The serious consequences of bankruptcy
By David Fendt
David Fendt explores the case of Boris Becker and the process of bankruptcy
Many readers will be aware of the recent conviction of the former tennis player, Boris Becker. He was adjudged bankrupt in June 2017 and in April 2022 found guilty of various offences under the Insolvency Act 1986 (IA 1986) for concealing assets and removing property from his bankruptcy estate. Consequently, on 29 April, Becker was handed a prison sentence of two years and six months and it has since been reported that his criminal conviction could lead to him being deported upon release.
Duties and discharge
There are many duties to which the bankrupt is subject under the IA 1986 including, under s.333, to give to their Trustee in Bankruptcy (TiB) such information as to their affairs, attend on the TiB at such times and do all such other things as the TiB may require for the purposes of enabling them to carry out their functions under the IA 1986.
Importantly, s.333 expressly states the duty continues to apply after a bankrupt’s discharge. The question may therefore be raised as to what the relevance of discharge is, if these duties continue after discharge occurs.
A bankrupt is automatically discharged from bankruptcy after a year, unless that period is suspended under s.279 IA 1986, which could happen if the court is satisfied that the bankrupt has failed, or is failing, to comply with their obligations under the IA 1986.
Discharge releases individuals from most of the restrictions and consequences that are imposed on them following the making of a bankruptcy order.
Such restrictions include being prohibited from: acting as a director of a limited company; for sole traders, trading under a different name from the one in which the bankruptcy order was made without disclosing the bankruptcy; practising as a solicitor; and acting as a charity or pension trustee.
There are also financial consequences, including undischarged bankrupts may not obtain credit of more than £500 without disclosing their bankruptcy status.
Another consequence is that being undischarged leaves the bankrupt’s future income at risk. Income is not generally treated as a bankruptcy asset, however s.310 IA 1986 entitles a TiB to apply for an Income Payments Order (IPO) against an undischarged bankrupt if they consider the debtor has surplus income beyond the amount needed to satisfy their basic domestic needs. If granted, IPOs can last up to three years, during which time the bankrupt will be required to pay part of their income to the TiB.
Similarly, s.307 IA 1986 permits the TiB to claim assets which have been acquired by or devolved upon an undischarged bankrupt since the commencement of the bankruptcy (known as ‘after-acquired property’). If the bankrupt receives a large inheritance whilst undischarged, the TiB could claim that for the estate.
It is, therefore, in a bankrupt’s interest to ensure they comply with their duties to their TiB, because failing to do so could lead to their discharge date being suspended (sometimes indefinitely), prolonging the time within which (a) they will be subject to restrictions, and (b) a TiB could claim income and after-acquired property. Consequently, the concept of discharge is mainly for the benefit of the bankrupt.
In terms of the TiB, discharge has no effect on their statutory function under s.305 IA 1986 to “get in, realise and distribute the bankrupt’s estate”. Indeed, by the first anniversary of a bankruptcy, the TiB will usually have only just scratched the surface on a typical bankruptcy estate, and it is not uncommon for bankruptcies to remain open for many years whilst litigation is pursued by the TiB for the benefit of the debtor’s creditors.
Importantly, not only are a bankrupt’s duties to their TiB unaffected, but discharge does not alter the position regarding their assets, which is one of the many misunderstandings that debtors have of the bankruptcy process. For example, I was once contacted by a debtor who had recently been discharged from bankruptcy. I was acting for the debtor’s TiB. The debtor was requesting that an asset which had vested in my client upon his appointment as TiB be returned to them now the bankruptcy had ended. I responded by saying that discharge does not affect the workings of s.306 IA 1986, which provides for the automatic vesting of the bankrupt’s estate in a TiB immediately upon their appointment. I therefore informed the debtor that the asset would remain the TiB’s property, unless of course they were willing to purchase it from them.
Powers of compulsion
In addition to the bankrupt’s duties to their TiB, the IA 1986 grants the TiB wide powers to compel the production of information, not only from the bankrupt, but from their spouse, or any other person who may have information concerning the bankrupt’s dealings, affairs or property (s.366). In the first instance, the TiB would usually invite such parties to comply voluntarily. However, if those parties refuse to do so, the TiB can apply to the court for an order compelling that party to deliver up information, or attend a private examination at which they will be examined on oath. Failing to attend that hearing can result in a warrant being issued for the party’s arrest.
So far as a bankrupt is concerned, the power under s.366 can be exercised after discharge, and is a useful means of enforcing the bankrupt’s duty to cooperate under s.312.
In addition to a private examination, the bankrupt could also be required to attend a public examination under s.290 IA 1986. Only the Official Receiver (OR) (a civil servant within the Insolvency Service) can apply for a public examination, although they are required to make such an application if requested to do so by more than half of the bankrupt’s creditors. If the court allows a public examination to proceed, not only will it be attended by the OR, but any TiB appointed over the bankrupt’s estate will be entitled to participate, as will any creditor. If the bankrupt fails to attend a public examination, they are guilty of a contempt of court. As with s.366, public examinations can take place after discharge.
What happens if a bankrupt fails to comply with a TiB’s requests, or fails to deliver up assets falling within the bankruptcy estate? As we saw with Becker, the answer lies, ultimately, in criminal sanctions, in respect of which there are a number under the IA 1986. The main offences are found in s.353-360 and include the following:
· Failing to disclose to the TiB full details of all property falling within the bankruptcy estate, and any disposals made of that property (s.353(1)). Becker was convicted under this section for failing to disclose ownership of a property in Leiman, Germany, and 75,000 shares in a company called Breaking Data Corp.
· Concealing from the TiB any debt due from the bankrupt and any property falling within the estate, and failing to deliver up any such property (s.354(1)). Becker was convicted of this offence for concealing a loan of €825,000 from the Bank of Alpinum of Lichtenstein.
· Removing any property worth more than £1,000 from the bankruptcy estate (s.354(2)). Becker’s conviction under this section related to the removal of c.€427,000 from the estate.
A sobering reminder
One does not generally see references in the legal news (and certainly not the mainstream press) to criminal prosecutions for Insolvency Act offences. However, Becker’s conviction highlights that whilst, for some, bankruptcy may act as a release from their debts and a way of starting their financial life again, it can also have a long-lasting effect, with duties that continue long after their discharge. Similarly, failing to comply with those duties can have serious consequences, including – as Becker has found – a loss of liberty.
David Fendt is senior associate at Russell Cooke Russell-cooke.co.uk