43. Creditors and liabilities

Details of the definition of a creditor and rights to participate in insolvency proceedings

Frequently asked questions

These FAQs are to assist official receivers in understanding the subject and should be read in conjunction with the more detailed guidance given in the main body of the chapter.

What is the difference between a creditor and a liability?

A liability is a sum of money (a debt) or some other indirectly financial obligation which is due to another person. That person is generally referred to as a creditor.

Is creditor defined in the legislation?

There is no statutory definition of a creditor in relation to the winding up of a company, but in relation to bankruptcy it is defined as a person to whom any of the bankruptcy debts is owed.

What is covered by the definition of debt in respect of a company?

A ‘debt’ in relation to the winding up of a company means any of the following:

• any debt or liability to which the company is subject at the relevant date
• any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and
• any interest provable.

You mention ‘relevant date’ in respect of company debts, what is this date?

The relevant date for the purposes of the definition of a company debt is the date the company goes into liquidation unless the petition was presented on or after 6 April 2010, and the company was in administration immediately prior to the date of liquidation, in which case the relevant date is the date that the company entered administration.

What are the debts of a bankruptcy?

The main categories of bankruptcy debts are:

• any debt or liability to which the bankrupt is subject at the commencement of the bankruptcy (being the date of the bankruptcy order),
• any debt or liability to which the bankrupt may become subject after the commencement of bankruptcy, including after discharge from bankruptcy, by reason of any obligation incurred before the commencement of bankruptcy (a contingent liability),
• any interest provable.

What if a fixed amount cannot be put on the debts of an insolvent – would they still be debts in the insolvency?

A debt in a winding up or a bankruptcy is a debt whether the debt or liability is present or future or whether it is certain or contingent.

In this regard, there has recently been case-law that has changed the position regarding overpayments of state benefits and a potential liability under a costs order. In short, this means that those types of debts would be included in an insolvency.

Are there any types of debts that would not be included in an insolvency?

There are. These are known as non-provable debts. The main ones are:

• fines
• student loan debts
• arrears of a debt due in family proceedings
• confiscation orders

Of course, debts incurred after the date of insolvency would also not be provable debts in the insolvency, nor would debts that are legally unenforceable.

I see that fines are not a provable debt. Does this include penalties imposed by authorities?

A number of authorities have the power to impose penalties for minor transgressions of the law, such as illegal parking, littering, disorder and rail fare evasion.

Such penalties are not considered to be fines and would be provable debts.

If the debts are not provable, does that mean that the bankrupt will not be released from the obligation to pay the debt on discharge?

Yes, and in addition to those debts that are non-provable not being released on discharge there is a category of debts that are provable (meaning that the creditor can participate in the bankruptcy) but are not released on discharge. The main categories of these debts are:

• debts incurred through fraud.
• a debt in respect of personal injury damages.
• a debt to the Social Fund (a crisis loan, for example).

What are preferential debts?

The general rule in formal insolvency is that all unsecured creditors are paid in fair proportions of the debt that they are owed. For example, 40p for every £ owed.

Preferential debts are however, as the name suggests, those debts paid in preference to the general body of unsecured creditors. The types of creditors that qualified to have debts considered as preferential was significantly reduced in 2003 and they generally consist now of only outstanding contributions to occupational pension schemes and outstanding remuneration of employees. Both of these are subject to limits as regards the period of arrears that can be considered preferential.

I thought that secured creditors also have priority in insolvency?

They do, but only in respect of the assets over which they hold security. Take, for example, a bankrupt’s property worth £200,000 with a mortgage outstanding of £125,000. The mortgagee may sell the property and repay the mortgage, but the surplus of around £75,000 (depending on costs) must be paid into the bankruptcy estate for distribution to the unsecured creditors.

If, in that example, the mortgagee was owed £250,000 they would still be able to sell the property and repay as much of the mortgage as possible from the sale proceeds, with the amount then outstanding (known as a ‘shortfall’) joining the other unsecured creditors for repayment from any other assets in the bankrupt’s estate.

A secured creditor can give up their security, allowing the asset to form part of the estate, and participate in the insolvency as an unsecured creditor, but this rarely happens.

Can any other parties ‘jump the queue’, as it were?

Where, before a company goes into liquidation or a bankruptcy order is made, there have been mutual credits, mutual debts or other mutual dealings between the insolvent and any creditor of the insolvent the sums due from one party to the other must be set-off. The balance, if any, is provable as a debt in the bankruptcy.

By way of summary example, therefore, if a creditor owes an insolvent £1,000 and the insolvent owes that same creditor £1,500, the two amounts will be set-off and the provable debt would be £500, being the difference between £1,500 and £1,000.

Can a creditor claim interest on their debt?

They can, depending on the nature of their agreement with the debtor. Generally, the interest payable will be as was agreed prior to insolvency, but normally capped at 8%.

What about post-order interest?

Any surplus remaining on the estate after the payment of preferential debts and ordinary unsecured creditors must be applied in paying interest on those debts that have been outstanding since the date that the company went into liquidation or the date of the bankruptcy order. Post-insolvency interest ranks equally whether it applies to preferential or non-preferential creditors.

Introduction and overview

43.1 General overview

Where a winding-up order or a bankruptcy order is made against an insolvent, the creditors of that insolvent lose, in essence, the right to pursue that insolvent or the insolvent’s property in respect of the debts due¹. In return, creditors acquire a right to a share in any divided payable from the administration of the insolvent estate.

_{1. Section 130(3) and section 285(3)}

43.2 Definition of a creditor

There is no statutory definition of a creditor in relation to the winding up of a company, but in relation to bankruptcy it is defined as a person to whom any of the bankruptcy debts is owed¹.

‘Creditor’ is generally defined as ‘one to whom another person owes money’².

_{1. Section 383(1)}

_{2. Mozley Whiteley’s Law Dictionary Tenth Edition 1988}

43.3 Unsecured creditors, secured creditors and preferential debts

Unsecured creditors are creditors who do not have security for the debt. Secured creditors have security over property of the borrower. A creditor may be both secured and unsecured where the security does not cover the whole amount due.

Creditors may have preferential status (meaning they are paid in preference to the general body of unsecured creditors). Unsecured creditors whose debts do not have preferential status and are not postponed rank equally for dividends in accordance with their admitted claims¹. This is one of the basic principles of the insolvency legislation to ensure an orderly distribution of assets.

In respect of a company, or a trading bankrupt, the main creditors are likely to be for trade debts and debts to the crown and for non-trading bankrupts the bulk of the debt is likely to be in respect of consumer credit and utilities.

_{1. Rule 14.12; section 328}

43.4 Company debts

A ‘debt’ in relation to the winding up of a company means any of the following¹:

• any debt or liability to which the company is subject at the relevant date (see below)
• any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and
• any interest provable.

_{1. Rule 14.1}

43.5 ‘Relevant date’ for the purposes of the definition of company debt

The relevant date for the purposes of the definition of a company debt is the date the company goes into liquidation unless the company was in administration immediately prior to the date of liquidation, in which case the relevant date is the date that the company entered administration¹.

_{1. Rule 14.1(3)}

43.6 Partnership debts

There is no special definition of debts in relation to a partnership insolvency and the definition applied to companies or bankruptcy (see above) would apply, depending on the type of order to which the insolvent was subject.

43.7 Bankruptcy debts

Bankruptcy debts are defined as¹:

• any debt or liability to which the bankrupt is subject at the commencement of the bankruptcy (being the date of the bankruptcy order),
• any debt or liability to which the bankrupt may become subject after the commencement of bankruptcy, including after discharge from bankruptcy, by reason of any obligation incurred before the commencement of bankruptcy (a contingent liability),
• any amount specified in any criminal bankruptcy order made prior to the commencement of the bankruptcy (criminal bankruptcy orders were abolished in 1988 so official receivers are will rarely to encounter such debts), and
• any interest provable.

_{1. Section 382(2)}

43.8 Broad scope of definition of debt or liability includes uncertain and contingent liabilities

A debt in a winding up or a bankruptcy is a debt whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion¹.

Liability is defined as a liability to pay or money’s worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment and any liability arising out of an obligation to make restitution².

_{1. Rule 14.1(5); Section 383(2)}

_{2. Rule 14.1(6)}

43.9 Opted-out creditors

It is possible for a creditor of the insolvency to opt out of, for example, receiving notices from the office-holder¹.

_{1. Section 248A; Section 383A}

43.10 Statute-barred debts (limitation)

The legislation¹ provides for time limits beyond which action cannot be taken in order to, for example, recover debts.

It should also be noted that a limitation period will continue to run through the period of bankruptcy. This is likely to be of importance in relation to those debts that are not released on discharge, such as debts incurred through fraud² and in particular where the official receiver is considering a suspension of the bankrupt’s discharge as this may prevent the possibility of recovery of those debts.

_{1. Limitation Act 1980}

_{2. Anglo Manx Group Ltd v Aitken [2002] BPIR 215}

43.11 Assigned debts

A debt or right to make a claim can be assigned (sold) and, if that happens, the assignee has the same rights as the original owner – to present a winding-up petition, for example.

Assignments can be by deed or by operation of law. To be valid, an assignment under deed (which is the manner in which a debt would normally be assigned) must be in writing¹.

Once a creditor has sold a debt to another party, the assignee should thereafter be considered the creditor for dividend purposes and any proof of debt submitted by the original creditor should be ignored unless the assignee has not submitted a proof of debt, in which case the original proof of debt can be considered to be on behalf of the assignee.

Assignment should not be confused with the appointment of a collection agent, who do not adopt the debt as their own but, instead, attempt to collect the debt for a fee.

_{1. Law of Property Act 1925, section 136}

43.12 Foreign debts

Following the provisions of European law¹ and UK law², foreign creditors have equal right to participate in insolvency proceedings on-going in England and Wales.

A claim from outside the EU may be resisted on the basis that the claim is in whole or part a penalty³ or that it would not be a provable debt under British insolvency law⁴.

_{1. EC Regulation on Insolvency Proceedings 2015}

_{2. Cross-Border Insolvency Regulation 2006}

_{3. Cross-Border Insolvency Regulations 2006, schedule 1 article 13(3)(a)}

</sup>4. Cross-Border Insolvency Regulations 2006, schedule 1 article 13(3)(b)</sub>

43.13 Conversion of foreign debts

Foreign debts are to be converted into sterling at the exchange rate prevailing at the date of liquidation or bankruptcy order¹. Daily currency exchange rates can be obtained from the Financial Times web-site.

The Bank of England maintains a record of historical exchange rates:

_{1. Rule 14.21}

43.14 Valuation of the claim – general

Any liability must have a value, including contingent liabilities. The official receiver as liquidator or trustee must estimate the value of any debt which, by reason of it being subject to any contingency for any reason, does not bear a certain value. The estimated amount, subject to any revision if circumstances change, is the amount provable¹ and should be included in any statement of affairs prepared.

The official receiver as liquidator or trustee cannot withhold money from the estate as an investment or in a suspense account to answer contingent claims as they arise.

The official receiver, as liquidator, must advise the creditor of their estimate of the valuation of the claim².

If the creditor is dissatisfied with the liquidator’s or trustee’s estimate or revision of an estimate, they may apply for it to be determined by the court³.

_{1. Section 322; Rule 14.14}

_{2. Rule 14.14(3)}

_{3. Section 167(3); Section 303}

43.15 Valuation of the claim - guidance

There is no statutory guidance as to the basis on which contingent liabilities should be valued. The responsibility for estimating the value of the claim is, in the first instance, placed on the convener of a decision making process for voting purposes, and then the liquidator or trustee for dividend purposes¹. It may save protracted correspondence if the official receiver in such circumstances seeks to have the creditor provide their own calculation of the claim, together with supporting evidence, and this calculation can then be assessed by the official receiver.

