TYPES OF CREDITOR
This Part provides guidance relating to particular types or classes of creditor. Where guidance on a creditor is provided in detail elsewhere in the chapter there will be a link to that more comprehensive guidance.
The Part provides guidance in relation to the following creditors/liabilities:
Guidance on the following debts, which are non-provable, is provided in Part 3, as follows:
Guidance on the following debts, which are preferential (or part preferential), is provided in Part 4, as follows:
When a proof of debt is submitted in respect of a guarantee given by the insolvent for the debt of a third party, the official receiver should obtain a copy of the guarantee and, if it was given within the two years preceding the insolvency proceedings, satisfy himself that it does not constitute a transaction at an undervalue (see paragraph 31.4A.96). Where it would appear that the debt is a transaction at an undervalue the proof may be rejected (see paragraph 40.17).
The liability under the guarantee will normally be dependant on the principal debtor’s failure to pay the debt. That being the case, the principal creditor must take into account all sums paid by the principal debtor up to the time he/she submits his/her proof, but need not adjust his/her claim if he/she receives further sums (subject to him/her not receiving more that 100p in the £ of the debt owed from the principal and guarantor).
Any proof submitted in the proceedings cannot exceed any limit in the guaranteed amount.
If a guarantee given by an insolvent (see paragraph 40.27) is ‘for all sums due’ from the principal debtor to the principal creditor, the liabilities will also extend to any guarantees given by the principal debtor to the principal creditor (in other words, the insolvent will have guaranteed the guarantees) [note 1].
Where a number of parties have co-guaranteed the debts of a third party, the principal creditor may in the event of default, and subject to any prior agreement, seek payment from any of the guarantors as he/she sees fit. The guarantors must however share the burden of the liability equally.
Where, therefore, one guarantor has, for example, discharged the whole amount due to the principal creditor, he/she may claim a contribution from the other guarantors. A co-guarantor with the insolvent who has discharged the insolvent’s ‘share’ of the debt may therefore prove in the proceedings for:
A person who has guaranteed a debt due from the insolvent, and paid it in full, may submit a proof in the proceedings for the amount paid. That person will also gain the rights that the principal creditor may have had against the insolvent in respect of his/her debt, including any rights to security or to preferential treatment for dividend purposes.
Where a guarantor has only guaranteed part of the insolvent’s debt, he/she may prove for that part of the debt in full and the principal creditor can prove for the remaining amount.
See paragraph 40.18 for guidance on double proofs.
A product or service guarantee given by the insolvent can give rise to a contingent unsecured claim (see paragraph 40.9) in the proceedings. It could also be an unsecured claim at the date of the proceedings. Where contingent, it is unlikely that a proof will be lodged unless the customer is dissatisfied with the product or service, where, for example, it requires replacement or repair. In the case of insolvency of the product or service provider, it is likely that a dissatisfied customer will prove for the cost of repair or replacement sourced elsewhere.
Where a trade association or insurance company has guaranteed the insolvent’s obligations, their claims in respect of the costs of settling customer claims should be dealt with as a guarantee (see paragraph 40.30).
Where two or more corporate entities are treated as a group for VAT (see Chapter 78) purposes, all members of the group are liable jointly and severally for any tax due from the representative member [note 2].
Where therefore a company is in liquidation and there is a group VAT debt, this liability may met by another part of the group with that group company then possibly having a claim against company in liquidation.
Excise duty is a tax on certain goods such as alcohol and tobacco products and is collected by the retailer. The duty payable on alcohol products is based on their alcohol content and volume and on tobacco products the rate chargeable relates to weight, amount or retail price. The duty on fuel is a flat rate per litre.
Excise duty is also payable on gambling activities such as fruit machines, bingo, lotteries and gaming.
Where the insolvent sold such goods or provided gambling services they may have a debt in respect of duty collected but not paid over to HMRC.
Air passenger duty is payable by airlines in relation to the carriage of passengers. The amount due relates to the final destination of the passenger based on the distance between London and the capital city of the destination country, and the type of aircraft used.
Where the insolvent operated as an airline, there may be a debt due in respect of unpaid air passenger duty.
Generally, foreign creditors are allowed full participation in insolvency proceedings in England/Wales (see paragraph 40.13), though a claim from outside the EU may be resisted on the basis that the claim is in whole or part a penalty [note 3] or that it would not be a provable debt under British insolvency law [note 4].
