PUBLIC POLICY IS NAMELY, THAT THE BANKRUPT'S ENTIRE PROPERTY SHOULD BE APPROPRIATED AND MADE AVAILABLE FOR PAYMENT TO THEIR CREDITORS
The trend of increasing Individual Insolvencies in England & Wales continues to gain momentum with 10'465 registered in November 2022 representing a 11.4% rise against the previous year and an 8.9% upsurge compared to November 2019's pre-pandemic figures. With 612 individual bankruptcy orders made in January 2023, this article will look at what assets form part of the Bankrupt's estate, which assets are exempt and how these may be challenged.
T H E B AN K R U P T C Y E S T A T E
Bankruptcy commences upon the making of a bankruptcy order and lasts until the bankrupt is either discharged or the order is annulled. Unless the court orders otherwise, the Official Receiver (OR) is immediately appointed to act as the first Trustee In Bankruptcy (TIB) pending the possible appointment of an Insolvency Practitioner (IP) to act as the TIB.
The primary function of the TIB as defined by s.305(2) IA 1986 is to collect and realise the bankrupt's assets, distribute the proceeds to creditors and return any excess to those who are entitled to it. These assets are collected into the 'Bankruptcy Estate' which exists in perpetuity and survives the discharge from bankruptcy.
K E Y P O I N TS
Pursuant to s.283 IA 1986, a bankrupt's estate comprises of all property in which they, at the date of their bankruptcy order, possessed a beneficial interest in. The general exceptions to this rule are: The bankrupt's tools of trade, domestic items, tenancies, personal correspondence, undrawn pension rights and documents protected by legal privilege (hereafter 'the Exempt Items').
However, pursuant to section 308 IA 1986, should the Exempt Items be valuable, the TIB can add these to the Bankruptcy Estate providing they are replaced with a reasonable alternative.
In the event that the bankrupt wishes to challenge their seizure or sale, then the burden is on the bankrupt to prove that they fall within the statutory exception and;
The TIB is under not under any obligation to provide funds for the replacement of assets unless and until there are sufficient assets in the Bankruptcy Estate.
Included in the Bankruptcy Estate will be the bankrupt's family or matrimonial home and the TIB's interest in the bankrupt's family home is subject to any charge over the Property in favor of a spouce pursuant to the Family Law Act 1996. The practical effect of such a charge allows the bankrupt's spouce to continue occupying the home pending a final divorce proceeding but, it does not create any form of propriety interest superior to the TIBs.
A bankrupt's income or salary does not fall within the bankruptcy estate, so the TIB may only claim it if there is an income payments order (IPO) or income payments agreement (IPA) in place. Income received by the bankrupt between the bankruptcy order and the date of the IPO may also be subject to an IPO.
E S T A T E A S S E T S
A bankrupt's estate comprises of all property in which the bankrupt had a beneficial interest at the date of their bankruptcy order and is immediately invested in the TIB upon the making of the bankruptcy order
"Property" is very widely defined by section 436 of the IA 1986 and includes all the debtor’s: Money, Goods, Chose in Action (such as legal proceedings i.e. the proceeds will go to the debtor’s estate), land, obligations and every description of interest whether present or future or vested or contingent arising out of or incidental to, property and all other descriptions of property wherever it is situated.
In fact, the courts have consistently described the successive statutory definitions of 'Property' as being “about as wide as they could be” and with the list of what can be considered 'Property' forever increasing, it is unlikely that any challenge to limit the description would will succeed. Consequently, assets that will comprise the bankruptcy estate include all of the bankrupt's:
Freehold Property: This includes the family or matrimonial home.
Freehold Reversions i.e. a freehold title where tenants are in occupation.
Leasehold Property.
Vehicles: such as cars, vans, trucks, motorhomes, classic cars, motorbikes etc.
Cash in hand or in bank accounts including joint accounts.
Excess Income.
Pension in Payment
Redundancy Payments
Book debts providing the bankrupt was trading.
Stock, fixtures and fittings providing the bankrupt was trading.
Tax refunds.
Insurance Claims including payments out of an insurance policy which covers personal injury.
Life Assurance Policies.
Collections such as stamps, wine, coins.
Premium Bonds.
Timeshare property.
Voidable transactions.
Things in Action: this includes the proceeds of litigation.
Intellectual Property such as patents, trademarks and licences
Royalties.
After-Acquired Assets.
These estate assets should be collected, valued and sold, by the TIB as part of their statutory function in administering the bankrupt's estate. Consequently, any disposition of these assets by the bankrupt following the presentation of the Bankruptcy Petition will be a voidable transaction and any sale subsequent to the bankruptcy order may result in a criminal sanction.
T H E B A N K R U P T ' S F A M I L Y H O M E & P R O P E R T Y
The beneficial interest of the bankrupt in their family home (being their sole or principal residence), or their interest in the sole or principal residence of their present or former spouse or partner, is usually the most valuable asset in a bankrupt's estate. Consequently, in the event that the bankrupt's beneficial interest is >£1000 the TIB can take steps to realise their interest.
