DECIDING WHETHER A RIGHT OF ACTION VESTS – BANKRUPTCY ONLY
This Part of the chapter provides information and guidance to assist an official receiver in making a decision as to whether or not a right of action vests in him/her as the trustee of a bankrupt’s estate.
This Part of the chapter does not deal with employment claims. Information and guidance relating to such claims can be found in Part 8 of this chapter.
The flowchart attached at Annex K to this chapter may assist official receivers in deciding if, and, if so, to what extent, a right of action vests in a trustee. The flowchart is intended to be a useful overview of the subject, but is not to be used in isolation, without reference to the more detailed information given in this Part.
Before making a decision regarding as to whether or not a right of action vests in the official receiver as trustee, he/she should ensure that he/she is fully conversant with the information and guidance contained in this Part of the chapter (particularly, paragraphs 31.9.37 to 31.9.46), and has full information (of the type outlined at paragraph 31.9.17) regarding the right of action.
The Act provides that all property belonging to or vested in the bankrupt at the commencement of the bankruptcy forms the bankrupt’s estate [note 1]. Property is defined in the Act as including ‘things in action’ [note 2] and the bankrupt’s estate vests in the official receiver on his/her appointment as trustee [note 3]. Case law has, however, developed to set some limits as to the extent that certain types of rights of action constitute property for this purpose and, therefore, vest in a bankrupt’s trustee (see paragraphs 31.9.37 to 31.9.46).
A provision prohibiting assignment of a right of action (see paragraph 31.9.119) does not affect the vesting of a right of action in the trustee. The Act provides that property vests in the trustee without assignment [note 4] [note 5].
Since the right of action vests by operation of law, the official receiver, as trustee, is not required to give notice of the vesting to potential defendants [note 6].
It has long been a principle of bankruptcy law that actions that are solely ‘personal’ (see paragraph 31.9.38) do not vest in the trustee and therefore they remain the property of the bankrupt [note 7] [note 8] [note 9].
It was held, in 1841, that, ‘Nothing is more clear than that a right of action for an injury to the property of the bankrupt will pass to his [trustee]; but it is otherwise as to an injury to his personal comfort. [Trustees] of a bankrupt are not to make a profit of a man’s wounded feelings.’. This principle still stands today.
A personal right of action has been defined as an action ‘where the damages are to be estimated by immediate reference to the pain felt by the bankrupt in respect of his [her] body, mind or character, and without immediate reference to his [her] rights of property’ [note 10].
Examples of personal (and therefore non vesting) rights of action are:
See paragraph 31.9.42 for guidance on rights of action that are part ‘personal’ and part ‘property’.
Examples of non-personal (property) actions are:
See paragraph 31.9.42 for guidance on rights of action that are part ‘personal’ and part ‘property’.
Often, in correspondence or papers relating to a claim, the official receiver will see reference to ‘special damages’ and ‘general damages’.
Generally speaking, for the purposes of deciding who owns which part of any claim, special damages are ‘property’ which vest as part of a bankruptcy estate and general damages are ‘personal’ and thus remain in the ownership of the bankrupt.
Many events lead to damage to the bankrupt’s property and their person. For example, a typical road accident may lead to an injury to the bankrupt’s body (for example, whiplash) and, also, damage to the bankrupt’s property (damage to the car) and/or the need to incur additional (and otherwise unnecessary) expenses (damage to the financial position – which is a property damage). Following the relevant case law (see paragraph 31.9.37), this may cause a problem in deciding whether the action vests in the official receiver, as trustee, or not.
It used to be the case that such an action would be, effectively, ‘split’ between the personal damage and the property damage, and each claim pursued separately (one by the bankrupt and the other by his/her trustee) [note 11]. This way of deciding matters is not, however, considered good law any longer (see paragraph 31.9.43).
It has been held that where a right of action involves damage to both the person and property of the bankrupt, there is only one cause of action, with different ‘heads’ of damage. The right cannot be split [note 12] (see paragraph 31.9.44 for a limited exception to this principle).
