Bounce Back Loans and Bankruptcy Restriction Undertakings & Orders

Introduction

We expect a significant rise in the number of people who are bankrupt being subjected to lengthy Bankruptcy Restriction Orders as a result of having taken out Bounce Back Loans during the pandemic and not paid them back. There is a crackdown on bounce back loan repayment at the moment.

For a person who is bankrupt this means that they could be unable to buy a house, or a car or run a business for up to 15 years after their bankruptcy formally comes to an end.

What is a Bankruptcy Restriction Order?

A Bankruptcy Restriction Order is an order which can be obtained by the Official Receiver at court against a person who is already bankrupt. It extends the time for which that person is subject to the important restrictions of bankruptcy.

These restrictions can be severe and include:-

• Not being able to borrow more than £500 without first telling the lender about your bankruptcy;
• Not being able to act as a director of a limited company without first obtaining the permission of the Court;
• Not being involved in the management or promotion of a limited company without the permission of the Court;
• Not being a trustee of a charity
• Being prohibited from working in various posts in education – such as a school governor, or in certain parts of the health industry or holding various posts in the health industry.

There are many more restrictions – a list of which can be found on the GOV.UK by searching the document Additional effects of a bankruptcy restrictions order or undertaking.

The reality is that the bankruptcy restrictions have far reaching consequences whatever the circumstances but particularly where a Bounce Back Loan is involved.  The Insolvency Service is taking a very tough line on Bounce Back Loans and applying for length Bankruptcy Restriction Orders where there is no Bounce Back Loan repayment or allegations of Bounce Back Loan fraud.

What is a Bankruptcy Restriction Undertaking?

A Bankruptcy Restriction Undertaking has the same effect as a Bankruptcy Restriction Order – the only difference is that you don’t go to court but agree to it voluntarily.

• It is a legally binding written agreement and takes effect when signed by both the bankrupt and the Official Receiver and is sent to the Court.
• In summary – you are asked to agree to a set of allegations against you and a period of time (often many years) during which you will be bound by the bankruptcy restrictions. https://www.legislation.gov.uk/ukpga/1986/45/schedule/4A/paragraph/7

Whether you are faced with a bankruptcy restrictions order or a bankruptcy restriction undertaking situation – it is vital to take legal advice to avoid what could be long lasting consequences of being subject to either of them.  Decisions made in haste or without legal advice can affect your future for many years.

Rise in Bounce Back Loan related Bankruptcy Restriction Orders and Undertakings

According to the Insolvency Service statistics, the numbers of bankruptcy restrictions order and bankruptcy restriction undertakings in previous years remained at a steady level. For example, in 2015/16 according to the Insolvency Service there were 432 cases recorded and the figures remained steady until 2020. The majority of these cases were by way of bankruptcy restriction undertakings.  These numbers then dropped off dramatically in the pandemic.

• However, it is expected that these numbers will increase significantly now the worst of the pandemic is over.
• The Insolvency Service is making significant efforts to crack down on what they see as Bounce Back Loan abuse – going after directors of companies with director disqualification orders and chasing down individuals with bankruptcy or bankruptcy restriction orders & undertakings. The Insolvency Service crackdown is driven by the government, who want individuals who took out loans when they should not have to be made bankrupt – and where they were already bankrupt, have the terms of the bankruptcy restrictions extended – often for many years.

The crackdown against those who took Bounce Back Loans has been well publicised with the Government directing that The Insolvency Service try and recover funds and penalise those who it considers abused the process.  

In a press release in August 2022, the Insolvency Service reported bankruptcy restrictions for a combined total of 48 years against 5 individuals who took Covid-19 financial support to which they were not entitled or misused the funds.

The Bankruptcy Restriction Order & Bankruptcy Restriction Undertaking process

The first formal contact you can expect is a letter from the Secretary of State setting out the allegations and inviting you to volunteer to undertake and be subject to the restrictions of bankruptcy for a period of time. 