_{1. Rules 14.7 and 15.33}

43.16 Subrogation of claims to Secretary of State where debts paid from National Insurance Fund

If an employer becomes insolvent, certain debts owing to employees may be paid by the Secretary of State from the National Insurance Fund. The most common of these debts are arrears of pay, holiday pay and pay in lieu of notice¹.

When such payments have been made to employees, the Secretary of State assumes the rights of each employee for the debt paid and becomes a single creditor of the insolvent employer, enjoying preferential status as appropriate, and the employee’s participation in the insolvency in respect of the debt paid is ended².

The Secretary of State is, in relation to the claims to which there is subrogation, entitled to priority over other preferential claims of the employee in respect of wages/holiday pay³.

_{1. Employment Rights Act 1996, section 167}

_{2. Employment Rights Act 1996, sections 167(3) and 189}

_{3. schedule 6, category 5}

43.17 Subrogation of claims to third-party

Where a creditor’s claim includes amounts advanced to the company or bankrupt for the purposes of paying employees’ remuneration and holiday pay, the right to be treated preferentially that the employee would have had had their debt not been paid by the creditor would pass to the creditor.

Such advances are often made by banks through the operation of an overdraft facility. For subrogation to apply, it is not necessary for the person making the advance to know a particular advance was made for the purpose of paying remuneration, provided they were aware that some of the advances they were making were for that purpose. In the case of a bank, this will nearly always be the case and it will then be necessary to identify which parts of the overdraft were applied to remuneration when calculating the preferential element¹.

The maximum that the creditor can claim as preferential is the lower of:

• the amount advanced for the purpose of paying the employee’s remuneration and actually used for that purpose; and
• the maximum preferential claim for remuneration less the employee’s actual preferential claim for remuneration.

_{1. Re James R Rutherford & Sons [1964] 1 WLR 1211}

43.18 Post-insolvency debts

Where a debt is incurred after the commencement of the insolvency proceedings (which is more likely in a bankruptcy case), it is not a provable debt¹. If it is to be paid at all by the liquidator or trustee, it is either as an expense properly incurred in the insolvency proceedings or payable out of any surplus remaining after the provable debts have been paid in full².

Where the debt is not considered a properly incurred expense, in bankruptcy it will usually fall to the bankrupt to pay out of future income, but in a winding up the creditor will have no remedy. The liquidator may pay the debt (to facilitate the sale of a property, for example), but is not compelled to do so.

_{1. Section 382(1); Rule 14.1}

_{2. Section 328}

Non-provable debts

43.19 Meaning of ‘prove’

Where a company is being wound up, or a bankruptcy order has been made, a person claiming to be a creditor and wishing to recover their debt in whole or in part must, subject to any order of the court], submit their claim in writing (which can include in electronic form), to the liquidator, official receiver as receiver and manager, or trustee¹.

A person who lodges a claim is referred to as ‘proving’ for their debt and the document by which they seek to establish there claim is referred to as the ‘proof’².

A summary of the Rules relating to proving can be found in chapter 44.

_{1. Rule 14.3}

_{2. Rule 1.2}

43.20 Debts that are not provable

The legislation provides a wide definition of debts that are considered provable. It has been held that the notion that all possible liabilities within reason should be provable helps achieve equal justice to all creditors and potential creditors in any insolvency, and, in bankruptcy proceedings, helps ensure that the former bankrupt can in due course start afresh¹.

There are, however, exceptions to this general principle, as follows:

• In bankruptcy, any fine imposed for an offence²,
• In bankruptcy, any obligation (other than an obligation to a lump sum or to pay costs) arising under an order made in the family proceedings or any obligation arising under a maintenance assessment under the Child Support Act 1991³,
• In administration, winding-up or bankruptcy, any obligation arising under certain drug trafficking and proceeds of crime legislation⁴,
• In administration, winding-up or bankruptcy, any obligation arising from a payment made out of the social fund by way of crisis loan or budgeting loan⁵

_{1. Re Nortel and others [2013] UKSC 52}

_{2. Rule 14.2(2)(c)(i)}

_{3. Rule 14.2(2)(c)(ii) and (iii)}

_{4. Rule 14.2(2)(a)}

_{5. Rule 14.2(2)(b)}

43.21 Categories of debts often wrongly considered not provable

Certain categories of debts are often wrongly considered to be not provable, as follows:

• Penalty charge notices in relation to motoring
• Penalty notice under immigration laws
• Overpayment of state benefits
• Lump sum payments in respect of family proceedings

43.22 Categories of debts not provable in some circumstances

Certain debts are not provable in some circumstances. Guidance relating to the main categories of these is in this Part, as follows:

• Social Fund loans
• Certain student loan debts,
• Postponed debts,
• Debts owed by minors

43.23 Categories of debts not provable by virtue of being unenforceable

Certain debts are not provable by virtue of being unenforceable debts. Guidance relating to the main categories of these is in this Part, as follows:

• Gambling debts incurred prior to 1 September 2007
• Statute-barred debts
• Debts owed by minors

43.24 Creditor pursuing a non-provable debt

Any claim against a bankrupt which is a non-provable debt in the bankruptcy proceedings may be pursued by the creditor obtaining judgment at any time between the bankruptcy order and the bankrupt’s discharge, but only with the sanction of the court¹.

The official receiver, if satisfied that the debt is a non-provable debt, should inform the court in which the proceedings are taking place of the bankruptcy order and seek to ensure that judgment is given only in respect of the non-provable debt.

Except where there are arrears of maintenance payments due to the bankrupt’s former spouse, the pursuit of a non-provable debt is most likely to occur after discharge when the permission of the court is not required.

_{1. Section 285(1)}

43.25 Bankruptcy petition founded on a non-provable debt

The definition of bankruptcy debt makes no distinction between a provable and a non-provable debt. The court therefore has jurisdiction to make an order on a petition based on a non-provable debt, but the court’s discretion has been restricted in that it will only grant a bankruptcy order on the basis of a non-provable debt in exceptional circumstances¹.

_{1. Levy v Legal Services Commission [2001] 1 FLR 435 CA; Wehmeyer v Weymeyer [2001] BPIR 548}

43.26 Postponed debts

Postponed debts are not provable until all other claims of creditors, and interest payable thereon, have been settled in full¹.

Postponed debts are:

• claims where profit has been made or one or more investors have suffered a loss as a result of a person contravening a relevant requirement of the financial services and markets act 2000.
• any other claim postponed by the act or any other enactment, for example
  • certain partnership debts²
  • debts in relation to terrorism forfeiture orders³

_{1. Rule 14.2(4)}

_{2. Partnership Act 1890, section 3}

_{3. Terrorism Act 2000, schedule 4 paragraph 50}

Debts not released on discharge (bankruptcy only)

43.27 Debts not released on discharge - general

The bankrupt’s liability to repay bankruptcy debts (except out of assets of the bankruptcy) is released on their discharge from bankruptcy¹.

Certain categories of debts are however not released on discharge. In effect, this means that the bankrupt becomes liable, once again, for the debt on their discharge from bankruptcy.

_{1. Section 281(1)}

43.28 Categories of debts not released on discharge

The following categories of debts are not released on discharge¹:

• a debt incurred in respect of, or the payment of which was avoided by, any fraud or fraudulent breach of trust to which the bankrupt was a party.
• any liability in respect of a fine, or a security entered into before a court, including one imposed for a public revenue offence.
• a liability in respect of a confiscation order.
• a liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages under consumer protection law] in respect of personal injuries.
• a liability arising under any order made in family proceedings or under a maintenance calculation made under the child support legislation.
• an obligation in respect of a budgeting loan or a crisis loan from the social fund where the bankruptcy petition was presented on or after 19 March 2012.
• a debt due in relation to a student loan.
• generally, any non-provable debt (which includes many of the aforesaid categories).

_{1. Section 281(3) to (7)}

43.29 Debt for fraud not released on discharge

A debt incurred by fraud is not released on discharge¹.

It has been held that fraud in the context of these provisions has simply to be proved in the common law sense, and is intended to refer to debts tainted by actual dishonesty², or where the act (breach of trust, for example) was both deliberate and involving dishonesty</sup>3</sup>.

A fraud would not be present simply on the basis of a foreign judgment on an action for fraud⁴ nor would an obligation to repay money obtained under undue influence automatically be fraud for these purposes⁵.

The most common fraudulently incurred debt encountered by the official receiver is likely to be a payment of social security benefits where the benefits were obtained fraudulently.

_{1. section 281(3)}

_{2. Templeton Insurance v Brunswick [2012] EWHC 1522 (Ch)}

_{3. Woodland Ferrari v UCL Group Retirement Benefits Scheme [2002] Ch 115; Soutzos v Asombang [2010] EWHC 842 (Ch)}

_{4. Masters v Leaver [2000] BPIR 28}

_{5. Mander v Evans [2001] 1 WLR 2378}

43.30 Official receiver’s role where discharge of a liability is in question

It is not uncommon for a dispute to arise between a creditor and a (former) bankrupt over whether the debtor has been released from the liability to pay a particular debt by virtue of the relevant provisions outlined above.

Whilst an official receiver can provide information relating to the position of the law (if so asked), it is not for them to arbitrate the dispute and, ultimately, if the parties cannot agree a position it is likely that the matter will have to be dealt with at court by one or other of the parties referring it there.

Guarantee and warranty debts

43.31 Debts in relation to guarantee given by insolvent

When a proof of debt is submitted in respect of a guarantee given by the insolvent for the debt of a third party, the official receiver should obtain a copy of the guarantee and, if it was given within the two years preceding the insolvency proceedings, satisfy themselves that it does not constitute a transaction at an undervalue. Where it would appear that the debt is a transaction at an undervalue the proof may be rejected.

The liability under the guarantee will normally be dependant on the principal debtor’s failure to pay the debt. That being the case, the principal creditor must take into account all sums paid by the principal debtor up to the time they submits their proof, but need not adjust the claim if they receives further sums (subject to them not receiving more that 100p in the £ of the debt owed from the principal and guarantor).

Any proof submitted in the proceedings cannot exceed any limit in the guaranteed amount.

43.32 ‘All sums due’ guarantees given by insolvent

If a guarantee given by an insolvent is ‘for all sums due’ from the principal debtor to the principal creditor, the liabilities will also extend to any guarantees given by the principal debtor to the principal creditor (in other words, the insolvent will have guaranteed the guarantees) ¹.

_{1. Bank of Scotland v Wright [1990] BCC 663}

43.33 Co-guarantors

Where a number of parties have co-guaranteed the debts of a third party, the principal creditor may in the event of default, and subject to any prior agreement, seek payment from any of the guarantors as they see fit. The guarantors must however share the burden of the liability equally.

Where, therefore, one guarantor has, for example, discharged the whole amount due to the principal creditor, they may claim a contribution from the other guarantors. A co-guarantor with the insolvent who has discharged the insolvent’s ‘share’ of the debt may therefore prove in the proceedings for:

• the insolvent’s share of the debt discharged, and
• a proportionate share of those amounts due from the other co-guarantors which cannot be recovered due to their own insolvency.

43.34 Guarantee given by third party for debts of insolvent – liability of guarantor

A person who has guaranteed a debt due from the insolvent, and paid it in full, may submit a proof in the proceedings for the amount paid. That person will also gain the rights that the principal creditor may have had against the insolvent in respect of their debt, including any rights to security or to preferential treatment for dividend purposes ¹.

The liability of the guarantor, who has not paid, or been called upon to pay, the debt due under the guarantee is a contingent liquidation/bankruptcy debt² but if the creditor is still in a position to prove, the guarantor may not prove³.

1. Re Oriental Commercial Bank, ex parte European Bank (1871) 7 Ch App 99; Re Fenton Ltd, ex parte Fenton Textile Association Ltd [1931] 1 Ch 85; Re Lamplugh Iron Ore Co Ltd [1927] 1 Ch 308

2. Re Paine [1897] 1 QB 122

3. Re Whitehouse (1887) 37 Ch D 683; Re Fenton Ltd, ex parte Fenton Textile Association Ltd [1931] 1 Ch 85

43.35 Guarantee given by third party for debts of the insolvent – liability of creditor

Where a guarantor has not fully paid the debt due under the guarantee, the principle creditor may lodge a proof. Generally, before doing so, the creditor must give credit for any amount received from the guarantor¹ or from any security realised².

