Part 3 Annulment order on grounds “debts and expenses paid in full”

April 2010

Part 3 Annulment order on grounds “debts and expenses paid in full” (cases where petition was presented on or after 6 April 2010)

NOTE

Transitional provisions for April 2010 Rules changes

For cases where the petition was presented on or after 6 April 2010, the Rules described in this part will apply and the guidance and advice therein should be followed.

For cases where the petition was presented before 6 April 2010 the Rules prior to the introduction of The Insolvency (Amendment) Rules 2010 will continue to apply and the guidance and advice in Technical Manual Chapter 6A Part 3 (issued July 2008) may be followed. This is attached at Annex 1.

  

6A.18 ‘Payment in full’ required notice period and matters to be proved 

Where the application is made on the grounds of debts and expenses paid or secured [Note 1], the period of notice provided by the applicant to the official receiver or trustee must be not less than 28 days before the hearing. The applicant must also provide the official receiver with a copy of the application and supporting witness statement [Note 2] Matters to be proved to the satisfaction of the court include:

  1. All bankruptcy debts which have been proved must have been paid in full, or secured in full to the satisfaction of the court [Note 3];
  2. If the debt is disputed, or a creditor can no longer be traced, the bankrupt must provide such security as the court considers adequate, to satisfy any sum that may be subsequently proved to be due to the creditor concerned [Note 4]. Where security has been given in respect of an unpaid creditor the court may direct that details of the alleged debt and security are advertised in such a manner as the court thinks  just [Note 5].

 

6A.19 Official receiver’s report required for payment in full application

When the application to annul is on the grounds of the debts and expenses of the bankruptcy all being paid or secured [Note 1], and the official receiver is the trustee, he/she must file in court, not less than 21 days before the hearing, a report to court [Note 6].

 

6A.20 Contents of official receiver’s report to court on payment in full application

The official receiver’s report should contain the following [Note 7]:

  1. brief details of the circumstances leading to the bankruptcy;
  2. a summary of the bankrupt’s assets and liabilities, both at the date of the bankruptcy order and at the date of the application, explaining any differences; 
  3. details of any creditors known to the official receiver who have claims but have not proved (see paragraph 6A.30);
  4. the extent (if any) to which, and the manner in which, the bankruptcy debts and expenses have been paid or secured, and, if secured, to what extent the official receiver considers (based on the information provided by secured creditors, solicitors etc) the security previously given over assets by the bankrupt to be satisfactory (see also paragraph 6A.45 and following paragraphs; and 
  5. any other matters which he/she considers should be drawn to the court’s attention e.g. lack of co-operation (see also paragraphs 6A.30 to 6A.32).This should include information to indicate whether, if the bankruptcy had proceeded to its full conclusion, the bankruptcy debts and expenses would have been paid in full and, if so, whether statutory interest would be paid and at what rate. See also paragraphs 6A.36 to 6A.43; and
  6. whether the official receiver supports the bankrupt’s application.

 

6A.21 Inclusion of Employment Rights Act claims

Where appropriate, the official receiver, in any report to the court and at the hearing of an annulment application, should draw the attention of the court to any Employment Rights Act claims which may have arisen as a result of the bankruptcy order. The court can then consider whether it should seek any undertakings (or make directions) with regard to the discharging of those claims or the reinstatement of the former employees. The official receiver should also give advance notice to the applicant of his/her intention to raise the matter at the hearing and ask what proposals the applicant has with regard to payment or reinstatement (see also paragraph 76.44).

 

6A.22 Identifying potential statutory interest in report to court

In determining whether or not to annul a bankruptcy order under s. 282(1)(b) the court may, if it thinks just, take into account whether any sums have been paid or payment secured in respect of statutory interest for proven bankruptcy debts [Note 8] Statutory interest or ‘post commencement interest’ means interest on the bankruptcy debts at the rate specified in section 328(5) of the Insolvency Act 1986 in respect of periods during which those debts have been outstanding since the commencement of the bankruptcy [Note 9]. Where the official receiver is trustee when the annulment application is made [Note 1], he/she should make specific mention in his/her report to the court regarding any payment or provision that has been made for statutory interest. If no payment or provision has been made but it is expected that there would be a surplus in the bankruptcy were the administration of the case to continue to its conclusion, which would allow for the payment of interest at the rate laid down in section 328(5), this should also be mentioned in the official receiver’s report [Note 10] . It will then be a matter for the court to decide whether statutory interest should be paid to the creditors as part of the application [Note 11] [Note12] or whether, for example, the estate should revert to the bankrupt without the payment of any statutory interest. It will be helpful to the court if the official receiver notes the rate of statutory interest applicable [Note 13] in his/her report. See paragraphs 6A.37 to 6A.43 for details of case law concerning statutory interest.

