Introduction and Definition of Debt/Liability

PART 1

Introduction and Definition of Debt/Liability

(May 2008)   

40.1 Purpose

The purpose of this chapter is to provide details of the potential creditors and liabilities in an insolvency.

 

40.1A Insolvency (Amendment) Rules 2010 – Transitional Provisions (amended July 2010)

The Insolvency (Amendment) Rules 2010 came into force on 6 April 2010 and have had some effect on the guidance in this chapter. The amendments apply to cases where the petition was presented on or after 6 April 2010 (unless in a liquidation there was a voluntary winding up resolution or certain administration proceedings before this date). Full details of the transitional provisions can be found in schedule 4 to the Insolvency (Amendment) Rules 2010 and a summary is available at Annex A. For the purposes of this chapter reference will only be made to the petition date in the transitional provisions.  

 

40.1B – Explanation of terms (amended July 2010)

In this part, in relation to companies, reference is made to the “relevant date”. This is defined as the date on which the company went into liquidation or, if the liquidation was immediately preceded by an administration, the date on which the company entered administration [note 1].

 

40.2 Company debts (amended July 2010)

A ‘debt’ in relation to winding up means any of the following [Note 1A];

For cases where the petition was presented before 6 April 2010 :-

a) any debt or liability to which the company is subject at the date on which it goes in to liquidation

b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and

c) where a debt bears interest, the interest due up to the relevant date (see paragraph 40.1B) [Note 2].

For cases where the petition was presented on or after 6 April 2010 :-

a) any debt or liability to which the company is subject - 

  1. in the case of a winding up which was not immediately preceded by an administration, at the date on which the company went into liquidation
  2. in the case of a winding up which was immediately preceded by an administration, at the date on which the company entered administration.  

b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and

c) where a debt bears interest, the interest due up to the relevant date.(see paragraph 40.1B) [Note 2].

 

40.3 Liability in tort

Liability in tort is a liability arising out of a civil wrong, done by one person to another, entitling the victim to claim damages. It is independent of contract and includes actions for libel, assault and trespass.

Prior to 1 June 2006 in order to make a claim for damages in respect of a liability in tort a claimant had to demonstrate that 3 elements of a tort were in place: 

  • The existence of a duty of care owed by the company to others.
  • The breach of that duty of care by the company.
  • The existence of material damage incurred to the claimant as a consequence of the breach of duty at the time the claim is made.

The difficulty arising from statutory provisions was that claims could only be made following the manifestation of material damage to the claimant. Some companies have 'long-tailed liabilities', that is those debts that accrue after a long latency period where a claimant only exhibits actionable damage many years after a negligent action (or inaction) e.g. the effects of exposure to asbestos causing illness many years later. By the time the claimant is able to demonstrate that material damage as a consequence of the breach of duty has occurred insolvency proceedings may have long been concluded and the claimant left without remedy.

On 1 June 2006 The Insolvency (Amendment) Rules 2006 came into force and made an amendment to the relevant rule [Note 3] extending the definition of debt to include claims founded in tort where all of the elements required to bring an action against a company exist at the time a company goes into liquidation, except that the claimant has not yet suffered any damage and therefore, at that time, has no cause of action against the company. Future tort claimants who can demonstrate sufficient proximity to a company's negligent action or inaction will now be able to prove in the liquidation even if they are yet to exhibit any signs of material damage.

In general terms, the amendment made by the Insolvency (Amendment) Rules 2006 will apply to all companies that enter administration or go into liquidation on or after 1 June 2006, except where that administration or liquidation is immediately preceded by an administration or liquidation which commenced before that date.

As a result of the Insolvency (Amendment) Rules 2010 the amendment has been further clarified so that for cases where the petition is presented on or after 6 April 2010, any liability in tort is a debt provable in the winding up if the cause of action has accrued at the relevant date (see paragraph 40.1B) .

This amendment does not extend to bankruptcy (see paragraph 40.8) because a claimant's legal remedy against an insolvent company will be extinguished upon the liquidation of that company whereas in bankruptcy, a claimant will be able to take action against a debtor post bankruptcy should material damage manifest itself at a later date.

