New online debtors bankruptcy application procedure

The Order inserts a new section 398A into the Insolvency Act 1986 and provides for the Secretary of State (SOS) to appoint individuals to the new office of adjudicator and to appoint officers of the SOS's department to assist the adjudicators.

What does it do?

Since 6 April 2016 when the Order came into effect, a debtor can no longer petition the court to be made bankrupt. Instead, a debtor will need to apply online to an adjudicator at the Land Registry. The adjudicator must then apply to the Chief Land Registrar for the bankruptcy application to be registered in the register of pending actions as soon as reasonably practicable.

The debtor may apply to the Land Registry's Land Charges Department for cancellation of the pending action entry where the adjudicator:

1. refuses to make a bankruptcy order
2. upholds a refusal to make a bankruptcy order after the debtor asks for a review of the decision or
3. the debtor appeals to the court, which upholds the adjudicator's refusal to make a bankruptcy order.

The Land Registry has created a new form K11(ADJ) for these cancellation applications which should be completed by the debtor personally and submitted with a copy of the adjudicator's letter of refusal, letter of confirmation of refusal, or letter confirming the court's decision (as appropriate). The adjudicator will have a unique reference number and there will be a unique land charges reference number for pending actions which should both be inserted in the "particulars of entry" section of the form. Both of these numbers should appear in the adjudicator's letter.

Practice Guide 63 has also been amended to reflect the changes to the bankruptcy process in these circumstances and to clarify the procedure for cancelling bankruptcy entries both at the Land Charges Department and at the Land Registry. Please click here to read Practice Guide 63.

So what does this mean to us?

While it does not affect creditors as they still have to petition the court for someone to be made bankrupt, it can affect landlords, employers, commercial contracting parties and lenders to name a few.

All contracts that refer to an ‘act of insolvency’ should be reviewed, and those involved in negotiating draft agreements, leases, mortgages (or any documents that allow for a bankruptcy petition to trigger certain rights) should make sure that they amend those drafts to reflect the new application procedure.

If such documents are not updated, then where a debtor has applied online to make him or herself bankrupt avoidable consequences could occur. For example:

1. The landlord may not be able to re-enter and forfeit a lease on a tenant's application to be made bankrupt.
2. Where a lease requires a replacement or an additional guarantor in the event of the guarantor's bankruptcy, the landlord may not be able to insist on a new guarantor.
3. Sale agreements may not be capable of being terminated.
4. Landlords may not be able to terminate agreements for lease.
5. Lenders may not be entitled to demand repayment of a loan before the repayment date.

This Order is in no way surprising with the major overhaul on insolvency legislation and procedures afoot, but the wide-reaching scope of this new process may not have been fully previewed and does not appear to be widely reported on.