 

6A.23 Copy report to applicant

The official receiver must also send a copy of his/her report (form LCRTB) to the applicant at the same time that it is filed in court [Note 14]. Where the applicant is the bankrupt, the copy report should be sent to him/her with a letter informing him/her that any further witness statements which he/she may wish to make should be filed at court and copies sent to the official receiver and any trustee.

 

6A.24 Copy of trustee’s report to official receiver

If the trustee is not the official receiver, responsibility for the report rests with the trustee. In addition to the report contents listed at paragraph 6A.20, the trustee’s report must also include a statement of the following [Note 15] :

  1. the trustee’s remuneration;
  2. the basis fixed for the trustee’s remuneration under Rule 6.138; and
  3. the expenses incurred by the trustee.

The trustee must send the official receiver a copy of his/her report at least 21 days before the hearing [Note 16]. The official receiver may then file an additional report, (Form LCRTB), a copy of which must be sent to the applicant at least 5 business days before the hearing. He/she should normally do this where he is aware of relevant facts not incorporated in the trustee’s report.

If the trustee is not the official receiver and the applicant has concerns that the amounts charged for the trustee’s remuneration and/or expenses in the proceedings are excessive, the applicant may apply to the court to review the trustee’s charges [Note 17]. In practice, it is unlikely that the official receiver would become involved in these additional proceedings as unless he/she has filed a report under Rule 6.207 he/she is not required to attend at the annulment hearing when a trustee other than the official receiver has been appointed [Note 18]. Should the court make an order under Rule 6.207A it shall send a copy of such order to the official receiver [Note 19].

 

6A.25 Paying or securing for debts outside proceedings

Where payment in full appears likely within a short period after the bankruptcy order, the official receiver should not object to the settlement of claims etc. outside the proceedings by third parties but not using assets which might otherwise vest as part of the bankruptcy estate. As a matter of practice, the official receiver should inform the bankrupt of the benefits of paying or securing the debts outside the proceedings (e.g. through a solicitor on whose undertaking as to subsequent payment to creditors the court can reasonably rely [Note 20]. In such cases the order will determine the date from which the annulment will be effective and may call for a further report confirming payment of the debts. The bankrupt may be informed that where funds, even from a third party, are paid to the official receiver, this will attract (additional) fees and make it more costly for him/her to obtain an annulment. There is no discretion to waive fees in these circumstances. The official receiver should not seek to deter payment by third parties outside the proceedings solely on the basis of the loss of fee income.

For further information on the calculation of fees under the financial regime applicable to cases where the bankruptcy order was made on or after 1 April 2004 see the LOLA desk instructions which can be accessed on the intranet.

 

6A.26 Paid in full annulments, letter to bankrupt and his/her solicitor (amended November 2014)

Where the official receiver becomes aware of an application to annul the bankruptcy order on payment in full grounds, it may assist him/her in dealing with the requirements placed upon the official receiver as a result of the application, if he/she writes to the bankrupt and/or his/her solicitor, emphasizing the relevant provisions of section 282 and rules 6.206 to 6.214.  In particular, emphasis should be placed on the information required by the trustee (or official receiver) to compile a detailed report regarding the bankruptcy and the application [Note 7]. Other matters which the official receiver may wish to highlight are the possibility that the court may direct the trustee (or official receiver) to notify unproved creditors or advertise the annulment application [Note 21], the fact that all proved creditors must be paid in full or the debts secured to the satisfaction of the court [Note 3], and where proved creditors cannot be traced adequate security is to be provided to the court to satisfy the potential claims of such creditors [Note 4]

For post 6 April petition cases the official receiver should also ensure that the bankrupt and his / her solicitor are aware of the provisions regarding disclosure on the Individual Insolvency Register (IIR) (see paragraph 26.24).

