PART 5
March 2010
EFFECT OF A DRO
46.74 Effect of a DRO – moratorium
(January 2011)
The main effect of a DRO will be to place a moratorium period on the debts listed in the DRO [note 1] (see paragraph 46.51). This means that creditors cannot take any action to recover or enforce (see paragraph 46.75) those listed debts during this period. The moratorium normally lasts 12 months [note 2] (see paragraph 46.79 for exceptions to this) – after which the debts will be discharged [note 3].
46.75 Restriction on action to recover or enforce a DRO debt
During the moratorium period (see paragraph 46.74), a creditor to whom a specified (see paragraph 46.51) qualifying (see paragraph 46.9) debt is owed has no remedy in respect of the debt and may not commence a bankruptcy petition in respect of the debt, or otherwise commence any action or other legal proceedings against the debtor for the debt, except with the permission of the court and on such terms as the court may impose [note 4].
In this respect, the term “debt” includes interest, penalty or other sum that becomes payable in respect of the debt [note 5]. If the creditor has any action pending in respect of the debt, the court may stay the proceedings or allow them to continue on such terms as the court thinks fit (see paragraph 46.76) [note 6].
46.76 Example of a situation where court may allow continuance of proceedings in respect of a DRO debt
It is expected that it will be rare that a court would allow proceedings in respect of a DRO debt to continue. An example of this might be where third party insurers are involved and a creditor is required to establish liability before the insurers will settle the claim.
46.77 Position of secured creditors
The restriction on action to recover or enforce a DRO debt (see paragraph 46.75) has no effect on the right of a secured creditor to enforce their security [note 7].
46.78 Effect of a DRO on debt management arrangements
If the debtor is in a debt management arrangement: -
immediately before a DRO is made, that other arrangement(s) will automatically cease on the making of the DRO [note 8].
46.79 Exceptions to the normal 12-month moratorium period
The moratorium period (see paragraph 46.68) will, in most cases, last 12 months beginning with the effective date of the order (see paragraph 46.57). The exceptions to this principle are [note 9]:
46.80 Maximum period of extension of moratorium
The moratorium period may be extended more than once, but may not be extended (see paragraph 46.79) beyond three months after the date that it would normally expire (see paragraph 46.74) [note 10].
46.81 Timing of extension of moratorium
The moratorium can only be extended whilst it is still in force. It cannot be extended retrospectively [note 11].
46.82 Discharge from qualifying debts
At the end of the moratorium period (see paragraph 46.74) the debtor is discharged from all the qualifying debts (see paragraph 46.9) specified in the order (see paragraph 46.51) [note 12].
This, obviously, does not apply if the DRO has been revoked (see paragraph 46.65) [note 13].
It also does not apply to any debt that the debtor incurred in respect of any fraud or fraudulent breach of trust to which the debtor was a party [note 14].
46.83 Register of debt relief orders
The legislation requires that the Secretary of State maintain a register of DROs [note 15], and that the official receiver make an entry in that register relating to the DRO (see paragraph 46.52). In practical terms, this is achieved by entering details of the DRO in the existing IIR (see paragraph 4.22).
46.84 Withholding of information relating to those at risk of violence
Where a person subject to a DRO, a DRRO (see paragraph 46.94) or a DRRU (see paragraph 46.94) would be at risk were their address published in the IIR (see paragraph 46.83), the court may order that the debtor’s current address is withheld [note 16].
46.85 Territorial extent of effect of a DRO
A DRO will have effect only in England and Wales, though any qualifying debts (see paragraph 46.9) incurred outside of England and Wales can be included in the DRO – the effect of this being that the creditor would not be able to take action to recover the debt (see paragraph 46.75) in England and Wales.
Neither the EC Regulation (see Chapter 41) or the UNCITRAL Model Law (see Chapter 42) will apply to DROs as both procedures require that the debtor is divested of his/her assets to have effect – a feature not present in a DRO.
An individual may be subject to a DRO if he/she lives in England and Wales, or in the last three years has been resident or carrying on business in England and Wales [note 17].
46.86 Effect of a DRO on ongoing debts
The debtor will only have protection (see paragraph 46.75) for debts specified in the DRO (which means debts where the identity of the creditor and amount owed are included – see paragraph 46.51). Any debt in excess of that specified amount – including debts incurred after the date of the DRO – would be open to action for recovery by the creditor.
