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Government proposes making it easier to wind up companies where there is no dispute


Creditors could be able to apply to wind up insolvent debtors without having to go to court, the Government has said.

The proposal forms part of a consultation to streamline the system for bankruptcy and company winding-up petitions where there is no dispute between the parties.

Moving away from the current court-based insolvency system has the potential to save the taxpayer millions of pounds, the Government said.

Restructuring specialist Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said the proposals pointed to "significant changes" to the way in which companies could be wound up.

"These changes are procedural but have wider effects, most obviously in terms of enforcement and termination triggers in legal documents - credit teams, lenders, contract teams and restructuring professionals need to take note," he said.

Business Minister Ed Davey said that the courts had an important role to play in bankruptcy and winding-up applications where there is a "real dispute" between parties. However, a more streamlined route was needed in the majority of cases where there was no disagreement.

"These reforms should help to deliver better outcomes, reduce unnecessary burdens on creditors and debtors and bring substantial savings for the taxpayer," he said.

A creditor of an insolvent company can currently apply to a court to wind up that company's affairs. Petitions for personal bankruptcy made by either a creditor or debtor, must also be made to court.

In its consultation, the Government said that only around 5% of debtors chose to defend bankruptcy petitions brought by creditors in court. "In all but these few cases, there is therefore no dispute for a court to arbitrate," it said.

If approved, the plans would introduce an electronic application system applicable as a first step in almost all cases. Applications would be directed to a specially-appointed adjudicator with an office based at the Insolvency service, which is part of the Department for Business, Innovation and Skills (BIS).

The adjudicator would be able to decide the outcome of each application where there is no disagreement between the parties, allowing courts to focus on disputes that require a judicial settlement, the Government said.

The proposals would also introduce a mandatory pre-action process to encourage debtors and creditors to reach agreement on the way forward before a petition was issued.

However, restructuring specialist Lomax warned that these additional procedures could "complicate matters".

"Reform which simplified process, saves time and cost and frees up court resource for genuine disputes is welcome. However, it is not at all clear that the proposals will achieve these aims. They could complicate matters with an additional layer of costly process, with the courts remaining the default forum in most cases," he said.

He warned that the "anecdotal" statistic relating to the number of debtors who chose to defend their bankruptcy petition in court was misleading, as many bankruptcy settlements were the result of complex negotiations between the parties before the dispute reached a final court hearing.

"For reform to be truly effective, legislators need to look behind the headline statistics at how such matters are dealt with by the parties in practice. If these proposals are to achieve their aims, they need to take on board the lessons learned from similar, although more wide-ranging, changes introduced as part of the civil justice reforms in 1999 – reforms which had similar objectives and which have had mixed success," he said.

Justice Minister Jonathan Djangoly said that the review was part of the Government's wider work to "use the courts as a last rather than first resort".

"We want to make sure the right cases are dealt with in the right ways and this means in some situations, like some debt cases, they should not need to go before the courts at all," he said.

The Government insisted that "safeguards for debtors" would be built into the new process. Debtors would be able to respond to a creditor's application, review the adjudicator's decision or refer a dispute to court. Debtors would also be able to appeal the adjudicator's decision in court, it said.

Although creditors would still be able to instigate proceedings against their debtors, they would first have to take all "reasonable steps" to resolve the debt problem, the Government said. Debtors would also be encouraged to seek independent debt advice.

Individual debtors who wished to apply for bankruptcy for themselves would have the choice of submitting an electronic or a paper application, and would be able to pay the application fee in instalments.

The consultation, which will only apply to applications made in England and Wales, will close on 31 January 2012.

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