 

6A.27 Attention to be drawn to implications of rules 6.209 & 6.211 and statutory interest

(Amended February 2014)

The official receiver may also wish to make reference to the decision in re Robertson (a bankrupt) [1989] 1 WLR 1139, where the Court of Appeal held that under section 282(1)(b), a bankruptcy order could not be annulled until the debts had been satisfied to the extent required by rules 6.209 and 6.211 (i.e. proved and paid in full). Rule 6.211(2) was amended with effect from 6 April 2010 to include the provision that the proven bankruptcy debts could be secured in full to the satisfaction of the court as an alternative to being paid in full. The case of Official Receiver v McKay [2009] EWCA Civ 467 considered the effect of variation or withdrawal of a proof of debt by a creditor. The insolvency rules allow for the withdrawal or variation of a proof of debt by agreement between the creditor and the trustee [Note 22].  Failing that a proof of debt may be expunged or reduced by the court upon the application of the trustee or a creditor [Note 30]

The official receiver may also provide details of his/her estimated costs in the proceedings, including any insurance costs incurred (see paragraph 49.19), together with a list of the known creditors and proved creditors. The attention of the bankrupt or solicitor should also be drawn to the trustee’s requirement to pay statutory interest after settling the proved claims before any return can be made to the bankrupt, where payment to creditors is dealt with within the proceedings by the trustee. The issue of payment of statutory interest is likely to be a matter that the court will wish to see addressed as part of the proceedings, as mentioned above in paragraph 6A.22. See also paragraphs 6A.37 to 6A.43 for details of case law concerning statutory interest.

 

6A.28 Formal proof not received 

Where the official receiver is aware of an outstanding claim, but  no formal proof of debt (Form 6.37 or substantially similar) is received, the official receiver should make this clear in his/her report under rule 6.207 and ask the court not to make any direction under rule 6.209 (see paragraph 6A.30 for details of the directions the court can make). This will apply particularly where there is a stay of advertisement and proof of debt forms have not been dispatched to creditors. The court is only likely to make a direction under rule 6.209 where there is no written notification of a claim from a known creditor.  

 

6A.29 Writing to unproved creditors in advance of the annulment application hearing

Where the official receiver is trustee and receives notice of an application under section 282(1)(b) (debts and expenses paid in full), he/she may consider issuing a letter to known unproved creditors (See paragraph 40.31 for the definition of ‘proved’), informing them of the application and consequences of not proving and inviting submission of a proof of debt. Other matters the official receiver may seek to clarify with the creditor are: 
  1. The exact amount of their claim in the proceedings;
  2. Whether they hold security which they are content to rely on;
  3. Whether they have received some payment or no longer have any claim in the matter. (It is possible in cases where annulment occurs some time after discharge that the debt no longer exists as payment has been made, if so no proof of debt should be submitted);
  4. Whether the creditor requires payment of statutory interest on their claim or will they waive their claim for this (see paragraphs 6A.37 to 6A.43) regarding statutory interest)

Obtaining this information prior to the court hearing may reduce the necessity of the court adjourning the application under Rule 6.209 (see paragraph 6A.30) and will clarify the extent of proved claims prior to the hearing. 

 

6A.30 Court directions concerning notice to creditors who have not proved

Where an application is made on the grounds that all the debts have been paid or secured [Note 1], and the official receiver and/or the trustee has reported that there are known creditors who have not proved (e.g. Department of Work and Pensions, HM Revenue and Customs), rule 6.209 provides that the court may:

  1. direct the trustee or, if no trustee has been appointed, the official receiver to send notice of the application (form NOACNP) to such of those creditors as the court thinks ought to be informed of it, with a view to their proving their debts (if they so wish) within 21 days [Note 23], and
  2. direct the trustee or, if no trustee has been appointed, the official receiver to advertise the fact that the application has been made (form NFN1), so that creditors who have not proved may do so within a specified time [Note 24], and
  3. adjourn the application meanwhile, for any period not less than 35 days [Note 25] (to allow time for proofs of debt to be submitted).

