May 2010
Part 6 Final Distribution and application of assets in bankruptcy cases
After all expenses in the bankruptcy have been paid in full, payments are made to creditors in the following order of priority [note 1]:
36A.104 Specially preferred debts - apprenticeships [note 2]
This section applies where a bankruptcy order is made in respect of an individual to whom another was an apprentice or articled clerk at the time when the petition on which the order was made was presented and the bankrupt or apprentice gives notice to the trustee terminating the apprenticeship or articles. Where an articled clerk or apprentice has paid a fee, the trustee may pay a sum in respect of the unexpired period of his/her training (as at the date of the bankruptcy order), in which case the sum ranks as a pre-preferential debt. In calculating the sum to be repaid the trustee will take into consideration the duration of the apprenticeship unexpired and the general circumstances of the case. It is unlikely this situation will be encountered in practice.
36A.105 Specially preferred debts – trustee expenses from a previous (undischarged) bankruptcy
Where a bankrupt is adjudicated bankrupt again following an earlier bankruptcy, and where he/she remains undischarged from the earlier bankruptcy [note 3], any expenses incurred by the trustee as part of his/her asset recovery duties in the earlier bankruptcy (including dealing with an income payments agreement or income payments order), shall be a first charge on the assets recovered in the later bankruptcy [note 4]. See also paragraphs 36A.118 and 36A.119.
36A.106 Abolition of crown preference and remaining preferential creditors
The implementation of the EA2002 reduced the creditors who were previously entitled to preferential ordinary unsecured status. The majority of unsecured creditors (including HM Revenue and Customs(HMRC), see paragraph 36A.107 and 36A.61) now rank equally as non-preferential ordinary unsecured creditors where the petition was presented on or after 15 September 2003. The remaining categories of debt defined as preferential (contributions to occupational pension schemes, remuneration etc. of employees, levies on coal and steel production) apply in both liquidation and bankruptcy proceedings [note 5] [note 6]. Refer to paragraph 36A.108 for further information.
36A.107 Debts ranking as preferential where petition presented before 15 September 2003
For those cases where the petition was presented before 15 September 2003, the different categories of preferential creditors historically included debts due to HMRC and social security contributions.
Whilst these categories of preferential debt will not be applicable in cases where the petition was presented on or after 15 September 2003, there may still be cases where the petition was presented before 15 September 2003 but where a distribution is to be made after this date, where the preferential claims of these creditors will still need to be considered.
For further information on preferential creditors claims (including a table setting out the categories of creditor and time limits used to define the preferential debts in cases where the petition was presented before 15 September 2003) please refer to the Case Help Manual part on Distributions, Bankruptcy and Company Cases, paragraph x.
36A.108 Debts ranking as preferential where petition presented on or after 15 September 2003
Following the abolition of Crown preference, in cases where the petition was presented on or after 15 September 2003, Schedule 6 to the IA86 (as amended by the EA2002) details the remaining categories of preferential debt, which are applicable in all types of liquidations, administrative receiverships, voluntary arrangements and bankruptcy, as follows:
a) Any sums owed by the bankrupt which are subject to Schedule 4 of the Pension Schemes Act 1993; these constitute contributions to occupational pension schemes and state scheme premiums;
b) remuneration etc. of employees (where they have been an employee of the bankrupt), as defined by Schedule 6 to the IA86, [note 7], and limited to the whole or any part of the 4 month period immediately prior to the relevant date (as defined by IA86 section 387 [note 8]). In bankruptcy proceedings, the relevant date is the date the interim receiver appointed under section 286 is first appointed, following the presentation of the bankruptcy petition, or where no interim receiver has been appointed, the date of the making of the bankruptcy order [note 9]. The claim cannot exceed £800 [note 10];
c) levies on coal and steel production [note 11] [note 6].
36A.109 Exceptions where the change to preferential status introduced by EA2002 does not apply (bankruptcy cases)
The transitional provisions, where the change introduced by the EA2002 (see paragraph 36A.106) does not apply, are applicable where prior to 15 September 2003, a petition for a bankruptcy order was presented, or an individual voluntary arrangement (IVA under part VIII of the IA86) had effect [note 12]. It will also not apply to a case where a proposal for an IVA is made (under part VIII of the IA86) either before or after the 15 September 2003, by a person who was adjudged bankrupt on a petition presented before 15 September 2003[note 13].
For cases where the bankruptcy petition was presented before 15 September 2003, Schedule 6 of the IA86 (prior to amendment by the EA2002) defined the different categories of preferential debts. These included debts due to HMRC and social security contributions. There may still be cases where the petition was presented before 15 September 2003 and where a distribution is to be made after this date, where the preferential status of these creditors will still need to be considered. See the Case Help Manual Part Distributions, Bankruptcy and Company Cases, paragraph x for further information.