Where the guarantee was limited to a fixed sum, the creditor has the right to prove for the whole of the debt, until 100p/£ is received, even if monies have been received from the guarantor, but only where the guarantor is liable for a fixed sum element of any balance remaining under the guarantee (when all other potential repayment sources have been applied to the debt) and not where they are liable for a fixed-sum element of the overall debt³.

The principle creditor cannot be obliged to proceed only against the guarantor, rather than proving⁴.

_{1. Burnand v Rodocanachi, Sons & Co (1882) 7 App Cas 333 at 339}

_{2. Aylwin v Witty (1861) 30 LJCh 860}

_{3. Re Sass ex parte National Provincial Bank of England [1896] 2 QB 12}

_{4. Re Rees (1881) 17 Ch D98 CA}

43.36 Warranties

A product or service guarantee given by the insolvent can give rise to a contingent unsecured claim in the proceedings. It could also be an unsecured claim at the date of the proceedings. Where contingent, it is unlikely that a proof will be lodged unless the customer is dissatisfied with the product or service, where, for example, it requires replacement or repair. In the case of insolvency of the product or service provider, it is likely that a dissatisfied customer will prove for the cost of repair or replacement sourced elsewhere.

Where a trade association or insurance company has guaranteed the insolvent’s obligations, their claims in respect of the costs of settling customer claims should be dealt with as a guarantee.

Tax, duty and VAT debts

43.37 Excise duty (tobacco, alcohol, fuel and gambling)

Excise duty is a tax on certain goods such as alcohol and tobacco products and is collected by the retailer. The duty payable on alcohol products is based on their alcohol content and volume and on tobacco products the rate chargeable relates to weight, amount or retail price. The duty on fuel is a flat rate per litre.

Excise duty is also payable on gambling activities such as fruit machines, bingo, lotteries and gaming.

Where the insolvent sold such goods or provided gambling services they may have a debt in respect of duty collected but not paid over to HMRC.

43.38 Air passenger duty

Air passenger duty is payable by airlines in relation to the carriage of passengers. The amount due relates to the final destination of the passenger based on the distance between London and the capital city of the destination country, and the type of aircraft used.

Where the insolvent operated as an airline, there may be a debt due in respect of unpaid air passenger duty.

43.39 Foreign revenue debts

Generally, foreign creditors are allowed full participation in insolvency proceedings in England/Wales.

Within the EU, the revenue collection authority of one Member State may request the revenue collection authority of another Member State enforce the collection of revenue debts within that other Member State¹. Subject to some limited exceptions, the collection authority is then obliged to comply with that request.

The relevant provisions extend to all taxes and duties of any kind, including those arising from local authorities, but do not include compulsory social security contributions or monies due of a contractual nature. The provisions also include penalties, fines, fees, interest, costs and surcharges.

The provisions will continue to apply between the Member States and the UK until 2026². It follows therefore that the official receiver may receive a claim from HMRC on behalf of a revenue collection authority in another Member State of the EU.

_{1. Council Directive 2010/24/EU Mutual assistance for the recovery of claims relating to taxes duties and other measures}

_{2. MARD Regulations 2011, regulation 1}

43.40 VAT group registration

Where two or more corporate entities are treated as a group for VAT purposes, all members of the group are liable jointly and severally for any tax due from the representative member¹.

Where therefore a company is in liquidation and there is a group VAT debt, this liability may met by another part of the group with that group company then possibly having a claim against company in liquidation.

_{1. Re Nadler Enterprises [1981] 1 WLR 23}

Penalty charges

43.41 Penalty charge notices relating to parking, etc

Enforcement of certain traffic regulations, for example those relating to parking, driving in bus lanes and disregard of a congestion charge, is a civil (rather than criminal) matter, for which responsibility lies with the relevant local authority or, in some cases, Transport for London.

Enforcement of contraventions are generally by way of a Penalty Charge Notice imposing a financial penalty issued on the spot or by post (where the contravention is evidenced through CCTV, for example) by the relevant authority.

Although such charges are often colloquially called ‘fines’, they do not meet the definition of a fine given in the legislation and are therefore provable debts.

The Police retain the power to enforce parking and other regulations in certain circumstances and in relation to certain local authority areas. Any contravention that is enforced by the police under the criminal law will be considered to be a ‘fine’ and will not, therefore, be provable.

43.42 Penalties for contraventions of road traffic licensing rules

The Driver and Vehicle Licensing Agency have the power to issue penalties where a person does not correctly declare an uninsured or un-taxed vehicle as off the public road, by completing a statutory of road notice (SORN). Such a penalty would be a provable debt.

Where the person has been fined by the court for a related offence¹, the debt would not be provable, and would not be released on discharge.

_{1. Vehicle Excise and Registration Act 1994, section 29}

43.43 Fixed penalties for road traffic offences

Certain road traffic offences may be dealt with by way of a fixed penalty¹. Payment of the fixed penalty removes any liability to conviction for the offence to which the penalty relates². Such a penalty would not be considered a fine but is also unlikely to be considered a debt as, if not paid, it simply means that the liability to conviction would remain.

Where the person has been fined by the court for a motoring offence, the debt would not be provable, and would not be released on discharge.

_{1. Road Traffic Offenders Act 1988, section 54}

_{2. Road Traffic Offenders Act 1988, section 55}

43.44 Penalty fares for railway fare evasion

Where an individual travels on a train without a valid ticket the rail operator can charge a penalty fare, which is generally £20, on top of the fare that ought to have been paid.

A penalty fare is a civil liability and is therefore a provable debt¹.

If the railway operator can prove an intent to avoid payment (such as using a forged ticket, deliberately avoiding a ticket inspector or using another person’s ticket), then it might refer the matter to a magistrate’s court for prosecution. Similarly, a passenger can be reported for a failure to provide their details on the request of a ticket inspector². Any fine imposed by the court as a result of such a contravention would not be a provable debt and would not be released on discharge.

_{1. Railways Act 1993 section 130(8)}

_{2. Regulation of the Railways Act 1889 section 5(2) and (3)}

43.44 Penalty charge notices under immigration law

Where an employer is found with illegal migrant workers in their workforce, they may be served with a Notice of Liability for a Civil Penalty by the Border Agency of the Home Office. This financial penalty is a civil (rather than criminal) sanction and is intended to penalise the employer for having acted without due care and diligence in operating recruitment and employment practices¹.

Such a penalty does not meet the definition of ‘fine’ given in the legislation and is therefore a provable debt.

_{1. Immigration, Asylum and Nationality Act 2006}

43.45 Penalty charges for disorder

Certain low level nuisance offences, such as littering, making graffiti or disorderly conduct, can be dealt with by the imposition, by a police officer, of a penalty notice on the offender¹. An agreement to pay the penalty removes any liability to conviction, but cannot be taken to be an admission of guilt. If the offender agrees to pay, but subsequently does not do so, the penalty becomes a fine and is, therefore, not provable and the debt is not released on discharge.

_{1. Criminal Justice and Police Act 2001}

Wages and benefits

43.46 Advances of salary

Most individuals are paid an annual salary under their contracts of employment and the employer pays this by making (usually) monthly payments through the year. Where an advance of salary has been given to the employee, they have simply been paid in uneven instalments, receiving a larger proportion at the time of the advance and a reduced sum thereafter. Consequently, if the employment continues it can be regarded that there is no debt as the employee will provide the services for which they have been (pre)paid.

If, however, the employment ceases before the employee has provided all the labour for which they have been paid this then gives rise to a debt which is provable in the bankruptcy as the advance cannot then be recovered from the salary. This arises even if the employment terminates post-bankruptcy as there would be a contingent liability.

43.47 Advances of benefits (payments on account)

An advance of benefit available is under the Universal Credit system (known as a Payment on Account).

When a payment is made, Universal Credit payments are subsequently reduced for a period of time until the Payment on Account is accounted for, typically over 6 or 12 months. Universal Credit payments then resume normal levels.

Following a bankruptcy any sums due in relation to a Payment on Account would be considered to be a provable debt and the DWP should not recover the outstanding sums from the bankrupt, including by way of reduced benefit payments.

43.48 Overpayment of state benefits

Overpayment of state benefit, such as housing benefits, jobseekers allowance or tax credits may be made as a result of mistakes, change of circumstances or fraud.

It has been held by the Supreme Court¹ that overpayments of benefits are contingent liabilities and, as such, are provable debts.

Such a debt incurred through fraud would not however be released upon discharge.

_{1. Re Nortel and others [2013] UKSC 52}

43.49 Social Fund loans

The Social Fund provides a pot of money that can be used to provide interest free loans to people in receipt of social security benefits to assist them in dealing with unexpected emergency expenses.

An obligation in respect of a loan from the Social Fund is not a provable debt¹.

An obligation in respect of a budgeting loan or a crisis loan from the Social Fund where the bankruptcy petition or application was presented on or after 19 March 2012 will not be released on discharge².

_{1. Rule 14.2(2)(b)}

_{2. Section 281(8)}

43.50 Post-bankruptcy benefit overpayments

It is considered that overpayments which are made after the date of the bankruptcy order are a post bankruptcy liability, for which the bankrupt would be liable to repay, even if they arose following an error (the decision to overpay) which occurred before the order.

43.51 Statute-barred debts – recovery of social security and tax credit debts

The legislation¹ provides that the definition of ‘action’ as regards the steps that are barred for recovery of debts incurred under the social security or tax credit legislation when the limitation period expires applies only to actions in a court of law and not, for example, to recovery from future benefits or future income.

Recovery would, however, be prohibited by the making of a bankruptcy order.

_{1. Welfare Reform Act 2012, section 108}

Domestic and personal debts

43.52 Water rates

Most unmetered water rates will be charged annually (generally on 1 April), payable in advance. In the majority of cases, the agreement between the supplier and the consumer will contain a provision, or ‘insolvency clause’ for the annual charge to be apportioned in the event of liquidation or bankruptcy and, where such a clause exists, the supplier will only be entitled to prove for apportioned usage and arrears up to the date of the insolvency order.

Where there is no insolvency clause the total of the unpaid annual charge will be a provable debt and will not be recoverable from the insolvent.

Where the water usage is metered, the provable debt is simply for the usage and arrears up to the date of the insolvency order.

A water company cannot disconnect for unpaid charges if the debt relates to an individual’s principle home¹.

_{1. Water Industry Act 1991, section 61}

43.53 Gambling debts

A gambling contract can be defined as a contract by which two parties or more agree that a certain sum of money, or other thing, shall be paid or delivered to one of them, on the happening or not of a certain event. Gambling contracts entered into after 1 September 2007 are treated in a similar manner to other contracts in law¹.

It would be rare for the official receiver to encounter a case with a large element of debt for unpaid gambling debts as the provision of credit facilities by licensed providers of gambling is tightly restricted².

_{1. Gambling Act 2005, section 335}

_{2. Gambling Act 2005, section 81}

43.54 Spread-betting debts

In relation to spread-betting, it is possible to lose more than the initial stake.

Spread-betting is not covered by the gambling legislation and is, instead, a regulated activity under the oversight of the Financial Conduct Authority.

Where the insolvent has entered into a spread-betting contract any debt due under that contract is a provable debt¹.

_{1. Financial Services and Markets Act 2000, section 412}

43.55 Debts to spouse or civil partner

Where a person is married to, or is in a civil partnership with, the bankrupt at the date of bankruptcy, and that person provided credit to the bankrupt, the debt, although not a postponed debt, ranks behind all other categories of debt¹. This would include any interest payable on the debt. Whether or not the parties were married/in a civil partnership at the date that the credit was provided is irrelevant so far as the effect of this provision is concerned.