This position was confirmed, and somewhat advanced upon, in a later case [note 13], where such an action (referred to in the judgment as a ‘hybrid’ claim) was held to be an action that would vest in a bankrupt’s estate, with any damages awarded for the personal element of the claim being held on a constructive trust (see paragraph 31.9.200) for the benefit of the bankrupt by his/her trustee.
A claim for race discrimination normally causes more than one type of damage (in technical terms, this is referred to as having more than one ‘head of damage’ - see paragraph 31.9.173).
In the normal way of deciding such matters, such a claim would vest in the trustee in bankruptcy (as a ‘hybrid’ claim) (see paragraph 31.9.43). It has been held, however, that in a claim for race discrimination the claimant can limit his/her claim to one for injured feelings making the claim entirely personal and taking it out of the bankruptcy estate. In the case in point, the bankrupt was allowed to ‘drop’ the loss of earnings part of the claim and continue with the claim for ‘injured feelings’. [note 14].
It is thought that this approach was taken due to the seriousness of race discrimination, though it is possible that the principles would be applicable to other discrimination cases (see paragraph 31.9.172). It is not thought that the principle would be applicable to other types of ‘hybrid’ claims and the position outlined in paragraph 31.9.43 should, instead, be followed.
All rights of action arising before the date of a bankruptcy order which seek to recover property vest in the trustee whether or not they contain claims for damage that relate to ‘personal’ damages to which the bankrupt is entitled. Only a right of action that is solely personal (see paragraph 31.9.37) would not vest.
In this context, it is irrelevant if the ‘property’ element of the claim is the lesser part.
31.9.46 Examples of hybrid actions (amended July 2012)
Examples of hybrid actions are as follows:
An action would be a hybrid action even if the property damages were directly connected to the personal damages – as in the second and fourth examples above.
Where the official receiver is dealing with a ‘hybrid’ claim he/she should, as a first step, write to the bankrupt’s advisors, setting out the position outlined in paragraphs 31.9.42 to 31.9.45, asking them to form a view on whether the claim vests in the trustee of the bankruptcy estate, or not. Ideally, the position should be agreed.
The official receiver may use the letter attached at Annex C to this chapter for this purpose.
It is likely that, having read the cases referred to in the letter, the advisors will form the view that the actions vests in him/her as trustee. If they do not, the matter should be referred to Technical Section.
It is not unusual, where there is a legal dispute, for the party that is being sued to bring a counterclaim. Where the bankrupt is bringing a counter-claim, or is the defendant to a counterclaim, any positive difference between the value of the claim and the value of the counter-claim is the asset that vests (see also paragraph 31.9.208).
The defence of a claim is not the same as making a counter-claim - though, invariably, they are closely connected in many cases. Chapter 9 gives information and guidance on dealing with claims against the insolvent.
Unless there is a pressing need to do so (such as the imminent expiry of the limitation period – see paragraph 31.9.143), the official receiver acting as receiver and manager should defer the decision as to whether the right of action vests or not to avoid the possibility of committing any subsequently appointed trustee to an unfavourable course of action (see paragraph 31.9.29).
Such decision can then be made by the trustee on his/her appointment.
Generally speaking, a right of action arises at the point of the event which leads to the claim (a vehicle accident, for example), though any action that relates to the property of the bankrupt (including a contract) would vest by virtue of the underlying property vesting, regardless of when the event took place (i.e., even after bankruptcy or after discharge).
Where there is no underlying property, a right of action arising from an event before the date of the bankruptcy would be an asset vesting in the official receiver, as trustee (assuming that the claim was not entirely ‘personal’). Any right arising from an event after the date of bankruptcy, but before discharge, would be open to be claimed by the official receiver in his/her capacity as trustee as after acquired property (again, assuming the claim was not entirely ‘personal’) (see Chapter 31.8). The decision to claim should be based on the value of the ‘property’ element of the claim, though official receivers should be careful not to claim a right of action that they cannot then deal with (in these circumstances it might be better that the action is left with the bankrupt and any ‘property’ monies awarded during bankruptcy claimed as after-acquired.
