The role of a trustee in bankruptcy

The role of a trustee in bankruptcy


Trustee in bankruptcy

When the court or the adjudicator makes a bankruptcy order, it will pass its files to the Official Receiver (OR), who is a person who works for the Insolvency Service. The bankrupt debtor has to give the OR a statement of affairs within 21 days of the bankruptcy order. The OR must, within 12 weeks of the bankruptcy order, decide whether to appoint themselves as trustee in bankruptcy (TIB) or instead call a meeting of creditors to enable them to appoint an insolvency practitioner of their choice as the TIB.

The ownership of all the assets in the bankrupt's estate passes to (vests in) the TIB automatically on their appointment. The main duty of the TIB is to convert the value of the assets in the bankrupt's estate to money. From these proceeds the TIB will first pay their own costs and expenses and then the balance available will be used to pay off as much of the 'bankruptcy debts' as possible. The TIB has wide powers to enable them to perform their duties.

Assets of the bankrupt's estate

All assets, including the debtor's sole or principal residence, property acquired after the bankruptcy order and choses in action, in which the bankrupt debtor has an interest form part of the bankrupt's estate except the following:

  • The tools of the debtor's trade (including vehicles);
  • Assets necessary for the basic domestic needs of the debtor and their family;
  • Certain types of tenancy;
  • Assets that the debtor holds on trust for the benefit of others (i.e. assets which the debtor is not entitled to benefit from themselves);
  • Compensation for injuries to the debtor's 'body, mind or character', which would include compensation for personal injury or for defamation;

However, special rules apply to the debtor's beneficial interest in their home or main home or in the home or main home of their present or former spouse or civil partner. This interest will automatically re-vest in the debtor 3 years after the bankruptcy order unless by then the TIB has:

  • realised that interest;
  • applied for an order for sale or possession of the home;
  • applied for a charge against the property so that any proceeds of a future sale will first be used to pay the debts of the bankrupt estate; or,
  • agreed with the debtor that their interest can be bought back by increasing the total bankruptcy debt.

Unless the court orders otherwise, the beneficial interest will also re-vest automatically in the debtor if the TIB makes an unsuccessful application in respect of the home.

If the Official Receiver is the TIB they will deal with the debtor's home as follows:

  • For a period of 2 years and 3 months from the date of the bankruptcy order no steps will be taken to market the debtor's beneficial interest in their home, although the OR might decide to sell it if approached by a buyer and the offer is in the best interest of the creditors.
  • After this period of 2 years and 3 months the OR will only sell the debtor's beneficial interest in the home if that interest is valued at more than £1,000.

If there is sufficient equity and if the OR is not aware of any willing purchaser the OR can apply for a Secretary of State appointment of an insolvency practitioner as trustee of the bankrupt estate to deal further with the property.

If the value of the interest is more than a £1,000 but is insufficient to attract the appointment of an insolvency practitioner, the OR would invite offers from the debtor or another connected person (for example the debtor's spouse) to buy the interest. If no offer is received that would allow transfer of the interest before expiry of the 3-year period, the OR could apply for a charging order against the property.

If the value of the interest is less than £1,000 the OR will take steps to re-vest the beneficial interest in the debtor.

  • If an undischarged bankrupt becomes the beneficial owner of any assets during the bankruptcy (after-acquired assets), except if that asset is to be a principal residence for themselves or a spouse or partner, they have to inform the TIB within 21 days. The TIB can then serve a notice on the bankrupt stating that the 'after-acquired' asset will be included in the bankrupt estate for the benefit of the creditors. The 'after-acquired' property will then vest in the TIB as soon as the notice is served on the bankrupt.

However, any assets acquired by the debtor after discharge of the bankruptcy order do not vest in the TIB, but belong to the ex-bankrupt.

Bankruptcy debts

To be recognised as a bankruptcy debt the claim must be payable in money (or money's worth) and arise from an obligation incurred prior to the date of the bankruptcy order. This means that the debt can either be due at the date of the bankruptcy order or it can fall due only after the bankruptcy order as long as the obligation which resulted in the debt occurred before the date of the bankruptcy order. If this is not the case the claim will not be counted as a bankruptcy debt.