 

40.4 Future and contingent liabilities

It is immaterial 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 opinion. It may be a debt or liability, in relation to the winding up. [Note 4]

 

40.5 Creditor

There is no statutory definition of the term 'creditor' in relation to winding up, but its dictionary meaning is 'one to whom a debt is owing'.

 

40.6 Partnership debts

The provisions of the Insolvency Act 1986 [Note 5] apply, with modifications, to insolvent partnerships as provided in the Insolvent Partnerships Order 1994 (IPO). The definitions given in paragraphs 40.2 to 40.10 apply to partnerships and their members dependent on what type of proceedings they are subject to.

The Partnership Act 1890 states that every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner [Note 6]. The two main types of debts, which may arise in dealing with partnerships, depending upon the type of insolvency encountered by the official receiver (see Chapter 53, paragraphs 53.24 to 53.51 for types of partnership insolvency and Chapter 36, paragraphs 36.86 to 36.87 for the order of priority of payment) are joint debts and separate debts.

 

40.6A Partnership debts - Joint debts

Contractual debts tend to be joint debts, which are the joint responsibility of the members of the partnership. The terms of the contract and/or the partnership agreement may need to be reviewed for possible agreement of members to several responsibility for partnership debts, in addition to their joint liability. A deceased member’s estate is jointly and severally liable for the partnership debts, in so far as they remain unsatisfied by the joint estate, but subject to the prior payment of his/her separate debts [Note 6]. The Insolvent Partnerships Order 1994 defines a "joint debt" as a debt of an insolvent partnership, in respect of which an order is made by virtue of Part IV or V of that Order [Note 7]. 

 

40.6B Partnership debts - Separate debts

The Insolvent Partnerships Order 1994 defines a “separate debt” as meaning a debt for which a member of a partnership is liable, other than a joint debt [Note 7]. Generally, these are private debts of a member, not incurred directly in relation to the trading activities of the partnership.

 

40.7 Bankruptcy debts

"Bankruptcy Debts" [Note 8] are defined as:

  • Any debt or liability to which the bankrupt is subject at the commencement of the bankruptcy,
  • Any debt or liability to which the bankrupt may become subject after the commencement of the bankruptcy (including after his/her discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy,
  • Any amount specified in any criminal bankruptcy order made prior to the commencement of the bankruptcy. (The power to make criminal bankruptcy orders was abolished by the Criminal Justice Act 1988 so it is unlikely that the official receiver will come across such debts.)
  • Where a bankruptcy debt bears interest, the interest due up to the date of the commencement of the bankruptcy [Note 9].

 

40.8 Liability

"Liability" is defined as a liability to pay money 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 restitution [Note 10].

 

40.9 Liability in tort

In determining whether any liability in tort (see paragraph 40.3) is a provable debt the bankrupt is deemed to become subject to that liability by reason of an obligation incurred at the time when the cause of action accrued, i.e. the debt arises at the time the damage becomes apparent [Note 11].

A liability in tort has 3 elements, which must be proved before a claim in bankruptcy proceedings can be made:

  • The existence of a duty of care owed to others.
  • The breach of that duty of care.
  • The existence of material damage incurred to the claimant as a consequence of the breach of duty at the time the claim is made.

The amendment to the definition of debt on companies referred to in paragraph 40.3 does not extend to bankruptcy as a claimant will be able to take action against a debtor post bankruptcy should material damage manifest itself at a later date and consequently the claimant must continue to demonstrate the existence of material damage from the breach of the duty of care at the time the claim is made.

 

40.10 Future and contingent liabilities

It is immaterial 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 opinion. It may still be a bankruptcy debt [Note 12].

 

40.11 Creditor

A ‘creditor’ in relation to a bankrupt means a person to whom any of the bankruptcy debts is owed [Note 13].

 

40.12 Provable debts

Claims by creditors are provable as debts against the company or, as the case may be, the bankrupt whether they are present or future, certain or contingent, ascertained or sounding only in damages. The majority of debts encountered by the official receiver will be provable debts. In bankruptcy, the bankrupt will be released from most of these debts upon his/her discharge (see Chapter 22, paragraph 22.42). Exceptions include the following:

  • Claims which are provable in bankruptcy, but from which the bankrupt will not be released upon his/her discharge from bankruptcy [Note 14].
  • Claims which are not provable debts [Note 15]. 