Where there are unproved Crown debts, the official receiver should ensure that notification of the bankruptcy order has been given to Crown Departments.

 

6A.31 Disputed debts/untraced creditors 

Where a debt is disputed or a creditor, having notified his/her claim, can no longer be traced, the annulment may still proceed provided the bankrupt lodges security to the satisfaction of the court until such time as the matter has been resolved. In practice this might mean the bankrupt paying the amount of the debt into the court [Note 4]. See also paragraphs 6A.34 to 6A.35 concerning the court’s refusal to grant annulment where deliberate delay has occurred and it has not been possible to identify proved creditors, irrespective of monies lodged to pay potential creditor claims.

 

6A.32 Order to include details of interest beneficiary

The official receiver may wish to draw to the court’s attention, that any order made for the payment of monies into Central Funds at the court should also make reference as to who will obtain the benefit of any interest earned on the monies lodged at court, pending resolution of the matter. 

 

6A.33 Release of security following advertisement

Where the court orders advertisement regarding the debt of an untraced creditor and no claim is made on the security within 12 months of the advertisement, the court shall, on application, normally by the former bankrupt, order the security to be released [Note 5].

 

6A.34 Late application preventing annulment (Gill v Quinn [2005] BPIR 129)

Where an application to annul a bankruptcy is made on payment in full grounds, the court must be satisfied that the bankruptcy debts and expenses have either been paid or secured to its satisfaction [Note 1]. In the matter of Gill v Quinn, [2004] All ER(D)21, the deputy district judge refused Mr Gill’s application to annul the bankruptcy order,  as he held that the debts had not been paid or secured within the meaning of section 282(1)(b).

Mr Gill was deemed by the court to have acted deliberately to avoid repaying the whole or part of his creditors, irrespective of the fact that he deposited a sum of money with a solicitor to be held as security in respect of the unpaid debts. By making an application for annulment on payment in full grounds 12 years after the date of the bankruptcy order, the evidence required to show which creditors had proved in the bankruptcy was either destroyed or lost, as the records and official receiver’s case file had been destroyed and attempts to contact the creditors were unsuccessful.

 

6A.35 Refusal to grant annulment upheld by Court of Appeal (Gill v Quinn [2005] BPIR 129)

On appeal, the decision of the district judge was upheld and the following concluded:

  1. A bankrupt is not entitled to assume that by delaying his/her annulment application for a lengthy period, he/she might avoid repaying the whole of his/her indebtedness.
  2. Depositing funds with a solicitor as security does not increase the likelihood of the creditors being paid where they cannot be identified or located as a result of the delay in making the application.  The court may refuse to grant an annulment where it is of the opinion that by delaying presentation of his/her annulment application,  the bankrupt’s intention is to deliberately avoid repaying the whole of his/her indebtedness.  In particular the court is likely to take this view where the body of creditors likely to remain unpaid as a result of the delay is substantial.

 

6A.36 Interest on debts only to date of bankruptcy order

Section 322(2) states that where a bankruptcy debt bears interest, that interest is provable only up to the date of the bankruptcy order. An annulment application made under section 282(1)(b) provides that all the ‘bankruptcy debts’ have been paid. The term ‘bankruptcy debt’ (as defined by section 382) does not include post-bankruptcy interest thus creditors are not entitled to be paid interest after the commencement of the bankruptcy order however see information on the payment of statutory interest at paragraphs 6A.37 to 6A.43.

 

6A.37 Statutory interest when using third party funds for payment in full (and PRU/RTLU appointed) (Wilcock v Duckworth[2005] BPIR 682 ChD)

In the case of Wilcock v Duckworth [2005] BPIR 682 ChD, the court considered the payment of statutory interest when using third party funds. At the time of the bankruptcy order (August 1992), there were insufficient funds to pay creditors, the official receiver was appointed trustee, and the case was subsequently passed to the Insolvency Service Protracted Realisations Unit in operation at that time ("PRU"), to deal with an outstanding property interest.   In January 2003 an insolvency practitioner trustee was appointed to realise the property interest, which had substantially increased in value since the date of bankruptcy.

