PART 3
March 2011
MATTERS FOR WHICH SANCTION IS REQUIRED - BANKRUPTCY
29.30 Matters for which sanction is required – bankruptcy
So far as bankruptcy is concerned, the majority of the acts for which the official receiver, as trustee, is required to seek sanction are listed in a schedule to the Act [note 1]. There are also two in the Act itself [note 2] [note 3], and one in an Insolvency Regulation [note 4]. These provisions can be viewed by clicking the links in the notes page to this Part.
29.31 The Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2010 (the ‘modernisation’ changes)
Certain of the provisions relating to the seeking of sanction (see paragraph 29.14) were affected by the ‘modernisation’ changes to the insolvency legislation brought into force in April 2010 [note 5] . Particularly, the requirement to seek sanction for certain acts was removed for cases where the bankruptcy order was made on or after 6 April 2010 [note 6].
Where a requirement to seek sanction was removed this is noted in the relevant paragraph below.
Annex 4 to this chapter sets out the schedule of the Act listing those matters which require sanction (see paragraph 29.30) as existed before the ‘modernisation’ changes (and, therefore, which applies to those cases where the bankruptcy order was made before 6 April 2010).
29.32 Sanction – examples of actions for which the official receiver requires sanction
With one exception (paragraph 29.38, which gives an example of when sanction is not required), the following paragraphs provide examples of the types of acts for which the official receiver, as trustee, will require sanction.
29.33 Carrying on the business of the bankrupt
Sanction is required where the official receiver, as trustee, wishes to carry on the business of the bankrupt [note 7].
It is rare that the official receiver, as trustee, would seek to continue the business of a bankrupt and, instead, the appointment of an insolvency practitioner as trustee should be the preferred option. The considerations for the official receiver when making a decision whether to continue the bankrupt’s business are covered in Chapter 62.
Where the official receiver, as trustee, finds it necessary to operate a local bank account in connection with ongoing trading (rather than the Insolvency Services Account – see Chapter 36, Part 9), he/she will require sanction to operate the account. [note 8].
See also paragraph 29.34 regarding the appointment of the bankrupt to manage his/her business.
29.34 Appointing bankrupt to manage business
Appointing a bankrupt to manage his/her business requires sanction [note 9].
In reality it would be unusual for a situation to arise where this would be the correct way to proceed, and it would usually be more appropriate to seek the appointment of an insolvency practitioner as trustee or a special manager (see Chapter 32.4). A situation where the appointment of the bankrupt might be appropriate would be where he/she were a farmer and agreed to remain caring for the livestock (see paragraph 24.62).
29.35 Bringing or defending legal proceedings
Sanction is required where the official receiver, as trustee, wishes to bring (see paragraph 29.36) or defend (see paragraph 29.37) legal proceedings relating to property comprised in the bankrupt’s estate [note 10].
When making an application to bring or defend legal proceedings, the official receiver should particularly consider how he/she is to deal with the possibility of an (adverse) costs order being made (for example, by way of a conditional fee arrangement or an indemnity from creditors).
29.36 Bringing legal proceedings
In most cases, the trustee will be seeking to bring (rather than defend) legal proceedings relating to property in the estate and, for the reasons given in paragraph 31.9.129, the bringing of legal proceedings is not normally the best way to deal with such a right. Instead, as explained in that paragraph, alternative courses of action such as settlement or assignment are usually more appropriate
Legal proceedings brought in connection with assets of the estate, such as the seeking of an order to take possession of a property or an application to extend the three year period in which a family home can be dealt with [note 11], would need sanction [note 12] see paragraph 31.3.85.
Sanction would not be required to make application for an income payments order as such an application would not relate to property in the estate.
29.37 Defending legal proceedings
Sanction is required should the official receiver, as trustee, need to defend legal proceedings relating to property comprised in the bankrupt’s estate [note 13]. An example of where an official receiver may wish to defend a claim is where the bankrupt is being sued for breach of contract. The contract will vest in the official receiver, as trustee, and, assuming that the claimant has been given leave to proceed with the claim (see Chapter 9, Part 6), it may be beneficial to the estate to defend the claim, if the official receiver receives advice that the claim is without merit. This would normally only be applicable where there were assets to distribute and the defeat of the breach of contract claim would reduce the overall liabilities leading to a higher pro-rata payment to the other creditors.
In any case, the best way to proceed may be by way of a settlement of the claim (for which sanction is also needed where the bankruptcy order was made before 6 April 2010 – see paragraph 31.9.87).
29.38 Employing solicitors does NOT need sanction
The official receiver does not need sanction to employ solicitors to provide legal advice (including legal advice in connection with the bringing or defending of a legal action) [note 14].
29.39 Bringing proceedings to challenge a transaction at an undervalue, a transaction defrauding creditors or a preference
At first sight the requirement to seek sanction to bring proceedings for certain types of antecedent recoveries [note 15] might appear to be the same as bringing legal proceedings relating to property comprised in the bankruptcy estate (see paragraph 29.35). The difference, though, is that an action to recover a preference, transaction at an undervalue or a transaction defrauding creditors does not arise from property in the bankrupt’s estate. Instead, the right to bring the proceedings arises from the Act, and does not constitute property.
