Annex 1

ANNEX 1

Exempt property - bankruptcy only (Old Chapter 8, Part 9 – issued September 2000)

This Annex comprises the old Chapter 8, Part 9, which was last updated in September 2000. This will be removed and replaced in due course when a new chapter (Chapter 30) containing information on exempt property is issued.

1. General

Exempt property is defined in section 283(2) and does not form part of a bankrupt’s estate. It includes ‘such tools, books, vehicles and other items of equipment as are necessary for the bankrupt to continue his employment, business or vocation’ and ‘such clothing, bedding, furniture, household equipment and provisions as he needs to satisfy the basic domestic needs of himself and his family’. Section 117 of the Housing Act 1988 extended the provisions relating to exempt property so that certain tenancies are exempt property and do not fall to be dealt with in a bankrupt’s estate. Exempt property may be claimed for the estate by the bankrupt’s trustee if it is likely that the proceeds from the sale of that property will exceed the cost of a replacement (see chapter 31.2 which, while dealing with vehicles, has wider application). The claim against the property in question must be made by the trustee by notice in writing within 42 days of his becoming aware of the property or, where the official receiver is trustee, within 42 days of his becoming trustee if he was already aware of the existence of the property prior to becoming trustee. (Note that time limit, set by the Act, can be extended on application to the court.) The trustee is not required to purchase a replacement item unless and until he has sufficient funds in the estate to do so. If a third party offers to pay the trustee a sum of money which the trustee is satisfied is equivalent to the likely net benefit to the estate of selling the property and purchasing a replacement, the trustee may accept that sum instead of realising the property (see also paragraph 10 below). Property claimed for the estate under section 308 or 308A cannot then be disclaimed by the trustee without the leave of the court.

Notes: [s283(2)] [s283(3A] [s308 & 308A] [s376] [R6.187(2)] [R6.188] [s315(4)]

 

2. Consideration of exempt property

Even though exempt property, where it is considered that the proceeds of sale will exceed the cost of replacement, can only be claimed by a trustee, while acting as receiver and manager of the bankrupt estate, the official receiver is required to take steps to protect property which the trustee may claim for the estate. Therefore, the official receiver must consider whether any claim by the bankrupt that an item is necessary, and so exempt, is reasonable. It is for the bankrupt to satisfy the official receiver that the item is necessary and where this is not done and the official receiver believes and has reasonable grounds for believing that the property is not exempt, the official receiver is entitled to treat the property as part of the estate and deal with it accordingly. If the official receiver has information to suggest that property may be exempt, but the bankrupt has not made a claim that it be treated as such, the official receiver should draw the bankrupt’s attention to the exempt property provisions and satisfy himself that there are reasonable grounds for believing that they do not apply before taking action to claim or dispose of the property for the benefit of the estate. It is important that the official receiver believes, and has reasonable grounds for believing, that he is entitled to seize or dispose of items which he does not consider are exempt property, in order to gain the protection available to him against any liability for loss or damage where he seizes or disposes of property which is not in fact comprised in the estate.

Notes: [s287 (3)(a)] [s287(4) or 304(3)]

 

3. ‘Other items of equipment’

The phrase ‘other items of equipment’ does not include stock or the insolvent’s trading premises. The fact that these form part of the estate may mean that the bankrupt cannot continue in business in which case tools, books, vehicles and other items of equipment which would have been exempt property had the bankrupt continued trading, will instead fall to be dealt with as part of the estate.

Notes: [s283(2)(a)]

 

4. ‘Necessary... for use personally’

Where a bankrupt claims that items are necessary either to satisfy his and his family’s basic domestic needs or for his use personally in his employment, business or vocation, he should be asked to make a statement explaining the circumstances justifying his claim. For an item to be ‘necessary’ to him for use in his employment, business, etc., it should be really needed for his personal use but the meaning of ‘necessary’ should not be restricted to ‘indispensable’. The phrase ‘for use personally’ does not mean that the bankrupt should have the exclusive use of the item but assets used by, for example, employees and not by the bankrupt are not exempt property.

 

5. ‘In his employment, business or vocation’

The words ‘in his employment, business or vocation’ are best interpreted to mean that use of the item is necessary in connection with the bankrupt’s employment, business, etc, as opposed to being necessary in the course of that employment or business. If therefore a bankrupt needs a vehicle in order to travel to and from work, because of a lack of alternative transport, it would be necessary for use in his employment or business even if he did not use the vehicle once he had arrived at his place of work. An asset may be an exempt asset even though the bankrupt is not in employment at the date of the bankruptcy order if, without the asset, the prospect of him obtaining employment would be substantially reduced. So in relation to vehicles, the availability of alternative transport (assuming provision of a company vehicle would not be usual for the type of employment in question) is a factor in deciding whether a vehicle is exempt property. The official receiver will need to consider in each case whether there is a reasonable prospect of the bankrupt obtaining work. Similarly, a self-employed bankrupt without work at the date of the bankruptcy order might nevertheless be able to claim assets as exempt property. If the bankrupt has not had any work for a substantial period, it is questionable whether he has a business or vocation in which any of his assets could be used. He may therefore be unable to satisfy the official receiver that he ought to be able to retain any assets as exempt property: Again the real and present prospect of future work is a factor to be taken into account. A business should be viable and if there is no reasonable prospect that the business will be able to continue in the future, assets should not be treated as exempt assets. The viability of the business after a bankruptcy order may be different from the viability of the business which may have led to the bankrupt’s failure. Finally, it should be noted that ‘employment, business or vocation’ need not mean the bankrupt’s only form of income generation.