Mr Wilcock sought annulment of the bankruptcy order on the grounds of payment in full, using third party funds. As in the case of Gill v Quinn [2004] (see paragraphs 6A.34 to 6A.35), due to the time which had elapsed since the making of the bankruptcy order, difficulties arose in identifying all of the creditors.

 

6A.38 Dispute as to whether statutory interest due

In Wilcock v Duckworth (see paragraph 6A.37) The court was asked to consider the point regarding statutory interest as it related to the possible annulment. Mr Wilcock argued that it would be unfair to pay statutory interest when it took such a long time to appoint the trustee, and that as third party funds were being used, statutory interest was not payable under section 328 as confirmed by the decision in Re a Debtor (No 37 of 1976) [1981] All ER 129.

The court held that where an application for annulment on the grounds of payment in full is made and third party funds are used, that should not be used as a vehicle to deny creditors the interest they would otherwise seek to claim under section 328(4). Also that as a pre-requisite to annulment,   evidence should be provided that creditors have been contacted, and interest should be paid or an allowance made for the interest on the creditors’ claims.

 

6A.39 Creditor categories and period for which statutory interest should be paid

In deciding which creditors should be paid statutory interest, the court decision in the case of Wilcock v Duckworth [2005] BPIR 682 ChD divided the creditors in to three categories :

  1. Creditors who require interest to be paid;
  2. Creditors who advise the trustee that they waive their claims to interest ; and
  3. Creditors who offer no view (including creditors that cannot be located)

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 paragraphs 6A.40 to 6A.43).

 

6A.40 Payment of statutory interest payment not an automatic pre-requisite for annulment

In contrast to the case of Wilcock v Duckworth [2005] BPIR 682 ChD (see paragraphs 6A.37 to 6A.39) the court in the case of Harper v Buchler [2004] BPIR 724 decided that statutory interest is not automatically a bankruptcy debt, therefore payment of such is not a pre-requisite to obtaining an annulment on payment in full grounds. 

 

6A.41 Payment of statutory interest dependent on the source of funds used for annulment application

The court in Harper v Buchler held that regard should be had to the source of funds being made available to discharge creditors, when considering whether provision for statutory interest should be made i.e. whether third party funds are introduced to pay the debts or sufficient assets exist in the bankruptcy estate to discharge the original debts in full plus the statutory interest .

 

6A.42 Third party monies not to be used to avoid paying statutory interest

Following on from the decision in Harper v Buchler (see paragraphs 6A.40 to 6A.41) other than when the annulment application is made very shortly after the making of the bankruptcy order, it is not acceptable for the bankrupt to seek to use third party funds to obtain his/her annulment as a means of avoiding payment of statutory interest in those cases where there would be sufficient funds in the bankruptcy estate to pay all of the debts with statutory interest.

 

6A.43 Surplus cases -  payment of statutory interest a pre-requisite for annulment

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.

In arriving at this decision, Registrar Derrett took into account the substantial time for which the creditors had waited to receive payment, stating that it would be wrong for the bankrupt alone to benefit from the windfall resulting from the increase in property prices. Furthermore the introduction of third party funds would seem inappropriate when the bankruptcy estate assets, if realised, would be sufficient to pay all debts, costs and statutory interest.

The decision in Wilcock v Duckworth [2005] BPIR 682 ChD (see 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.

 

6A.44 Rebating the Secretary of State fee in surplus cases (bankruptcy  order prior to 01/04/04)

As a result of the coming into force of The Insolvency Proceedings (Fees) (Amendment) Order 2007 the whole of The Insolvency Fees Order 1986 has been repealed, and the limits on the charging of the Secretary of State fee removed.  In addition, the realisation fee chargeable by the official receiver when acting as the receiver and manager of a bankruptcy estate is also removed, in bankruptcy cases where there is a surplus.

This means that in bankruptcy cases where the bankruptcy order was made on or before 31 March 2004, as the authority under Article 4(2) of the Insolvency Fees Order 1986 has been revoked, where the bankruptcy estate is in surplus or goes into surplus post 1 April 2007, there is no facility to rebate the Secretary of State fee on that surplus.

For bankruptcy cases where the bankruptcy order was made on or after 1 April 2004, a different fees regime applies therefore this issue does not arise.