Within the EU, the revenue collection authority of one Member State may request the revenue collection authority of another Member State enforce the collection of revenue debts within that other Member State. Subject to some limited exceptions, the collection authority is then obliged to comply with that request.
The relevant provisions [note 5] extend to all taxes and duties of any kind, including those arising from local authorities, but do not include compulsory social security contributions or monies due of a contractual nature. The provisions also include penalties, fines, fees, interest, costs and surcharges.
It follows therefore that the official receiver may receive a claim from HMRC on behalf of a revenue collection authority in another Member State of the EU.
Enforcement of certain traffic regulations, for example those relating to parking, driving in bus lanes and disregard of a congestion charge, is a civil (rather than criminal) matter, for which responsibility lies with the relevant local authority or, in some cases, Transport for London [note 6] [note 7] [note 8] [note 9] [note 10] [note 11].
Enforcement of contraventions are generally by way of a Penalty Charge Notice imposing a financial penalty issued on the spot or by post (where the contravention is evidenced through CCTV, for example) by the relevant authority.
Although such charges are often colloquially called ‘fines’, they do not meet the definition of a fine given in the legislation (see paragraph 40.84) and are therefore provable debts.
The Police retain the power to enforce parking and other regulations in certain circumstances and in relation to certain local authority areas. Any contravention that is enforced by the police under the criminal law will be considered to be a ‘fine’ and will not, therefore, be provable (see paragraph 40.84).
The Driver and Vehicle Licensing Agency have the power to issue penalties where e person does not correctly declare an uninsured or un-taxed vehicle as off the public road, by completing a statutory of road notice (SORN). Such a penalty would be a provable debt.
Certain road traffic offences may be dealt with by way of a fixed penalty [note 13] [note 14]. Payment of the fixed penalty removes any liability to conviction for the offence to which the penalty relates [note 15].
A penalty fare is a civil liability and is therefore a provable debt [note 18].
If the railway operator can prove an intent to avoid payment (such as using a forged ticket, deliberately avoiding a ticket inspector or using another person’s ticket), then it might refer the matter to a magistrate’s court for prosecution [note 19]. Any fine imposed by the court as a result of such a contravention would not be a provable debt (see paragraph 40.84) and would not be released on discharge (see paragraph 40.177).
Where an employer is found with illegal migrant workers in his/her workforce, he/she may be served with a Notice of Liability for a Civil Penalty by the Border Agency of the Home Office. This financial penalty is a civil (rather than criminal) sanction and is intended to penalise the employer for having acted without due care and diligence in operating recruitment and employment practices [note 20] [note 21].
Such a penalty does not meet the definition of ‘fine’ given in the legislation and is therefore a provable debt.
Certain low level nuisance offences, such as littering, making graffiti or disorderly conduct, can be dealt with by the imposition, by a police officer, of a penalty notice on the offender [note 22]. An agreement to pay the penalty removes any liability to conviction, but cannot be taken to be an admission of guilt. If the offender agrees to pay, but subsequently does not do so, the penalty becomes a fine and is, therefore, not provable and the debt is not released on discharge.
Most individuals are paid an annual salary under their contracts of employment and the employer pays this by making (usually) monthly payments through the year. Where an advance of salary has been given to the employee, he/she has simply been paid in uneven instalments, receiving a larger proportion at the time of the advance and a reduced sum thereafter. Consequently, if the employment continues it can be regarded that there is no debt as the employee will provide the services for which he/she has been (pre)paid.
If, however, the employee ceases before the employee has provided all the labour for which they have been paid this then gives rise to a debt which is provable in the bankruptcy as the advance cannot then be recovered from the salary. This arises even if the employment terminates post-bankruptcy as there would be a contingent liability (see paragraph 40.9).
An advance of benefit available is under the Universal Credit system (https://www.gov.uk/universal-credit/overview) (known as a Payment on Account).
A Payment on Account is not a loan. It is more comparable to receiving an advance of salary (see paragraph 40.42). When a payment is made, Universal Credit payments are subsequently reduced for a period of time until the Payment on Account is accounted for, typically over 12 months. Universal Credit payments then resume normal levels. Following a bankruptcy the Payment on Account would continue to be ‘repaid’ through the reduction in subsequent benefit payments to the claimant.
If there is a change in the debtor’s circumstances before the Payment on Account is fully accounted for, and the debtor is no longer eligible for Universal Credit, the outstanding balance represents an overpayment of benefits recoverable by the DWP, and that overpayment would be a provable debt in the proceedings. This arises even if the entitlement to benefits ceases post-bankruptcy as there would be a contingent liability (see paragraph 40.9).