Where divorce or dissolution proceedings are concluded prior to the bankruptcy order being made, the former spouse/civil partner’s claim ranks equally with the other unsecured creditors.

_{1. Section 329}

43.56 Motor Insurers Bureau

The Motor Insurers Bureau (‘MIB’) can provide compensation to victims of negligent uninsured and untraced drivers. Every motor insurer is required to be a member of MIB¹ and contribute to its funding.

Where the MIB has a claim in the proceedings it will usually arise by virtue of them having paid compensation to a third party where the bankrupt was the negligent uninsured driver and is now pursuing the bankrupt for the compensation paid.

Such a debt is a provable debt, but any element of the debt that relates to compensation paid for personal injuries may not be released on discharge. It is open to the MIB to consider whether and to what extent they wish to pursue the bankrupt post-bankruptcy and the official receiver need not get involved.

_{1. Road Traffic Act 1988, section 145(6)}

43.57 Television licence fee

It is possible to pay for a TV licence in monthly or quarterly instalments and, in all cases, payment is made in advance of the period to be covered by the licence. If an individual misses a payment, then there is no valid licence and continued use of TV receiving equipment would be an offence¹.

It is not possible, therefore, to have a debt to the TV licensing authorities. An individual has either paid for a licence and has one, or has not paid and does not have one.

Where a person has been prosecuted for not having a TV licence, and a fine has been issued, such a fine is a non-provable debt not released on discharge.

_{1. Communications Act 2003, section 363}

43.58 Debts owed by minors

Under common law, a contract involving a minor (that is, someone under the age of 18¹) is voidable at the minor’s option. A debt or debts owed by a minor are only provable where they are legally enforceable.

Enforceable contracts are those that are for ‘necessaries’, which are goods suitable to the condition of life of the minor, such as food, drink, clothing or lodging, and to their actual requirements at the time of sale and delivery, such as education².

It follows therefore that a minor may be made bankrupt, but only in respect of debts incurred in respect of necessaries.

_{1. Family Law Reform Act 1969, section 1}

_{2. Proform Sports Management Ltd v Proactive Sports Management Ltd [2006] EWHC 2903(Ch)}

Council tax and business rates

43.59 Council tax

Council tax is a tax levied by local authorities on domestic properties to pay for the expenses of the authority and other authorities (such as Police and fire services)¹.

The amount payable depends on the rateable value of the property as assessed², subject to various exemptions and discounts.

Liability to pay the council tax falls jointly and severally on the resident and owner of the property³ or, in the case of a liability due to residency, that individual’s spouse or civil partner if they are also so resident⁴.

_{1. Local Government Finance Act 1992}

_{2. Local Government Finance Act 1992, section 5}

_{3. Local Government Finance Act 1992, section 6}

_{3. Local Government Finance Act 1992, section 9}

43.60 Council tax – unoccupied premises

Where premises are unoccupied and the liable council taxpayer is the trustee, the premises are exempt from council tax¹. This exemption applies even if the unoccupied property remains furnished.

Unoccupied premises are also exempt from council tax where the mortgagee is in possession under the terms of the mortgage.

_{1. Council Tax (Exempt Dwellings) Order 1992, article 3}

43.61 Council tax – billing and arrears

At the beginning of the financial year a local authority will issue a demand notice in respect of a relevant property1. This notice is an estimate of the council tax due based on the assumption that the residency of the occupier will continue for the entire billing period. The notice usually requires that this amount is paid in 10 instalments.

_{1. Council Tax (Administration and Enforcement) Regulations 1992}

43.62 Council tax – provable debts

All outstanding liabilities (that is, all arrears and future instalment payments) for council tax for the year in which the insolvency commences are provable debts unless the debtor moves during that year, in which case any liability due for the new property would not be provable¹.

This applies whether or not the company/bankrupt was in arrears at the date of insolvency.

_{1. Re Nortel and others [2013] UKSC 52; Kaye v South Oxfordshire DC [2013] EWHC 4165}

43.63 Non-domestic rates (business rates)

Non-domestic rates are similar to council tax, but are chargeable in relation to business premises (sometimes called ‘hereditaments’). The amount due is calculated by multiplying the rateable value of the property by the business rates multiplier set by central government¹.

The amount payable depends on the rateable value of the property as assessed, subject to various exemptions and discounts².

Liability to pay the council tax falls jointly and severally on the occupiers of the property. If the property is empty, the owner (or the person entitled to possession) will be liable after the property has been empty for a period three months (or six months for an industrial property), though a liquidator or trustee in bankruptcy is exempt³.

_{1. Local Government Finance Act, part III}

_{2. Local Government Finance Act 1988, sections 43 to 49}

_{3. Local Government Finance Act 1988, sections 45 and 65; The Non-Domestic Rating (Unoccupied Property) Regulations 2008, regulation 4}

43.64 Non-domestic rates (business rates) – collection and recovery

The amount estimated as due for non-domestic rates will be billed for the start of the financial year¹.

The local authority will allow the payment to be made in instalments, on a monthly basis².

_{1. The Non-Domestic Rating (Collection and Enforcement) (Local Lists) Regulations 1989, regulations 4 and 5}

_{2. The Non-Domestic Rating (Collection and Enforcement) (Local Lists) Regulations 1989, schedule 1}

43.65 Non-domestic rates – provable debts

All outstanding liabilities (that is, all arrears and future instalment payments) for non-domestic rates for the year in which the insolvency commences are provable debts¹.

This applies whether or not the company/bankrupt was in arrears at the date of insolvency.

_{1. Re Nortel and others [2013] UKSC 52; Kaye v South Oxfordshire DC [2013] EWHC 4165}

Debts to landlords

43.66 Arrears of rent and related debts

Many insolvents will be in arrears to their landlords in respect of rent - especially in relation to commercial premises. Arrears of rent are a provable debt in liquidation and bankruptcy proceedings and may be calculated pro-rata where the insolvency order is between payment dates¹, though landlords do retain certain rights against the property of the insolvent.

A landlord may also have a claim in respect of loss or damage as the result of the issue of a disclaimer in respect of the leased property.

The landlord might also submit a claim for forfeiture or dilapidations.

_{1. Rule 14.22}

43.67 Continuing obligations under leases

Where a tenancy was created before 1 January 1996, an insolvent may have obligations under the lease (this is referred to as ‘privity of contract’) despite the fact that they have assigned it to a third party¹. The obligation may be after an assignment where the original lessee may remain liable under covenants².

Even if the tenancy was granted after 1 January 1996 the insolvent may have a liability under the lease where a guarantee was given to the landlord.

_{1. Hindcastle Limited v Barbara Attenborough Associates Limited [1996] 2 WLR 262}

_{2. Warnford Investments Ltd v Duckworth [1979] 1 Ch 127}

43.68 Authorised guarantee agreements

For tenancies created after 1 January 1996, the concept of liability under privity of contract was discontinued¹. A landlord may require a tenant who assigns a lease to enter into an ‘authorised guarantee agreement’, under which the tenant who assigns the lease or tenancy may guarantee performance of the tenant’s covenants by the assignee, but not any subsequent assignee².

_{1. Landlord and Tenant (Covenants) Act 1995, section 3}

_{2. Landlord and Tenant (Covenants) Act 1995, section 5}

43.69 Assured or secure tenancy rent arrears – possession orders

An assured or secure tenancy may be subject to a suspended possession order requiring the bankrupt to repay rent arrears under threat of the termination of the tenancy and the right of a landlord to recover their property from a defaulting tenant is not affected by bankruptcy. It has been held that a possession order is not a remedy against the property or person of the bankrupt and therefore is not restricted¹.

The landlord is not entitled to recover any arrears of rent, except by way of dividend in the bankruptcy. A possession order granted might still be suspended but not on condition of the payment of rent arrears. Any suspended possession order in force at the date of the bankruptcy order might be varied to remove any provision for payment of rent arrears.

The consequence of this is, in assessing a bankrupt for an income payments agreement, or order, official receivers should not include any amounts payable in respect of rent arrears under a suspended possession order. Commencement of the agreement should be deferred or stepped allowing the bankrupt time to seek a variation of the suspended possession order. Under no circumstances should the bankrupt be advised to cease making payments under the terms of the suspended possession order before it has been varied by the court.

No allowance should be made in respect of an informal agreement to make payments of rent arrears to avoid possession proceedings. Such payments should stop immediately, even if this might trigger an application for possession.

_{1. Christina Sharples v Places for People Homes Ltd [2012] Ch 382}

Debts relating to litigation and court proceedings

43.70 Costs

It has been held that costs are contingent liabilities for the purpose of proving in insolvency proceedings.

Where a bankrupt is involved in any claim before the court, whether as claimant or respondent, and proceedings have been issued prior to the date of the bankruptcy order, any order for costs made against the bankrupt, whether made before or after the date of the bankruptcy order, is a provable debt in the bankruptcy on the basis that it is a contingent liability, the contingency being a risk of adverse costs arising when the court proceedings are issued¹.

_{1. Re Nortel and others [2013] UKSC 52}

43.71 Fines and other court penalties and liabilities

Any fine (defined as ‘any pecuniary penalty or pecuniary forfeiture or pecuniary compensation payable under a conviction) is not a provable debt¹.

Such a definition would not include penalty charges imposed by local authorities or the police.

A liability under a recognisance (which is a security entered into before a court with a condition to perform some act required by law) is not released on discharge. A penalty imposed for an offence relating to public finance is not released without the consent of the Treasury².

_{1. Rule 14.2(3); Magistrates Court Act 1980, section 150}

_{2. Section 281(4)}

43.72 Creditor’s costs of execution

A judgment creditor is entitled to prove in the insolvency for any unrecovered costs of their execution. The creditor cannot do so where the insolvency intervened in the execution so that the costs are a charge on the proceeds of sale or if the officer charged with the execution has deducted their costs before accounting to the liquidator or trustee for the proceeds of sale.

If execution was levied after the commencement of the winding up, the judgment creditor is unable to claim in the winding-up proceedings for the costs of the execution. The officer charged with the execution is not entitled to claim in the proceedings but must look to the judgment creditor to discharge any shortfall in their costs, and the creditor may make a claim for those costs.

43.73 Confiscation orders

The courts have the power to make a confiscation order against a person who has been shown to have benefitted from the proceeds of crime, and similar. Any liability in respect of such an order under the following legislation is not a provable debt¹:

• Proceeds of Crime Act 2002
• Drug Trafficking Offences Act 1986
• Criminal Justice (Scotland) Act 1987
• Criminal Justice Act 1988

Such debts under the Proceeds of Crime Act 2002 are also not released on discharge².

_{1. Rule 14.2(a)}

_{2. Section 281(4A)(b)}

43.74 A liability in respect of personal damages not released on discharge

The liability of a bankrupt to pay damages to a third party in respect of a personal injury claim is a provable debt in the bankruptcy but the bankrupt is not released from the debt on discharge unless the court so directs¹.

_{1. Section 281(5)(a)}

43.75 Liability in tort (including unliquidated damages)

Liability in tort is a liability arising out of a civil wrong, where the victim of the wrong is entitled to bring a claim (or complaint) to claim damages. It would include actions such as libel, assault or trespass.

The legislation makes specific provision that such liabilities in tort, including those for unliquidated damages, are provable debts in a winding up or bankruptcy so long as the event which leads to the claim occurs prior to the date that the company went into liquidation (unless the petition was presented on or after 6 April 2010, and the company was in administration immediately prior to the date of liquidation, in which case the relevant date is the date that the company entered administration) or the individual was made bankrupt¹.

_{1. Rule 14.2(1); Section 382(1); Re Dollar Land Holdings [1993] BCC 823}

43.76 Liability in tort where harm yet to happen

In the case of a company, the legislation provides that, for cases where the date of liquidation (or an earlier preceding administration) was on or after 1 June 2006, the liability in tort will be a provable debt (requiring some estimation where there is a pre-insolvency actionable claim, even if the harm to the victim has not yet materialised¹. An example may be where the victim has been exposed to asbestos but has not yet developed the symptoms of asbestosis.