This right is subject to a '3-Year Use it or Lose it rule' insofar that pursuant to s.283 Insolvency Act 1986 within 3 years of their appointment the TIB must have either:
Realised the debtor's interest in the Property
Applied for an Order for sale of the Property.
Applied for an Order for possession of the Property.
Applied under s.313 IA 1986 for an order that a charge be created against the Property in favour of the bankruptcy estate (i.e. the proceeds of any future sale of the property are remitted to the trustee before passing into the hands of the debtor).
Agreed the bankrupt can reacquire their interest in the Property, in return for an increase in the amount owed in bankruptcy.
More than one property may qualify as the bankrupt's family home and a property may be freehold or leasehold, registered or unregistered and be solely or jointly owned. It may also be located abroad.
The TIB's interest in the bankrupt's family home is subject to any charge on the property in favor of a spouse arising under the Family Law Act 1996. The practical effect of such charges allows a bankrupt's spouse to continue occupying the home pending a final order in divorce proceedings but it does not create any form of proprietary interest that is superior to the TIB's.
Rented Property
Providing the bankrupt stays on target with their rental payments, their bankruptcy is unlikely to affect their rental situation. However, a landlord will likely apply for eviction should the bankrupt enter into arrears, even if these are included in the bankruptcy, or if there has been breach of the tenancy agreement as a result of the bankruptcy order.
Assured, protected and secured tenancies are excluded from a bankrupt's estate but section 308A of the IA 1986 permits the TIB to claim such tenancies by giving notice to the bankrupt. Continuation tenancies are included in a bankrupt's estate where residential occupiers have a right to hold over at the end of a long tenancy, under Part II of the Landlord and Tenant Act 1954.
Residential Landlords
Residential landlords retain their right to repossess the property:
Christina Sharples v Places for People Homes Ltd [2011] EWCA Civ 813: the Court of Appeal held that section 285(3)(b) of the IA 1986 does not prevent an order for possession being made in favor of a landlord on the grounds of rent arrears. The right to re-entry was not a remedy.
Consequently, notices pursuant to section 8 of the Housing Act 1988 should be served on a bankrupt tenant and possession proceedings issued on the grounds of non-payment of rent.
Rented Commercial Property
Pursuant to s.347(1) IA 1986, should the bankrupt be a tenant of commercial premises then the landlord may use the commercial rent arrears recovery (CRAR) procedure set out in the Tribunal, Courts and Enforcement Act 2007 against goods on those premises for up to six months' worth of rent arrears. This is despite the goods in question having vested in the TIB at the making of the bankruptcy order.
Pursuant to s.347(2), IA 1986 a landlord whom uses this power between the presentation of a bankruptcy petition (or the making of a bankruptcy application online) and the bankruptcy order may continue to do so but must pay any amount recovered exceeding the value of six month's rent arrears to the TIB.
Life Tenancy
Providing a bankrupt’s life tenant’s life interest is not protected (i.e, it is not drafted to terminate if they are declared bankrupt) it will automatically vest in the TIB without any conveyance, assignment or transfer. Consequently, in these circumstances the TIB will not require an order for possession.
Assuming the the bankrupt's life interest has value, the TIB will wish to extract this for the bankruptcy creditors. Practically, this translates as a negotiated settlement payment. The TIB has a number of options when deciding to realise the life tenant's trust rights (assuming they are not protected). These include selling or assigning the interest (depending on whether this is permitted by the terms of the trust) and they may seek to have the interest valued for these purposes. Alternatively, the TIB in bankruptcy may consider simply collecting the trust income for a given period.
E X C L U D E D I T E M S
Pursuant to s.283 Insolvency Act 1986, the 'Excluded Items' generally consist of the bankrupt's:
Tools of Their Trade: In addition to basic tools this includes books, vehicles and other items of equipment as are necessary to the bankrupt for their individual use in their employment, business or vocation. However, the TIB can require the bankrupt to replace their tools with cheaper equivalents should the cost of replacing them be less than the realisable value of the existing tools.
Domestic Items: These are assets necessary for the basic domestic needs of the bankrupt and their family (such as clothing, bedding, furniture, household equipment and provisions). However, the TIB can require these to be sold should the cost of a reasonable replacement be cheaper.
Tenancies: This includes al property held by the bankrupt under an assured tenancy, protected tenancy, secured tenancy or protected occupancy of a dwelling house. However, the TIB can claim such property by notice to the bankrupt within 42 days of learning of it, or after that period with the permission of the court.
Undrawn pension rights
Personal correspondence of the bankrupt.
Right to legal professional privilege
The above is not an exclusive list and other items may be excluded subject to the application of other legal mechanisms e.g. the bankrupt's income .
The Bankrupt’s Income
A bankrupt's income or salary does not fall within the bankruptcy estate, so the TIB can only claim it if there is an income payments order (IPO) or income payments agreement (IPA) in place. Income received by the bankrupt between the bankruptcy order and the date of the IPO may also be subject to an IPO.
Pursuant to sections 310 and 310A IA 1986, an IPO or an IPA allows the TIB to claim any earnings, income or payments of the bankrupt beyond the amount needed to satisfy the bankrupt's basic domestic needs. Income received by the bankrupt between the bankruptcy order and the date of the IPO may also be subject to an IPO.
