So far in 2017 there has been a flurry of activity concerning annulment of bankruptcies. The judgment in Safier v Wardell and others  EWHC 20 (Ch) (“Safier”) has been followed by the introduction of the Insolvency Proceedings (Fees) Order 2016 (“Fees Order 2016”), the publication of Dear IP 74 and Dear IP 77 and most recently Yang v Official Receiver, Manchester CC & Joanne Wright  EWCA Civ 1465.
Dear IP 77 “reaffirms the position regarding the payment of funds into the ISA and the charging of fees” so I want to consider the operational challenges that arise for practitioners and the practical issues affecting the annulment process following this new guidance.
It is a common situation for an appointed trustee in bankruptcy to be asked to stay any further action whilst the bankrupt applies to annul the bankruptcy. The bankrupt wants to know how much is required to “pay in full” and the trustee has to provide a figure so a payment can be made, usually with funds being introduced by a third party, sufficient to pay the bankruptcy debts, costs and expenses in full.
Such an application would be on the grounds set out in section 282 of the Insolvency Act 1986 (“IA”), whereby the Court may annul the bankruptcy if “..the bankruptcy debts and expenses have all, … been either paid or secured for to the satisfaction of the court” (section 282(1)(b), IA). So it can exercise its discretion the Court relies upon the trustee’s report confirming that the necessary payment has been made. (Rule 10.133 of the Insolvency (England and Wales) Rules 2016) (“IR 2016”).
When compiling the required calculation, the trustee has to consider the fees and charges due to the Official Receiver (“OR”) and the Secretary of State (“SoS”) whilst also considering the mechanism to receive payment. This latter point can be tricky because of the timing of the trustee’s report to Court in advance of the Court hearing and also the requirements of the third party. The court’s acceptance of security by way of a solicitor’s undertaking provides a solution to avoid the potential deadlock resulting if an annulment order cannot be made unless and until the creditors have been paid.
Third Party Funds
The OR and the SoS fees and expenses in all bankruptcies for performing their statutory functions and duties under section 415 of IA. The current fees are outlined in Fees Order 2016 (SI 2016/692) which came into force on 21 July 2016 and revoked The Insolvency Proceedings (Fees) Order 2004 (SI 2004/593). For bankruptcies where the bankruptcy order was made following a bankruptcy petition presented before 21 July 2016 then Fees Order 2004 continues to apply, so practitioners are currently dealing with two regimes.
Safier was concerned with the extent of the expenses that the bankrupt had to pay. The judgment confirmed that the ad valorem or SoS fee (“the SoS Fee”) was not chargeable on the third-party monies when the trustees paid the funds into the Insolvency Services Account (“ISA”).
Practitioners and their solicitors will be very familiar with this situation; the bankrupt often attempts to negotiate and all the various elements which make up the debts, costs and expenses will be challenged. The Fee, in particular, often represents a substantial sum which can be the difference between a third party being willing to assist and not.
Importantly though, Safier, reaffirmed the accepted working practice that the trustees were relying upon, being guidance provided by the Dear IP 39 published in October 1997. This stated that although regulation 20 of the Insolvency Regulations 1994 (SI 1994/2507) (“IR 1994”) required a trustee to pay all monies received in the course of carrying out their functions into the ISA, these functions should only relate to the bankrupt's estate. It acknowledged that, usually, monies received from third parties do not derive from assets in the bankrupt's estate therefore they are not received in the course of a trustee's functions. The operation of suspense accounts in the ISA was justified on policy grounds to facilitate a benefit to the insolvent estate it would not otherwise have received.
It became common working practice for trustees in bankruptcy to exclude the SoS Fee when calculating the total amount required to pay in full using third party funds. Trustees would request the opening of a suspense account when paying the monies into the ISA, without having to operate a client account.
This reduced the total amount required to annul the bankruptcy order where third party funding was involved and if an early application could be made then the costs involved would be kept to a minimum and there would also be a swifter return to creditors. This practice assisted the trustee as it gave certainty so they could report to Court and it effectively “ring-fenced” the funds to protect the third party in the event the order was not made.
This was a positive decision for all concerned, enabling practitioners and their advisers to be able to give definitive information to the bankrupt and ensuring that the annulment process can be concluded efficiently. Payment of the funds into a suspense account in the ISA was therefore a practical and essential part of this process.
Dear IP 74
Dear IP 74, published on 12 January 2017, a day before the judgment in Safier, introduced a change to how the Insolvency Service (“IS”) operated the ISA. Practitioners were informed that the SoS Fee would be charged on all receipts regardless of the trustee's instructions on paying-in. The trustee would then have to apply for a rebate if he could establish that the monies were third party funds.
Dear IP 77
The IS then announced, with effect from 1 July 2017, that third party funds would not be accepted into the ISA. It stated that the ISA cannot be used as a local bank account to facilitate third party funds being paid to creditors and suspense accounts will only be opened where there is some question as to the ownership of the funds.
So what does a trustee do when asked to receive monies from a third party so he can report to the Court that the requirements of section 282(1)(b) IA can be met?
Open a client account to receive the money? This is the best possible practical solution but does involve more cost and more importantly with more stringent money laundering requirements being introduced, more risk. The operation of the account must be totally transparent and it is inevitable that some delay and resistance will be encountered from the third party when they are asked to submit to the usual checks.
But what if, as in Safier, the practitioner does not operate a client account and had always utilised the established albeit “extra-statutory practice” of paying such monies into an ISA suspense account?
One option would be to instruct their own solicitors to receive the money and then make the necessary payments. The risk effectively passes to the solicitors who will in turn have to be satisfied that they can comply with the strict and mandatory requirements in respect of money laundering and operating as a bank.
Another method would be to insist that the debtor’s or third party’s solicitor makes payments directly to creditors and then pays the practitioner his costs and expenses.
Third parties however are often reluctant to see their money dissipated without the guarantee of the annulment being granted, for which the court retains discretion.
If the bankruptcy debts and expenses are not paid before the application is heard, they will need to be secured for to the satisfaction of the court. Rule 10.138(7) of IR 2016 provides that security includes an undertaking given by a solicitor and accepted by the court. The solicitor for the bankrupt or third party can therefore undertake to the court that payments will be made to creditors and the costs paid, usually within 7 days.
All these methods work but it must be taken into consideration that the process has to operate in conjunction with the ongoing Court timetable and it often proves an extremely difficult task for the practitioner to manage when they have to rely upon creditors providing confirmation that their claim has been satisfied so the practitioner can provide the necessary report to Court, whilst keeping costs to a minimum!
The decision of the IS to withdraw the facility of the suspense account inevitably causes practitioners problems. Ultimately this could jeopardise the return to creditors, as the more cumbersome and uncertain process may dissuade third parties, who will already be concerned about the amount they are paying, from getting involved.
Whilst the Fees Order 2016 does away with the SoS Fee and replaces it with a fixed general fee, payable regardless of where the funds are coming from for bankruptcies after 21 July 2017, this does not assist the trustee with how to receive and deal with the third party monies.