Overpayment of state benefit, such as housing benefits, jobseekers allowance or tax credits may be made as a result of mistakes, change of circumstances or fraud.
It has been held by the Supreme Court [note 23] that overpayments of benefits are contingent liabilities (see paragraph 40.9) and, as such, are provable debts. This decision over-ruled earlier decisions generally declaring such debts as non-provable [note 24] [note 25].
Such a debt incurred through fraud would not however be released upon discharge (see paragraph 40.178).
Bankrupts who have repaid, or are repaying, a debt which would be provable as a result of the over-ruling of earlier case law (see paragraph 40.44) may have a claim against the Department for Work and Pensions (‘DWP’) for the recovery of those monies. This is a matter between the bankrupt and the DWP. The official receiver has no claim on any monies repaid to the debtor.
It is considered that overpayments which are made after the date of the bankruptcy order are a post bankruptcy liability, for which the bankrupt would be liable to repay, even if they arose following an error (the decision to overpay) which occurred before the order.
The following table provides a quick reference guide for dealing with overpayments of state benefits in relation to the making of the bankruptcy order (“BO”):
Recovery decision made
Treatment in Bankruptcy
DWP can recover.
The legislation [note 26] provides that the definition of ‘action’ as regards the steps that are barred for recovery of debts incurred under the social security or tax credit legislation when the limitation period expires applies only to actions in a court of law and not, for example, to recovery from future benefits or future income.
Recovery would, however, be prohibited by the making of a bankruptcy order (see paragraph 40.2).
Most unmetered water rates will be charged annually (generally on 1 April), payable in advance. In the majority of cases, the agreement between the supplier and the consumer will contain a provision, or ‘insolvency clause’ for the annual charge to be apportioned in the event of liquidation or bankruptcy and, where such a clause exists, the supplier will only be entitled to prove for apportioned usage and arrears up to the date of the insolvency order.
Where there is no insolvency clause the total of the unpaid annual charge will be a provable debt and will not be recoverable from the insolvent.
Where the water usage is metered, the provable debt is simply for the usage and arrears up to the date of the insolvency order.
A water company cannot disconnect for unpaid charges if the debt relates to an individual’s principle home [note 27].
Council tax is a tax levied by local authorities on domestic properties to pay for the expenses of the authority and other authorities (such as Police and fire services) [note 28] [note 29] [note 30] [note 31].
Liability to pay the council tax falls jointly and severally on the resident and owner of the property [note 37] or, in the case of a liability due to residency, that individual’s spouse or civil partner if they are also so resident [note 38].
Where premises are unoccupied and the liable council taxpayer (see paragraph 40.50) is the trustee, the premises are exempt from council tax. This exemption applies even if the unoccupied property remains furnished (see also paragraph 62.16).
Unoccupied premises are also exempt from council tax where the mortgagee is in possession under the terms of the mortgage.
See paragraph 31.3.191 for advice regarding the liability for council tax where the official receiver is in possession of a property.
At the beginning of the financial year a local authority will issue a demand notice in respect of a relevant property [note 40] [note 41]. This notice is an estimate of the council tax due based on the assumption that the residency of the occupier will continue for the entire billing period. The notice usually requires that this amount is paid in 10 instalments.
This applies whether or not the company/bankrupt was in arrears at the date of insolvency.
Non-domestic rates are similar to council tax, but are chargeable in relation to business premises (sometimes called ‘hereditaments’). The amount due is calculated by multiplying the rateable value of the property by the business rates multiplier set by central government [note 44].
Liability to pay the council tax falls jointly and severally on the occupiers of the property. If the property is empty, the owner (or the person entitled to possession) will be liable after the property has been empty for a period three months (or six months for an industrial property), though a liquidator or trustee in bankruptcy is exempt (see also paragraph 62.16). [note 50] [note 51] [note 52] [note 53]
The local authority will allow the payment to be made in instalments, on a monthly basis [note 56].
This applies whether or not the company/bankrupt was in arrears at the date of insolvency.
A gambling contract can be defined as a contract by which two parties or more agree that a certain sum of money, or other thing, shall be paid or delivered to one of them, on the happening or not of a certain event. Gambling contracts entered into after 1 September 2007 are treated in a similar manner to other contracts in law [note 59].
It would be rare for the official receiver to encounter a case with a large element of debt for unpaid gambling debts as the provision of credit facilities by licensed providers of gambling is tightly restricted [note 60].
