INSOLVENCY AND THE TAKING CONTROL OF GOODS OTHER THAN IN EXECUTION OF A JUDGMENT

PART 6

APRIL 2014

INSOLVENCY AND THE TAKING CONTROL OF GOODS OTHER THAN IN EXECUTION OF A JUDGMENT  

9.102 Scope of this Part

This Part provides guidance on the interaction between a creditor’s right to take control of goods other than in execution of a judgment (see paragraph 9.103) and the insolvency legislation.

Guidance in relation to creditors taking control of goods in execution of a judgment is in Part 5.

 

9.102a Continuing use of the term ‘distress’ in the insolvency legislation

Whilst the term ‘distress’ has been updated following the implementation of legislation in April 2014 and is now known as ‘taking control of goods’ (see paragraph 9.9), the term distress continues to be used in the insolvency legislation [note 1] [note 2] [note 3].  The legislation [note 4] provides that distress, for the purpose of the insolvency legislation is defined as including ‘use of the [taking control of goods process] and references to levying distress, seizing goods and related expressions shall be construed accordingly’.

 

9.103 Power of creditor to take control of goods other than in execution of a judgment

An enforcement agent acting on behalf of a landlord (see paragraph 9.10) may take control of goods under a CRAR in certain circumstances (see paragraph 9.22).

The HMRC have a general power to take control of goods (see paragraphs 9.81 to 9.82) and the Child Support Agency and local authorities may also do so, appointing a private bailiff as enforcement agent, after obtaining a liability order (see paragraphs 9.25 to 9.26).

Such creditors will be known as ‘qualifying creditors’ for the purposes of this Part.

 

9.103a Ability of a qualifying creditor to take control of goods in insolvency

In a company case, a creditor has effectively no ability to take control of goods after the presentation of the winding-up petition (see paragraph 9.106).

In bankruptcy, subject to the restrictions outlined in paragraphs 9.107 to 9.109, the enforcement agent on behalf of qualifying creditor (see paragraph 9.103) may take control of goods at any time (even after the making of the order), but not after discharge in respect of a debt incurred before the date of the bankruptcy [note 5] [note 6] and only for rent due for the six-months (see paragraph 9.104) prior to the beginning of the bankruptcy [note 7].

 

9.104 Amount in relation to which landlord can validly take control of goods (bankruptcy only)

As outlined in paragraph 9.105, a landlord’s right to take control of goods post-bankruptcy is limited to rent for the six months prior to the bankruptcy order.  The legislation provides that, when calculating the amount of rent in relation to which the landlord may validly take control of goods, rent should be considered as accruing from day to day and should be apportionable in respect of time accordingly [note 8]

Where rent is payable in advance, and is due for payment prior to the date of the bankruptcy order, it should not be apportioned even if part of the rent is for a period after the date of the order [note 9].  If rent is payable in arrears, it should be apportioned using a figure for the daily rent multiplied by the number of days for which rent is outstanding up to the date of the bankruptcy order [note 10]

 

9.105 Goods taken control of more than three months before the order

If an enforcement agent has taken control of goods more than three months before the insolvency order, the qualifying creditor (see paragraph 9.103) is entitled to retain any goods or monies that that may still be held at the date of the order, unless, in a company case, the goods were taken control of after the presentation of the winding-up petition (see paragraph 9.106) [note 11] [note 12] [note 13] [note 14] [note 15] [note 16]

 

9.106 Goods taken control of after the presentation of a winding-up petition

Any taking control of goods process by an enforcement agent carried out, or being carried out after the commencement of a winding up (being the date of the presentation of the petition) is void against the liquidator, except with the permission of the court.  It is extremely unlikely that any court would allow a landlord to gain advantage over other unsecured creditors in this way [note 17].

Any goods or proceeds of sale held by the enforcement agent should be passed to the liquidator.  Additionally, any proceeds passed to the landlord should be recovered.  In the case of difficulty, the guidance of Technical Section should be sought.

 

9.107 Goods taken control of under a CRAR after presentation of bankruptcy petition (bankruptcy only)

Where goods have been taken control of by a landlord under a CRAR (see paragraph 9.22) after the presentation of the petition, and an order is subsequently made on that petition, any surplus over and above the six months rent (see paragraph 9.104) should be held to the order of the trustee [note 18]. This is subject also to the provisions regarding the taking control of goods within three months of the order (see paragraph 9.108).