• Early advice can be critical before responding as it is possible at that point to negotiate a shorter period or even see the allegations dropped.
• If you do nothing and do not agree to the undertaking, the next step is that the Secretary of State will issue an application at Court asking for an order that you be subjected to the bankruptcy restrictions.  Where a court application is made necessary, the Secretary of State will ask for a much longer period.
• The application to Court must be made before the end of the 12 month automatic discharge period and it must be supported by a report by the Official Receiver setting out the grounds for a bankruptcy restrictions order.  Notice of the hearing, with a copy of the application and report, must be served on the bankrupt at least 14 days before the hearing.
• The minimum period for which a bankruptcy restrictions order or bankruptcy restriction undertaking can be effective is 2 years and the maximum is 15 years as is set out in the Insolvency Act 1986 Sch 4A para 4(2).  Records show that those who are alleged to have fallen foul of Bounce Back Loans can expect to be penalised for a longer period, often 8 – 12 years.  

What does this mean for you?

What this means in reality is that whilst a person will be discharged from bankruptcy usually within 12 months (and therefore discharged from liability for the debts) they are effectively prevented from restarting their financial lives by perhaps going into business again or buying a house or even buying a car for many years after the bankruptcy is finished.

What does the court generally consider when making a Bankruptcy Restriction Order?

When deciding to make a bankruptcy restrictions order or accept a bankruptcy restriction undertaking, the court or the Secretary of State will look closely at the bankrupt’s conduct.

Normally this will be conduct leading to why the bankrupt was unable to pay their debts, but the court is entitled to take any conduct into account, either before or after the bankruptcy (see Insolvency Act 1986 Schedule 4A, para 2)

It is for this reason that the court can take in to account any Bounce Back Loans which the individual has taken out before being bankrupt.

The Insolvency Act 1986 lists a series of general behaviours on the part of the bankrupt that can also be taken into account by the court in deciding whether it is appropriate to make a Bankruptcy Restriction Order (Insolvency Act 1986 Schedule 4A, para 2(2)). These can include, among others:

• failing to keep records
• failing to produce records of that kind on demand by the Official Receiver or the trustee
• any anti-avoidance transaction set out under Insolvency Act 1986
• carrying on any gambling, rash or hazardous speculation or unreasonable extravagance
• neglect of business affairs

If the bankrupt was an undischarged bankrupt at any time during the period of six years ending with the date of the current bankruptcy, the court must take this fact into account Insolvency Act 1986 Schedule 4A, para 2(3)).

Whilst it isn’t really of much relevance now, it should be pointed out that a court cannot take into account any conduct of the bankrupt that took place before 1 April 2004 (as per Enterprise Act 2002 (Commencement No 4 and Transitional Provisions and Savings) Order 2003, SI 2003/2093, art 7).

What can you do to minimise the impact of a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking?

The Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking process is very similar to the director disqualification process, an area of the law we have been advising our clients on for the past 20 years.

Our experts can advise on the following areas

• Drafting the initial response to the Official Receiver. It is vital you don’t ignore the threat of a Bankruptcy Restriction Order.  Ignoring it and hoping it will go away is not a good option.  We can help you with the important initial response – which will then give you the time you need to properly consider all your options. The Official Receiver often tries to “hurry” people in to agreeing to a Bankruptcy Restriction Undertaking  in the hope that they can meet their own internal quotas quickly. Our team can remove that pressure and allow you to look at the allegations properly – and ask for the relevant documentary back up evidence if you need to see it.

• Defence of the Bankruptcy Restriction Order. If we consider that there are limited / no grounds for the claim against you, we can help defend the application. Often this can involve a detailed letter of response or even witness statement evidence and representation at court.

• Negotiation of a Bankruptcy Restriction Undertaking period. Where there do appear to be grounds to bring a Bankruptcy Restriction, we can still help by trying to reduce the period of the restrictions that the Insolvency Service is trying to impose. This can be done often by a detailed letter of response.  
• Negotiation of a Bankruptcy Restriction Undertaking allegations. It is important to try and amend by consent the wording of the allegations in the undertaking document itself – so that the way in which the allegations are written are less harmful to you. It must be remembered that this document might be referred to in the future. The less harmful they are, the better.  