36A.110 Landlords
Where a landlord levies distress upon the goods or effects of an individual who is adjudged bankrupt before the end of the period of 3 months beginning with the distraint, then the goods or effects, or the proceeds of sale, are charged for the benefit of the preferential creditors but only to the extent that the bankrupt’s estate is insufficient to meet those debts. When this has occurred, the landlord may rank as a preferential creditor, to the extent of the value of the goods or proceeds surrendered by him/her. Any person surrendering distrained goods in this way is entitled to share in any dividend to preferential creditors payable out of the other assets, but cannot be paid from the proceeds of the surrendered assets [note 14]. This applies in bankruptcy as it does in corporate insolvency. Refer to paragraph 36A.64 which includes a worked example illustrating how to calculate the dividend payable to preferential creditors and the distraint creditor in this scenario.
36A.111 Unsecured debts which are neither preferential nor postponed
Non-preferential unsecured creditors (which are neither preferred or postponed, see paragraph 36A.116 and also Part 4 of this chapter for further information on postponed debts) rank equally between themselves in the bankruptcy proceedings and are entitled to be paid in full after the preferential creditors where there are sufficient assets. If there are insufficient funds to pay them in full, they share the available assets between themselves in proportion to their debts [note 15].
36A.112 Dividend payments for joint debts listed in separate estates
Where the official receiver or trustee is dealing with a case where both husband and wife are subject to separate bankruptcy orders, it is sometimes the case that both have joint and several liability for the same debt, for example a joint bank account which is overdrawn.
The trustee should consider the claim and where appropriate admit it in full in each of the bankruptcy estates. When the trustee is ready to pay a dividend from the separate estates, he/she should pay the dividend, as normal, in the first estate (the case with the earlier court number). Then, in the second estate (the later court number), he/she should also calculate the dividend as normal, that is on the joint creditor’s claim in full, together with any other claims, but, in total, the joint creditor should not be paid more than the amount of its full claim.
If the joint creditor’s claim is likely to be overpaid as a result of the second estate dividend payment, the trustee should not pay the joint creditor more than its claim but split the surplus monies in two. One half should be remitted back to the first estate where it should be treated as an asset and, subject to any fees due, used to pay other creditors. In the second case, the share of the surplus monies should be used to pay other creditors, but not the joint debt.
In this way, the principle of, in effect, the first estate paying a portion of the second estate’s debt under guarantee is acknowledged and accounted for. It is likely that in practice the adjustments will need to be planned and made before the dividends are actually paid.
36A.113 Interest
(Amended June 2010)
Any surplus left after payment of the debts that are neither preferential nor postponed should then be used to pay interest on the debts outstanding since the commencement of the bankruptcy (to the date of payment of the debt). Interest on preferential debts ranks equally with interest on all other debts (except those that are postponed) [note 16]. The interest payable is the greater of:
a) that applicable under s17 of the Judgments Act 1838 (JA1838)at the date of the commencement of the bankruptcy (statutory interest)[note 17], currently this stands at 8%; and
b) the rate of interest that the bankrupt would have to pay in respect of the debt if he/she had not been adjudicated bankrupt (contractual interest) [note 18]. Interest should be calculated on a simple basis.
(b) Interest due on debts for periods up to the date of the bankruptcy order
In certain circumstances creditors may include interest accumulated on their debt for periods prior to the bankruptcy order, even where this has not previously been reserved or agreed, as follows [note 19]:
(i) If a debt is due by written instrument and payable at a certain time, interest may be claimed for the period from that specified time to the date of the bankruptcy order [note 20].
(ii) If the debt is due otherwise, interest may only be claimed if, prior to the presentation of the petition a written demand for payment was made by or on behalf of the creditor, giving notice that interest would be payable from the date of the demand to the date of payment [note 21]. Interest claimed in this way can only be claimed for the period between the date of the demand and the date of the bankruptcy order [note 22]. The rate of interest to be claimed cannot exceed the rate specified in section 17 of the JA1838 on the date of the bankruptcy order, as detailed at sub paragraph (a) above[note 24].
36A.114 Considering the period for statutory interest (Wilcock v Duckworth [2005] BPIR 682 ChD)
Where all creditors have been paid in full, statutory interest is applicable on proved debts, from the date of the bankruptcy order [note 16]. This applies even where the debt as proved includes interest already charged as part of the repayment terms of that debt, up to the date of the bankruptcy order [note 25][note 26].
In the case of Wilcock v Duckworth [2005] BPIR 682 ChD, the court considered the payment of statutory interest when using third party funds to fund a paid in full annulment, where there were difficulties in identifying all the creditors due to the time that had elapsed since the making of the bankruptcy order.
In deciding which creditors should be paid statutory interest, the court divided the creditors in to three categories:
With regard to the period for which statutory interest should be paid, the court decided that the debtor should pay statutory interest on the debts from the date of the bankruptcy order, to the date the official receiver was released; and then for the period from the date of the appointment of a trustee until annulment. This solution is only to be applied where creditors have been denied their money over a long period, but also where it would be unfair for the debtor to carry the burden of interest for the entire period in those cases where considerable time has elapsed.