A debtor will be under an 'obligation' if, at the date of the bankruptcy order, there was a genuine possibility of a payment liability arising out of some form of legal relationship or duty.

The debt can be contractual, a tortious liability, a liability created by statute, etc. It doesn't matter whether the debt is certain or contingent and whether the amount is fixed or only capable of being determined by rules or opinion.

Any interest due on a bankruptcy debt with regard to the period prior to the bankruptcy order can be proved as part of the bankruptcy debt.

An exception to the above is that child support maintenance can't be a bankruptcy debt.

Proof of debt

To prove for their debt in bankruptcy the creditor will complete a Proof of Debt Form (Form 6.37). In this form the creditor will state how and when the debt was incurred, the total amount of the claim and the amount of any un-capitalised interest. The creditor can also attach to the form any documents in support of the claim.

After proofs of debt have been lodged with the TIB they will be available to be inspected by:

  • any creditor;
  • the bankrupt; and,
  • by any person acting on behalf of either of the above people.

If the TIB agrees thereto, a creditor that submitted a proof may at any time thereafter withdraw it or change the amount claimed.

If the OR received any proofs before the TIB was appointed, they must send them with an itemised list to the TIB. The same will happen should a new TIB be appointed.

The TIB can admit a proof either for the whole or part of the amount claimed. If they reject all or part of the amount claimed, they have to provide the creditor that submitted the proof with written reasons for doing so. If this creditor is not satisfied with the reasons they can, within 21 days from the date of receiving the reasons, appeal to the court to have the decision reversed or varied.

Any other creditor and the bankrupt may also appeal the decision of the TIB on any proof and may do so to the court within 21 days of becoming aware of the TIB's decision.

If the TIB is of the opinion that a proof has been improperly admitted, they can apply to court to have it expunged or the amount reduced.

Powers of the TIB

The trustee in bankruptcy (TIB) has wide powers with regard to the bankrupt estate once it has automatically vested on their appointment.

  • The TIB can recover assets that the debtor disposed of (without the prior consent of or later ratification by the court) in the period between the presentation of the bankruptcy petition to court and the appointment of the TIB because such transactions are legally void.
  • The TIB can apply to have any person who appears to have information about the debtor or the debtor's dealings, affairs or property to appear before court to supply that information.
  • The TIB can undo transactions which the debtor entered into while they were insolvent or that resulted in the debtor becoming insolvent if that transaction involved:
    • an asset being disposed of at an undervalue, i.e. at a significantly lower value than it was worth, at any time within 5 years preceding the day of the presentation of the bankruptcy petition;
    • giving a preference to any associate at any time within 2 years preceding the day of the presentation of the bankruptcy petition;
    • giving a preference to any other person at any time within 6 months preceding the day of the presentation of the bankruptcy petition.
  • The TIB can apply to court to have any transaction, whereby credit at an extortionate rate was given to the debtor within 3 years of the bankruptcy order, cancelled or varied.
  • The TIB can disclaim any onerous property found in the bankrupt estate, such as unprofitable contracts, unsaleable property or property that may give rise to a liability to pay money or perform onerous acts.
  • The TIB can recover pension contributions made by the debtor if making those contributions prejudiced the debtor's creditors. It would be seen to prejudice the creditors if those contributions were made simply for the purpose of putting the assets beyond the reach of the creditors or if considering the debtor's circumstances, the contributions were of an excessive amount.
  • The TIB can apply to court while the bankruptcy order is in force for an income payments order (IPO) whereby the debtor will be required to pay an amount of their income, but not so much as would leave the bankrupt with less than is needed to meet their and their family's reasonable domestic needs, to the TIB for the benefit of the creditors. The TIB can also seek to enter into an income payments agreement (IPA) with the bankrupt whereby the bankrupt agrees to pay over an amount of their income to the TIB. An IPA is usually an alternative to an IPO; for example, the TIB may first seek an IPA because it is a simpler procedure, but apply to court for an IPO as they cannot reach agreement with the bankrupt. It is possible, although it is rare, for an IPO and an IPA to be in place at the same time. Both the IPA and IPO can remain in operation for a maximum of 3 years and therefore will usually continue after the debtor's discharge from the bankruptcy.