 

9.108 Goods taken control of within three months of order

Where a qualifying creditor (see paragraph 9.103) has taken control of goods within three months of the making of the winding-up order or bankruptcy order, the goods or proceeds of sale are charged for the benefit of the preferential creditors (see Chapter 40, Part 4) to the extent that any assets comprised in the insolvent’s estate are insufficient to meet the preferential creditors’ claims [note 19] [note 20].  Where there are other assets in the case which would pay in full preferential creditors, then the creditor is entitled to retain the goods or proceeds of sale.

In a company case this is subject to the general rule that the taking control of goods process is void after the presentation of the petition (see paragraph 9.106).

 

9.109 Goods taken control of after bankruptcy order

An enforcement agent acting on behalf of a qualifying creditor (see paragraph 9.103) may take control of goods (subject to the restrictions outlined in paragraphs 9.104 and 9.107 to 9.108) at any time and even against property comprised in the bankrupt’s estate and property vested in the trustee.  The only exceptions to this are where an application for an interim order in relation to an IVA is pending (see Chapter 20, Part 5), in which case permission of the court is required (see paragraph 20.26) [note 21] [note 22] [note 23] [note 24].

 

9.110 Goods taken control of after premises disclaimed (bankruptcy only)

An enforcement agent acting on behalf of a qualifying creditor (see paragraph 9.103) may take control of goods, in the terms outlined in paragraph 9.109, even if the official receiver has issued a disclaimer of the premises in which the goods are located (see Chapter 34), assuming the bankrupt is still in possession of the premises [note 25].

 

9.111 Value of goods at risk exceeds value of debt in relation to which creditor may take control of goods (bankruptcy only)

If, an enforcement agent acting on behalf of a qualifying creditor (see paragraph 9.103) has issued notice of an intention to take control of goods (see paragraph 9.32) and , the difference between the value of the bankrupt’s property at risk and the sum owed to the creditor for which he/she can take control of goods (see paragraph 9.104) is sufficient to provide a reasonable sum for the estate, the official receiver should, where possible consider one of the following actions to avoid the costs of the taking control of goods process (see paragraph 9.120): 

  • Giving an undertaking to pay the rent/debt (see paragraph 9.112); or, if not possible,
  • Paying the rent/debt from available funds (see paragraph 9.113); or, if not possible,
  • Incurring a debit balance to pay the rent/debt (see paragraph 9.114).

 

9.112 Giving an undertaking to pay the rent/debt to avoid control of goods being carried out (bankruptcy only)

Where, in the circumstances outlined in paragraph 9.111, it is necessary to give a guarantee to pay the outstanding rent/debt in relation to which the qualifying creditor (see paragraph 9.103) intends to take control of goods, such guarantee should be in the form of Annex 1 (see paragraph 9.115).

Before giving such an undertaking, the official receiver must ensure that the goods will realise more than sufficient to cover the amount due.

The official receiver will also need obtain sanction of the Secretary of State before the undertaking can be given (see Chapter 29) [note 26].

A copy of the undertaking must be placed in the file-plan and also passed to any insolvency practitioner who may subsequently be appointed.

 

9.113 Paying the rent/debt to avoid control of goods being carried out (bankruptcy only)

Where, in circumstances that it is prudent to avoid goods being taken control of (see paragraph 9.111) and the creditor will not accept the official receiver’s undertaking to pay the rent/debt (see paragraph 9.112), the official receiver must take immediate steps to protect the estate by paying the rent/debt from available funds.  Where there are no available funds, the guidance in paragraph 9.114 should be followed.

The official receiver will also need obtain sanction of the Secretary of State before the undertaking can be given (see Chapter 29) [note 27].

 

9.114 Paying the rent/debt to avoid control of goods being carried out – incurring a debit balance (bankruptcy only)

Where, in circumstances that it is necessary to pay the rent/debt to avoid control being taken of the bankrupt’s goods (see paragraph 9.113), the official receiver may, with the permission of Technical Section, create a debit balance to pay the sum for which the landlord/creditor could take control of goods.

