Credit is a system of doing business whereby goods or services are supplied to a purchaser direct or to a third party on the understanding that the price will be paid at a later date.
There are many different types of credit agreements available today. When dealing with any assets that may be subject to a credit agreement the official receiver will need to ascertain the type of credit agreement as this will affect the way in which the goods can be dealt with.
When a seller allows a purchaser to pay by credit and does not state in the contract when the title to the goods passes to the purchaser, the agreement is known as a personal credit agreement. Examples of these agreements are purchases by credit cards, charge cards (including store cards), bank loans (which may also be used generally to reduce other borrowings), via catalogues etc.
Running account credit is a facility under which the supplier provides goods or services (or cash) from time to time up to a credit limit which is set by the amount of the payments made by the debtor and which cannot be exceeded. This is particularly true of store credit cards. Fixed sum credit is any other facility whereby a debtor can receive credit, either in one lump sum (such as a bank loan) or by instalments.
Under a personal credit agreement, the purchaser is deemed to have ownership of the goods as soon as he/she takes possession of them which means that if the purchaser fails to pay the instalments the seller or provider of the credit facility has no right to take back the goods, only to pursue the purchaser for the money owed. Such goods can be sold by the official receiver as trustee, the original seller or credit company then having an unsecured claim in the estate for the outstanding balance.
These agreements are so called because initially the finance company hires the goods to the customer and after a certain number of payments have been made, the customer has the option to buy the goods, usually by making a nominal final payment. Until the customer has exercised this option to purchase, the goods are the property of the finance company and may not be disposed of by the customer.
This describes a sale agreement where payment is made by instalments but the contract specifies that title to the goods does not pass to the purchaser until a particular condition has been met. This condition will generally be that title does not pass to the buyer until all instalments have been paid in full.
If the official receiver as trustee/liquidator does not adopt the agreement (see vi), the finance company will tend to recover and sell the goods and claim in the proceedings for any shortfall.
Hire purchase (HP) and conditional sale agreements originally took the form of a contract between the supplier of goods and the purchaser. However, the volume of such agreements and the cost of individual items involved have meant that suppliers have had to reduce the burden to their own monetary resources by involving finance companies.
The way in which it works is that a customer who wishes, for instance, to buy a car on finance approaches a car dealer. The car dealer then sells the vehicle to a finance company and receives full payment from the finance company for the car. The finance company then lets the vehicle to the purchaser under the terms of the HP or conditional sale agreement and receives the repayments from the purchaser. Thus, there is no contract between the car dealer and the purchaser of the vehicle, only between the purchaser and the finance company.
The official receiver as trustee/liquidator usually has the right to adopt the agreement but will only do so where the value of the goods exceeds the amount of the remaining payments. Where this is the case, the official receiver may realise the equity in the goods after gaining the agreement of the finance company to the goods being sold and the outstanding debt being paid from the sale proceeds.
It is important to check the terms of these finance agreements as some carry a clause stating that the agreement is terminated in the event of a bankruptcy order or winding up order being made, allowing the finance company the right to recover the goods. Where a creditor wishes to exercise their option to terminate the HP or conditional sale agreement because of insolvency, a default notice must be served and will probably be sent to the official receiver. If the official receiver has taken the goods into protective custody, steps should be taken to return them to the supplier or finance company without unnecessary delay.
In summary, the main distinction between a hire purchase agreement and a conditional sale agreement is that the former will generally contain an option to purchase the goods after complying with the terms of the agreement and in the latter title will inevitably pass after complying with the terms of the agreement.
Under a lease hire agreement, neither the title to the property nor risk of ownership passes to the hirer, which means that the supplier of the goods (the lessor) will always own the goods and will be responsible for repairs. For the payment of a regular charge specified by the original leasing agreement, the customer will be able to use the goods within the terms of the agreement.
This type of agreement is often attached to plant and machinery. For example, the constant advances made in technology and the fact that they are quite prone to breakdown means that photocopiers are often leased.
The official receiver has no more right to dispose of goods on lease hire than the lessee would have done and should allow the lessor to recover the goods as soon as possible. Any outstanding hire charges will become an unsecured debt in the proceedings.
Lease purchase is similar to lease hire but the agreement will generally contain a clause which states that, on payment of a fee at the end of a specified leasing period, ownership will pass to the buyer. Such agreements are most commonly found in relation to motor vehicles.
For example, at the end of the lease period a car could be either bought under the agreement, often for a price fixed at the time that the original agreement was entered into, or returned to the dealer if no longer required. It should be noted however, that many finance arrangements now provide for substantial final payments which may make obtaining title to the goods impractical.
Unless the agreement for the goods on lease purchase has reached the stage where the goods have actually been “purchased” by the insolvent, the supplier of the goods is still the legal owner. However, where there is equity in the goods, the official receiver should seek the agreement of the finance company to a sale with the balance due under the agreement being paid from the sale proceeds.
Suppliers may insert a clause in the contract of sale at the time of supply which states that the title to the goods does not pass to the purchaser until full payment is received. This is known as “retention of title”. Retention of title clauses will usually be encountered in relation to stock. Generally, a retention of title clause cannot be attached to fixtures.
The supplier’s claim to any goods supplied under a contract with a retention of title clause will be valid against any subsequently appointed trustee or liquidator. It is up to the supplier to prove that there is a valid retention of title clause but the official receiver should not sell any goods recovered until the validity of the clause has been decided.
