The Insolvency Service has published the 2008 fourth quarter insolvency statistics. They make interesting reading. On the personal side, "There were 29,444 individual insolvencies in England and Wales in the fourth quarter of 2008 on a seasonally adjusted basis. This was an increase of 8.2% on the previous quarter and an increase of 18.5% on the same period a year ago."
The press comment on this has been fairly negative in the main, especially in a recent article by Ross Clark in the Spectator. He cited some of my research in his article. My response letter to his argument that feckless debtors are pushing the insolvency figures upwards was subsequently published in the following edition of the Spectator with some minor editing. Most importantly they did not include a sentence that cited Income Payments Orders (IPOs) and Bankruptcy Restrictions Orders (BROS) as accompanying provisions to the Enterprise Act 2002 discharge reforms which make bankruptcy a relief and rehabilitation tool which is not, when fully considered, especially liberal. As you can see I have argued that the recent increase in the figures is arguably due to the fall out from recent lending activities and not solely due to a group of irresponsible debtors. This species of debtor must however make up some portion of the figures. But they are not the sole driver.
Adopting a debtor friendly approach or a creditor friendly approach to these vexed issues is problematic and too often people tend to fall down on one side of the fence or other. We must be careful not to draw conclusions without evidence. More research on the drivers of bankruptcy and personal insolvency generally is required, especially in light of the recent upsurge. The ESRC funded work currently being undertaken at Nottingham Trent University in this regard is eagerly awaited.
In the meantime I offer the following thoughts. The effect of the Enterprise Act 2002 (EA) personal discharge provisions has been hotly debated, with camp one arguing that the statistics cited above show that the reduction in the automatic discharge period from three years to a maximum of one year has given rise to an increase in redress to the insolvency laws. Camp two offers a counterblast based on the premise that the figures are indicative of sustained and heavy credit usage coming home to roost, coincidentally at around the same time as the legislative change. Whether the change in the discharge provisions has encouraged indebted individuals to seek redress to the insolvency laws is a matter for debate, the credit increase figures are however clearly demonstrable. If the change has encouraged anybody, it is not the legislature’s intended recipients, namely entrepreneurs, but consumer debtors. Whether or not the consumer debtor actually chooses to become indebted because of a perceived liberal discharge regime is also a moot point. The other changes encompassed in the EA and elsewhere regarding, inter alia, Income Payment Orders, Bankruptcy Restriction Orders, and so forth must also be factored into the discussion.
The total bankruptcy figures for the last three years (2004:35,898, 2005:47,291, 2006:62,812) do seem to support the camp one thesis, especially when compared with the three years prior to the enactment of the EA (2001:23,477, 2002: 24,292, 2003: 28,021). But camp two will take solace in the Bank of England overall personal credit level increases for the last ten years. The second main point on the large increase in personal insolvency statistics must focus on the manifest swelling of the individual voluntary arrangements (IVAs) figures. Total IVA usage for the whole of 1999 (7,195) was just over half that for the first quarter of 2007 (13,233) alone. What has driven this voluminous increase? Is it the camp two credit thesis as outlined above, i.e. credit growth, or something else?
It has been argued in some quarters that this increase has been driven by the marketing activity of the IVA specialist firms, giving rise to greater awareness of insolvency procedures amongst the wider public. This in turn, so the argument goes, has also had an effect on the bankruptcy increases. Whilst the legislature in enacting the IVA did not have consumer debtors in mind when they enacted the regime, it could be argued that consumer use is not misuse, but a necessary corollary of lending practices, i.e. a pressure valve is needed to relieve the casualties of over-indebtedness and IVAs seem to be answering the call. Space does not allow a discussion of county court administration orders, deeds of arrangement, and the proposed debt relief orders, but clearly these regimes must also be borne in mind.
According to the latest figures IVAs are still increasing but the rate is slowing. Following the 4th May 2007 statistics release, learned commentators observed that this slowdown was due to the banks tightening up on their IVA approval criteria and that the exponential growth will decrease. This may be true with the full IVA, i.e. the procedure that the 1986 legislation promotes as an alternative to bankruptcy for entrepreneurs, pursuant to the legislature’s original intention. However, with the introduction of a new little brother regime in the coming year or so, i.e. the simple individual voluntary arrangement (SIVA), the two arrangement regimes taken together might even surpass bankruptcy as the predominant personal insolvency choice.
What is the practical effect of these increases? The first issue to consider must be the re-sourcing of the administrative machinery that has to deal with these insolvent estates, be that the courts, Insolvency Service or insolvency practitioners. Are the courts and the Insolvency Service going to continue to be adequately financed to manage with paperwork volume and such like? Should different forms of financing be mooted? For example, would a levy on the burgeoning IVA specialists be acceptable? The levy could be used to spread the costs of overall personal insolvent estate administration. Insolvency statistics make interesting reading for a multiplicity of reasons, not least as a marker to determine administration costs as outlined above. However, they also give rise to wider social and economic issues. Are the figures moving us towards a position where we might conclude that personal insolvency is not just a social problem but on a macro-economic level, a full blown economic issue? The recent increases in creditors’ bad debt provision may lead us to such a tentative conclusion.
Picture Credit: Muir Hunter Museum of Bankruptcy, KU (GP).