Such a claim would also be provable in bankruptcy, but the bankrupt would not be discharged from the debt, so the potential claimant would be free to pursue the bankrupt post-bankruptcy.

_{1. Rule 14.2(1)}

Business debts

43.77 Deficiency in pension scheme

A deficiency in a pension scheme operated by the insolvent for the benefit of employees can be a debt in insolvency proceedings.

43.78 Insurance claims

An insurance company, by the nature of its business, has numerous contingent liabilities. Special rules, including in respect of the order of payment, apply to the winding-up of insurance companies.

43.79 Contributories

A contributory is a person liable to contribute to the assets of a company in the event of it being wound up. Any present and past member¹ is a contributory, subject to certain qualifications as to liability².

Where a contributory has made such a contribution, he she will be a creditor in the insolvency for the amount contributed.

_{1. Section 79}

_{2. Companies Act 2006, section 112; Section 74(1)}

Debts due under family and domestic proceedings including debts to CSA

43.80 Debts due under family and domestic proceedings

Certain debts in respect of family and domestic proceedings are not provable. The definition of such proceedings is broad and can be taken to include any court proceedings involving the settling of family business, such as the setting of maintenance orders¹.

The court may make an order for maintenance. Maintenance awarded to a civil partner is for their own benefit while maintenance awarded to an unmarried parent is for the benefit of their child. However, maintenance can be awarded to a spouse for their own benefit and/or for the benefit of a child who is under the age of 18, or 23 if the child is in full-time education.

A liability in relation to an order arising under family proceedings is not released on discharge unless the court so directs².

_{1. Rule 14.2(2)(c) and (3)}

_{2. Section 281(5)(b)}

43.81 Debts due in respect of an obligation to make a lump sum payment or to pay costs in respect of family proceedings is provable

An obligation to make a lump sum payment or pay costs in respect of family proceedings is, however, a provable debt¹, but is not released on discharge².

_{1. Rule 14.2(c)(ii)}

_{2. Section 281(5)(b)}

43.82 Debts due in respect of an obligation to the Child Support Agency

The Child Support Agency (CSA) has the power to make sure that adults who live apart from their children contribute financially to their upkeep by paying maintenance where the parties concerned are unable or unwilling to reach an agreement on maintenance.

Any obligation under a maintenance assessment made under the legislation is not a provable debt¹, and would not be released on discharge2.

_{1. Rule 14.2(c)(iii)}

_{2. Section 281(5)(b)}

43.83 EU child maintenance arrears not a provable debt; lump sum debts provable but not released on discharge

The general principle under the EC Regulation is that the law of the State of the opening of the proceedings is the law that is used to decide matters. There are exceptions to this general principle, but none of them cover debts made under matrimonial proceedings.

Any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family proceedings is not a provable debt. The Act defines “family proceedings” as having the same meaning as that given in the Magistrates Court Act 1980. The Magistrates Court Act 1980, as amended, refer to European Directives on the jurisdiction, and the recognition and enforcement, of judgements in civil and commercial matrimonial matters and matters of parental responsibility¹.

This being the case, it is likely that an order of an EU court in matrimonial proceedings would be recognised by the English court and fall within the definition of “family proceedings” in the Rules.

In summary therefore, arrears of child maintenance under an EU order are not a provable debt in an English bankruptcy². A debt following an EU order for a lump sum maintenance payment is a provable debt, but is not released on discharge.

_{1. Magistrates Court Act 1980, section 65}

_{2. Wehmeyer v Wehmeyer [2001] BPIR 548}

Student loans

43.84 Student loans are generally non-provable debts

Student loans are granted to eligible students to assist with the costs of higher education under a number of pieces of legislation.

The position of student loans as provable debts has changed over the years as the legislation has developed. In summary, the position is as follows¹:

| ### Date of order | ### Loan made under | ### Status of debt | | — | — | — | | ### Before 1 July 2004 | Education (Student Loans) Act 1990, orTeaching and Higher Education Act 1988 | Provable | | ### Between 1 July 2004 and 31 August 2004 | Education (Student Loans) Act 1990 | Not provable | | Teaching and Higher Education Act 1988 | Provable | | ### On or after 1 September 2004 | Education (Student Loans) Act 1990, or Teaching and Higher Education Act 1988 | Not provable |

_{1. Education (Student Loans) (Repayment) Regulations 2009 regulation 80(2)(b)}

43.85 A debt in respect of a student loan not released on discharge

A debt in respect of a student loan is not released on discharge where the bankruptcy order was made on or after 1 September 2004. This is provided for in legislation¹ other than the insolvency legislation.

_{1. Education (Student Loans) (Repayment) Regulations 2009 regulation 80(2)(b)}

Preferential debts

43.86 Preferential debts - general

Preferential debts are debts which are to be paid in preference to other unsecured debts and also in preference to the holder of a floating charge (see below)¹.

Following changes to the law in September 2003 the categories of debt that are considered to be preferential were significantly reduced with the Crown losing most of its preferential status.

Since the majority of those cases to which the pre-September 2003 rules applied will now have been dealt with, this Part does not discuss in detail those debts that were formerly preferential but, in summary, they are debts due to HMRC such as PAYE deductions, duty and VAT (see Annex A below).

_{1. Schedule 6; Section 176; Section 386}

43.87 Definition of relevant date

The categories of preferential debts are defined to the extent that they are owed at, or leading up to, the ‘relevant date’¹. So far as concerns compulsory liquidation and bankruptcy the relevant date is defined as:

• in relation to a winding up, the date of the winding-up unless that was preceded by administration (in which case the relevant date is the date that the company entered administration), or the earlier date of the appointment of a provisional liquidator².
• in relation to bankruptcy, the date of the making of the bankruptcy order, or the earlier date of the appointment of an interim receiver³.

_{1. Section 387}

_{2. Section 387(3)}

_{3. Section 387(6)}

43.88 Contributions to occupational pension schemes as a preferential debt

A debt in respect of a sum due by the insolvent in respect of an employer’s contributions to an occupational pension scheme in the 12 months prior to the relevant date or in respect of an employee’s contributions deducted but not paid into the scheme in the four months prior to the relevant date is a preferential debt¹.

_{1. Schedule 6, paragraph 8; Pension Schemes Act 1993, schedule 4}

43.89 Claims by National Insurance Fund in respect of pension contributions

The trustee of a pension scheme can make a claim to the National Insurance Fund for outstanding pension contributions. Where such a claim is made, the National Insurance Fund, in the person of the Secretary of State for BIS will have a subrogated claim in the insolvency for the payment, part or all of which may be preferential.

43.90 Remuneration of employees as preferential debts – wages

Any amount which is owed by the insolvent to a person who is or has been an employee of the debtor and is payable by way of remuneration in respect of the whole or any part of the period of four months before the relevant date is a preferential debt. This is subject to a limit of £800¹.

The legislation provides further qualification of the types of debts that would be considered preferential under this provision, such as relating it to statutory employment rights claims³ and the dismissal of the employee⁴.

_{1. Schedule 6, paragraph 9; Insolvency Proceedings (Monetary Limits) Order 1986, article 4}

_{2. Schedule 6, paragraph 13}

_{3. Schedule 6, paragraph 14(1)}

43.91 Remuneration of employees as preferential debts – holiday pay

An amount owed by way of accrued holiday pay, in respect of any period before the relevant date, to a person whose employment has been terminated by the insolvent (whether before, on or after that date) is a preferential debt¹.

_{1. Schedule 6, paragraphs 10, 14, 15}

43.92 Protective awards

Where an employer fails to consult properly prior to dismissing employees as redundant, an Employment Tribunal may make a financial award in favour of the dismissed employees. Such an award is known as a protective award and should be treated as provable debt which is preferential¹. This is the case even if the award is not made until after the insolvency order².

_{1. schedule 6, paragraph 13(2)}

_{2. Haine v Day [2008] BCC 845}

Secured creditors

43.93 Secured creditors – general

The concept of a creditor holding security, being a secured creditor, is an important one in insolvency as a secured creditor retains rights against the property of the insolvent which are not available to an unsecured creditor¹.

In particular, the secured creditor retains rights to take possession of, and sell, such property of the insolvent against which their debt is secured, with their responsibility to the insolvency estate being limited to a requirement to pay over any surplus funds to the liquidator/trustee for the benefit of the estate following the sale of the secured asset².

_{1. Section 285(4); Flightline Limited v Edwards and another [2003] 1 WLR 1200}

_{2. Evans v Finance-U-Ltd [2013] ECC 26}

43.94 General definition of security

Security has been held to be defined in the following terms; ‘security is created where a person (‘the creditor’) to whom an obligation is owed by another (‘the debtor’) by statute or contract, in addition to the personal promise of the debtor to discharge the obligation, obtains rights exercisable against some property in which the debtor has an interest in order to enforce the discharge of the debtor’s obligations to the creditor’¹.

_{1. Re Paramount Airways Ltd [1990] BCC 130}

43.95 Definition of a secured creditor – company

A secured creditor, in relation to a company, means a creditor of the company who holds in respect of their debt a security over property of the company. Security means, in relation to England and Wales, any mortgage charge, lien or other security¹.

_{1. Section 248(1)}

43.96 Landlord’s right of entry not security

It has been held that a landlord’s right of re-entry is not a form of security¹.

_{1. Razzaq v Pala [1998] BCC 66}

43.97 Money advanced for the benefit of the company

The creation of a charge should be for the benefit of the company. If the monies advanced were for the benefit of another party, and the lender was aware of the purpose for which the moneys were to be used, the validity of the charge may be challenged¹.

_{1. Re Destone Fabrics Ltd [1941] Ch 319}

43.98 Definition of a secured creditor – bankruptcy

In bankruptcy, a debt is secured to the extent that the person to whom the debt is owed holds any security for the debt (whether a mortgage, charge, lien or other security) over any property of the person by whom the debt is owned¹.

_{1. Section 383(2)}

43.99 Proofs of debts of secured creditors

In relation to an insolvent estate, a secured creditor can:

• rely entirely on their security and not submit a proof of debt;
• surrender their security and prove for the whole amount of the debt¹; or
• place a value on their security and prove for the balance of their debt².

Where a creditor puts a value on their security and that security is subsequently realised, the net amount realised shall be substituted for the value previously placed on the security and the creditor will be entitled to prove for the adjusted balance³.

_{1. Rules 14.19, 14.41}

_{2. Rule 15.28}

_{3. Rule 14.19}

43.100 Proving for interest in relation to secured debts

In all cases a creditor is not entitled to include within their proof a claim for interest falling due after the insolvency order date¹.

_{1. In re London, Windsor and Greenwhich Hotels, Quatermaine’s Case [1892] 1 Ch 639; Section 322(2)}

43.101 Redemption of security by liquidator or trustee

The official receiver, as liquidator or trustee, may give notice to a creditor whose debt is secured that they propose, at the expiration of 28 days from the date of the notice, to redeem the security at the value put upon it in the creditor’s proof¹.

_{1. Rule 14.17}

43.102 Valuation of security

Where the liquidator or trustee serves notice of an intention to redeem the security, the creditor has 21 days (or such longer period as the liquidator or trustee may allow) to exercise their right to re-value the security. If the creditor re-values their security, the trustee may only redeem at the new value¹.

_{1. Rule 14.17(2)}

43.103 Liquidator or trustee dissatisfied with secured creditor valuation

The liquidator or trustee, if dissatisfied with the value which a secured creditor puts on their security (whether in their proof or by way of re-valuation) may require the property comprised in the security to be offered for sale. The exception to this is where the security has been re-valued and the re-valuation has been approved by the court¹.