See paragraph 40.94 for guidance on the position of gambling liabilities as provable debts.
In relation to spread-betting, it is possible to lose more than the initial stake.
Spread-betting is not covered by the gambling legislation and is, instead, a regulated activity under the oversight of the Financial Conduct Authority (www.fca.org.uk).
The rights of an insolvent under a leasing agreement are generally to a right to possess and use the leased item while the lease/rental payments are up to date. On the making of the insolvency order the lessor will normally take back possession of the item and claim in the insolvency proceedings for outstanding sums due under the agreement.
Where the insolvent has entered into a simple credit agreement, it will be the case that ownership of the goods to which the agreement relates will have passed to the insolvent at the time that the agreement was entered into, with the balance of monies due being a debt in the insolvency proceedings.
Guidance on agreements where the lender retains rights to the goods is provided in paragraphs 40.143 to 40.150.
Many insolvents will be in arrears to their landlords in respect of rent - especially in relation to commercial premises. Arrears of rent are a provable debt in liquidation and bankruptcy proceedings [note 64] [note 65] and may be calculated pro-rata where the insolvency order is between payment dates [note 66] [note 67], though landlords do retain certain rights against the property of the insolvent (see paragraphs 9.46 to 9.52).
A landlord may also have a claim in respect of loss or damage as the result of the issue of a disclaimer in respect of the leased property (see paragraphs 34.74 to 34.76).
Where a tenancy was created before 1 January 1996, an insolvent may have obligations under the lease (this is referred to as ‘privity of contract’) despite the fact that they have assigned it to a third party [note 68]. The obligation may be after an assignment where the original lessee may remain liable under covenants [note 69].
Even if the tenancy was granted after 1 January 1996 the insolvent may have a liability under the lease where a guarantee was given to the landlord.
See paragraph 40.63 for further information on such an agreement.
For tenancies created after 1 January 1996, the concept of liability under privity of contract was discontinued [note 70] (see paragraph 40.62). A landlord may require a tenant who assigns a lease to enter into an ‘authorised guarantee agreement’, under which the tenant who assigns the lease or tenancy may guarantee performance of the tenant’s covenants by the assignee, but not any subsequent assignee [note 71].
An assured or secure tenancy (see Chapter 30, Part 4) may be subject to a suspended possession order requiring the bankrupt to repay rent arrears under threat of the termination of the tenancy (see paragraphs 30.77 to 30.88).
Should a bankrupt wish to avoid enforcement of a possession order, he/she must fulfil the conditions of the suspended order and pay the instalments ordered by the court. If a bankrupt wishes to make such payments to avoid losing his/her home, the official receiver should not object. When assessing the bankrupt’s income and expenditure for IPA/IPO purposes (see Chapter 31.7), the official receiver should allow a sum ordered by court towards the repayment of rent arrears as a reasonable expense.
Where a bankrupt has reached a voluntary agreement with the landlord to pay rent arrears following the landlord threatening to take possession proceedings, then the official receiver, as trustee, should not intervene in those payments. If the official receiver considers the payments to be excessive, and if they are likely to compromise the bankrupt’s ability to make a payment under an IPA/IPO, the official receiver should ask the bankrupt to vary the agreement with the landlord.
Liability in tort is a liability arising out of a civil wrong, where the victim of the wrong is entitled to bring a claim (or complaint) to claim damages. It would include actions such as libel, assault or trespass.
The legislation makes specific provision that such liabilities in tort, including those for unliquidated damages [note 72] [note 73] [note 74], are provable debts in a winding up or bankruptcy so long as the event which leads to the claim occurs prior to the date that the company went into liquidation (unless the petition was presented on or after 6 April 2010, and the company was in administration immediately prior to the date of liquidation, in which case the relevant date is the date that the company entered administration) or the individual was made bankrupt [note 75] [note 76].
In the case of a company, the legislation provides that, for cases where the date of liquidation (or an earlier preceding administration) was on or after 1 June 2006, the liability in tort (see paragraph 40.65) will be a provable debt (requiring some estimation – see paragraph 40.20) where there is a pre-insolvency actionable claim, even if the harm to the victim has not yet materialised [note 77]. An example may be where the victim has been exposed to asbestos but has not yet developed the symptoms of asbestosis.
Such a claim would also be provable in bankruptcy, but the bankrupt would not be discharged from the debt (see paragraph 40.181), so the potential claimant would be free to pursue the bankrupt post-bankruptcy.