 

40.12A Provable debts not released upon discharge

Discharge from bankruptcy does not release the bankrupt from any bankruptcy debt incurred under the following circumstances: 

  1. A bankruptcy debt incurred in respect of, or forbearance in respect of which was secured by means of, any fraud or fraudulent breach of trust to which he/she was a party [Note 16].

Examples of the circumstances, which may result in this type of debt, include:  

  • Benefit overpayments made as a result of benefit fraud on the part of the bankrupt;
  • A creditor abstaining from the enforcement of a right over assets, as a result of fraudulent representations made by the bankrupt;
  • A postponement of loan payments, granted by a creditor, for a temporary period of time, as a result of fraudulent representations made by the bankrupt.   
  1. Any liability in respect of a fine imposed for an offence or from any   liability under a recognisance except, in the case of a penalty imposed for an offence under an enactment relating to the public revenue or of a recognisance, with the consent of the treasury [Note 17]. A recognisance is a security entered into before a court with a condition to perform some act required by law.

It should additionally be noted, that any fine imposed for an offence is not provable (see paragraphs 40.22 and 40.22A) [Note 15] 

  1. Discharge does not, except to such extent and on such conditions as the court may direct, release the bankrupt from any bankruptcy debt which;  
  • consists in a liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages by virtue of Part 1 of the  Consumer Protection Act 1987, being in either case damages in respect of personal injuries to any person, or
  • arises under any order made in family proceedings [Note 18].

A liability of a bankrupt to pay damages to a third party in respect of a personal injury claim is a provable debt in bankruptcy and the bankrupt is not released from this debt upon discharge. However, if not dealt with within the judgment for damages itself, the court would need to decide whether to allow the debt to be pursued by the creditor post discharge. It is for the creditor rather than the official receiver to approach the court in this regard.

It should be noted, that any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family proceedings or any obligation arising under a maintenance assessment made under the Child Support Act 1991, is not provable (see paragraph 40.23) [Note 15]

With regard to an obligation to pay a lump sum or costs ordered to be paid in family proceedings, in relation to bankruptcy orders made after 1 April 2005, such debts are provable. The bankrupt is not released from such debts upon discharge, except to such extent and on such conditions as the bankruptcy court may direct [Note 19] [Note 20].  

 

40.12B Motor Insurers’ Bureau

The official receiver may, on occasion, deal with claims from the Motor Insurers’ Bureau (“MIB”). MIB was established in 1946 for the purpose of providing compensation to the victims of negligent uninsured and untraced motorists. As a result of the Road Traffic Act 1988, every insurer underwriting compulsory motor insurance is required to be a member of MIB and to contribute to its funding.

Where MIB has a claim in the proceedings it will often arise by virtue of MIB having paid compensation to a third party and pursuing the bankrupt for reimbursement of the amount paid.  Discharge from bankruptcy will not release the bankrupt from the debt to the extent that payments to the third party relate to a claim for personal injury [Note 18].

Where the official receiver encounters debts owed to MIB, in the course of his/her duties, he/she should inform the bankrupt that he/she may not be released from the debt on discharge. It is open to MIB, post discharge to argue the extent to which part or all of the debt relates to personal injury and consider whether and to what extent they wish to pursue the claim post discharge.

 

40.12C Limitation period for provable debts not released upon discharge

In Anglo Manx Group Ltd v Aitken, it was held that the limitation period on an action for a debt which is not discharged under section 281 continues to run throughout the bankruptcy period. (See paragraph 40.19 for further details of statute barred debts) [Note 21].

In particular, counsel for Anglo Manx Group Ltd contended that, as the sums advanced to the debtor were obtained by fraud and the bankrupt was not therefore released from this debt upon discharge, their claim should be treated as suspended during the bankruptcy period for the purposes of the Limitation Act 1980. The court however held that the time on this cause of action began to run before the bankruptcy order and was not suspended for the purposes of the Limitation Act 1980.

