Bankruptcy: A Fresh Start

2.     Introduction

2.1     In a world in which the general availability of credit is taken for granted, indeed in which generally available credit is seen as a principal motor of economic growth, this advice, so well known a generation or two ago, now seems hopelessly out of date. The use of credit is a fact of everyday life and so, therefore, is the risk that some credit will fail to be repaid. It is also the case that in the overwhelming majority of cases credit advanced is repaid, whether by businesses or by consumers. The responsible use of credit is, therefore, a phenomenon which should be encouraged whilst recognising that even the most responsible user may, through force of circumstance, be unable to fulfil a bargain honestly entered into. The unexpected loss of employment or of a market, a period of ill health or the need to give up paid employment in response to a change in family circumstances, the failure of a major customer, these are all familiar occurrences that can often lead to financial difficulty and, in some cases, to insolvency. For a small minority of individuals insolvency is the result of conduct, which at best has been irresponsible, or, at worst, simply dishonest. Current (and past) bankruptcy law and practice seems to many to be predicated on the reverse assumption.

2.2    The number of individuals going into bankruptcy or making formal arrangements with their creditors discloses a rising trend over the last twenty-five years:

2.3    By comparison with other English-speaking OECD countries the number of individual insolvencies is relatively small. However, at some 65%, business related failures represent a far higher proportion of the total than in other countries. For example, of the 1.4 million bankruptcy filings in the USA in 1998 some 1.35 million were by consumers. In the same year in Canada, of a total of 86,000 bankruptcies 75,000 related to consumers whilst figures for 1998/99 for Australia show there to have been some 27,000 individual insolvency proceedings, 89% of which related to consumers.

Why businesses fail

2.4    During January and February 1999, in order to obtain further information on the number of cases of business failure in which the conduct of the bankrupt (or the directors) could be seen as reprehensible (at least on the face of it), Official Receivers were asked to carry out a survey of business failures and to classify businesses that they had dealt with (companies as well as bankruptcies) according to a pre-determined list of possible reasons for failure.

2.5    Official Receivers or their deputies review every case (with the exception of cases where the bankrupt has failed to surrender to the proceedings) after a period of 28 days from the date of the Winding-up Order or Bankruptcy Order. They then make a preliminary decision as to whether the circumstances regarding the failure of the company or individual in question, requires further investigation. They were asked to classify all trading cases according to the principal reason for the failure of the business.

2.6    The detailed results of the survey are at Annex A to this report. Out of 1412 cases where it had proved possible to identify the main cause of failure, less than 2% were said to be attributable to fraud by the debtor/partner (bankruptcy cases) or the directors (companies) and therefore having the potential to lead to prosecution for offences other than those created in insolvency legislation. The most common causes of failure identified were loss of markets or customers and failure to deal with income and value added tax affairs.

2.7    Half of the businesses in question had traded for less than 4 years, with 32% failing within the first 2 years. Looking to the age profile of the "failed businessman", out of 1473 cases where this information was available, 40% were aged between 45 and 60, with 79% being aged 35 or over and 6% aged 60 or over.

2.8    The results of the survey offered confirmation of the high rate of the failure of businesses within their early years and that a lack of capital is a major factor in such failure. The age of those who had failed in business implied that many of them have a good span of their working lives ahead of them should they wish to try again in business.