Insolvency (Hansard, 13 July 1999)

§ Dr. Howells

We have been concerned for some time that for too many people the fear of failure stifles innovation and enterprise. The Insolvency Service was 153W therefore asked to take a fresh look at attitudes to business failures, balancing the needs of bankrupts with the rights of their creditors.

A small number of bankrupts, an estimated 7–12 per cent., may be deemed to be culpable, including those who deliberately set out to mislead and deceive others. But for those who fail for reasons beyond their control, despite their best efforts to save their businesses, we need a new attitude.

The Insolvency Service's study suggests that the bankruptcy laws could be changed to allow people who have put money into their business to hold on to enough to cover the deposit for a new home on a pound-for-pound basis matching their investment up to a maximum limit of, say, between £10,000 and £20,000. This concession would not apply to culpable bankrupts.

We now plan to consult on this proposal and on the possibility of differentiating between bankrupts who have been simply unfortunate and those whose behaviour has been unacceptable. The Insolvency Service study suggests that culpable bankrupts could face disqualification from between three and five years, with exceptionally bad cases being extended to fifteen years. On the other hand, responsible risk-takers could be discharged earlier than at present. Six months instead of three years is suggested.

As well as consulting on these ideas, we hope to introduce some important but uncontroversial amendments to insolvency law as soon as possible, including the possibility of a rescue period for companies in trouble. Building on these ideas, the DTI and the Treasury are also carrying out a joint review of Company Rescue Mechanisms.

As part of the Insolvency Service's study, Official Receivers carried out a survey of business failures during January and February 1999. They found that: out of 1,412 cases, less than 3 per cent. of failures were attributable to fraud; half of all businesses had traded for less than 4 years, 32 per cent. failed within their first 2 years; 33 per cent. of directors and bankrupts involved were aged between 35 and 45; the most common reason for insolvency give was the businesses' loss of market or its main customer (19 per cent.).

The Study concluded that a linkage between investment in a business and keeping a limited amount of money to cover a mortgage deposit could have a number of benefits. It could: remove a real disincentive to set up in business; encourage better capitalisation of new businesses. A major cause of failure of businesses in their first 3 years is lack of capital; provide an incentive to better record keeping (it claimed to have invested would have to be substantiated). Poor record keeping is another common factor in many bankruptcies.