A deficiency in a pension scheme operated by the insolvent for the benefit of employees can be a debt in insolvency proceedings. See paragraph 61.99 for detailed guidance.
Where a person is married to, or is in a civil partnership with, the bankrupt at the date of bankruptcy, and that person provided credit to the bankrupt, the debt, although not a postponed debt (see paragraph 40.93), ranks behind all other categories of debt (see paragraph 40.4) [note 78]. This would include any interest payable on the debt. Whether or not the parties were married/in a civil partnership at the date that the credit was provided is irrelevant so far as the effect of this provision is concerned.
Where divorce or dissolution proceedings are concluded prior to the bankruptcy order being made, the former spouse/civil partner’s claim ranks equally with the other unsecured creditors.
The Motor Insurers Bureau (‘MIB’) (http://www.mib.org.uk/Home/en/default.htm) can provide compensation to victims of negligent uninsured and untraced drivers. Every motor insurer is required to be a member of MIB [note 79] and contribute to its funding.
Where the MIB has a claim in the proceedings it will usually arise by virtue of them having paid compensation to a third party where the bankrupt was the negligent uninsured driver and is now pursuing the bankrupt for the compensation paid.
Such a debt is a provable debt, but any element of the debt that relates to compensation paid for personal injuries may not be released on discharge (see paragraph 40.181). It is open to the MIB to consider whether and to what extent they wish to pursue the bankrupt post-bankruptcy and the official receiver need not get involved.
An insurance company, by the nature of its business, has numerous contingent liabilities. Special rules, including in respect of the order of payment, apply to the winding-up of insurance companies (see paragraphs 59.27 to 59.32).
It has been held that costs are contingent liabilities for the purpose of proving in insolvency proceedings.
Where a bankrupt is involved in any claim before the court, whether as claimant or respondent, and proceedings have been issued prior to the date of the bankruptcy order, any order for costs made against the bankrupt, whether made before or after the date of the bankruptcy order, is a provable debt in the bankruptcy on the basis that it is a contingent liability (see paragraph 40.9), the contingency being a risk of adverse costs arising when the court proceedings are issued [note 80].
See paragraph 31.9.71A for guidance in relation to vesting actions on-going at the date of the order.
Costs paid by a bankrupt post bankruptcy where the costs should have been regarded as a provable debt in consequence of over-ruling of an earlier decision that such costs were not provable [note 81] may now be the subject of applications for recovery by the bankrupt. These monies are unlikely to fall within the bankruptcy estate. It would also appear to be possible for a bankrupt, who has been the subject of a subsequent bankruptcy order based upon a post (earlier) bankruptcy costs order, which would now be a provable debt, to seek an annulment (see Chapter 6A) of the subsequent order.
A judgment creditor is entitled to prove in the insolvency for any unrecovered costs of his/her execution (see Chapter 9, Part 2). He/she cannot do so where the insolvency intervened in the execution so that the costs are a charge on the proceeds of sale or if the officer charged with the execution has deducted his/her costs before accounting to the liquidator or trustee for the proceeds of sale.
If execution was levied after the commencement of the winding up, the judgment creditor is unable to claim in the winding-up proceedings for the costs of the execution. The officer charged with the execution is not entitled to claim in the proceedings but must look to the judgment creditor to discharge any shortfall in his/her costs, and the creditor may make a claim for those costs.
It is an offence to install or use a television receiver without a valid TV licence [note 82] [note 83] (see http://www.tvlicensing.co.uk/?WT.mc_id=mec_Search_Brand).
It is possible to pay for the licence in monthly or quarterly instalments and, in all cases, payment is made in advance of the period to be covered by the licence. If an individual misses a payment, then there is no valid licence and continued use of TV receiving equipment would be an offence [note 84].
It is not possible, therefore, to have a debt to the TV licensing authorities. An individual has either paid for a licence and has one, or has not paid and does not have one.
A contributory is a person liable to contribute to the assets of a company in the event of it being wound up [note 85] [note 86]. Any present and past member [note 87] is a contributory, subject to certain qualifications as to liability [note 88] [note 89].
Where a contributory has made such a contribution, he she will be a creditor in the insolvency for the amount contributed, though they will have a separate meeting, where required (see Chapter 16).
Contributories also have certain rights in relation to the insolvency (see Part 9).
See paragraphs 31.10.36 to 31.10.42 for guidance on making calls on contributories for unpaid contributions.