 

6. ‘Household equipment’

It is not considered that items such as stereo equipment, a television, a video recorder and computer are necessary to satisfy the basic domestic needs of the bankrupt and his family. Although such items will not therefore be considered exempt property under the heading of household equipment, the usual considerations concerning their likely realisable value and the prospective benefit to the estate should be considered before agents are instructed to deal with them. Depending on the nature of the bankrupt’s work, such items might, however, be exempt as necessary to his employment, business or vocation e.g. a computer.

 

7. Items subject to hire purchase and conditional sale agreements

A bankrupt’s rights under a hire purchase or conditional sale agreement are capable of forming part of his estate and the exempt property provisions apply to items acquired by him under such agreements. In all cases the official receiver should inform the owner of the item of the making of the bankruptcy order and state whether a claim that the item is exempt property has been made (and, where the official receiver is trustee, whether that claim has been accepted). If the owner of the item chooses to exercise a right under the agreement to repossess it, any surplus arising on the asset could be claimed by the trustee as after-acquired property. If the item repossessed is important in the bankrupt’s work, it may be necessary for the official receiver to reconsider whether other items claimed by the bankrupt as exempt property should be seized for the estate.

Notes: [s307]

 

8. Partnerships

The exempt property provisions of section 283(2) do not apply to partnership property, either whether the partnership is wound up as an unregistered company in conjunction with petitions against insolvent members or where bankruptcy orders are made against the partners on their own petition under article 11 of the Insolvent Partnership Order 1994 (see also paragraph 53.81).

Notes: [Insolvent Partnership Order 1994, article 10 and 11, schedule 7 paragraph 7(2), article 8, schedule 4, paragraph 28]

 

9. Replacement property

Where the official receiver as trustee claims for the estate an item which is exempt property, because he considers that its realisable value exceeds the cost of a reasonable replacement, he is under no duty to provide that replacement until he has funds in the estate to do so. In most cases it will be necessary to wait until the item is sold before he has sufficient funds from which to provide the replacement but he should make efforts to minimise the period that the bankrupt will be without the asset. The official receiver should purchase the replacement by providing the bankrupt with a cheque made payable to the vendor but not until the bankrupt has provided written details of the item being purchased (e.g. car registration number, model and vendor’s name and address). Whilst the onus is on the bankrupt to ensure that the replacement property is suitable for its intended purpose, the official receiver should nonetheless use his judgement to assess the reasonableness of the replacement cost, e.g. the minimum amount below which it would not be reasonable to expect to obtain a roadworthy and reliable vehicle. As an alternative, if a third party offers the official receiver the difference between the value of the property and the value of the replacement, the official receiver can accept that offer, enabling the bankrupt to retain the property. The costs of sale which would otherwise be incurred should also be taken into account in assessing any such offer. In all cases the official receiver should take no action to claim the property unless he can be certain that there will be a net benefit to the estate. This means that the official receiver should take a conservative view of the value of the property so as to provide a reasonable margin of safety, after payment of agents’ costs and the cost of a suitable replacement. Official receivers are expected to rely on advice from their agents as to whether such a net benefit can be achieved and may incur a debit balance on the estate to obtain such advice. Where a number of items, such as some pieces of antique furniture, would together achieve a net figure, the official receiver can consider them as a group.

Notes: [s308 and 308A] [R6.187(2)] [R6.188]

 

10. Official receiver as receiver and manager

Where the official receiver as receiver and manager of a bankrupt’s estate is satisfied that there will be a net value from replacing a ‘necessary’ item, the bankrupt should only be allowed to keep control of the item, pending a trustee’s appointment, if he insures it (comprehensively in the case of motor vehicles) with the official receiver’s interest being noted on the policy. The official receiver should write to the insurance company to ask them to note his interest (see chapter 49 Part 2) and notify him of any activity in relation to the policy. The bankrupt should be informed in writing that he may not validly dispose of the item and that his trustee will contact him regarding it. The bankrupt should also be informed that even though the official receiver has allowed him temporarily to retain possession of the item, this action in no way binds the trustee, who may take a different view as to whether the item is exempt or may take a decision to claim it for the estate. If proper arrangements cannot or will not be made by a bankrupt to protect the asset as required by the official receiver, the official receiver should take steps to protect it, by taking it into safe-keeping, if possible, and, if appropriate, by applying to the court for directions that he sell the property and purchase a replacement before a trustee is appointed. As the property does not form part of the estate, the official receiver as receiver and manager of the bankrupt’s estate cannot dispose of the item without the sanction of the court. If a dispute arises between the official receiver and a bankrupt about the necessity of an item, the official receiver should immediately apply to the court for directions to safeguard his position.

Notes: [s284(1)] [s291(2)] [s287(2)] [s363(3)]

 

11. Appointment of practitioner as trustee

If an insolvency practitioner is appointed trustee, the official receiver should provide him with details of all items which he considers may be exempt property. Details of any action taken by the official receiver should also be given in the trustee’s record book.

Notes: [form IPROH]

 

12. Further information

Further information regarding exempt property may be found as follows:

Paragraph 9.11 and 9.37 - distress,

Paragraph 31.2.17 - 31.2.28 - motor vehicles,

Paragraphs 31.6.62 - 69 - plant and machinery,

Paragraph 34.33 - disclaiming exempt, property where previously claimed

Paragraph 53.81 - partnerships.

 

 

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