Upon the making of a bankruptcy order section 285 of the Insolvency Act 1986 imposes restrictions on creditors with provable claims, from taking recovery action against the bankrupt, without the permission of the court [Note 22]. Depending upon the period, which has expired under the limitation period at the bankruptcy order date, this may lead to such a creditor as detailed at paragraph 40.12A above, being unable to continue with recovery action after discharge. This is a potentially serious issue in cases where the official receiver wishes to obtain an order for the suspension of the bankrupt’s discharge, as if the discharge period is suspended the restrictions imposed by section 285 will remain in force for an extended period, throughout which the limitation period will continue to run.

Where there are creditors with claims in bankruptcy which are provable, but which are not released upon discharge as detailed at paragraph 40.12A, the official receiver is encouraged to consider the position of these creditors, with regard to the outcome of the judgment in Anglo Manx Group Ltd v Aitken, when deciding whether to apply for a suspension of the bankrupt’s discharge for any reason (see Chapter 22, Part 4).

 

40.13 Effect of non-provable debts

The exclusion by law of claims from proof means there is no relief for the debtor, who cannot avoid these debts by becoming bankrupt. These liabilities are not released on discharge. A creditor in respect of a non-provable debt cannot participate in the winding- up or bankruptcy proceedings or share in any dividend paid.

 

40.14 Drugs Confiscation Orders

Any obligations arising under a confiscation order made under Section 1 of the Drug Trafficking Offences Act 1986, section 1 of the Criminal Justice (Scotland) Act 1987 or section 71 of the Criminal Justice Act 1988 or under Parts 2, 3 or 4 of the Proceeds of Crime Act 2002, are not provable.

[Note 23]

 

40.15 Postponed debts

Postponed debts (see paragraph 40.120 for details) are not provable until all other claims of creditors, and the interest payable thereon, have been paid in full [Note 24].

 

40.16 Debts non- provable on the grounds of public policy

(August 2008)

Other debts may be non-provable by virtue of provisions in the legislation under which they arise, or on grounds of public policy [note 25].

Following the adoption of the EC Regulation on insolvency proceedings on 29 May 2000 and the introduction of the Cross-Border Insolvency Regulations 2006 on 4 April 2006 foreign revenue debts are now provable claims in insolvency proceedings commenced under the Insolvency Act 1986 (see Part 9, paragraphs 40.145 and 40.145A and Chapter 42, paragraph 42.67 for further information)

Gambling debts incurred prior to 1 September 2007 are not enforceable in law, being considered debts of good faith and are therefore not provable debts. On 1 September 2007, the Gambling Act 2005 came in to force, part 17 of this Act deals with the legality and enforcement of gambling contracts, which are now to be treated in a similar manner to other contracts in law. This provision does not apply retrospectively, therefore, any gambling contract made, or any right arising from an agreement made before this section came into force will not be enforceable. (See paragraph 40.103A) [Note 26]. 

 

40.16A Non-provable debts – Social Fund loans

(Added March 2012)

Where the bankruptcy petition is presented on or after 19 March 2012 the liability to repay monies owed to DWP regarding a budgeting or crisis loan (granted from the Social Fund) is a non-provable debt.

Note: [Rule 6.223 and 12.3 as amended by the Insolvency (Amendment) Rules 2012]

 

40.17 Post-insolvency debts

Where the debt arises after the commencement of the insolvency proceedings, it is not provable. If it is to be paid at all, it is either as an expense properly incurred in the insolvency proceedings (see Chapter 36, Part 4) or payable out of any surplus remaining after the provable debts have been paid in full [Note 27]. Where the debt is not considered a properly incurred expense, in bankruptcy it usually falls to the bankrupt to pay out of future income, but in a winding up the creditor has no remedy. The liquidator may pay, e.g. to facilitate the sale of the property, but is not compelled to do so.

Interest relating to periods after the commencement of insolvency proceedings is discussed in Part 10 (paragraphs 40.147 to 40.159).

 

40.18 Costs

Whether costs are a provable debt depends on when they were incurred. Costs of legal proceedings are in the discretion of the court. Until an order for payment of costs is made there is no obligation or liability to pay them and there is no right to recover them. The discretionary nature of the court’s power to order costs indicates that there is no liability, contingent or otherwise, in the absence of a court order. They are not contingent liabilities for the purpose of proving in insolvency proceedings [Note 28]. In Re: Wisepark Ltd [1994] BCC 221 it was held that a claim for costs was not a contingent liability within section 382 and could not be bound by a voluntary arrangement.

