The Government’s concerted efforts to promote its small business credentials have been much in evidence recently.
Tony Blair has announced a £50m fund to back entrepreneurs, and Lord Trotman has been appointed to review the needs of the country’s small- and medium-sized businesses.
More controversially, the Department of Trade and Industry (DTI) announced proposals last month aimed at reforming bankruptcy laws and changing attitudes to business failure.
The bankruptcy proposals would allow those deemed ‘responsible risk takers’, whose enterprises failed despite their best efforts, to keep up to £20,000 of their investment.
They would be free to use this money towards a new home or to invest in another business. ‘Responsible’ bankrupts might also be discharged after as little as six months.
A moratorium, during which creditors would be unable to pursue debts, while attempts were made to rescue struggling businesses, has also been suggested as part of the proposals.
Shifting the risk of failure
Unsecured creditors are the inevitable victims of business failure. Until now, they have been able to take some comfort from the fact that, no matter how much they are suffering, the proprietor of the bankrupt business is likely to be suffering more. Invariably, they have little warning of the impending business failure, and are often themselves pushed to the verge of insolvency as a result of the collapse.
An unintended consequence of the proposals may be the change in attitude to risk carried by the small- to medium-sized creditor.
Jaundiced creditors may also take the view, perhaps with some justification, that a business proprietor with a £20,000 safety net may be prepared to take greater risks with their money, and until closer to the end, than is currently the case.
The ‘reasonable’ entrepreneur
The DTI’s proposals draw a distinction between the ‘responsible risk taker’ and the ‘culpable’ bankrupt – who sets out to deceive creditors.
To be of any use to the bankrupt, a decision as to which category he falls into would have to be made early on in the bankruptcy process.
It is hard to imagine who would be in a position to make that sort of assessment. It often takes insolvency practitioners months, if not years, to work out why a business has failed, and whether anybody has been deceived.
In a small bankruptcy (where the net assets were £20,000 or less) any investigation that is even half-thorough could use up a significant portion of the net assets. It is likely, therefore, that only in the clearest cases would the proposal be of any practical use.
A possible alternative would be to require the bankrupt to discharge the onus of establishing that he had been a ‘responsible risk taker’. Who should make that decision, and what standard they should set are clearly matters for debate.
My own view is that it would be unduly complicated and expensive for this to involve any form of juridical determination. The official receiver or the responsible insolvency practitioner would seem the more obvious choice.
As far as the test is concerned, the common law and the Insolvency Act both impose minimum standards of skill and care upon directors. Surely similar subjective and objective tests to those set out in Section 214 (4) of the Insolvency Act 1986 could be applied to bankrupts who expect to benefit at the expense of their creditors.