46.87 Effect of a DRO on the debtor’s assets
As explained in Part 1, the debtor will not be eligible for a DRO if their property (asset) level is above £300 (plus a motor vehicle worth up to £1,000). Those assets below that threshold will not vest in the official receiver and will not be included in the DRO.
This means, for example, that it will not be necessary for the official receiver to assign a life policy back to the debtor in the same way as is necessary in a bankruptcy.
46.88 Effect of a DRO on the creditor’s ability to charge interest on the debt
The legislation does not prevent a creditor from adding interest, penalties and charges to a specified debt (see paragraph 46.51). In reality, this will be of little consequence to the debtor (as the interest, penalties and charges will be discharged at the end of the moratorium along with the originating debt – see paragraph 46.74), unless the DRO is subsequently revoked (see Part 4).
46.89 Effect of a DRO on debts owed to the Department for Work and Pensions
(Amended December 2011) The case of Secretary of State for Work and Pensions v Payne and another [2011] UKSC 60 examines the correct treatment of overpayments and repayments of benefit where a DRO has subsequently been made against the recipient of the benefit. The court held the view that the Insolvency Act 1986 [note 4] prevented the deduction at source of overpayments or repayments of a benefit that had been specified in the DRO as qualifying debts.
46.90 Effect of a DRO on a landlord
Where a debtor owes rent to their current landlord, the landlord may not take action to recover the debt (see paragraph 46.75), but may still take action to recover possession of the property if this is allowed under the terms of the lease/tenancy agreement.
46.91 Effect on a DRO of the death of the debtor
Where a debtor dies during the moratorium period (see paragraph 46.74), the official receiver is required, as soon as practicable after receiving notice to revoke the DRO (see Part 4), enter note of the fact and date of death on the IIR (see paragraph 46.83) and send notice of the revocation to creditors specified in the DRO and the personal representatives of the deceased debtor [note 20].
This would not affect the possibility of the deceased debtor’s estate being subject to an administration order under the legislation relating to deceased insolvents [note 21] (see Chapter 54).
46.92 Restrictions on a debtor subject to a DRO
(Amended March 2013)
Where a debtor is subject to a DRO, during the moratorium period [note 22] (see paragraph 46.74) it is an offence for that debtor to:
Obtain credit in excess of £500 without telling the person from whom he/she obtains the credit about the DRO [note 23] [note 24].
Engage directly or indirectly in any business under a name other than that in which the DRO was made without disclosing to all persons with whom he enters into any business transaction the name in which that order was made [note 25].
Act as a director of a company or directly or indirectly take part in or be concerned in the promotion, formation or management of a company, without the leave of the court [note 26] [note 27].
These restrictions imposed by insolvency legislation carry on for the period that a debtor is subject to a DRRO/DRRU (see paragraph 46.94) [note 28] [note 29]. Further guidance on restrictions imposed on debtors subject to a DRO, DRRO, IDRRO or DRRU can be found at Chapter 46, Part 7.
46.93 Potential offences in respect of a DRO
There are DRO offences in the legislation, and these are, roughly, in line with the bankruptcy offences. Detailed discussion of the offences is outside the scope of the Technical Manual but produced below is a list of the DRO offences:
46.94 Debt relief restriction orders (DRRO) and debt relief restriction undertakings (DRRU)
(Amended March 2013)
It is possible for a debtor with a DRO to be subject to a DRRO or DRRU where there has be some level of irresponsible behaviour or culpability by the debtor in the incurring of the debts [note 35] [note 36] [note 37]. A list of the matters of behaviour that may result in a DRRO or DRRU are listed in the legislation [note 38]. In essence, the system of DRROs and DRRUs is very similar to the system of BROs and BRUs, and the types of misconduct in DROs essentially mirrors that in bankruptcy.
The effect of a DRRO or DRRU is to extend the DRO restrictions (see paragraph 46.92) for the period of the DRRO or DRRU.
The effect of a DRRO or DRRU is to impose restrictions similar to those imposed on debtors subject to a Debt Relief Order for the period of the DRRO or DRRU. Further guidance on restrictions imposed on debtors subject to a DRO, DRRO, IDRRO or DRRU can be found at Chapter 46, Part 7.
[Back to Part 4 – Investigation into the debtor’s affairs and the revocation and amendment of a DRO] [On to Part 6 – Competent authorities and approved intermediaries]