This article was written by Mr Kaplinsky of the advocacy department. It was inspired by a recent case in which he was instructed - it did not need the appeal he feels is required to clarify the law!
Bankruptcy Offence; Official Receiver; Satisfactory Explanation; Fair Trial; Privilege against Self Incrimination; Legal Uncertainty
“It is in the interests of the business community to put in peril the man who goes bankrupt without having so conducted his affairs as to be able satisfactorily to explain why some substantial loss has been incurred”
This was the judgment of Lord Justice Sachs in the case of R v Salter. When a bankruptcy order is made the individual who is the subject of the order is unquestionably in a position of severe legal vulnerability. As a result of the provisions of Insolvency Act 1986 Chapter VI those in this unfortunate position can find themselves prosecuted for a variety of criminal offences for non-disclosure of financial information, concealment of property, falsification of documents and specifically for failing to give a satisfactory explanation for the manner in which their loss occurred. Approximately 82 people per year are convicted of bankruptcy offences in the United Kingdom. Over 50% of those convicted receive custodial or suspended sentences. The impact of a criminal conviction for a professional person can be particularly catastrophic leading to the temporary or permanent cessation of professional business activity and consequent unemployment and long term impoverishment.
While most informed observers would agree that it is in the interests of the business community to require bankrupt individuals to account for and explain their losses, close examination of the legislation and case law shows that important gaps in the law remain leaving bankrupt individuals at the mercy of criminal offences that have yet to be fully defined and made certain.
The Legal Framework
The offence of failing to give a satisfactory explanation for the manner of loss is set out in Insolvency Act 1986 s. 354(3)
The bankrupt is guilty of an offence if he without reasonable excuse fails, on being required to do so by the official receiver, the trustee or the court –
(a) To account for the loss of any substantial part of the property incurred in the 12 months before petition or in the initial period, or
(b) To give a satisfactory explanation of the manner in which such a loss incurred
A crucial issue for those advising on these prosecutions or potential prosecutions is “how do you define a satisfactory explanation?” There has been no common law guidance to clarify this question since the Insolvency Act was passed 24 years ago and the leading case on this question remains that of R v Salter. This was a case in which the prosecution was brought for offences created by the Bankruptcy Act 1914 which were similar but not identical to those established by the 1986 Act. Sachs LJ delivering the judgment of the Court of Appeal in 1968 stated that a jury should be directed that the bankrupt should give such reasonable detail as was appropriate in all the circumstances. "The degree of particularity required of the bankrupt may vary greatly according to the facts of the case. Sums which are really small in relation to the substantial part of the estate need not of course be traced".
What is the problem with the law as it stands?
The law of bankruptcy must of course balance competing interests. On the one hand it is in the public interest that the affairs of bankrupts should be investigated, assets traced and distributed to creditors and therefore bankrupt individuals must give full and satisfactory explanations of their losses. However it is also necessary to ensure that individuals are not prosecuted for crimes that are vague and uncertain particularly as these offences depart from general right established in the jurisprudence of ECJ that a person should have a right not to incriminate themselves.
There is a very wide spectrum of responses to investigation that the law may permit. At the most lenient end of the spectrum individuals have a right to silence when prosecuted. At the other extremity individuals must provide a full and detailed response to all questions put to them by those investigating in the knowledge that those answers may be used as evidence against them in separate and additional prosecutions arising out of those answers. Clearly the law should draw a line on this issue so that those being investigated are aware of their legal obligations particularly as failure to adhere to the provisions of the Insolvency Act 1986 has such disastrous consequences.
In the Court of Appeal in 1968 Sachs LJ provided an eloquent explanation for the rationale behind prosecutions. He also clearly established that it is inappropriate for a direction to be given to the jury that the bankrupt had not failed to give a satisfactory explanation if he had done his best to supply an explanation but had been unable to do so. He also explicitly accepted that “the degree of particularity required of the bankrupt may vary greatly according to the facts of the case”. He then went on to set out the relevant factors in gauging the degree of particularity and level of co-operation required to avoid conviction. Only one relevant factor was then provided. The one factor to be taken into account when gauging whether the explanation provided was satisfactory is "sums which are really small in relation to a substantial part of the estate need not be traced". However this one relevant factor provided by the common law in assessing whether the level of co-operation amounts to a criminal offence is arguably irrelevant as the 1986 Act subsequently passed explicitly states that the offence is only committed if the bankrupt fails to account for the loss of a substantial part of his property.
Therefore this important legal question remains unanswered – how is “satisfactory explanation” to be defined? Is this an objective or subjective test? Would for example the defendant be guilty if the failure to provide detailed information is itself a product of the actions of others for which the defendant cannot be held responsible? Is the standard of investigator’s conduct to be taken into account? What is the position if the bankrupt suffers from learning difficulties? What if the bankrupt is illiterate or has limited English language skills? Is the individual to be convicted if he was genuinely confused as to the manner of his loss? The Court of Appeal made it clear in 1968 that the standard of co-operation cannot be uniform but no further assistance is offered by the common law or legislation.
Bankruptcy Offences and Human Rights
The Human Rights Act 1998 incorporates two essential human rights established by the European Convention of Human Rights into English law that are relevant to the consideration of bankruptcy offences. First “no one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence at the time when the offence was committed”. The ECJ has held that imprecise criminal offences do not in themselves amount to an infringement of a defendant? human rights. However there is a fundamental need for the criminal law to be certain and predictable so as to avoid injustice. It would of course be absurd to seek to enforce a law that prohibits the possession of drugs without explicitly defining what drugs are prohibited and what drugs are not. While the bankruptcy offences cannot be seen to be contrary to ECHR Article 7 the need to increase clarity and predictability to avoid injustice remains.
Secondly it has been argued that the bankruptcy offence as set out above is contrary to the right to a fair trial as set out in Article 6 of the ECHR. The jurisprudence of the Strasbourg Court has subsequently implied into that Article 6 right the privilege against self incrimination. The Court of Appeal concluded in Regina v Kearns that the bankruptcy offences set out in the 1986 Act amount to a legitimate and proportionate limitation of the right not to incriminate oneself and that "the public interest that the affairs of bankrupts should be investigated was ample justification for the limited restriction imposed by s.354(3) the regime of which was a proportionate legislative response to the problem of administering and investigating bankrupt estates”.
The fact that bankrupt individuals are by definition in positions of severe financial weakness may explain the shortage of cases taken to the appeal courts which in turn has contributed to the lack of much needed judicial guidance on this question. While no human rights violations can be argued to exist under the current legal framework the combination of a dearth of case law, considerable legal uncertainty, severe penalties and a departure from the general right against self incrimination leaves those facing bankruptcy at risk of being condemned into the uncharted reaches of a murky legal black hole.
Ben Kaplinsky is a Higher Courts Advocate at Ronald Fletcher Baker LLP