Costs awarded prior to the commencement of the insolvency proceedings are provable. Those awarded after the commencement of insolvency proceedings are not.

 

40.19 Statute barred debts

Limitation periods are governed by the Limitation Act 1980 but it does not contain any provisions specifically setting time limits for the commencement of winding up or bankruptcy proceedings by a creditor.

The Limitation Act 1980, section 24 states that an action shall not be brought on any judgment after the expiration of six years from the date on which the judgment became enforceable and section 38 further defines an action (unless the context otherwise requires) as including 'any proceedings in a court of law'.

The Court of Appeal in the case of Ridgeway Motors (Isleworth) Limited v ALTS Limited [2005] EWCA Civ 92 concluded that winding-up and bankruptcy proceedings are not an action upon a judgment within the meaning section 24 and therefore are not subject to the 6 year limitation period and that consequently there is nothing to prevent a judgment creditor presenting a petition at any time after the 6 year period has expired.

The Court of Appeal also considered in this case the position of an ordinary creditor who has not established the debt due by judgment, which would mean that section 24 would not apply. The Court of Appeal held that a person who is owed a debt by a company under a contract is not entitled to present a petition after the expiration of 6 years from the accrual of his/her course of action. If the debt is statute barred at the time of the presentation of the petition, then the petitioner is not at that date a creditor of the company and therefore has no standing to present a petition in that capacity [Note 29].

In general debts incurred more than six years before the winding-up or bankruptcy order are not provable [Note 30]. However, the legislation is complex and there are many exceptions to this general rule, for example where the claim involves personal injuries, the period runs to 3 years from the date of the injury or first knowledge of the effect of the injury. [Note 31]

 

40.20 Debts arising from charges made under deeds

Where the debt results from a charge made under deed, e.g. a mortgage, the limitation period is twelve years [Note 32]. The mortgagee can pursue the debt at any time in the twelve-year period or claim in the insolvency proceedings if they occur within the twelve years.

The time limit for enforcing the principal debt due under a charging order is 12 years from the date of its creation [Note 33]. (This period will start to run again from the date of any part-payment of the sum due and may be extended on more than one occasion.) This means that where a debtor pays regular instalments on such a debt the creditor can pursue him/her any time in the 12-year period from the last payment. After the12-year period has expired the debt is not provable. The limitation period for enforcing payment of the interest accruing under a charging order is 6 years, after which it is not provable.

 

40.21 Non-provable debts and the statement of affairs

All debts and liabilities, whether or not provable, should be included in any statement of affairs prepared. Non-provable debts should be marked as such.

 

40.22 Fines

(Amended November 2012)

Any fine (as defined in the Magistrates Court Act 1980) imposed on a bankrupt for an offence is not provable [Note 15]. This includes fines imposed as a result of criminal proceedings ( for parking penalties see paragraph 40.22A below)

At section 150 of the Magistrates Court Act 1980 a fine is defined as including any pecuniary penalty or pecuniary forfeiture or pecuniary compensation payable under a conviction.  In effect, this means that a fine is usually the result of a criminal conviction.

Where a fine is imposed as a result of the bankrupt being stopped by the police and receiving an on-the-spot fine, i.e. for not having Road Tax on a vehicle, this is also not a provable debt as the activity/inactivity leading to the fine was a criminal offence. 

Police officers have the power to issue a penalty notice for disorderly conduct on the street or in a police station for offences which constitute criminality such as shoplifting (a criminal offence under s1 of the Theft Act 1968). Once issued the offender can choose to make payment or request a court hearing. Payment is not considered to be an admission of guilt and results in the removal of the liability to conviction. Non-payment of the penalty notice results in the registration of the penalty as a fine at one and a half times the value of the original penalty, this will not be a provable debt in bankruptcy.  Further information regarding what type of behaviour may result in the issue of a penalty notice for disorder can be found on the Home Office website at  www.homeoffice.gov.uk/police/ 

 

40.22A Penalty Charge Notices (frequently referred to as “fines”)

(Amended November 2012)

Fixed penalty notices or penalty charge notices issued on behalf of a local authority, including those in relation to the London congestion charge, are not fines for the purpose of section 150 of the Magistrates Act 1980. They should be treated as provable debts and will be released on discharge from bankruptcy. This is applicable to the majority of parking fines.