• Helping protect your future career prospects. It is vital that anyone facing a Bankruptcy Restrictions Order or Bankruptcy Restriction Undertaking understands the long-term impact on their career prospects.  For example – it will prohibit you from being a director of a company or being involved in the management or promotion of a company. Whilst this might not seem an issue at the present time – circumstances can change and if you are offered an opportunity in the future to be a director – you might have prohibited yourself from the ability to apply to court to allow this to happen.
• For example – anyone subject to a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking can apply to court for permission to become a director despite the extended period of restrictions pursuant to section 17 of the Company Director Disqualification Act 1986. However – this is only likely to succeed if the period of the restrictions is less than 6 years. Therefore, if you have agreed in haste to a longer period, you are likely limiting your ability to be a director should your career circumstances change.  But taking advice early means we can negotiate any period of the Bankruptcy Restriction Undertaking down – and thus allow you more options moving forward. We do a lot of this type of work with director disqualification undertakings as well – and are very skilled in these types of negotiations. Investing some time now to get the wording and period of the Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking right  can make a huge difference moving forward.  

• Helping protect your matrimonial home. We act for a lot of bankrupts or those worried about bankruptcy who own a home or jointly own a home. Despite the worrying situation, there are things you can do to minimise the chances of losing your home.

• Individual Voluntary Arrangement (IVA) advice.

How long is a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking?

A Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking can last between two to fifteen years. The period will often depend upon the seriousness of the alleged misconduct in the original bankruptcy itself. (Insolvency Act 1986 Sch 4A para 4(2)).

Where the bankrupt took out a Bounce Back Loan and then made themselves bankrupt – Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking appear to be being imposed for longer periods of time.

What happens if you break the restrictions imposed by the Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking?

• It is a criminal offence not to comply with the terms of a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking. If a person is subject to a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking and breaks their restrictions, they may be prosecuted, and may be fined, imprisoned or both (Insolvency Act 1986 s350)
• You can be prosecuted and further Bankruptcy Order Restrictions put in place.
• If you take part in the management of a company without court permission you can be liable for the company debts (CDDA 1986 s 15) and may go to prison
• If you instruct someone else in a company to do things – you can again be held liable for company debts  (CDDA 1986 s 15) or go and may go prison.

What if the original bankruptcy is annulled?

If your original bankruptcy order is cancelled (commonly called annulled), because it should not have been made, the Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking will be annulled.

Other points to note

• Anyone who has agreed to a Bankruptcy Restrictions Order or Bankruptcy Restriction Undertaking will be listed on public registers, for example, the Individual Insolvency Register
• further information about the Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking will be displayed on the Bankruptcy Restrictions Search Facility for 3 months – after this time the public may still request details of the misconduct
• may appear in a press release such as the regular press statements form the Government website on bounce back loan abuse

• People can complain about people they think are breaching the terms of their Bankruptcy Restriction Undertaking. For details of how to complain about an individual who is breaching the terms of a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking you can visit GOV.UK and search ‘complain about someone who’s bankrupt’.

• If you receive a Bankruptcy Restriction Order or agree to a Bankruptcy Restriction Undertaking – your creditors will be made aware of it

• A Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking will come to an end on the date specified in the actual document itself (Insolvency Act 1986 Sch 4A para4 (1)).

Interim Bankruptcy Restriction Order

Where the bankrupt’s alleged misconduct has been so serious so as to possibly put the public at risk, the Court can make an Interim Bankruptcy Restrictions Order (IBRO) pending a full hearing of an application for a BRO.  https://www.legislation.gov.uk/ukpga/1986/45/schedule/4A/paragraph/5

The process provides that the bankrupt is provided with 2 days’ notice of the hearing and if the bankrupt believes the IBRO was wrong then the bankrupt may make an application that it be removed.