However, the TIB can only seek an IPO or IPA while the debtor is an undischarged bankrupt. This may be for a lump sum payment following a windfall (such as a nil rate tax coding or a gambling win), regular monthly payments or both. Once the payment arrangement is in place, it may be varied by the court (for IPOs and IPAs) or by agreement (for IPAs only).
An IPO or IPA typically lasts for a period of 36 months and so may continue to bind the bankrupt beyond their discharge from bankruptcy as well as third party payers such as their employers.
The Self-Employed Bankrupt's Tools of Trade
Should the bankrupt be self-employed then any business asset will usually be claimed by the TIB. However, whether employed or self-employed then as discussed above, the bankrupt is entitled to retain such tools, books vehicles and/or other items of equipment as are necessary to the bankrupt for use personally by them in their employment business or vocation. The TIB can still require these tools to be sold should their be cheaper reasonable alternatives and should the bankrupt wish to dispute this, the burden remains on them to prove that their tools fall within the exemption.
The Bankrupt’s Vehicles
As with the tools of trade, the bankrupt’s vehicle may be claimed as exempt but if it is valuable, the TIB can force its sale and replacement with a cheaper alternative pursuant to s.308 IA 1986. When sold, the TIB will use the sale proceeds to pay for a replacement vehicle, with the balance being paid into the estate. However, while a replacement vehicle may be bought before or after realisation, the TIB is not under any obligation to provide funds for the replacement unless and until there are sufficient assets in the Bankruptcy Estate.
The Bankrupt’s Pension Arrangements
Most pension schemes are excluded from bankruptcy estates and cannot be claimed by the TIB. These must be a UK state pension scheme or a scheme approved or registered by HM Revenue and Customs (HMRC). To be a "qualifying" overseas pension scheme, further requirements apply, including the duty to provide certain notifications and undertakings to HMRC.
But, providing the bankrupt's pension scheme is not an approved or a registered scheme it may be claimed by the TIB unless the bankrupt successfully applies to the court for an exclusion order or comes to a qualifying agreement with the TIB i.e. understanding with the TIB that the pension should be excluded.
As for drawing from a pension:
Horton v Henry [2016] EWCA Civ 989: The Court of Appeal confirmed that a bankrupt cannot be compelled to draw down an unelected pension to generate estate income via an income payment arrangement.
However, the TIB may consider the bankrupt's income being drawn from a pension scheme when considering entering into an IPO or IPA.
E N H A N C I N G B A N K R U P T C Y E S T A T E S
The TIB has powers under the IA 1986 to increase the value of a bankrupt's estate.
Dispositions of Property between the Bankruptcy Petition and Order
Section 284(1) and section 284(3) of the IA 1986 together provide that any disposition of property made by a bankrupt during the period from the petition being presented against them (or when a bankruptcy application is made) until their estate vests in the TIB is void, unless made with court consent or the court subsequently ratifies it. This section is intended to protect the bankrupt's estate from being dissipated or reduced before a bankruptcy order is made and the TIB appointed.
Assets Acquired after the Bankruptcy Order
The bankrupt must notify the TIB if, during the course of their bankruptcy, they acquire a beneficial interest in any property. The bankrupt must notify the TIB within 21 days of acquiring the beneficial interest in question. The TIB can then choose whether to include the bankrupt's recently acquired property within the assets available to satisfy the bankruptcy debts
Should the TIB decide to include any after-acquired property then they must serve notice to that effect on the debtor. Upon service of such a notice, the property in question immediately vests in the trustee with effect from the date on which the bankrupt acquired their interest in the property.
This requirement does not apply where a bankrupt acquires an interest in a principal residence for themselves or their spouse or partner.
Reviewable / Antecedent Transactions
The TIB may review and challenge transactions entered into by the bankrupt before being made bankrupt. These are often referred to as ‘reviewable’ or antecedent ‘transactions’. If successful, TIB claim may increase the value of the bankrupt's estate.
HOW WE CAN HELP
Unlike most law firms, our standard retainer includes a commitment to support clients past judgement and through enforcement. Our dedication to you does not cease with judgement but until you have received your court ordered damages/compensation in full and recovered with the costs of the litigation.
Prior to commencing any litigation, we undertake a detailed search of your opponents assets in order to ensure the cost of litigation never outweighs its benefits. Thereafter, we maintain a watchful vigil over these resources so you can be secure that you will receive your due judgment.
Gavin Renwick has successfully dealt with fraudulent debtors whom have supplied false information to county court bailiffs, High Court Enforcement Officers and/or made false representations in the Insolvency Courts in a bid to frustrate enforcement, hinder judgement and inflict further financial pressure on their creditors. In these cases often involving attempts to hide assets in faux-companies family run companies or through sham-divorces and fake addresses it may sometimes be necessary to present a bankruptcy petition at court and place the debtor's assets under the stewardship of the courts to protect them.
We have successfully advised and appeared for creditors at bankruptcy hearings. Should you require any legal advice whether as a debtor or creditor then contact us for confidential legal advice.
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