_{1. Rule 14.18}

43.104 Re-valuation of security where secured creditor is petitioning creditor

Where the petitioning creditor is a secured creditor and has, being the petitioner, put a value on their security, or has voted in respect of the unsecured value of the debt, they may re-value the security held only with the permission of the court¹.

_{1. Rule 14.15}

43.105 Surrender of security on failure to disclose

Where a secured creditor submits a proof of debt but fails to disclose a security held, they can be required to surrender the security for the benefit of the general body of creditors unless the court is satisfied that the omission was inadvertent or the result of an honest mistake¹.

_{1. Rule 14.16}

Mortgages and charges

43.106 Priority of charges

As a general rule, a charge created earlier would rank in priority over one created later. The exception to this would be that, in relation to a company, a fixed charge ranks over a floating charge even if created later¹ though, in reality, this rarely occurs in practice, as the floating chargeholder will generally require that the person giving the charge undertake not to further charge the assets.

The priority of the charges may be changed by a ‘deed of priority’ agreed between the borrower and the holders of the charges affected by the change in priority. The deed of priority would be effective even where it resulted in a floating charge taking priority to an earlier fixed charge².

_{1. Companies Act 2006, section 754}

_{2. Re Portbase Clothing Ltd [1993] BCC 96}

43.107 Marshalling

Marshalling, or marshalling of securities, is the term to describe the equitable remedy available to secured creditors where they have security over the same assets of a debtor. Without going into detail, it describes the process of sharing the assets between the creditors.

43.108 Remedies for a chargeholder

The usual remedy in respect of company fixed charges is the appointment of a receiver to realise the security.

Otherwise, the chargeholder may simply seek the repossession and sale of the charged property.

The proceeds of sale may be applied to the repayment of the capital sum and interest accrued prior to the date of the insolvency order. The creditor cannot include the post insolvency order interest in calculating the amount to be claimed in submitting a proof of debt¹.

_{1. In re London, Windsor and Greenwich Hotels, Quatermaine’s Case [1892] 1 Ch 639}

43.109 Shortfall following repossession

Often, following repossession, there will be a shortfall in the monies required to repay the debt due under the charge.

The chargeholder would, in this circumstance, become an unsecured creditor for the amount of the shortfall.

43.110 Re-scheduling of debt and deeds of acknowledgement

A mortgagee or other secured chargeholder may request the bankrupt to sign a document acknowledging the level of debt, shortfall or similar. Such a document is generally known as a deed of acknowledgement. This might be in connection with an arrears repayment plan or a re-mortgage.

If the bankrupt completes such a deed, a new debt might be created on which recovery action might be based at any time within the limitation limit. It is not for the official receiver to influence the bankrupt about how to proceed in this matter. The bankrupt should simply be advised to seek independent legal advice.

Whilst a post bankruptcy debt can be created by rescheduling and deed, the underlying debt it is still a bankruptcy debt.

43.111 Official receiver to check receipt of monies where security given

The official receiver should check that monies secured by a charge against the insolvent’s property were received by the insolvent before or at the time the charge was created. If not, the transaction may be a preference.

43.112 Legal mortgages

A mortgage is the conveyance, assignment or demise of any land or estate in it as security for the repayment of money borrowed. The owner of the land (mortgagor) signs a deed (mortgage) that gives the lender (mortgagee) an interest in the property. The term mortgage (from the French ‘death pledge’) is applied to the transaction itself, the deeds and the rights of the mortgagee.

Mortgages are governed by statute¹, and the terms will be set out in the deed.

_{1. Law of Property Act 1925}

43.113 Equitable mortgages

An equitable mortgage is one that is considered to be a mortgage under equity (in the interests of justice), but does not qualify as a legal mortgage¹.

This may be because of a defect in the paperwork or because the borrower lacked capacity to properly grant the mortgage to the borrower (where they were only a joint owner, for example).

If registered, an equitable mortgage can take priority as usual.

_{1. Downsview Nominees Ltd v First City Corpn Ltd [1993] AC 295}

43.114 Mortgages and charges in land must be in writing

Any contract for a disposition in land, which would include a mortgage or a charge, is not valid unless it is writing, incorporates all the terms agreed by the parties and is signed by all the parties¹.

_{1. Law of Property (Miscellaneous Provisions) Act 1989, section 2}

43.115 Registration of charges - general

Where the charged property comprises unregistered land and the mortgage is capable of registration, then it should be registered at the Land Charges Registry¹ in order to bind purchasers.

Where the property comprises registered land the charge should be registered with the Land Registry; again this is to bind purchasers.

It is not necessary for a charging order obtained against a company to be registered with the Registrar of Companies².

_{1. Land Charges Act 1972}

_{2. Re Overseas Aviation Engineering (GB) Ltd [1962] 3 All ER 12}

43.116 Registration of charges – companies

Where a charge was created before 6 April 2013, the company must send details of the charge to the Registrar of Companies¹. Where the charge was created on or after 6 April 2013 the Registrar must register the charge where it is filed within the period allowed², but there is no requirement on the company to effect registration. Failure to register the charge will however render it void against a liquidator, administrator or creditor of the company³.

_{1. Companies Act 2006 section 860}

_{2. Companies Act 2006 section 859A}

_{3. Companies Act 2006 section 859H(3)}

43.117 Bankrupt continuing to reside in charged property

Providing the secured creditor is content, there is nothing to prevent the bankrupt or joint-owner continuing to reside in the charged property.

Where payments continue to be made to the secured creditor, the creditor would, in these circumstances, and subject to the terms of the mortgage arrangement, use these sums in the first instance to discharge the continuing accrual of interest under the mortgage. The creditor is otherwise unable to pursue the bankrupt for interest falling due after the order date.

43.118 Charging orders

Where a creditor obtains a judgment it may be followed up by a charging order in execution of the judgment.

A charging order may be made either absolutely or subject to conditions as to notifying the debtor or as to the time when the charge is to become enforceable, or as to other matters. The court by which a charging order was made may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order¹.

A charging order may be granted by the court over any interest held by the debtor beneficially in property, certain securities, funds in court or under any trust. The court making the order may provide for the charge to extend to any interest or dividend payable to the debtor in respect of the asset².

_{1. Charging Orders Act 1979, section 3}

_{2. Charging Orders Act 1979, section 2}

43.119 Power of a company to create a charge

The legislation provides that a company has unrestricted capacity to borrow unless that power is restricted in the objects of the company in its memorandum of association.

Similarly, unless restricted by the objects, the directors have power to give security for the company’s borrowings on such terms as they see fit¹.

Technically, borrowing or the giving of a charge in contravention of the objects of the company is void at common law², though the decision of the directors is binding on the company where the creditor acted in good faith³.

_{1. Companies Act 2006, section 31(1)}

_{2. Commercial Bank of Canada v Great Western Railway of Canada (1865) 16 ER 112}

_{3. Ashbury Railway Carriage and Iron Co v Richie (1875) LR 7 HL 653; Companies Act 2006, sections 39 and 40}

43.120 Fixed charges

The right of a creditor to recover their capital sum and interest from definite and ascertainable assets is termed a fixed charge.

A fixed charge fastens from the moment of its creation to the particular property in question (machinery or buildings, for example), and gives the holder of the charge an immediate security over that property so that the debtor may not sell or otherwise deal with the charged property without the consent of the chargeholder.

Unlike a mortgage, a charge does not give the chargeholder a proprietary interest in, or possession of, the property.

43.121 Floating charges (companies only)

A floating charge is defined in the Act as a charge which, as created, was a floating charge¹.

It has been further defined in case law² as follows:

‘A floating charge is ambulatory [movable] and shifting in its nature, hovering over and, so to speak, floating with the property which it is intended to affect until some event occurs, or some act is done, which causes it to settle and fasten on the subject of the charge within its reach and grasp (also known as crystallisation).’

_{1. Section 251}

_{2. Illingworth v Houldsworth [1904] AC 355}

43.122 Deciding whether a charge is fixed or floating (companies only)

Deciding whether a charge is a fixed charge or a floating charge is a matter of establishing the intentions of the parties in creating the charge and also characterising the charge by reference to law¹. Even though the parties consider the charge to be of one variety that does not prevent the court from declaring it otherwise², taking into account the substance not the form of the charge³.

_{1. Agnew and another v Inland Revenue Commissioners (Brumark) [2001] 2 AC 710}

_{2. Keenan Bros Ltd [1986] BCLC 242}

_{3. Re Brightlife Ltd [1987] Ch 200}

43.123 Crystallisation of floating charges - automatic (companies only)

Certain events cause a floating charge to become a fixed charge, meaning that the company can no longer sell the charged property without the consent of the chargeholder. This is known as crystallisation of the charge. Those events are:

• The winding up of the company or the appointment of a receiver¹ but not the application for a receiver²; or
• The cessation of the company’s business³.

Crystallisation will happen on these events even if the debenture states otherwise⁴.

_{1. Woodroffes (Musical Instruments) Ltd 1986 Ch 366}

_{2. Re Hubbard & Co Ltd, Hubbard v Hubbard & Co Ltd (1898) 68 LJ Ch 54}

_{3. Governments Stock and Other Securities Investment Co Ltd v Manila Railway Co [1897] AC 81}

_{4. SAW (SW) 2010 Ltd v Wilson [2018] Ch 213}

43.124 Crystallisation of floating charges - automatic (companies only)

In addition to the automatic crystallisation of a floating charge, the parties may also agree contractually that a floating charge, created by a debenture, may be crystallised into a fixed charge by intervention of the debenture holder¹. Generally, this intervention will be by way of the appointment of a receiver out of court, by may be by service of a notice.

_{1. Re Brightlife Ltd [1987] Ch 200}

43.125 Equitable charges

An equitable charge arises where a chargee is entitled to look to an asset or class of assets to discharge a liability¹.

It differs from an equitable mortgage in that there is no agreement to create a charge or mortgage and the property may only be sold by order of the court.

If registered, an equitable charge can take priority as usual.

_{1. Re Cosslett (Contractors) Ltd [1998] Ch 495}

43.126 Charging orders obtained by solicitors for costs

Subject to limitation, a solicitor may apply to court for a charging order in respect of costs in relation to a matter for which they were acting in bringing proceedings¹.

_{1. Solicitors Act 1974, section 73}

43.127 Debentures (companies only)

A debenture is a written acknowledgement of a debt by a company, usually under seal¹, containing provisions as to the payment of interest and repayment of principal (the original loan sum). A debenture does not necessarily provide for security in the form of a charge over the company’s assets, but debentures are usually secured by a floating charge or a fixed and floating charge.

A company can create more than one debenture, in which case, unless specified otherwise, they would rank in order of priority according to the dates on which they were created.

_{1. British India Steam Navigation Co v Inland Revenue Commissioners (1881) 7 QBD 165}

Other forms of security – liens, pledges and bills of sale

43.128 Liens

A lien is a right to retain possession of another’s property pending the discharge of the indebtedness. A creditor with a lien would generally be treated as a secured creditor in insolvency proceedings¹.

A lien over book and records is not however enforceable against the official receiver².

_{1. Section 248; Section 383(2)}

_{2. Section 246; Section 383(4)}

43.129 Pledges (pawnbroker)

A pledge is the term to describe the item given to a pawnbroker in return for a loan. If the loan is not repaid within a certain time period, the pawnbroker has the right to sell the goods.

43.130 Security bills of sale

A security bill of sale is a bill given to secure payment of monies. Generally it is given over personal assets/chattels.

The legislation provides that an applicable bill of sale must be registered within seven clear days of its making, and must be renewed at least once every five years. The method of registering the bill of sale is to send, to the High Court, the original bill of sale, together with a witness statement attested in front of a solicitor stating that the effect of the bill of sale has been explained to the person granting the assignment.

Failure to register the bill of sale properly will mean that it is ineffective against a trustee in bankruptcy. This would mean that the debt would be considered to be unsecured and the goods purportedly covered by the bill would be free to be realised by the official receiver, as appropriate¹.

