supervision of work carried out by insolvency practitioners and that carried out by the OR and AiB. The AiB is currently consulting on its funding regime for the future. ICAS has highlighted for some considerable period the need for a more fundamental review of the structure and functions which the agency undertakes. Removing duplication of effort in regulatory areas, considering when it is appropriate for public agencies to undertake bankruptcy case operations and separating out the inherent conflict between acting as government advisors and service providers are only some of the areas worthy of further scrutiny.
So, is the bankruptcy system broken as was asserted in the programme? Those working in the profession probably do not recognise that scenario. For most of those individuals who are subject to bankruptcy they do not come out the other side with lavish lifestyles. The majority do fully declare their assets and co-operate with their trustee. The number of BROs are relatively small in comparison with the number of people who are declared bankrupt in the UK each year. Yes, the system can be improved but it is far from broken.