My Lords, I shall speak also to Amendments 28ZKB, 28ZKC, 28ZKD and 28ZKE which are in my name and that of my noble friend Lady Hayter. I should make it clear that we on this side support the new bankruptcy regime and welcome what is set out in the Bill to try to make progress in this important area, but we would like to suggest some improvements. In so doing, I declare an interest as chair of StepChange, the leading debt advice charity.
We are concerned that the proposed changes to the bankruptcy process, wherein a court-based process is being replaced with an adjudicator, may lead to individuals and sole traders being declared bankrupt when there is actually an alternative debt solution which would be more appropriate for their situation and would have less severe consequences for the debtor. Such miscarriages of justice could lead to the debtor unnecessarily losing assets, including their house, or unnecessarily closing their business, and prevent them getting bank finance for 12 months or longer.
Particularly at this time, we need to be very careful about how the debt relief processes work in practice. Under the new process, as I understand it, a debtor will make an application to an adjudicator. The adjudicator will then determine the application based on two criteria: the jurisdiction criteria based on the
debtor’s centre of main interest and whether the debtor is unable to pay their debts. Establishing the centre of main interest is important due to the recent development of bankruptcy tourism, where individuals from states with more onerous bankruptcy regimes, such as Germany or the Republic of Ireland, petition for bankruptcy in the UK in order to be discharged from their debts after 12 months. If the adjudicator is satisfied as to both criteria the order will be made. If the adjudicator is not satisfied that the criteria have been met, they cannot make the order.
The adjudicator will be able to request further information from the debtor, and if they receive information from third parties—for example, a spouse writing to the adjudicator to claim that the debtor was seeking to go bankrupt in order to avoid matrimonial claims—they would be able to decide whether or not to take this information into account. If the adjudicator is satisfied that the criteria have been met after receiving further information, the order will then be made. If the adjudicator rejects the application, the debtor is able to request a review of their file. If, after review, the application is once again rejected, the debtor can appeal to court.
We need to consider the scale of the problems being faced by people experiencing unmanageable debt. We believe that some 6.2 million households are either in, or are close to having, significant debt problems. Bankruptcy is only one of three formal debt solutions, each of which involves the court, a licensed insolvency practitioner or the Civil Service equivalent. These include debt relief orders, individual voluntary arrangements and county court proceedings. However, many of StepChange’s clients prefer to reach a voluntary arrangement which we broker with their creditors and enter into a debt management plan under which they pay off their debts through us over a number of years. Last year, we returned some £300 million to creditors, and we are on target to counsel some 500,000 individuals this year.
At present, when a bankruptcy application is made to the court, either staff at the filing stage or the district judges or registrars at the hearing have an opportunity to point the debtor towards proper debt advice, and many discover that an alternative debt remedy is more appropriate for them. This may not only prevent miscarriages of justice, as I have already mentioned, but may also save the court, and particularly the official receiver, considerable unnecessary work.
However, we understand that under the new proposals, an adjudicator will not have the discretion to refer a debtor to seek advice, and will have no choice but to process all eligible bankruptcy applications without considering whether an individual may be better off using an alternative debt solution.
The Government propose to deal with this concern in the new adjudication process by assuming that debtors will take independent debt advice before making their bankruptcy applications. However, in practice we know that many of our clients can stall over doing something about their debts for up to a year, until something such as illness or reduced earnings tips them over the edge, so to speak. We are therefore very concerned that the procedures to be introduced do not
place sufficient stress on the need for debtors to seek independent free advice, with the consequence that the new system will be much less effective at preventing inappropriate bankruptcy applications.
Encouraging debtors to take appropriate debt advice prior to submitting an application will not necessarily ensure that they have all the information that they need in order to make an informed decision on whether bankruptcy is the best solution. Debtors contemplating bankruptcy are understandably under enormous financial and emotional stress and may be unaware of the sources of potential advice: my charity is the leading purveyor of free independent advice, but there are others, including Citizens Advice, and there are also fee-charging operations including, of course, insolvency practitioners.
Furthermore, while debtors may be aware of the gravity of bankruptcy and its implications, they may be unaware that they may qualify for an alternative debt remedy that would cost less, or be free, ensure that they maintain their homes and possessions, and have far less grave implications for their future relationship to credit.
I understand that in Scotland, where we operate as a separate charity, consideration is currently being given to making debt advice mandatory within the insolvency processes there, and I applaud that. I urge the Government to consider whether this would be a sensible step here. It would be possible to legislate to require a debtor to confirm that they have received independent expert advice before making their application. If that is too radical a step at this stage—and I accept that it may be—I urge the Government to think about emulating the Scottish Government to the extent of at least reviewing the whole debt arrangements system before too long. We have a major problem looming, as too many people are bumping along while prices rise, and with the spectre of a return to “normal” interest rates possibly the trigger for a whole range of new problems.
Amendments 28KA and 28KD give the adjudicator the opportunity to stay proceedings and work with debtors while they seek independent debt advice; or enable debtors to withdraw their application during the 10-working day postponement period, for example if they are advised during that period that bankruptcy is not the most appropriate debt solution.
When he responds, will the Minister clarify whether the Government will consider ensuring that the online forms to be used in this new system will require debtors to confirm that they have sought appropriate debt advice from the independent and free debt advice charities? Will he also confirm whether there will be an exhortation for the debtor to work with the debt advice organisations such as StepChange, Citizens Advice and IPs to ensure that the advice suggested or required on the online forms captures the best possible options and language for the debtor? Will the Minister also confirm whether discussions are being held with the Scottish Government, particularly the Accountant in Bankruptcy up there whose scheme is very similar to that proposed?
Amendment 28ZKE reflects our concern that discretion for the adjudicator to seek guidance from the court has not been included in the Bill. If the adjudicator were given the discretion to ask the court for directions if she is not satisfied as to whether the criteria for making an order have been fulfilled, this could avoid the review and appeal process, as the court could provide an answer or guidance on complex issues, including cases where a petition may have been presented for an ulterior motive, such as to avoid matrimonial claims.
At present it is up to the debtor to appeal to the court if, for example, the adjudicator rejects their application, and in these circumstances the debtor may face the prospect of two fees—not a palatable prospect if the debtor is out of funds. If the adjudicator had the ability to seek guidance from the courts, we think that many cases may be resolved without the need for the debtor to apply to the court directly and incur additional fees.
Without the ability to seek guidance from the court, the process will also be unnecessarily prolonged and may expose the debtor to additional perils. In the interim period between the initial application for the order and the last resort of an appeal to court, there will be no moratorium from creditor action and debtors could still be pursued by their creditors, with all of the associated stress and anxiety that this can cause. In our view, the drawn-out process could be avoided if the adjudicator could seek guidance from the court in the first instance.
We understand that the Government have discussed the issue with insolvency practitioners and they take the view that it is more important to have a simple system shorn of subjectivity and to a large extent kept out of the courts. Those are admirable aspirations, but when he comes to respond, will the Minister honestly defend a situation where simplicity seems to be trumping individual rights, where difficult judgment calls are eschewed in place of a box-ticking process and where people’s rights to be heard in court are being threatened? I would be willing to meet the Minister and his team if that would be helpful because I hope that we can find accommodation on these matters. I beg to move.
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