New bankruptcy legislation designed to reduce small businesses’ fears of going bust have been unveiled by the government.

The Department of Trade and Industry (DTI) said that the new Enterprise Act will end the ‘one-size-fits-all’ approach to bankruptcy and will encourage enterprise while cracking down on “irresponsible and reckless” creditors.

From today, a bankrupt will be automatically discharged from their bankruptcy after one year, rather than up to three years as happens currently.

Penniless entrepreneurs may even be discharged earlier, although ministers were quick to stress that the ‘can pay, will pay principle’ still applies, with bankrupts liable to lose their home and possessions if they fail to settle debts.

It is hoped that the new rules will reduce businesses’ fear of failure and encourage more people to start up their own firm without being too concerned about going bust.

The DTI said that the Act will introduce a fairer regime for entrepreneurs who have failed through no fault of their own, while punishing bankrupts who take advantage of their creditors and the public.

Other key measures in the Act include:

  • Introduction of Bankruptcy Restriction Orders (BROs) to protect the public and business community from “reckless, culpable or irresponsible” bankrupts.
  • Introduction of Income Payments Agreements (IPA) – a new way of repaying debts to creditors from the bankrupt’s income.
  • New fast track voluntary arrangements, enabling the bankruptcy order to be annulled in return for increased or speedier returns for creditors.
  • Removal of unnecessary restrictions on bankrupts.
  • A limit of three years on the period in which a trustee may deal with a bankrupt’s home.

Gerry Sutcliffe, the consumer minister, said that business is a dynamic process and difficulties and failure are an inevitable part of an enterprise economy.

“However, the fear and consequences of honest failure should not be so disproportionate that they act as a disincentive to entrepreneurs.

“If we are to build a truly enterprising economy, we need an insolvency regime that supports, rather than stifles, the development and growth of new businesses and helps reduce the consequences of failure,” he said.