_{1. Bills of Sale Act 1878, sections 8 to 11}

43.131 Searching the register of bills of sale

Where there is doubt as to whether a bill of sale is properly registered the official receiver may conduct a search of the register by letter to the High Court of Justice. The letter should give details of the persons who may have been party to the assignment, and also such details as are known of the assignment itself (such as the date and the property concerned). The request has a fee attached but the office can provide a certificate showing details of the registration (if any) and, for a further fee, an office copy of the documents provided in support of the application of registration.

Finance agreements

43.132 Leasing debts

The rights of an insolvent under a leasing agreement are generally to a right to possess and use the leased item while the lease/rental payments are up to date. On the making of the insolvency order the lessor will normally take back possession of the item and claim in the insolvency proceedings for outstanding sums due under the agreement.

43.133 Debts under credit agreements

Where the insolvent has entered into a simple credit agreement, it will be the case that ownership of the goods to which the agreement relates will have passed to the insolvent at the time that the agreement was entered into, with the balance of monies due being a debt in the insolvency proceedings.

43.134 Agreements where the finance company has rights over property

A finance agreement where the lender retains ownership or repossession rights over the vehicle until a specific date or when certain conditions (such as the amount of repayment made) have been met is usually known as a ‘conditional sale agreement’ or ‘hire-purchase agreement’.

Subject to any express clause in the agreement, the rights of the insolvent under the agreement will pass to the official receiver as liquidator or trustee.

Where there is doubt, the official receiver should peruse the terms of the agreement to confirm the extent to which the finance company retains ownership rights.

43.135 Difference between ‘conditional sale’ and hire-purchase’ agreements

The key difference between a conditional sale agreement and a hire purchase agreement is that under a hire-purchase agreement the hirer acquires an option to purchase the goods after complying with the terms of the agreement (to make 24 monthly payments, for example), whereas under a conditional sale agreement there is no such condition: property passes only on the payment of all instalments.

43.136 Termination of a ‘conditional sale’ type agreement

In practice an agreement where the finance company retains an interest in the property will usually contain a clause giving the finance company the right to terminate the agreement in certain circumstances, such as default on repayment or the making of an insolvency order against the borrower.

Where the finance company exercises such a right in relation to an agreement that relates to property of an insolvent, the potential benefit to the official receiver as liquidator or trustee will be restricted to the rights of the insolvent on termination of the agreement. The key right that the insolvent would hold in this regard is that the vehicle may not be repossessed without a court order if more than two thirds of the total price of the vehicle has been paid¹.

In deciding whether to consent to such an order, the official receiver should consider the value of the property to the estate were it to be sold (taking into account the need to settle the finance and any arrears).

_{1. Consumer Credit Act 1974, section 90}

43.137 Action to take in respect of property subject to finance agreement

Where the official receiver is dealing with property subject to a finance agreement, they should send the standard letter¹ to establish the type of agreement (that is, whether it is a simple credit agreement or a conditional sale-type agreement) and the amount required to settle the agreement.

The official receiver as liquidator or trustee may pay the amount required to complete the agreement and obtain title to the asset² if it is beneficial to do so, subject to any consolidation clause. In many cases there is no benefit in taking such action as the amount outstanding on a finance agreement, taking into account interest and charges, is in excess of the value of the item, taking into account depreciation.

Where the finance is a simple credit agreement, the official receiver may deal with the property as an asset in the proceedings.

_{1. NHP}

_{2. Re Piggin (1962) 112 LJ 424}

43.138 Standard consolidation clauses in relation to finance agreements

The standard agreements of most finance companies contain consolidation clauses which require the hirer to treat all agreements with the company as one for completion purposes. In this case the official receiver will not be able to complete one agreement without completing them all.

43.139 Claims for damages for early termination

The early termination of a finance agreement as a result of insolvency may give rise to the finance company making a claim for damages for breach of contract. In such a case the official receiver will have to decide whether the claim relates to genuine liquidated damages (which should be admitted) or a penalty (which should not) ¹.

Where the finance agreement is expressed to terminate on insolvency it should be remembered that the insolvency is not a breach of contract (unless specifically provided for) but simply an event on which the parties agree that the agreement should end. No question of damages therefore arises, although the agreement may provide for a contractual payment as compensation for early termination. This payment may be reduced or off-set by a discount for early settlement.

_{1. Graynor Finance v Liquidator of Eastore 1975 SLT 296}

43.140 Repayment to finance company on behalf of the insolvent

The payment of instalments by a person other than the party to the agreement does not result in the transfer of any rights (such as a right to take ownership of the property) to that third-party¹.

Any such payments should be treated as a loan and the person that made them may claim in the proceedings as an unsecured creditor.

_{1. Bennett v Griffin Finance [1967] 2 WLR 561}

43.141 ‘Logbook loans’

A ‘logbook loan’ is a type of loan that is granted generally to individuals in severe financial difficulty where other sources of borrowing are not available. Typically, the loan will have a very high APR (rates of up to 500% are not unknown) and, with punitive charges for missing payments, etc., the amount required to be repaid is often well in excess of the original loan. The loan is secured on the borrower’s vehicle through a bill of sale transferring ownership of the vehicle to the lender.

Where the official receiver encounters a logbook loan, or similar, they should check that the bill of sale on which the transfer is registered with the court. If it is not, the lender will have no security over the vehicle and it may be dealt with normally. If the bill of sale is registered, the official receiver should treat the vehicle as one with hire purchase.

Depending on the nature of the arrangement entered into by the bankrupt, or the manner in which the account was managed by the lender, the official receiver should also consider whether the agreement might be challenged as an extortionate credit transaction.

43.142 Retention of title

A retention of title clause, also referred to as a ‘reservation of title’ or ‘Romalpa’ clause, is a form of security used by a supplier of goods to afford protection against the possibility of the buyer default or insolvency. Where a valid retention of title clause exists the supplier may retain title to the goods until payment is received, and this will be valid against any subsequently appointed liquidator or trustee.

Interest

43.143 Interest on debts

Where a debt proved in the liquidation bears interest, that interest is provable as part of the debt except in so far as it is payable in respect of any period after the date that the company went into liquidation (or the date of administration where that immediately preceded the liquidation)¹.

Where interest on the debt was not previously reserved or agreed and where the debt was due by virtue of a written instrument and payable at a certain time, interest may be claimed from that date to the date of liquidation (or the date of administration where that immediately preceded the liquidation)².

Where the debt is due otherwise, interest may only be claimed if, before the date of the liquidation, a demand for payment of the debt was made in writing and notice given that interest would be payable from the date of demand³. In that case, interest may only be claimed for the period from the date of demand to the date of liquidation (or the date of administration where that immediately preceded the liquidation)⁴.

Unless where previously agreed, the interest rate chargeable can be no more than that set in the legislation, currently 8% per annum⁵.

_{1. Rule 14.23(1)}

_{2. Rule 14.23(2) and (3)}

_{3. Rule 14.23(4)}

_{4. Rule 14.23(5)}

_{5. Rule 14.23(6); Judgments Act 1838, section 17}

43.144 Interest on petition costs

The legislation provides a wide discretion to the court in the making of costs, including in relation to the hearing of a winding up or bankruptcy petition. Where such a costs order is made on hearing the petition there is an entitlement to interest on those costs¹.

_{1. Judgments Act 1838, sections 17 and 18}

43.145 Interest on trade debts

The legislation provides a right to claim interest on commercial (trade) debts for goods and services when payment is made after the agreed period, or after 30 days if no credit period has been agreed¹.

The interest rate currently chargeable is set at 8% above the Bank of England base rate².

Where the parties agree a contractual remedy for late payment of the debt, statutory interest is not applicable to the debt unless agreed otherwise³.

_{1. Late Payment of Commercial Debts (Interest) Act 1998, section 2}

_{2. Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002, article 4}

_{3. Late Payment of Commercial Debts (Interest) Act 1998, section 8(2)}

43.146 Post-insolvency interest

Any surplus remaining on the estate after the payment of preferential debts and ordinary unsecured creditors must be applied in paying interest on those debts that have been outstanding since the date that the company went into liquidation or the date of the bankruptcy order. Post-insolvency interest ranks equally whether it applies to preferential or non-preferential creditors¹.

_{1. Section 189(2) and (3); Section 328(4)}

43.147 Interest rate for post-insolvency period

The rate of interest to be applied for the post-insolvency period is whichever is greater of the following¹:

• the rate specified in the legislation (currently 8%)², and
• the pre-agreed/contractual rate applicable to that debt.

_{1. Section 189(4); Section 328(5)}

_{2. Judgments Act 1838, section 17}

43.148 Date that post-insolvency interest runs from

For trade debts and other similar expenses, post-insolvency interest would apply from the date of the insolvency order.

For debts with a fixed re-payment date that is post-insolvency, the interest would apply from the date that the debt was due¹.

For contingent liabilities it is suggested that the date that debt is due (and interest therefore applies) is the date of the insolvency order unless the event triggering payment has occurred in which case the relevant date would the date of that occurrence.

_{1. Section 189(2); Section 328(4)}

Right of set-off

43.149 Right of set-off – general

Where, before a company goes into liquidation</sup>1</sup> or a bankruptcy order is made, there have been mutual credits, mutual debts or other mutual dealings between the insolvent and any creditor of the insolvent proving or claiming to prove for a debt, an account must be taken by the official receiver, as liquidator or trustee, of what is due from each party to the other in respect of the mutual dealings and the sums due from one party to the other must be set-off</sup>2</sup>.

The balance, if any, once the account has been taken, is provable as a debt in the bankruptcy³.

By way of summary example, therefore, if a creditor owes an insolvent £1,000 and the insolvent owes that same creditor £1,500, the two amounts will be set-off and the provable debt would be £500, being the difference between £1,500 and £1,000.

_{1. Section 247}

_{2. Rule 14.25; Section 323}

_{3. Rule 14.25(2) to (4); Section 323(4)}

43.150 Right of set-off – balance due to the estate

It is possible for the provisions relating to the right of set-off to operate to reduce a book debtor’s liability to an insolvent estate.

43.151 Right of set-off – purpose of the provisions

The purpose of the provisions relating to insolvency set-off are to do substantial justice between the insolvent and their creditors¹. It would be unjust if the creditor had to discharge their debt to the insolvent in full while being left only with the right to prove and perhaps eventually receive a dividend in respect of the debt due to them.

_{1. Forster v Wilson 152 ER 1165}

43.152 Set-off is mandatory

Insolvency set-off is mandatory and cannot be excluded by agreement between the parties¹.

_{1. National Westminster Bank Ltd v Halesowen Presswork and Assemblies [1972] AC 785}

43.153 Mutual credits, mutual debts or other mutual dealings

The legislation requires that, for set-off to take effect there have to have been mutual credits, mutual debts or other mutual dealings between the parties.

Mutual credits arise where one or both parties to a transaction allow the other party to pay the sum due at a later date or on the occurrence of an agreed event¹.

Mutual debts arise where the insolvent and the other party owe each other a sum due payable now or in the future².

_{1. Ex parte Charles Prescot (1753) 26 ER 147}

_{2. Clark v Cort (1840) 41 ER 449}

43.154 Mutual credits, mutual debts or other mutual dealings – exceptions in companies

The legislation provides that in a liquidation mutual credits, mutual debts and mutual dealings shall not include, amongst other things¹:

• any debt arising out of an obligation where the liquidation was immediately preceded by an administration and at the time the obligation was incurred the creditor had notice that an application for an administration order was pending or a person had given notice of intention to appoint an administrator;
• any debt arising out of an obligation incurred during an administration which immediately preceded the liquidation;
• any debt arising at a time a petition for winding-up was pending

_{1. Rule 14.25(6)}

43.155 Mutual credits, mutual debts or other mutual dealings – exceptions in bankruptcies

The legislation provides that in a bankruptcy mutual credits, mutual debts and mutual dealings shall not include sums where the sum became due in knowledge that proceedings in respect of a bankruptcy application were ongoing or that a bankruptcy petition had been presented¹.