Local authorities make parking regulations, such as traffic regulation orders or traffic management orders and enforce parking contraventions in accordance with the law. Local Authorities were first involved in the enforcement of a limited number of parking acts by virtue of The Road Traffic Regulation Act 1984, although parking offences were still dealt with and enforcement action taken through the criminal court system. 

The Road Traffic Act 1991 decriminalised further parking offences and they therefore fell to the local authority to enforce through the civil system. Further information regarding the type of parking conduct dealt with by the local authority, as opposed to parking offences dealt with by the police and criminal court system is available from the following link www.patrol-uk.info/.../index.php

Not all local authorities have the same abilities under The Road Traffic Act 1991 and each must possess a Special Parking Area Order before they commence enforcement. Further information regarding local authorities and their specific parking enforcement abilities can be accessed via www.gov.uk/parking-tickets/overview   

 

40.22B Television licence fee

Part 4 of the Communications Act 2003 makes it an offence to install or use a television receiver without a valid TV Licence. The Communications (Television Licensing) Regulations 2004 set out the various types of TV Licence available, the fees payable and any concessions available, further details of which are available from www.tvlicensing.co.uk. An individual may either elect to pay the annual licence fee in a single payment or to pay by instalments. In all cases, the payment is made in advance for the period to be covered by the licence. If an individual is on a monthly or quarterly payment plan and he/she misses an instalment (or falls into arrears) then the licence may be revoked or cancelled.

The individual will then be committing a criminal offence, liable to a fine or imprisonment, if they continue to use the television receiver equipment after the date that payments cease [Note 34]. In order for an individual to avoid prosecution, the TV Licensing Authority will allow a defaulter time to bring their payments up-to-date, whilst ensuring they are aware of the consequences of not doing so.

Outstanding sums due to the TV Licensing Authority at the insolvency order date do not constitute a provable debt, as they are comprised of a statutory fee required to be paid in advance by a person to install or use a television receiver.

 

40.22C Penalty notice under Immigration, Asylum and Nationality Act 2006 (inserted January 2012)

It is contrary to the Immigration, Asylum and Nationality Act 2006 [note section 15] to employ an adult subject to immigration control and the Secretary of State may give an employer who acts contrary to the section a notice requesting him/her to pay a penalty of a specified amount (following a set code of practice).

In bankruptcy any fine for an offence is not provable and any fine is usually the result of a criminal conviction (see paragraph 40.22).  As the penalty under the Immigration, Asylum and Nationality Act is not a fine following a criminal conviction, the penalty is provable in the bankruptcy proceedings and the bankrupt will be released from it on discharge.

 

40.23 Family and domestic proceedings

(Amended July 2011)

The following obligations relating to family and domestic life are not provable debts in bankruptcy [Note.15]- 

  • Any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family proceedings; or  
  • Any obligation under a maintenance assessment made under the Child Support Act 1991. This includes maintenance payments and payments assessed by the Child Support Agency. 

‘Family proceedings’ for the purposes of this paragraph has the meaning given by section 281(8) of The Insolvency Act 1986 which applies the Magistrates' Courts Act 1980 [Note 44] and the Matrimonial and Family Proceedings Act 1984 [Note 45].

 

40.24 Student loans

(amended November 2012)

Student loans have been made under several pieces of legislation and their status depends on the legislation under which they were made and the date of the bankruptcy. The current position is that in all bankruptcy cases where the order was made after 1 September 2004, all outstanding student loans are not provable debts and thus not released in a bankrupt’s discharge from bankruptcy [Note 35].

On 1 July 2004 the Higher Education Act 2004 was implemented, which changed the student loan legislation and made separate provisions for student loans made under the Education (Student Loans) Act 1990 and the Teaching and Higher Education Act 1998.

Where the bankruptcy order was made on or after 1 July 2004, all student loans made under the Education (Student Loans) Act 1990 (often referred to as mortgage style loans) were made non-provable in bankruptcy with the consequence that they were not released on discharge.