Note: This supersedes information previously provided in “Dear IP”: issue 34 Article 55 (Dec 2007).

Further information can be found in the LOLA Desk Instructions.

 

6A.45 Property re-financing to fund payment in full annulment

As a result of  increased property prices, many bankruptcy estates where the official receiver was trustee have been transferred to insolvency practitioner trustees.  The (former) bankrupt’s interest in the property has often appreciated in value to the extent that the beneficial interest vesting as part of a bankruptcy estate has become sufficient ( if realised) to allow the bankruptcy debts and expenses to be paid in full. In turn, this enables an annulment of the bankruptcy order to be obtained on the payment in full grounds.

This situation has led to various re-financing schemes becoming available to (former) bankrupts, which enable them to use the increased property values to generate funds, which can then be used to pay the bankruptcy debts and expenses in a paid in full annulment application.

 

6A.46 Operation of a re-financing scheme

An example of the way such schemes operate to enable a (former) bankrupt to apply for annulment on the grounds of payment in full is as follows:-

  1. The (former) bankrupt, having an interest in a property with positive equity, instructs a solicitor to act for him/her;
  2. Details of the bankruptcy debts and expenses are obtained;
  3. The property is valued and the available equity is assessed together with the (former) bankrupt’s ability to maintain increased mortgage repayments;
  4. Arrangements are made to increase existing mortgage borrowing or to secure new mortgage borrowing to generate sufficient funds (secured against the equity in the property) to pay the bankruptcy debts and expenses in full;
  5. An application for the annulment of the bankruptcy order on the payment in full grounds is made;
  6. The mortgage lender provides the mortgage funds to the solicitor for use on condition that the annulment application is successful;
  7. The solicitor undertakes to the mortgage lender to seek an annulment of the bankruptcy order and to secure the vacation of relevant entries at HM Land Registry should the order be granted;
  8. If the application is not pursued or is unsuccessful the solicitor undertakes to refund the monies to the lender
  9. The solicitor undertakes to the court to pay the bankruptcy debts and expenses in full from the proceeds of the (re)mortgage, following the annulment of the order. On the granting of the annulment order the solicitor pays the debts and expenses, the mortgage loan becomes unconditional, and the (re)mortgage of the property is completed, and relevant HM Land Registry entries removed.

 

6A.47 Effect of the High Court decision in Halabi - debts must be paid in full to obtain annulment

The decision of the High Court in the matter of Halabi v London Borough of Camden and another [2008] EWHC 322 (Ch) affected applications for annulment under section 282(1)(b) of the Insolvency Act 1986 (payment in full), where a re-financing scheme as detailed at 6A.46 was used to raise the supporting funds.

This case was referred to a judge because of a procedural discrepancy, where the High Court did not consider undertakings to pay were acceptable to meet the requirements of the payment in full legislation, whereas the county courts would routinely accept such undertakings and annul bankruptcy orders.

In making his judgment in Halabi [Note 26] Mr John Jarvis Q.C stated that the meaning of “paid” within the context of section 282(1)(b) does not equate to ”secured by an undertaking”, and further added, “ the two are simply quite different concepts”.

The judgment in Halabi meant that where the court considered that it was appropriate to annul the bankruptcy order, but the debts were not paid in advance, it would not make an order to annul the bankruptcy based on an undertaking to pay.

Instead the court would make a conditional order of annulment specifying the date upon which the order would take effect, which was dependent upon the court receiving evidence that debts and expenses had been paid in full. This date would usually be when the official receiver reported to court that the bankruptcy debts and costs had been settled. Once the court received this evidence the annulment  became effective.

With effect from 6 April 2010 the Insolvency Rules were amended to specifically allow annulment where the debts have been secured in full by means of an undertaking accepted by the court. Details are provided in the next paragraph.

Further information regarding the case of Halabi and the process for dealing with orders made in the style of Halabi can be found in Annex 1.

