Stephen Baister examines the Enterprise Act and discovers a more liberal regime for personal insolvency

The majority of reforms relating to personal insolvency that are affected by the Enterprise Act 2003 (EA) come into force on 1 April 2004 (see, generally, the Insolvency (Amendment) Rules 2003, SI 2003/1730).

The EA radically reforms the provisions relating to the discharge of bankrupts.

Old section 279 of the Insolvency Act 1986 (IA) provided for automatic discharge from bankruptcy after three years (as a general rule), after two years (in 'summary administration' cases) and by court order (where there had been a prior bankruptcy in the past 15 years).

The new regime is considerably more liberal than even discharge following summary administration.

New section 279 (inserted by section 256 of the EA) provides for automatic discharge for the majority of bankrupts after one year or earlier if the official receiver files notice (see rule 6.214A Insolvency Rules 1986 as amended (IR)) that the affairs of the bankrupt do not require investigation, or that such investigation has been concluded, in which case the bankrupt is discharged when the notice is filed.

But there are safeguards.

First, the official receiver may still apply to suspend discharge, if a bankrupt fails to comply with his obligations, until the end of a specified period or the fulfilment of a specified condition.

Secondly, the trustee (where one has been appointed) or a creditor may, within 28 days of receiving notice from the official receiver of his intention to file a notice, inform the official receiver in writing that he objects to the proposed course of action (rule 6.214A(5) IR).

Reasons for the objection must be given.

The official receiver may reject the objection (he too must give reasons), but the trustee or creditor may appeal (rules 6.214A(5)(b) and 7.50 IR).

A third balancing safeguard is provided by the introduction of bankruptcy restrictions orders.

A person against whom an order is made will be precluded from acting as a receiver or manager of the property of a company on behalf of a debenture holder, but not as a court appointed receiver or manager (section 31 IA as amended by schedule 21 EA).

He may be liable for the criminal offences provided for by chapter VI of part IX IA (section 350(3A) IA as inserted).

In particular, he may be criminally liable for obtaining credit in excess of 250 without declaring his status as being the subject of an order (section 360(5) and (6) IA as inserted).

He is disqualified from acting as an insolvency practitioner (section 390(5) IA as inserted).

And he is subject to criminal liability if he acts as a director of a company or acts directly or indirectly or is concerned in the promotion, formation or management of a company without the permission of the court while subject to an order (section 11(1) of the Company Directors Disqualification Act 1986 (as amended)).

A person who is subject to a bankruptcy restriction order will also be precluded from holding certain public offices (for example, sitting as a justice of the peace, in parliament or in local government (see the amendments effected by sections 266-268 EA).

The application may be made by the secretary of state for trade and industry or the official receiver (paragraph I, schedule 4A IA).

It is made as an ordinary application in the bankruptcy, and must be supported by a report setting out the conduct relied on (rule 6.241 IR).

The application must be made before the end of one year, beginning with the commencement of the bankruptcy (namely, the making of a bankruptcy order) unless the discharge period has been suspended (paragraph 3 of schedule 4A).

Several grounds of conduct likely to lead to the making of an order are set out in paragraph 2(2) of the schedule, but these are not exclusive.

The making of an order is obligatory if the court reaches the conclusion that it is appropriate to make one having regard to the bankrupt's conduct (paragraph 2(1) of schedule 4A).

The order comes into force when it is made and may be for a period of between two and 15 years (paragraph 3 of schedule 4A).

The EA and the IR also allow the court to make interim bankruptcy restrictions orders (see rules 6.245-6.248 IR).

A bankrupt may enter into an undertaking that has the same effect as an order (paragraphs 7-9 of schedule 4A; see also rule 6.249 IR).

The parallel with proceedings under the Company Directors Disqualification Act 1986 is obvious, although not total, so it may be assumed that the jurisdiction will develop procedurally and jurisprudentially, at least to some extent, in a similar fashion to that relating to the disqualification of directors.

The other principal effect of the EA relates to the right of a trustee to seek an order for sale of the bankrupt's home.

Section 283A IA (inserted by section 261 EA) introduces important restrictions on the right of a trustee to realise the home of the bankrupt.

Under the new provision, where the bankrupt had an interest in a dwelling-house that was the sole or principal residence of the bankrupt, or the bankrupt's spouse or former spouse at the date of the bankruptcy order, the interest ceases to be comprised in the bankrupt's estate at the end of three years beginning with the date of the bankruptcy.

The interest then revests automatically in the bankrupt unless the trustee makes an application within the three-year period or takes other steps set out in the section.

The three-year period may be extended (section 283A(6)).

The new Act also aims to protect low-value property of the bankrupt.

New section 313A IA (inserted by section 261 EA) provides that the court must dismiss an application made in respect of a 'low value home'.

What will constitute a low value home is not yet clear.

Changes are made to income payment orders in the light of the new discharge provisions.

An application for an order must be made before discharge (section 310(1A)), although the order may continue after discharge but not for longer than three years (section 310(6) as amended).

The bankrupt is also allowed to enter into an income payments agreement with the official receiver or trustee (new section 310A).

Section 264 EA provides for a new type of individual voluntary arrangement, the so-called fast-track voluntary arrangement, introduced by insertion into the IA (sections 263A-263G).

The debtor must be an undischarged bankrupt, and the official receiver must be specified as nominee (section 263A).

Detailed provisions are to be found in chapter 7 (rules 5.35-5.50) IR.

The procedure differs from other forms of individual voluntary arrangement in that there is no meeting of creditors; creditors are simply invited to vote (rule 5.39), and there is no provision for proposing modifications (rule 5.39(1)(b)(iii)).

Registrar Stephen Baister sits at the Royal Courts of Justice