Loans under the Teaching and Higher Education Act 1998 (often referred to as income contingent loans) were similarly made non-provable in bankruptcy, with effect from 1 September 2004, following implementation of regulations applicable to the Higher Education Act 1998. Since 2004 regulations have been repealed and new regulations introduced. The current regulations were introduced in 2009 [Note 36].

Where bankruptcies occurred prior to these dates, student loans may be treated as provable debts and can be included in the bankruptcy and released on discharge. The relevant dates are 1 July 2004 for loans under the Education (Student Loans) Act 1990 and 1 September for loans made under the Teaching and Higher Education Act 1998.

No part of a student loan may be claimed as part of the bankruptcy estate, as after-acquired property or as part of an income payments order or agreement [Note 37].

 

40.25 Debts owed by minors

Under common law, a contract involving a minor is voidable at the minor’s option. A debt or debts owed by a minor, i.e. someone under the age of eighteen, are only provable where they are legally enforceable [Note 38]. Debts which are not legally enforceable against a minor, and are therefore not provable, cannot be the basis of a bankruptcy petition [Note 39].

Enforceable debts are those for ‘necessaries’, which are ‘goods suitable to the condition in life of the minor, and to his/her actual requirements at the time of sale and delivery’ [Note 40]. In general, necessaries may include whatever is reasonably required for maintaining his/her particular lifestyle within the normal standards of his/her particular society, depending upon his/her status. In comparison, necessities are essentials required by all for subsistence or survival. Necessaries may include, but are not limited to, food, clothing, medicine, lodging, essential services and teaching.

 

40.26 Can a non-provable debt be the basis of a bankruptcy petition?

A debt which is not a provable debt is nevertheless a ‘bankruptcy debt’. It follows that a creditor is entitled to present a bankruptcy petition in respect of such a debt and that the court has jurisdiction to make a bankruptcy order on such a petition.

Notwithstanding that it has such jurisdiction, in the case of Levy v Legal Services Commission the Court of Appeal made it clear that it found it very difficult to envisage the exceptional circumstances which would justify the making of a bankruptcy order where the petition has been presented in respect of a non-provable debt. Jonathan Parker LJ considered that such circumstances were probably confined to a change of carriage of the petition pursuant to rule 6.31. In addition it was held that for a creditor having a non-provable claim to use the bankruptcy regime for the purposes of establishing a surplus after the provable claims had been paid in full was to seek to use it for an impermissible collateral purpose [Note 41].

The Court of Appeal made it clear that, where there is no real prospect of a bankruptcy order being made in respect of a non-provable debt, the correct course is to set the statutory demand aside rather than allow a petition to be presented and put off such argument until the hearing of that petition [Note 42].

In the unlikely event that a creditor with a non-provable debt were to be successful in petitioning for bankruptcy, that creditor would be unable to participate in the bankruptcy process or any dividends (see paragraph 40.13).

A creditor with a non-provable debt may, however, be assisted in pursuing his debt where a bankruptcy order is made. For example, a trustee in bankruptcy using his powers to trace and recover assets, which after distribution result in a surplus which would be returned to the debtor. The creditor may, where they are having difficulty discovering assets, have a better chance of recovery in seeking to attach the surplus payable to the debtor from the bankruptcy estate.

 

40.27 Pursuing non- provable debts

Any claim against a bankrupt which is a non-provable debt in the bankruptcy proceedings may be pursued by the creditor obtaining a judgment at any time between the bankruptcy order and the bankrupt’s discharge, but only with the sanction of the court [Note 43]. These circumstances are most likely to arise where there are arrears of maintenance payments due to the bankrupt’s former spouse. The official receiver should satisfy himself/herself that the creditor’s debt is not provable in the bankruptcy and inform the parties that permission of the court should be obtained to continue or commence recovery proceedings. The official receiver should also inform the court in which the proceedings are taken of the bankruptcy and seek to ensure that any judgment is only granted in respect of the non-provable debt. Reference should also be made to Chapter 9, Part 2 paragraph 9.65 regarding the assets that may be seized if execution is levied.

The pursuit of non-provable debts is most usually undertaken after the bankrupt’s discharge, when permission of the court is not required.

 

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