Taking the stigma from bankruptcy

The Department of Trade and Industry is considering taking a leaf out of the US statute book and cutting the penalties imposed on bankrupts. Should going bust attract its traditional stigma?

The Department of Trade and Industry (DTI) is seeking to reduce the stigma attached to bankruptcy by repealing laws which prevent insolvents from holding public positions for three years after they have been declared bankrupt.

Under the law, insolvents are barred from holding financial directorships, being a member of Parliament, a school governor or a magistrate. But the DTI has written to government departments to gather ideas on how this can be changed.

The Lord Chancellor's Department is opposed to the changes, having already expressed its concern about bankrupts becoming judges. It fears their financial situation may leave them open to bribery or that they may not be impartial to fellow bankrupts who appear before them.

But the Government is keen to promote a US-style enterprise culture, where no stigma is attached to business failure, although, ironically, Congress is now looking at ways of tightening US bankruptcy laws.

The Government is also looking at dividing bankrupts into two categories – culpable and responsible. But is this realistic? And is it possible that UK laws can be successfully changed to emulate the US style of dealing with insolvents?

Stephen Gale, head of corporate recovery at Herbert Smith and vice-president of the Society of Insolvency Practitioners, believes that attempting to follow in the US' footsteps is unwise.

“Running off to Silicon Valley and grasping a few concepts and trying to graft them onto our culture will not work,” he says. “We have a system that works reasonably well but the US has a system which it is trying to change because the credit card companies are being completely raped. The very shed we are borrowing tools from is itself trying to change the tools.”

Gale believes there is scope for change although he argues that the Government should look at its own role.

“Ironically, one of the biggest areas for change is the role of the Inland Revenue, which tends to take a very uncompromising view. The Government should start with sorting its own back yard and its right as a preferred creditor.”

Abraham Ezekeil, an insolvency partner at niche factoring firm Wilde & Partners, thinks the three-year period is essential, although he sees no reason why bankrupts should not be allowed to hold non-financial positions during that time.

He says: “I do not personally have a problem with reducing the stigma in the sense that [bankruptcy] is not an amoral act. So why cannot the Government relax the roles that are non-financial?”

But he understands the Lord Chancellor's Department's concerns over undischarged bankrupts sitting as judges. “You have got to ensure a three-year freeze that allows the bankrupt to reflect,” he says. “If a judge is in the process himself, is he the best person to deal with that?”

And he is concerned by proposals to define bankrupts as culpable or responsible and treat them accordingly. “If the bankrupt sits there and runs up all these debts knowing he is going to go bottom up then I would say he is culpable,” he says. “I think it can be worked out from the conduct for the bankrupt itself but it is very difficult to address.”

Mark Andrews, senior partner and head of the insolvency group at Wilde Sapte, says the current bankruptcy policies should be left alone.

“A very large number of people cruise through bankruptcy. It is a protective regime and the ultimate purpose is to protect the debtor. It prevents him being pursued by creditors and then, after a period of time, you are completely discharged.”

Andrews believes that bankruptcy allows for the balance of interests between debtor and creditor to be maintained. “There are lots of different interests that are being balanced in the bankruptcy process. It may actually affect the way people think about the responsibilities involved in borrowing.”