In making this judgment the court considered the decision in Harper v Buchler [2004] BPIR 724 concerning circumstances where there is sufficient surplus to pay the debts in full with statutory interest (see also Chapter 6A Part 3 paragraphs 6A.40 to 6A.43).
36A.115 Surplus cases and the payment of statutory interest (Harper v Buchler (No 2) [2005] BPIR 577)
In Harper v Buchler (No 2) [2005] BPIR 577, due to property prices increasing in the ten years between the date of the bankruptcy order (1995) and the date of the annulment application, assets held within the bankruptcy estate provided funds which were more than sufficient to pay not only all of the debts, costs and liabilities of the bankruptcy but also statutory interest. The court held that this was a case where it was entirely appropriate for statutory interest to be paid before an order of annulment could be granted.
The decision in Wilcock v Duckworth [2005] BPIR 682 ChD (see paragraph36A.114 and Chapter 6A Part 3 paragraphs 6A.37 to 6A.39) does not overturn the points made regarding statutory interest in both Harper v Buchler cases as it relates to the time period for payment of statutory interest in PRU (now RTLU) cases only.
36A.116 Postponed debts in bankruptcy cases
(a) Debts to spouse or civil partner
Where a person is married to or has a civil partnership with the bankrupt at the date of the bankruptcy order, and that person has provided credit to the bankrupt, the outstanding debt is postponed and ranks behind all other categories of debt described at paragraphs 36A.104 to 36A.113. This includes any interest payable on the debt when a surplus arises. This debt postponement applies irrespective of whether they were or were not married to, or in a civil partnership with the bankrupt, at the date the credit was given, as long as they are married to or in a civil partnership with the bankrupt at the date of the bankruptcy order [note 27].
The following debts are not provable until all other claims of creditors, plus interest due on those claims (including statutory interest), have been paid in full:
i. claims under s382(1) of the Financial Services and Markets Act 2000 (where profit has been made or one or more investors have suffered a loss as a result of a person contravening a relevant requirement of the Financial Services and Markets Act 2000); and
ii. any other claim which is postponed by the Insolvency Act 1986 or any other enactment.
Note: The Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 came in to force on 1 December 2001, repealing the Banking Act 1987 and making the Financial Services Authority (FSA) responsible for all deposit takers, such as banks and building societies, and a new statutory compensation scheme was established by the FSA, operated by the Financial Services Compensation Scheme (FSCS). See Chapter 80, paragraphs 80.4 and 80.40 and Chapter 80 Annex E for further information on the compensation scheme.
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 on or after 1 September 2004, all outstanding student loans are not provable debts and thus are not released on a bankrupt’s discharge from bankruptcy. Further, where the 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 also made non-provable in bankruptcy with the consequence that they were also not released on discharge [note 28][note 29]. Where the date of the bankruptcy order occurs prior to these dates (1 July 2004 for loans under the Education (Student Loans) Act 1990 and 1 September 2004 for loans made under the Teaching and Higher Education Act 1988 (often referred to as income contingent loans), student loans may be treated as provable debts and thus be included in the bankruptcy and released on discharge.
36A.118 Stay of distribution in case of second bankruptcy
This subject is covered in greater detail in Chapter 21. Where a bankruptcy order is made against an individual who is an undischarged bankrupt and his/her existing trustee [note 30] has been given the prescribed notice of the presentation of the petition for the later bankruptcy [note 31], any further distribution or other disposition to him/her, as described below, is void except to the extent that it was made with the consent of the court or is or was subsequently ratified by the court [note 32].This applies to [note 33]:
a. any after acquired property under section 307(3) IA86 which is vested in the existing trustee;
b. any money paid to the existing trustee in pursuance of an income payments order under section 310 IA86; and
c. any property or money which is, or in the hands of the existing trustee represents, the proceeds of sale or application of property or money falling within sub-paragraphs (a) or (b) above.
The creditors of the bankrupt in the earlier bankruptcy [note 3] and the creditors of the bankrupt in any bankruptcy prior to the earlier one, are not creditors of the later bankruptcy in respect of the same debts, but the trustee may prove in the later bankruptcy for the unsatisfied balance of the debts, together with any interest payable on the balance and any unpaid expenses of the earlier bankruptcy. The claim made by the trustee in the earlier bankruptcy will rank in priority after all the debts, and the interest on those debts, have been paid in full from the later bankruptcy.
36A.119 Existing trustee’s expenses
The trustee in the earlier bankruptcy may have incurred expenses in dealing with assets which, upon the commencement of the later bankruptcy, must be treated as part of the estate for the purposes of the later bankruptcy [note 34] [note 35]. Where this has occurred, such assets are subject to a first charge in favour of the earlier trustee, for any bankruptcy expenses incurred by him/her in relation to dealing with these assets [note 34] [note 36], see also paragraph 36A.105.
For information on dealing with any surplus remaining after payment in full of all the bankruptcy debts and expenses, go to Part 8 of this chapter.
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