_{1. Section 323(4)}

43.156 No set-off where debt assigned with prior notice of ‘insolvency’ – company only

There can be no right of set-off, in liquidation, in respect of any debt which has been acquired by a creditor by assignment or otherwise, pursuant to an agreement between the creditor and any other party where that agreement was entered into¹:

• after the company went into liquidation;
• at a time when the creditor had notice that a winding up petition was pending;
• where the liquidation was immediately preceded by an administration, at a time when the creditor had notice that an application for an administration order was pending or a person had given notice of intention to appoint an administrator’ or
• during an administration which immediately preceded the liquidation.

_{1. Rule 14.25(6)(d)}

43.157 No mutuality where a debt has been assigned

In addition to the company restrictions (see above), where a debt owing by or to the insolvent has been assigned to a third party, and that third party has no other dealings with the insolvent, there can be no mutuality and, therefore, no right of set-off¹.

_{1. Turner v Thomas (1871) LR 6 CP 610}

43.158 Requirement for mutual dealings in the same capacity

In order for the provisions relating to insolvency set-off to apply, the dealings between the insolvent and the creditor must have been in the same capacity¹. For example, where a bankrupt that is a builder did work for a florist, any sum due to the builder by the florist for that work would be off-set against monies owed by the builder to the florist for the provision of flowers, as they were both acting in a personal capacity.

If, however, the florist were acting as an executor of a will in relation to which the builder was a beneficiary and the builder did work on the florist’s property, the debt for the work carried out would not be off-set against the monies due under the will as the florist does not owe those monies personally, but in their capacity as executor².

_{1. National Westminster Bank Ltd v Halesowen Presswork and Assemblies [1972] AC 785}

_{2. Bishop v Church (1748) 26 ER 1197}

43.159 Right of set-off cannot apply to third parties

The debts of third parties cannot be set-off, even with their consent, as to do so would be to allow the parties, by agreement, to subvert the fundamental principle of pari passu distribution of an insolvent’s assets¹.

For example, where a bankrupt had work carried out by a builder, any sum due to the builder by the bankrupt for that work could not be off-set against monies owed to the bankrupt by the builder’s wife, even with the builder’s agreement.

_{1. Re MS Fashions Ltd v Bank of Credit and Commerce International SA [1993] BCC 70}

43.160 Mutual rights must exist at date of order

For insolvency set-off to apply there must have been mutuality of obligation at the date of the insolvency order.

A debt owed to the bankrupt by a bankruptcy creditor arising after bankruptcy cannot therefore be off-set against a bankruptcy debt owed by the bankrupt to that creditor¹.

_{1. Dickson v Evans (1794) 101 ER 433}

43.161 Contingent claims and unliquidated claims

Contingent claims and unliquidated claims can be included in a right of set-off¹. The official receiver, as liquidator or trustee will be required to put a value to such claims in order that an account can be taken of them for the purposes of set-off.

Where, after calculation of the set-off account, an amount is owed to the insolvent arising from a contingent debt or sum payable at a future time, the amount due only has to be paid if and when it becomes due and payable².

_{1. Rule 14.25(7); Re Charge Card Services Ltd [1987] Ch 150}

_{2. Rule 14.25(5)}

43.162 Crown set-off

For the purposes of the insolvency set-off provisions, the Crown is considered a single entity, even though various aspects of its affairs may be handled through different departments of the Government¹.

Crown set-off would apply to all provable debts due to or from the Crown, whether they arise through legislation (tax liabilities, for example), or contract (through a Government procurement, for example).

Amounts due to the Secretary of State in respect of payments made to employees out of the National Insurance Fund can be subject to set-off notwithstanding that the debt was not due and payable to the Secretary of State at the date of the insolvency. This is because the debt is considered to be contingent².

_{1. DH Curtis (Builders) Ltd [1978] Ch 162}

_{2. Secretary of State v Frid [2004] UKHL 24}

43.163 Set-off where preferential and non-preferential debts

Where set-off applies in respect of a creditor that has both a preferential claim and a non-preferential claim, the amount due to the creditor must be applied pro-rata to the different categories of debt to arrive at the provable amount¹.

_{1. Re Unit 2 Windows Ltd [1985] 1 WLR 1383}

43.164 Set-off and rule regarding double proofs

The rule regarding double proof would apply in respect of insolvency set-off. A guarantee creditor cannot therefore apply set-off unless they have discharged the principal creditor’s liability¹.

Where, for example a director of a company in liquidation owed the company £100,000, they could not claim right of set-off in respect of a guarantee for £100,000 given to the bank for the company’s indebtedness unless they had discharged the debt due under the guarantee.

_{1. Glen Express Limited [2000] BPIR 456}

Creditors’ and contributories’ rights

43.165 Creditors’ rights – general

In addition to having the right to participate in a dividend from the estate (assuming the debt is provable), creditors have certain other rights in relation to insolvency proceedings, as follows:

• to present a winding up/bankruptcy petition.
• to a copy of the petition.
• to inspect proofs of debt.
• to inspect the court file.
• to inspect records of the insolvent.
• to receive a list of creditors (creditors only)
• to receive a report on the insolvent’s affairs.
• to request a meeting or decision making process (creditors only)
• in relation to a liquidation or creditors’ committee
• to request a public examination.
• to receive a copy of the official receiver’s intention to apply for release as liquidator or trustee.
• to apply to court regarding the acts of the liquidator or trustee.

43.166 Right to present a petition - company

A creditor, or creditors, contributory or contributories, may petition the court for the winding up of a company¹, on the grounds that it is just and equitable that the company be would up².

_{1. Section 124(1)}

_{2. Section 122(1)(g); Re A Company (No 003028 of 1987) (1987) 3 BCC 575}

43.167 Right to present a petition - bankruptcy

A petition for a bankruptcy order against an individual may be presented by a creditor or jointly by more than one creditor¹. The petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed².

_{1. Section 264(1)(a)}

_{2. Section 267(1)}

43.168 Right to a copy of the petition – company only

Every creditor or contributory of the company is entitled to be furnished by the solicitor for the petitioner (or by the petitioner themselves, if acting in person) with a copy of the petition within two business days after requesting if, on payment of the appropriate fee¹.

There is no equivalent provision in bankruptcy.

_{1. Rule 7.11}

43.169 Right to inspect proofs

The liquidator or trustee is under a duty, so long as the lodged proofs of debt are in their hands, to allow them to be inspected, at all reasonable times on any business day, by any creditor who has submitted a valid proof, or any contributory, or any person acting for such a party¹.

_{1. Rule 14.6}

43.170 Right to inspect court file

Any person stating in writing to be a creditor of the insolvent may inspect the court file of the proceedings and may also obtain from the court a copy of any documents on the court file¹.

Such a right is also exercisable by contributories of the company² and by any authorised representative of either a creditor or a contributory³.

The court can direct that certain documents are not open to inspection without the permission of the court⁴.

An application for the court to exercise such redaction of the file can be made by the official receiver, the office-holder or any person appearing to the court to have an interest⁵.

_{1. Rule 12.39(3)(c)}

_{2. Rule 12.39(4)(a)(ii)}

_{3. Rule 12.39(5)}

_{4. Rule 12.39(9)}

_{5. Rule 12.39(10)}

43.171 Right to inspect records – company only

The court may, at any time after the making of a winding-up order, make an order, that it thinks just, that the books and records of the company may be inspected by a creditor or contributory¹ (but the official receiver has discretion to provide access to the records without permission of the court).

Permission of the court to inspect the records is not required where a government department (or a person acting under that authority), being a creditor, has a separate statutory right to inspect the records².

There is no equivalent provision in bankruptcy. Should a creditor in a bankruptcy case request inspection of the bankrupt’s records, the official receiver should seek the bankrupt’s written consent to the creditor’s inspection.

_{1. Section 155(1)}

_{2. Section 155(2)}

43.172 Creditor’s right to receive a list of creditors

A creditor has the right to require an office-holder to provide a list of creditors and the amounts of their respective debts unless a statement of affairs has been delivered to Companies House (in liquidation) or filed with the court (in bankruptcy)¹.

Where required, the office-holder must as soon as reasonably practicable send it to the person requiring the list and may charge an appropriate fee for doing so².

Simply because the rules allow the official receiver, as office-holder, to direct the creditor to another source of the information does not mean (by expression or implication) that they are prohibited from providing a list to the creditor (or their properly authorised representative) and, in the interest of customer care the official receiver should endeavour to comply with any valid requests.

_{1. Rule 1.57(2)}

_{2. Rule 1.57(3)}

43.173 Power to omit details from a list of creditors

The official receiver may omit the name and address of any creditor from a list of creditors if of the view that its disclosure would be prejudicial to the conduct of proceedings or might reasonably be expected to lead to violence against any person, provided that the amount of the debt in question is still shown in the list and a statement is included that the name and address of the creditor has been omitted in respect of that debt¹.

_{1. Rule 1.57(4)}

43.174 Right to receive a report of the insolvent’s affairs

The official receiver is required at least once after the making of a winding-up order or bankruptcy order to report to creditors and contributories on the proceedings and on the position of the insolvent’s affairs¹.

_{1. Rules 7.48 and 10.66}

43.175 Provision of a list of creditors or report to creditors to insolvency practitioners

Insolvency practitioners should be provided with a list of creditors and/or a report to creditors where they can show that they act for a creditor in the insolvency. This can be done by specific authority from the creditor, the submission of a claim on behalf of the creditor, or by a ‘blanket’ authority – the details of which can be verified on the intranet

43.176 Right to request a public examination

A public examination may be requested by creditors whose claims comprise at least half the total value of known claims (which includes the claims of secured creditors without regard to the value of their security)¹.

Similarly, a public examination may be requested by three-quarters, in value, of a company’s contributories².

_{1. Section 133(2)(a); Section 290(2)}

_{2. Section 133(2)(b)}

43.177 Right to receive a notice of the official receiver’s intention to apply for release as liquidator or trustee

A creditor has the right to receive a notice of the official receiver’s intention to apply for release as liquidator/trustee and may, following receipt, object to the release within 21 days of the date of the notice.

43.178 Right to apply to court in respect of acts of the liquidator

A creditor or contributory aggrieved by an act or decision of the liquidator may apply to the court, and the court may confirm, reverse or modify the act or decision complained of, and make such order as it thinks just¹.

In practice, the court will only interfere with a decision of a liquidator if it was taken in bad faith or if it was so perverse as to demonstrate that no liquidator properly advised could have taken it².

_{1. Section 168(5); Re ACLI Metals (London) Ltd (AML Holdings Inc v Auger) (1989) 5 BCC 749}

_{2. Re Hamilton v Official Receiver [1998] BPIR 602; Re Abbey Forwarding Ltd v Hone [2010] EWHC 1644 Ch}

43.179 Right to apply to court in respect of acts of the trustee

A creditor dissatisfied by any act, omission or decision of a trustee of the bankrupt’s estate may apply to the court; and on such an application the court may confirm, reverse or modify any act or decision of the trustee, may give them directions or make such order as it thinks just¹.

For such an application to succeed, it will be necessary for the creditor to show that trustee was acting in a manner in which no reasonable trustee would act².

</sub>1. Section 303</sub>

_{2. Osborn v Cole [1999] BPIR 251}

43.180 Right to object to decision on proof

A creditor, if dissatisfied with the liquidator or trustee’s decision with respect to their proof, may make application to the court for the decision to be reversed or varied¹. Any application under these rules must be made within 21 days of the creditor receiving the liquidator or trustee’s written statement of his reasons for rejecting the proof.

Any other creditor, if dissatisfied with the liquidator or trustee’s decision in admitting or rejecting the whole or any part of a proof, may also apply to the court². Any application under theses rules must be made within 21 days of the creditor becoming aware of the liquidator or trustee’s decision.

_{1. Rule 14.8(1)}

_{2. Rule 14.8(3)}