Such clauses are often printed on the reverse of the purchase invoice, having already been included in the original supply contract. If the retention of title clause only appears on the reverse of the invoice, it could be deemed to be invalid as not being a term of the contract, the invoice having been issued after the making of the contract.
a Under the terms of a hire purchase or conditional sale agreement, it is an offence to dispose of the goods until all of the required payments have been made. Any purchaser who disposes of goods in such circumstances may be subject to prosecution under the Theft Act 1968.
b There are a number of finance arrangements relating to the purchase of motor vehicles, offered by main dealers, such as the Ford Options scheme. It would appear that these agreements are, in fact, a form of hire purchase with the final payment being the largest at about 50% of the purchase price. These schemes should be treated as hire purchase agreements.
c Where a third party has made payments under a finance agreement on behalf of the hirer, they acquire no rights over the property subject to the agreement, nor do they become the owner of the goods. In the event of insolvency, the payments made should be treated as a loan to the bankrupt/company and the third party will become an unsecured creditor.
d Both conditional sale and hire purchase agreements which involve an individual, and under which credit not exceeding £25,000 was provided, are known as “regulated agreements” under the Consumer Credit Act 1974. In the case of a regulated agreement where the purchaser has paid more than one third of the total price of the goods via HP/conditional sale, the supplier must obtain a court order to recover the goods under the terms of the Consumer Credit Act 1974. This only applies to goods costing less than £25,000. In the case of agreements entered into for business purposes, such as for plant and machinery, this threshold may well be exceeded.
e The Consumer Credit Act 1974 gives the courts power to grant relief to people who have entered into extortionate credit transactions, where a transaction involves grossly exorbitant payments or contravenes the ordinary principles of fair dealing. In exceptional cases where the official receiver as trustee/liquidator considers that a credit agreement which occurred in the three years prior to the date of the insolvency order is extortionate, he/she may apply to the court to set the transaction aside and the court may require the lender to repay any sums paid by the insolvent under the extortionate agreement, which repayment would be an asset of the estate. It is for the credit provider to show that the terms of the contract are not extortionate.
Where can I find out more?
The Insolvency Act 1986
Section 359 Fraudulent dealing with property obtained on credit
Consumer Credit Act 1974
The Technical Manual
Forms to be used:
NHP – Notice to Hire Purchase Company for bankruptcy and company cases and for Agreement not to be adopted
LOIS screen references are given in brackets e.g. (DO73)
1. Receive Screen 8 instructions relating to assets subject to credit.
2. Where it is known that there are third party goods (on lease etc) which are in official receiver’s control and if instructed to do so, contact the owner of the goods and ask them to recover their goods as soon as possible. Point out that the official receiver will take no steps to insure or protect the property pending collection.
3. Advise bankrupt that goods should be made available for collection.
4. Where a supplier is claiming retention of title over goods, ask for a copy of the clause in the contract of sale, if the examiner has not already done so. Once received, refer to examiner for a decision as to the validity of the clause.
5. If the clause is valid, contact supplier to arrange for collection of the goods at the earliest date. If clause is not deemed to be valid, notify supplier of the official receiver’s decision and dispose of goods in the usual manner.
6. Where goods are subject to a credit agreement issue form NHP to finance company, if not already done (DO73).
7. Once reply received, if goods are realisable, refer to examiner to confirm further action.
8. Where goods are subject to a hire purchase/conditional sale or lease purchase agreement, issue form NHP to finance company and on receipt of reply also check for clause providing for termination in the event of insolvency (DO73).
9. If the value of the goods does not exceed the value of the remaining repayments, and/or only a small deposit was paid send finance company notice that the official receiver will not adopt the agreement using form NHP (DO73).
10. Where the value of the goods is more than the value of the remaining repayments the official receiver may wish to adopt the agreement. Refer to examiner for further instruction.
11. If there is any doubt as to the value of the goods, efforts should be made initially to obtain an informal valuation by use of the various sources of information available to use e.g. Parkers Guide for a vehicle or local knowledge to ascertain whether premises would be likely to have a value. In any case of uncertainty however, a formal valuation should be obtained.
12. In a bankruptcy, check whether the bankrupt has claimed the goods as exempt. If the goods are to be treated as exempt, follow the procedure in the Case Help Manual part – Exempt Property.
13. If the agreement is to be adopted, contact the finance company and ask for their agreement to the official receiver disposing of the goods and paying any outstanding liability from the proceeds of sale.
14. If agreed, contact agents to dispose of the goods in the usual manner. Provide the agents with the details of the finance company and ask them to account to the finance company for their outstanding liability direct.
15. Once sale proceeds received from agent, check that outstanding sum has been paid to finance company.
16. If finance company do not agree to the official receiver disposing of the goods, notify them in writing that they must provide the official receiver with full details of the sale and requesting that any surplus, once the outstanding balance has been paid, should be remitted to the official receiver. Where the goods are under the control of the official receiver, arrange to release them to the finance company as soon as possible.
17. Enter all details of realisations on LOIS (CA08/15).
18. Any credit or charge card companies should be included in the list of creditors and the destruction of any type of card should be carried out by an examiner. (For further information, see Case Help Manual part: Banks, Building Societies and Credit/Charge Cards.)
19. Ensure that all creditors are entered on LOIS (CA31).