Unless the right arises in relation to property vested in the official receiver, any right of action arising after discharge would not vest in the official receiver as trustee and would not be open to claim as after-acquired property (apart from appeals – see paragraph 31.9.57).
Generally speaking, a personal injury type claim (which would normally only concern the official receiver were it to be a hybrid claim – see paragraph 31.9.43) arises at the date of the event leading to the injury, unless there is a delayed action to the injury – in which case the right arises at the date that the injury became apparent.
The solicitors acting for the bankrupt should be able to clarify when the right of action arose, as they will have had to use this date to calculate the limitation date (see paragraph 31.9.143).
An insurance policy taken out in the name of the bankrupt to, for example, cover him/her against an adverse costs order would vest in the official receiver as trustee. The official receiver would then have the benefit of that policy. This would apply even if the claim were to be personal to the bankrupt.
This is subject to any clause in the policy terminating it in the event of bankruptcy.
Notwithstanding this, it is unlikely to materially affect the basic principle that the official receiver, as trustee, should avoid litigating a right of action, for the reasons given elsewhere in the chapter (see paragraph 31.9.129 and 31.9.130).
Paragraphs 31.9.57 to 31.9.69 give information on the types of claims that the official receiver may encounter. The list is not exhaustive and is supplemented by the information given in Chapter 30, Part 5, which covers property personal to the bankrupt. A right of action arising in relation to property personal to the bankrupt cannot vest in the trustee (see paragraph 31.9.37).
Certain entitlements (such as the entitlement to receive tax credits [note15] or the entitlement to receive benefits [note 16]) do not pass to a trustee in bankruptcy. A right arising under such an entitlement cannot, therefore, be property which vests in the official receiver, as trustee.
A claim under an insurance contract entered into by the bankrupt would vest in the official receiver as trustee as a contract claim. This would be so even if the property subject to the claim would have been exempt (see Chapter 30, Part 1) had it been in the possession of the bankrupt as at the date of the making of the order (for example, where the bankrupt’s vehicle was destroyed in a fire, or his/her tools of the trade stolen).
Generally the right to appeal is not ordinarily a ‘thing in action’ or, as such, an item of property falling within the definition of property given in the Act [note 17]. If it is not an item of property it will not form part of the bankrupt’s estate and will not vest in the official receiver as trustee. [note 17a]
A right of appeal, however, may constitute a thing in action if the right has an economic value in its own right in the sense that damages may still be available [note 18]. Certainly a right of appeal relating to a vesting action would vest in the official receiver as trustee, even if that right arose after discharge [note 19] [note 20].
A right of appeal against a bankruptcy debt (including the judgement on which the order is founded) vests in the official receiver, as trustee [note 21].
An appeal against a tax assessment has been held to be a vesting claim and so would vest in the official receiver, as trustee [note 22].
It may be the case that the bankrupt is holding a right of action on trust for another. This may be the case where the contract from which the right of action arose specified which party had the right to bring an action under the contract, in certain circumstances.
An example may be where the bankrupt was a party to a mortgage loan to purchase a property and it later turns out that the property was not as advertised. The right to sue in relation to any property purchased with the mortgage loan may remain with the mortgagee (under the terms of the mortgage contract), being held on trust by the bankrupt for the mortgagee.
Property held on trust by a bankrupt does not form part of his/her bankruptcy estate [note 23], and so will not vest in the official receiver, as trustee.
The official receiver should, of course, satisfy him/herself of the veracity of the trust – seeking the advice of Technical Section, if required.
A claim for permanent disability benefit under a life policy (or similar) would vest in the official receiver, as trustee, as the claim arises from a contract. It has been held that it is of no consequence that the claim is conditional on the claimant having suffered pain and injury. The payment is dependant upon a contractual right to a sum of money and the policy proceeds do not represent recompense to the bankrupt for personal loss or damage, but rather payment on satisfaction of a contractual prospect [note 24].
