Trade and Industry Secretary Stephen Byers today unveiled proposals to encourage more people to set up their own businesses when he published a consultation paper on changes to the laws surrounding personal bankruptcy and proposed a crackdown on those guilty of

 Bankruptcy law currently makes no distinction between those who fail for reasons beyond their control despite their best efforts to save their business and those who deliberately set out to mislead and deceive. Currently, the vast majority lose their personal wealth and are automatically disqualified from being a director of a limited company and suffer a number of other restrictions for a period of up to three years.

 "Bankruptcy - A Fresh Start" - proposes:

 * Making a distinction between the two groups so that the vast majority of honest bankrupts do not continue to be stigmatised through association with the dishonest;

 * a much earlier discharge from bankruptcy - within six months of the Bankruptcy Order - for the large majority whose failure is honest;

 * a relaxation of the rules on exemption of personal property for those who have invested capital in their business;

 * that the small minority of those guilty of misconduct would be subject to the full rigour of a new, tougher and more restrictive regime and could be disqualified for up to 15 years; and

 * possible financial counselling for bankrupts where appropriate.

 Mr Byers said:

 "We must remove the stigma surrounding bankruptcy. Too many people are unwilling to set up their own business because they are worried about the consequences of failure.

 "We must change attitudes. Most businesses fail because of bad luck or a lack of cash. But for too long such people have been tarred with the same brush as the reckless minority whose company collapses because of fraudulent activity.

 "These measures will mean those "responsible risk-takers" will be discharged earlier from bankruptcy while at the same time protecting creditors and imposing tougher penalties on the reckless few.

 "Our proposals represent a radical reappraisal of the impact of financial failure on individuals. I hope that it will stimulate real debate about these issues, which are central to the development of a
 culture of responsible risk-taking."

 During January and February 1999, the Official Receivers carried out a survey of business failures for the Insolvency Service.

 Out of 1412 cases where it had been possible to identify the main cause of failure, less than 2% were attributable to fraud. Half of the businesses in question had traded for less than four years, with 32% failing within the first two years. 33% of the Directors of the
 bankruptcies involved were aged between 35 and 45.

 Notes to Editors

 1. "Bankruptcy - A Fresh Start" is intended to further the development of an entrepreneurial, business-friendly culture in the UK. This document concentrates on the law relating to individual
 insolvency and the way in which it deals with financial failure. The Insolvency Bill currently before Parliament and The DTI/Treasury Review of Company Rescue Mechanisms form the other parts of the Department's review of insolvency law.

 2. Press copies of the consultation document - "Bankruptcy - A Fresh Start" are available from Steven Raulston, DTI Newsroom, on 020 7215 5614. Public copies are available from Maureen Charles, The Insolvency Service, on 020 7291 6740. The document is also available
 on the Insolvency Service website at

 7. Responses to the consultation are requested by 30 June 2000.

 Background Note


 The consultation document proposes changes in five areas of  individual insolvency law:

 * An earlier discharge period for the majority of bankrupts;

 * post-bankruptcy individual voluntary arrangements administered by either trustees or the Official Receiver;

 * the introduction of restriction orders for dishonest or irresponsible debtors;

 * possible financial counselling for bankrupts, where appropriate; and

 * the exemption (under tightly defined circumstances) of a fixed amount of any equity in a bankrupt's home from the claims of the trustee.

 Discharge Period

 The experience of Official Receivers is that there are relatively few individuals who go bankrupt because of recklessness or dishonesty.  More common reasons are lack of capital, a lack of financial  management skills, bad debts or misfortune such as loss of employment. In recognition of that fact and in order to rehabilitate honest bankrupts as quickly as possible, the document proposes that  the majority of bankrupts should be discharged within six months of the bankruptcy order. This would not affect the ability of a trustee to claim any assets that the bankrupt had at the time of the order  and the trustee would be able to apply to the court to prevent an  automatic discharge where the bankrupt did not cooperate.

 Individual Voluntary Arrangements

 Where bankrupts can make a material contribution towards paying their debts they should continue to do so. The existing provision for bankrupts to be ordered to make payments to their trustee would remain. However, the document introduces the possibility of a new option, that of post-bankruptcy individual voluntary arrangements (IVAs) supervised by the Official Receiver (at present these must be set up and supervised by private sector practitioners). Such IVAs would be of benefit where the bankrupt wished to apply future income against the debts in the bankruptcy. In the United States Chapter 13 bankruptcies (the nearest equivalent to an IVA) are administered by local standing trustees who, because they deal with all cases in their district, can reduce costs and increase returns to creditors. Allowing the Official Receiver to do this work on a centralised basis would enable similar substantial economies of scale to be generated for the benefit of creditors.

 Tougher Regime for Dishonest Bankrupts

 The document proposes that the small minority of dishonest and irresponsible bankrupts should be the subject of a new, tougher regime analogous to Company Directors Disqualification. This would be achieved by the Official Receiver applying to the court for a restriction order against the bankrupt, for up to 15 years, so that the individual would be

 * Prohibited from acting as a company director or from taking part in the management of a limited company;

 * prohibited from obtaining credit over a certain sum which is not  subsequently repaid without disclosing his status; and

 * prohibited from trading in a name other than that in which he was  made bankrupt, unless he discloses that name.

 Financial Counselling

 The document also raises the question of whether financial counselling should be available to bankrupts. The question is asked whether, if such counselling should be provided, should it be
 compulsory for all bankrupts or should it be targeted to those most likely to need or benefit from it, for example if they wish to start another business. This would go a long way to helping those
 bankrupts where the lack of financial management skills has been identified as a material cause of their insolvency. There are many potential providers of such advice, one of which could be the Small Business Service.

 Home Equity Exemption

 A further proposal contained in the document is that of an exemption in relation to any equity in the bankrupt's home. This exemption would not be available to bankrupts made the subject of a restriction order. What is proposed is that, to a limit of say #20,000, there should be a pound for pound exemption in relation to any equity in the family home for a bankrupt who can prove he or she introduced capital into a business which was used appropriately.