The Explanatory note to this bill contains a detailed and clear summary of the provisions, their background and their implications. This Bills Digest is based on that explanatory note.

Commencement

The Bill provides that most of the Bill comes into force on the day after the date on which it receives the Royal assent. However, Clause 8, which relates to fraudulent debts, comes into force earlier on 10 March 2009 (Clause 2).

Insolvent gifts

The Bill changes the rules for insolvent gifts. These rules are one of four sets of rules entitling the Official Assignee (OA) to cancel certain things done by a debtor before bankruptcy that reduce the assets available to creditors (for example, giving money to a spouse or family trust).

"The law in section 54 of the Insolvency Act 1967 (the 1967 Act) was that:

• "gifts within 2 years before being adjudged bankrupt were “voidable as against the OA”, which means that the OA could cancel them if he or she wished without having to prove whether the debtor could pay his or her debts at the time or not; and
• "gifts within 2 to 5 years before being adjudged bankrupt were voidable as against the OA, unless the party claiming under the gift proved that the donor was able to pay all his debts without the aid of the property comprised in the gift. This means that the onus of proving that the debtor was solvent when he or she made the gift fell on the recipient of the gift.

"The law in section 204 of the 2006 Act is that a gift by a bankrupt to another person may be cancelled by the OA if:

• "the bankrupt made the gift within 5 years immediately before adjudication; and
• "the bankrupt was unable to pay his or her due debts immediately after making the gift. However, the effect of section 205 of the 2006 Act is that the onus of proving that the debtor was solvent when he or she made the gift falls on the recipient of the gift if the gift was made within 2 years, and on the OA if the gift was made between 2 and 5 years before adjudication" [3]   .

The Bill provides that:

• "gifts within 2 years of adjudication may again be cancelled entirely at the OA's discretion";
• "for gifts between 2 and 5 years, the onus of proof will no longer lie with the OA (to prove that the debtor was unable to pay his or her debts (the solvency test)). It will shift to the recipient of the gift";
• "the time at which the debtor must be proven to be able to satisfy the solvency test will shift. Instead of “immediately after making the gift”, it becomes either then, or any time after that up to adjudication. This means that if, for example, the debtor wins Lotto between making an insolvent gift and becoming bankrupt, the debtor may be able to avoid the gift being cancelled";
• "when proving solvency, account will again be taken of debts that have not yet fallen due, for example, contingent liabilities. The 2006 Act provides that the solvency test looks only at due debts" (Part 1, Clause 4, substituting Sections 204 and 205 of the Insolvency Act 2006; Clause 5 and 6, amending Sections 208 and 212 of the Insolvency Act 2006).

No asset procedure (NAP)

The Bill provides that the OA may extend the time before a debtor is automatically discharged from the NAP if satisfied that the 12-month period between admission to the NAP and discharge from it should be extended for the purpose of properly considering whether the debtor's participation in the NAP should be terminated. The Bill also stops fraudulent debts being cancelled when a debtor is discharged from the NAP. These are:

• any debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party;
• any debt or liability for which the bankrupt has obtained forbearance through fraud to which the bankrupt was a party. This applies, for example, if a debtor has induced a person to write off a debt through fraud (Part 1, Clause 7, amending Section 377 of the Insolvency Act 2006 by adding new subsections (2)-(7); Clause 8, inserting new Section 377A into the Insolvency Act 2006).

Comment

Section 377(2) of the 2006 Act provides that on discharge from the NAP, the debtor's debts that became unenforceable on the debtor's entry to the NAP are cancelled, and the debtor is not liable to repay any part of the debts, including any penalties and interest that may have accrued. The amendments in clause 8 exempt from this rule the same 2 classes of fraudulent debts that are protected from cancellation in bankruptcy under section 304(2)(a) and (b) of the 2006 Act.

Retention of information on register

The Bill provides for the retention of information on the public register for four years after a person is discharged from the NAP. There will be permanent retention of information after a person has two or more insolvency event (i.e. bankruptcies and admission to hte NAP) (Part 1, Clauses 9-11, amending Sections 448 and 449 of the Insolvency Act 2006 and inserting new Section 449A into the Insolvency Act 2006).

Transitional provisions: insolvent gifts and debt cancellation

The Bill provides that the Insolvency Act 2006 applies to any bankruptcy that is commenced before the date on which this Bill receives the Royal assent as if Clauses 4-6 (i.e. the provisions relating to insolvent gifts described above) had not been enacted. In relation to debts. Any debt cancelled under Section 377(2) of the Insolvency Act 2006 but later revived when New Section 377A (see Clause 8 of the Bill) is enacted is to be treated as if the debt had not been cancelled and " ... in particular, the debtor is liable to repay any part of the debt, including any penalties and interest that may have accrued during the period when the debt was cancelled. The Bill also provides that any proceedings for enforcement of the debt may be commenced and continued after the enactment of New Section 377A as if the debt had never been cancelled (Part 2, Clauses 14 and 15).

Comment

"[Clause 15 of this Bill] deals with fraudulent debts that are cancelled, on discharge from the NAP under the 2006 Act, between 10 March 2009 and the day after Royal assent, but that are then revived at Royal assent by the retrospective commencement of [Clause 8 of this Bill] as at 10 March 2009. [Clause 15 of this Bill] ensures that the debts must be treated in the period after Royal assent as if they had never been cancelled" [4]   .

Transitional provisions: public register

"The Bill provides that the amendments about the new 4-year period for retention of the NAP details on the public register do not apply to people who are admitted to the NAP before the day after Royal assent. The details of these people will be taken off the public register after discharge from the NAP. They will only reappear on the public register if they subsequently become bankrupt" [5]   . However, " ... [the Bill] provides that details will be kept on the public register indefinitely when a person has had multiple bankruptcy events, no matter whether the events took place before or after Royal assent. If a debtor has had their details removed from the public register, then the OA must put the details back if the debtor has had multiple bankruptcy events" [6]   (Part 2, Clauses 16 and 17).

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