Communication series part 2: Suspension of discharge from bankruptcy - when the Court hits pause on your fresh start

Upon discharge, a debtor is released from bankruptcy debts, and is no longer subject to a number of restrictions that apply during the period of undischarged bankruptcy.

Typically, a person's bankruptcy begins on the date the bankruptcy order is issued and continues until they are discharged (s.278 of the Insolvency Act 1986 (“IA 86”)). A debtor is automatically discharged under s.279(1) IA 86 no later than one year after the bankruptcy order is made, unless a criminal bankruptcy order has been issued (s.279(6) IA 86).

Effective communication plays a vital role in the bankruptcy process, particularly when dealing with the suspension of discharge from bankruptcy.

Restrictions on bankrupts

Until discharged, a bankrupt faces significant restrictions, including acting as a company director or being concerned in the management of a company without leave of the court, obtaining credit over £500 without disclosure of their bankruptcy, trading under a different name from the name under which they were made bankrupt without informing others, and being elected to the House of Commons.

Once discharged, however, the debtor gets a bit of breathing room. For example, they are no longer liable for bankruptcy debts under s.281 IA 86 (with exceptions), and the Official Receiver or trustee in bankruptcy (together, the “Trustee”) cannot swoop in to claim any after-acquired property or apply for an income payments order.

Suspension by court order

For bankrupt individuals who have failed to play by the rules, their automatic discharge after 12 months can be suspended by a court order under s.279(3) IA 86.

Only the Trustee can apply to suspend a bankrupt’s automatic discharge. The court cannot direct the Trustee on whether or when to make such an application, as clarified in Hardy v Focus Insurance Co Ltd. If a Trustee decides not to apply for suspension, the court will only intervene if the Trustee has acted fraudulently, in bad faith, or in a manner so unreasonable it defies logic (Osborn v Cole).

The ability to suspend a bankrupt’s automatic discharge under section 279(3) IA 86 only comes into play if the bankrupt has failed (or is failing) to meet their obligations or fulfil their duties under the IA 86. A Trustee deciding whether to seek a suspension should carefully consider any non-cooperation, concealment and/or non-disclosure of assets well in advance of the end of the discharge period.  Trustees should bear in mind that all allegations should be supported by evidence, and they should be able to show that they have made every effort to obtain cooperation.

The suspension is intended to be punitive in nature, and is aimed at ensuring bankrupt individuals meet their statutory obligations (Hellard v Kapoor). The suspension will remain in place until a certain specified period has passed, or until the bankrupt fulfils a specific condition after which their Trustee will file a report confirming the bankrupt’s compliance with their duties/obligations.

Factors affecting the decision

When deciding whether the bankrupt has failed to comply with their obligations under the IA 86, mere suspicion of non-compliance is not enough. The court must be convinced that there has been a failure to comply (see Official Receiver v Milborn).

This highlights the importance of open dialogue between the debtor, and the Trustee. A lack of clear and consistent communication can lead to misunderstandings and the potential suspension of discharge. Responding promptly to Trustee requests for information or action can prevent complications.

Even if the court is satisfied that the bankrupt has failed to fulfil their obligations, it can still choose whether to suspend the discharge.

Factors that may encourage suspension

• ongoing or significant non-compliance (as seen in Wilson v Williams, where the bankrupt individual refused to provide information about his pension, to which he had contributed £1 million, despite disclosing liabilities of at least £1 million);
• if the bankrupt will be motivated to comply by the suspension (however, Shierson v Rastogi suggests that while postponing discharge might push the bankrupt to follow through with their obligations, the main goal is to maintain the restrictions of bankruptcy, not just to motivate compliance); and
• engaging in activities prohibited for undischarged bankrupts, such as obtaining credit exceeding the £500 limit without disclosure or acting as a company director without permission of the court.

Factors that may dissuade the court from suspension 

• if a Trustee’s application for suspension is made too close to the automatic discharge date, particularly if the Trustee is found to have delayed or if the late application is seen as unfair, even if the bankrupt has previously failed to comply (see Bagnall v Official Receiver); and
• if the application is made with an ulterior purpose or for an improper reason, as seen in Chadwick v Nash where the court decided not to suspend discharge, despite the bankrupt providing inconsistent information, as the court found the trustee was actually trying to enforce an income payments agreement.

Conclusion

While automatic discharge from bankruptcy offers individuals a fresh financial start after 12 months, it remains contingent upon their full cooperation and compliance with obligations under IA 86. Any attempt to obstruct the process or conceal information can lead to a suspension of discharge, prolonging the bankruptcy period and its associated restrictions.

It is imperative for bankrupt individuals to engage transparently with their Trustee to ensure a timely discharge and avoid further legal complications, and to cooperate with the trustee and the Official Receiver as they are obliged to do pursuant to s.333 IA 1986. Proactive, clear communication is key to preventing issues that might lead to the suspension of bankruptcy discharge.

Further information

If you have any questions regarding this blog, please contact Dino Rapelas in our Restructuring and Insolvency team.

About the author

Dino Rapelas is an Associate in the Dispute Resolution team, specialising in Restructuring and Insolvency.