A claim for compensation from the Criminal Injuries Compensation Authority (http://www.cica.gov.uk/) has been held not to constitute property and cannot, therefore, vest in the trustee [note 25]. In short, it was held that there was no right to claim an award – the award was at the discretion of the board authority and could not, therefore, exist as property.
In November 2009 the Supreme Court issued a ruling that the Office of Fair Trading could not decide which bank charges were fair and which were not. [note 26]. This has somewhat restricted the ease with which account holders can seek to claim back charges but, nevertheless, a bankrupt may be pursuing a claim as at the date of bankruptcy.
Such a claim would vest in the official receiver as trustee of the bankruptcy estate, as it arises from a contract between the bankrupt and the bank to provide banking services
See paragraph 31.9.31a for guidance on dealing with a claim for the recovery of bank charges.
A licence or similar, such as a pilot’s licence or a solicitor’s certificate to practice, is personal to the person to whom the licence was granted. Rights of action arising in relation to such a licence cannot, therefore, form part of a bankrupt’s estate and consequently do not vest in the official receiver, as trustee [note 27] [note 28].
The Matrimonial Causes Act 1973 (MCA 1973) [note 29] allows a spouse to seek financial relief following divorce. Such a right does not constitute property (and even if it did, it would be property personal to the bankrupt) and cannot, therefore, form part of a bankrupt’s estate or vest in the official receiver, as trustee.
Generally speaking, any right arising from a marriage would not vest in a trustee in bankruptcy. In short, the trustee is not party to a marriage and cannot, therefore, be party to any rights arising in relation to the marriage.
The official receiver, as trustee, might consider claiming any property awarded in a financial settlement following divorce as after acquired property (see Chapter 31.8) if such property is awarded during bankruptcy.
Property awarded under the MCA 1973 prior to the making of the bankruptcy order would vest in the official receiver as trustee, following the principles outlined in paragraph 31.9.202.
A right to claim against a vet (due, for example, to death or injury caused to a pet negligently during treatment) would vest in the official receiver, as trustee, because the right to bring a claim arises from the contract between the bankrupt and the vet.
If the bankrupt is also claiming personal distress (or similar) due to the negligent death or injury (etc.) of the pet, then the claim would be hybrid and would vest in the official receiver, as trustee (see paragraph 31.9.43).
Generally speaking, solicitors, accountants and other professionals are engaged under a contract for services and thus a claim against that professional would be based on that contract, and would vest in the official receiver, as trustee, notwithstanding the substance of the instruction.
Where a bankrupt is bringing a claim on behalf of a deceased estate, he/she would be doing so in a representative capacity and the claim would not form part of the bankruptcy estate and consequently would not vest in the official receiver, as trustee.
Any monies awarded as a result of the action may end up vesting if the bankrupt was also a beneficiary under the will but this point has to be considered separately.
Where a death is caused by a wrongful act or neglect such as would (if death had not ensued) have entitled the deceased to bring an action for damages, the person liable shall still be liable to an action for damages despite the death of the person [note 30]. Such a action is for the benefit of the dependants of the person whose death was caused [note 31].
An action may include (or consist entirely) of a claim for damages for bereavement [note 32]. A claim which is entirely for bereavement is personal to the bankrupt and would not form part of the bankruptcy estate. Where a claim is partly in respect of bereavement and partly in respect of a claim for financial losses resulting from the death, it would be a hybrid claim (see paragraph 31.9.43) and would vest in the official receiver, as trustee.
A claim under the Inheritance (Provision for Family and Dependants) Act 1975 is a claim to an interest in a deceased estate on the grounds that the disposition of that estate does not make reasonable financial provision for the applicant [note 33]. Such a claim is personal and thus does not form part of the bankrupt’s estate.
A right of action arising under a bankrupt’s pension a scheme would not, therefore, vest in the official receiver as trustee.
Matters would be different were the pension not approved.
[Back to Part 2 – Dealing with a right of action [On to Part 4 – Effect of a right of action vesting]