PART 2
January 2012
Vehicles subject to third party interest (including finance)
31.2.22 Vehicles with third party interest
Whilst the insolvent may be the legal owner of a vehicle, (see paragraph 31.2.3), the vehicle may not be available to the official receiver as an asset. Other parties (and, primarily, we are talking about finance companies in this context) may have an interest in the vehicle or may retain limited ownership rights over the vehicle.
Equally, the insolvent may have use of a vehicle that it not owned by him/her – such as a vehicle that is leased, rented or provided by his/her employer.
31.2.23 Official receiver to check extent of third party ownership rights before dealing with vehicle
It goes almost without saying that the official receiver should not deal with a vehicle (by, for example, disposing of it) until he/she is sure that no other party has any valid claim over the vehicle.
It is possible for the official receiver to conduct a search of outstanding finance on a vehicle using the facilities provided by companies such as HPI or Equifax or by requesting agents to undertake the search on the official receiver’s behalf. There is a charge for conducting the search and such searches should therefore not be carried out as a matter of routine.
Generally, it will be sufficient to rely on information provided by the director or bankrupt to assess whether a vehicle is subject to any third party interest. Where there is doubt, the official receiver should request that his/her agents conduct a finance search before selling the vehicle (see paragraph 31.2.46).
31.2.24 Vehicles subject to finance
The most common third party right claimed in a vehicle is that of a finance company. For the purposes of this Part, the term ‘finance’ can be taken to cover two different types of agreements:
31.2.25 Agreements where the finance company has no rights over the vehicle
An agreement where the lender retains no rights to the vehicle is generally a simple loan and will usually be called a ‘credit agreement’ on the relevant documentation. It may be arranged through a ‘High Street’ lender directly by the borrower or through a specialist lender by a car dealer on behalf of the borrower. Where there is doubt, the official receiver should peruse the terms of the agreement to confirm that the lender retains no ownership rights.
Sometimes, the lender will retain the car ownership documents (primarily, the V5C) to prevent the borrower from disposing of the vehicle. Unless the agreement provides otherwise, the finance company will have no rights over the vehicle and the official receiver should realise the vehicle as appropriate (see Part 3 or 4), requesting that the loan creditor provide him/her with any vehicle documents it is retaining.
31.2.26 Agreements where the finance company has rights over the vehicle
A finance agreement where the lender retains ownership or repossession rights over the vehicle until a specific date or when certain conditions (such as the amount of repayment made) have been met is usually known as a ‘conditional sale agreement’ or ‘hire-purchase agreement’.
Subject to any express clause in the agreement, the rights of the insolvent under the agreement (such as the right to acquire ownership of the vehicle) will pass to the official receiver as liquidator or trustee. Advice on whether to exercise those rights is in paragraph 31.2.30.
Where there is doubt, the official receiver should peruse the terms of the agreement to confirm the extent to which the finance company retains ownership rights.
A ‘logbook loan’ is a type of loan that is granted generally to individuals in severe financial difficulty where other sources of borrowing are not available. Typically, the loan will have a very high APR (rates of up to 500% are not unknown) and, with punitive charges for missing payments, etc., the amount required to be repaid is often well in excess of the original loan. The loan is secured on the borrower’s vehicle through a bill of sale transferring ownership of the vehicle to the lender.
Where the official receiver encounters a logbook loan, or similar, he/she should check that the bill of sale on which the transfer is registered with the court (following the guidance in paragraphs 31.4B.162 to 31.4B.164). if it is not, the lender will have no security over the vehicle and it may be dealt with normally. If the bill of sale is registered, the official receiver should treat the vehicle as one with hire purchase (see paragraph 31.2.26).
Depending on the nature of the arrangement entered into by the bankrupt, or the manner in which the account was managed by the lender, the official receiver should also consider whether the agreement might be challenged as an extortionate credit transaction (see Chapter 31.4B, Part 6).
31.2.28 Termination of a ‘conditional sale’ type agreement
In practice an agreement where the finance company retains an interest in the vehicle (see paragraph 31.2.26) will usually contain a clause giving the finance company the right to terminate the agreement in certain circumstances, such as default on repayment or the making of an insolvency order against the borrower.
Where the finance company exercises such a right in relation to an agreement that relates to property of an insolvent, the potential benefit to the official receiver as liquidator or trustee will be restricted to the rights of the insolvent on termination of the agreement. The key right that the insolvent would hold in this regard is that the vehicle may not be repossessed without a court order if more than two thirds of the total price of the vehicle has been paid [note 1]. In deciding whether to consent to such an order, the official receiver should consider the value of the vehicle to the estate were it to be sold (taking into account the need to settle the finance and any arrears).
31.2.29 Action to take in respect of vehicle subject to finance agreement
(Amended February 2013)
Where the official receiver is dealing with a vehicle subject to a finance agreement, he/she should send the standard letter [note 2] to establish the type of agreement (that is, whether it is a simple credit agreement or a conditional sale-type agreement – see paragraph 31.2.24) and the amount required to settle the agreement.
Where the finance is a simple credit agreement (see paragraph 31.2.25), the official receiver may deal with the vehicle normally (see Part 3 or 4). Sanction would be required to make a payment to secure a vehicle which is subject to a conditional sale-type or hire-purchase agreement (see paragraph 29.42).
31.2.30 Check ‘equity’ position of vehicle before realisation
Where the agreement is of the conditional sale type (see paragraph 31.2.26), the official receiver must consider the amount required to settle any finance agreement when considering the value of the vehicle to the estate. If there would be a realisable value after taking the outstanding finance and costs of sale into account, the official receiver may instruct agents to deal with the sale of the vehicle (see paragraph 31.2.55) and the settling of the finance.