The request for permission must explain the following: 

  • The reason why other creditors will materially suffer if the goods are taken control of;
  • The realisable value of the assets involved;
  • The likely balance which will be available to the estate after deducting the costs associated with the sale;
  • The amount of debit balance required; and
  • That the official receiver is satisfied that the assets are not subject to liens (see Part 8) or other third party claims.

In summary, for the incurring of the debit balance to be agreed the benefit to the estate must be substantial.

 

9.115 Undertaking to pay the rent – separate account to be kept

The official receiver’s undertaking to pay rent/debt at Annex 1 (see paragraph 9.112) includes confirmation that a separate account will kept of the proceeds of sale of the goods and that the costs of the taking control of goods (see paragraph 9.120) will be part of the debt over which there is a charge to the enforcement agent.

 

9.116 Goods or monies surrendered by creditor

A creditor that has had to surrender goods or monies by virtue of the provisions outlined in paragraphs 9.106 to 9.108 has a claim as a preferential creditor for the value of the goods surrendered or the proceeds of sale.  The creditor and other preferential creditors will rank equally in respect of any distribution (see paragraph 36A.110).

 

9.117 Dealing with goods recovered from enforcement agent

Where the official receiver has recovered goods in the possession of an enforcement agent (see paragraphs 9.106 to 9.108), the goods should be realised for the benefit of the estate as appropriate, following the relevant guidance elsewhere in the Technical Manual, in particular Chapter 31.0, Part 4.

It ought not to be necessary to verify if there is any third party property in the goods recovered, as it is not possible for an enforcement agent to take control of third party property [note 28], though the official receiver should account to any joint-owners as appropriate.

As an alternative to taking delivery of the goods, the official receiver may agree to the sale being conducted by the enforcement agent, if this will result in a better return to the estate.  In this regard, the official receiver should consider the removal, sale and storage charges of each option, and the possibility that a better return may be obtained if, where the enforcement agent only holds a portion of the insolvent’s goods, the sale of the whole of the assets would be more advantageous.

 

9.118 Dealing with seized controlled goods where annulment, rescission, etc. is possible

If there is a possibility of the insolvency order being rescinded, appealed, stayed (see Chapter 6) or annulled (see Chapter 6A), the enforcement agent should not be instructed to undertake a sale (see paragraph 9.117).

Where there is likely to be a delay before the hearing, the official receiver may proceed with the sale with the agreement of the creditor and directors/bankrupt.  If such agreement cannot be obtained and the official receiver is concerned at storage charges, or similar, he/she should apply to court for directions [note 29] [note 30].

 

9.119 Official receiver as receiver and manager and/or insolvency practitioner to be appointed

Where, for the reasons given in paragraphs 9.106 to 9.108 of this Part, the creditor is liable to pass over monies or goods and the official receiver is not trustee and/or an insolvency practitioner is to be appointed, the official receiver should seek to recover the monies or goods at the earliest opportunity depending on, in the case of goods, the considerations is paragraph 9.117 regarding storage, etc.

 

9.120 Costs of the taking control of goods process

Where funds are to be remitted to the official receiver by the enforcement agent acting on behalf of a qualifying creditor (see paragraphs 9.106 to 9.108) less costs, he/she should request details of those costs [note 31].  If the official receiver considers the declared costs to be excessive, a request should be made to the enforcement agent to provide an adequate explanation of any disputed item.

If the agent refuses, or is unable to do so, and also refuses to adjust his/he costs, the official receiver may require, in writing, that the bill of costs be subject to detailed assessment (see Chapter 39).

See also paragraph 9.68 regarding the fees and costs that may be charged by an enforcement agent.

 

9.121 Where insolvent is sub-tenant

The landlord has the right to take control of goods of a sub-tenant to recover outstanding rent (see paragraph 9.20). Where the debtor is the tenant, the rights and restrictions of/on the landlord to act in this way where an insolvency order has been made (see paragraph 9.103) apply equally where the insolvent was a sub-tenant.

 

[Back to Part 5 – Insolvency and the execution of a judgment by a creditor] [On to Part 7 – Creditor applying for or enforcing a charge in relation to the insolvent’s property]