HMRC stance on Bankruptcy and unpaid taxes Submitted on 05.09.2011

When facing financial meltdown many businessmen (soletraders and partnerships) will consider the idea of declaring personal bankruptcy. 

Whilst it absolves the duty of the bankrupt to repay the tax debt and all other unsecured debt the Official Receiver may still invoke powers to apply for a Bankruptcy restriction order against the bankrupt. A Bankruptcy Restriction Order or BRO, is a court order made against a bankrupt once a court has decided that the bankrupt’s conduct has been culpable or dishonest.

When a court imposes a Bankruptcy Restriction Order (BRO) it will subject the debtor to certain restrictions for a set period of between 2 and 15 years.

The restrictions are the same restrictions as every bankrupt will experience during a normal bankruptcy period, which are set out in the insolvency law, however the Bankruptcy Restriction Order (BRO) will lengthen the time period of the bankruptcy restrictions, instead of allowing them to be lifted when the bankrupt is discharged, as is normally the case.

The restrictions which are set out in insolvency law that can expect during a bankruptcy are:

• You must declare you are bankrupt to a creditor if you are trying to obtain in excess of £500 credit
• You must inform potential business colleagues and associates the name, or trading style under which you were made bankrupt.
• You are restricted from acting as a company director, from taking part in its promotion, formation or management without the court’s prior permission.
• You may not act as an insolvency practitioner, or as the receiver or manager of the property of a company on behalf of debenture holders.
• You may not be a member of parliament in England or Wales.

Here are some examples of the actions that could attract a Bankruptcy Restriction Order (BRO), as listed on the insolvency services website.

• Incurring debts that you knew you had no reasonable chance of being able to repay.
• Selling assets at under their market value or giving away these assets for free.
• Showing priority to certain creditors, such as family or friends in preference to others.
• Being unreasonably extravagant with your spending.
• Gambling or making rash speculations.
• Causing your debts to increase by neglecting your business affairs and responsibilities.
• Fraud or fraudulent breach of trust.
• Carrying on with your business when you knew, or should of known that you were insolvent.

The court will decide on the length of time the Bankruptcy Restriction Order is to be imposed, but it is generally accepted that the length of the Bankruptcy Restriction Order will be influenced by the amount of financial harm your behaviour has caused your creditors.

And finally, the power of a Bankruptcy Restriction Order (BRO) is not to be underestimated, for if you are found guilty of breeching your BRO you commit a criminal offence, and therefore if found guilty you could be fined or imprisoned.