The vast majority of legal actions to make antecedent recoveries are brought by Moon Beever under the Service Level Agreement to deal with antecedent recoveries (see Chapter 31.4A, Part 1). The procedure for seeking sanction for this type of action is led by the contactor (see paragraph 31.4A.16) and is therefore different to the procedure for seeking sanction otherwise (see paragraph 29.7).
Sanction to take action to enforce an order restoring the position following a successful application in regards to an antecedent recovery (see, for example, paragraph 31.4A.54) will be required as this would constitute the bringing of legal proceedings (see paragraph 29.36).
29.40 Accepting, for the sale of property in the estate, payment at a later date (a sale ‘on credit’)
It is possible that the official receiver, as trustee, may wish to come to an arrangement whereby property of the estate is sold, with payment being made at a later date. Such an arrangement would require sanction [note 16]. Generally speaking this is unlikely to be the most appropriate way to act as there would always be the risk that payment would not then be forthcoming.
A situation where such an arrangement is common is in the assignment of a right of action (see Chapter 31.9, Part 6) where the assignee (often, the bankrupt) is without funds to pay for the assignment up front and will, instead, enter into an arrangement where the right of action is assigned for a share of the winnings (see paragraph 31.9.107).
29.41 Mortgaging or pledging property of the estate with the purpose of raising funds for the benefit of the bankruptcy estate.
It is difficult to envisage a situation where the official receiver, as trustee, will have the need to mortgage property in the estate to raise funds, but such an action will require sanction [note 17]. Where it is necessary to raise funds to deal with some other property in the estate (such as raising funds to bring a legal action – see paragraph 29.36), it is likely that it will be more appropriate to seek financial support from the principal creditors (see paragraph 31.9.137) or, where the amount required is small, to seek permission from Technical Section to incur a debit balance (see paragraph 29.10).
29.42 Make payments to secure a property right for the bankrupt’s estate
Where the official receiver wishes to make a payment to secure a property right for the estate, he/she would require sanction [note 18].
The most likely reason that the official receiver, acting as trustee, would seek to make a payment to secure property for the bankruptcy estate would be in circumstances where the property was held on hire purchase, conditional sale, or similar. In such circumstances, it may be appropriate to make a payment to settle the agreement (to make, for example, the final ‘balloon’ payment) in order that the item can be taken into the estate. It would be necessary, of course, that the value of the item, net of realisation costs, exceeded the payment to be made for sanction to be given.
Another (albeit, less common) circumstance where a payment may be made will be where the bankrupt holds partly-paid up shares (see paragraph 31.5.65).
29.43 Compromising on a book debt (where order was pre 6 April 2010)
It may be the case that a book debtor of the bankrupt is unable to settle his/her debt in full immediately. In such case, it may be appropriate for the official receiver, as trustee, to negotiate a deferred repayment of the debt – perhaps at a premium, or to accept a lower sum to avoid, potentially fruitless, recovery action. Such compromise would require sanction [note 19].
Where the bankruptcy order was made on or after 6 April 2010 it is not necessary to seek sanction for a compromise of this type [note 20] (see paragraph 29.31).
Where an agreement or contract between the bankrupt and a third party contained an arbitration clause, and that contract is adopted by the official receiver, as trustee, the official receiver is bound to follow that clause, where there is a dispute [note 21] (see paragraph 31.9.10). Where the bankruptcy order was made before 6 April 2010, sanction will be required to enter the arbitration process [note 22].
If the contract was not adopted, and a matter in the contract requires to be determined in connection with the bankruptcy proceedings, the official receiver, as trustee, may seek sanction to make application to court for an order that the matter may be referred to arbitration [note 23].
29.45 Coming to an arrangement with a creditor in respect of a bankruptcy debt
In some cases there may be a dispute as to the amount owed by the bankrupt. In cases where there is to be no dividend this will effectively be an academic point, but in cases where there are assets for distribution it may be necessary for the official receiver, as trustee, to come to an arrangement with the creditor whose debt is in dispute in order to deal with his/her claim and proceed with a distribution to creditors.
It is also possible that the official receiver, as liquidator, may have to adjudicate upon a claim even though it cannot be paid in a bankruptcy following the existence of third party interests (e.g. an insurance claim).
Such arrangements will require sanction [note 24].
29.46 Coming to an arrangement in respect of any claim against the official receiver as trustee
Where a third party has a claim (for example, a legal claim) in relation to the administration of bankrupt’s estate (where, for example, the official receiver has disposed of property not belonging to the estate), the official receiver, as trustee, may seek to settle the claim rather than defending the claim in the courts.
Such a compromise or arrangement would require sanction [note 25].
[Back to Part 2 – Matters for which sanction is required – liquidation]