If the vehicle has no realisable value, the finance company should be informed, by letter [note 3] that the official receiver does not intend to adopt the agreement. The finance company should also be notified of the location of the vehicle, as in the address of the person who retains control of it.
There may be different considerations where the vehicle is, or may be, exempt property (see Chapter 30, paragraph 30.155).
31.2.31 Creditor taking vehicle where no right to repossess
It is not unknown for a creditor to take possession of a bankrupt’s vehicle despite having no right to do so (either because the agreement was a credit agreement – see paragraph 31.2.25 – or because there was no right to repossess without a court order – see paragraph 31.2.28). Often, it will be the case that the bankrupt has voluntarily ‘handed back’ the vehicle. In such a case, the official receiver should notify the creditor of his/her interest in the vehicle and decide whether there is any benefit to the estate in instructing agents to collect the vehicle from the creditor for sale.
It is likely to be better that the vehicle is left with the creditor for them to conduct the sale with their reasonable costs being taken from the sale proceeds and the remainder being remitted to the official receiver.
A lease agreement generally gives the person leasing the vehicle no ownership rights over the vehicle, which remains as the property of the lessor at all times. Lease agreements are most often encountered in a trading case, but are not unknown in a domestic circumstance.
Generally, a lease agreement will give the lessee exclusive rights to use the vehicle for a set period (normally, between 2-5 years) in return for a fixed, monthly payment. This right would pass to the official receiver as liquidator or trustee but, subject to any ‘right to buy’ agreement (see paragraph 31.2.34), it is unlikely to be of any benefit to the estate. In such circumstances the official receiver should inform the lessor that he/she does not intend to adopt the agreement and inform them of the whereabouts of the vehicle. This should be done within 24 hours of the official receiver becoming aware of the location of the vehicle.
31.2.33 Motability scheme agreements
The Motability Scheme enables disabled people to lease a car, powered wheelchair or scooter by using their government-funded mobility allowances. An individual is able to exchange his/her allowance for a mobility package. Payments to Motability are made directly by the Department for Work and Pensions. The right to receive these benefits is personal to the individual. As the official receiver is not capable of fulfilling the eligibility criteria it is considered that this renders the contract with Motability personal to the bankrupt and therefore not capable of vesting.
As neither the vehicle nor the lease contract with Motability forms part of the bankruptcy estate the official receiver has no interest in the vehicle.
31.2.34 Lease agreement with an option to purchase
At the end of a leasing period (see paragraph 31.2.32), the vehicle will generally be returned to the leasing company, but there may be a clause in the agreement that gives the lessee the right to purchase the vehicle (sometimes at a pre-agreed price). Subject to any express term in the agreement that right will pass to the official receiver as liquidator or trustee.
In deciding whether to take advantage of this right, the official receiver should consider the value of the vehicle (see paragraph 31.2.44) against the price being asked by the leasing company. In the likely event that the vehicle is worth less than the amount being asked for, the official receiver should follow the advice in paragraph 31.2.30 regarding the non-adoption of the agreement.
A hire agreement is an agreement to rent a vehicle for a short period of time (generally, less than 30 days). The person hiring the vehicle has no ownership rights over the vehicle and, whilst the benefit of the agreement will pass to the official receiver as liquidator or trustee, the agreement is extremely unlikely to be of any value. Where an insolvent is hiring a vehicle at the date of the making of the order, the official receiver should inform the company hiring out the vehicle that he/she does not wish to adopt the agreement and inform them of the location of the vehicle. This should be done within 24 hours of the official receiver becoming aware of the location of the vehicle.
31.2.36 Vehicles subject to employee loan scheme
A number of motor manufacturers operate employee car loan schemes as benefits to their employees. As only employees of the manufacturer are eligible to join the scheme and membership will terminate if the employment with the manufacturer ceases, the membership is considered to be personal to the individual member and will not pass to the official receiver as trustee.
In general, these schemes give the member an opportunity to purchase a car by means of a 12 month rental period with an option to buy at the end of the period. The agreement will state the terms under which the manufacturer can continue to exert control of the car during that initial period – which may include a clause terminating the agreement on bankruptcy.
31.2.37 Action to be taken with regards to a vehicle subject to an employee loan scheme
If the scheme agreement is in the initial ‘pre-purchase’ period (normally 12 months – see paragraph 31.2.36), the official receiver need take no action as regards the vehicle as it is not, at that point, property of the bankrupt.
If the agreement has passed that initial period and the bankrupt has taken the option of purchasing the vehicle, the official receiver should deal with the vehicle normally.
If the agreement passes the 12 month period during the period of bankruptcy and the bankrupt exercises the right to purchase, the official receiver should consider claiming the vehicle as after-acquired property, following the guidance in Chapter 31.8.
31.2.38 Conditional-sale vehicle as exempt property
A vehicle subject to finance such as conditional sale (see paragraph 31.2.26) may be treated as exempt property (see Chapter 30, paragraph 30.155).
31.2.39 Effect of third party paying the outstanding finance
Where a third party pays the outstanding finance on a vehicle (where, for example, a third party pays the finance on behalf of a bankrupt), the title to the vehicle will pass to the hirer (in this case, the bankrupt) and not to the third party [note 4]. Depending on the terms of the finance (i.e., whether the finance company retained ownership of the vehicle) and when the finance was paid-off, this will either have the effect of increasing the value of the vehicle to the estate, or making it available to be claimed as after acquired property (see Chapter 31.8).
[Back to Part 1 – Dealing with a vehicle – general] [On to Part 3 – Sale of vehicles with realisable value]