Let us help you today

At FWJ we regularly advise

• Individuals and directors facing Bounce Back Loan related claims
• Individuals facing Bankruptcy Restriction Order claims and dealing with Undertakings
• Bankruptcy Annulments, Bankruptcy Defence, protecting your home and dealing with enquiries from the Insolvency Service, HMRC or the Trustee in Bankruptcy
• Applying to reduce the period of bankruptcy restrictions.
• Helping you become a director of a company despite a bankruptcy restriction order or bankruptcy restriction undertaking.

Whatever the nature of your enquiry, contact out expert team today. Or speak to Stephen Downie for immediate help

One of the most astute appointments I have ever made.

A client of the firm

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Recent examples of Bankruptcy Restriction Orders & Bankruptcy Restriction Undertakings involving Bounce Back Loans

Set out below are some recent examples of people who have been subject to Bankruptcy Restrictions Orders or Bankruptcy Restriction Undertakings as published by the Government Insolvency Service. As can be seen, the periods are high. Expert advice from Francis Wilks & Jones can help reduce this.

Case 1 – Individual obtaining £15,000 Bounce Back Loan – 7 years  Bankruptcy Restriction Undertaking

Not being fully entitled obtaining a Bounce Back Loan for £15,000 and then topping up with an additional £1,250 not using it for the benefit of the business and having other significant liabilities.  Having been discharged from bankruptcy in September 2021 as a result of signing the undertaking the individual will remain subject to bankruptcy restrictions until August 2029.

Case 2 – Obtained Bounce Back Loan of £50,000 – 11 years  Bankruptcy Restriction Undertaking

For applying for the Bounce Back Loan not being eligible for it and then not using it for its purpose being the economic benefit of the business.  The individual applied for bankruptcy and will now in effect be subject to bankruptcy restrictions until August 2033.

Case 3 – Bounce Back Loan of £47,500 – 10 years Bankruptcy Restriction Undertaking

Knowingly obtaining a Bounce Back Loan when not financially eligible later filing for bankruptcy with debts of only £75,000 overall will now, as a result of signing the undertaking, not be released from the restrictions of bankruptcy until August 2033.

Case 4 – Bounce Back Loan for £50,000 – 12 years Bankruptcy Restriction Undertaking

Individual obtained a Bounce Back Loan knowing he was not entitled to it and shortly after spending the money applied for bankruptcy.

Case 5 – Bounce Back Loan for £25,000 – 10 years Bankruptcy Restriction Undertaking

Obtained a Bounce Back Loan totalling £25,000 by misrepresenting business turnover.  No evidence was available as to how the money was used to satisfy that the benefit of it had been used for the business.

Case 6 – Bounce Back Loan £18,000 with a top up £8,000 – 9 years Bankruptcy Restriction Undertaking

By providing inaccurate information about turnover, individual obtained a Bounce Back Loan and failed to use it for the benefit of the business.  The individual signed an undertaking on the 22 September 2022 extending the period under which he is subject to bankruptcy restrictions until 2031.

Case 7 – Bounce Back Loan for £50,000 – 10 years Bankruptcy Restriction Undertaking

Obtaining a Bounce Back Loan for £50,000 to which the individual was not fully entitled effectively extending his time under which he will be under bankruptcy restrictions until August 2032 having filed for bankruptcy in March 2022.

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Get in touch today

Taking legal advice is vital to avoid a mistake potentially leaving yourself open to being subject to restrictions for up to a maximum of 15 years despite having been discharged from bankruptcy.  We may be able to reduce the period of restriction or even avoid a restriction order at all.

With the maximum term of a Bankruptcy Restriction Order being 15 years the idea and benefits of being in and out of bankruptcy within 12 months suddenly fall away but instead being faced with the prospect of not being able to move on with their everyday lives for many more years to come. 

Whatever the nature of your enquiry, contact out expert team today. Or contact Stephen Downie direct for immediate help

I was greatly impressed with FWJ. Their commercial approach combined with specialist knowledge and tactical expertise was pivotal in the claim being dropped and costs recovered in full.

A client of the firm