 

6A.48 Payment of Debts Secured by undertaking

Amendments to the rules with effect from 6 April 2010 as a result of the IAR have made the issue of securing the payment of debts by means of an undertaking to the court much clearer. Rule 6.211(2) has been expanded to provide that in applications under s.282(1)(b) all bankruptcy debts which have been proved must have been paid in full, or secured in full to the satisfaction of the court. This is further clarified by rule 6.211(6) which states that for the purposes of securing payment of bankruptcy debts or post-commencement interest, security includes an undertaking given by a solicitor and accepted by the court.

As a result of these amendments to the rules, ‘Halabi’ style annulment orders, where there is a delay between the making of the order and the date that it becomes effective, are likely to become less common. Where an official receiver receives notification of an annulment application, and it appears that the order requested is in the style of Halabi, the official receiver should refer the bankrupt and his/her solicitor to the provisions of the IAR as the use of a solicitor’s  undertaking may be preferable in the proceedings.

 

6A.49 Default in re-financing following annulment

When dealing with annulments involving a re-financing scheme where an undertaking has been given, should there be any default in the proceedings (for example, if the (former) bankrupt declines to complete the (re)mortgage) the matter should be brought back before the court. This is because of the undertaking given by the solicitor and the fact that an asset vesting in the trustee of the bankruptcy estate has been transferred into the (former) bankrupt ‘s ownership without consideration. Two months is considered ample time in which to complete this matter, if arranged under a scheme similar to that detailed at paragraph 6A.46.  It may also be suggested to the court that, if not already issued, the annulment order may be drawn up but not issued by the court, pending confirmation that the creditors, and the bankruptcy expenses, have been paid. This may operate as an incentive to those involved in a scheme to complete it without undue delay.

 

6A.50 Dealing with applications for annulment – Summary  

  1. Where an application for annulment is made under section 282(1)(b) IA86 the trustee is required to report to the court. The matters to be included in the report are set out in rule 6.207(2) of the Insolvency Rules 1986.
  2. The report must include details of any creditors known to the trustee who have not proved. The rules require that only the proved creditors be paid in full but the judgment in Re Robertson (A Bankrupt) 1 WLR 1139 (see paragraph 6A.27) provided that the Rules, in effect, required all the debts to have been proved. If debts remain unproved at the date of filing the bankrupt's application for annulment, steps must be taken, under rule 6.209 IR86, to give the creditors an opportunity to prove.
  3. Debts must be paid or secured for in full. Following the principles In Re Keet [1905] KB 666 (see paragraph 6A.27), referred to in the judgment of Mr Jarvis in Halabi , unconditional releases of debts, or a payment of  less than 100p in “full and final settlement”, is not payment in full. If a debt is disputed or a creditor cannot be traced the bankrupt must give adequate security for the debt, for example in the form of monies paid into court.
  4. Statutory interest on the debts should be paid where there are sufficient assets in the bankruptcy estate to pay all liabilities, costs, fees and expenses. This follows the principles laid down by  Registrar Derrett in Harper v Buchler (No.2)  [2005] BPIR 577(see paragraph 6A.43).
  5. The conduct of the bankrupt may be a factor. Reference to Gill v Quinn [2005] BPIR 129 (see paragraphs 6A.34 to 6A.35).
  6. In Halabi Mr Jarvis confirmed that annulment is not a matter of right for a bankrupt, it is a matter of discretion. Court will take into account the public interest in exercising its discretion. Where there has been gross mismanagement or misconduct the court may decline to exercise its discretion.

 

 

6A.51 Court’s attention to be drawn to the IVA provisions (amended May 2015) 

When dealing with cases where a payment in full annulment application is made, particularly where the annulment application is on the basis of a property re-financing scheme, the official receiver may wish to draw the court’s attention in  their  report to court under rule 6.207, to the provisions under section 261 to annul the bankruptcy following the approval of an IVA.  This provides for an appointed supervisor to deal with the asset realisation following approval of the IVA. See Part 4 for further information regarding annulments following an approved IVA.

 

6A.52 Secretary of state fee only charged on payments into the Insolvency Services Account (ISA)

As a result of the revocation of the Insolvency Fees Order 1986 by the Insolvency Proceedings (Fees) (Amendments) Order 2007 [Note 27] and implementation of The Insolvency Proceedings (Fees) Order 2004 (as amended), the Secretary of State fee may only be charged on monies paid into the ISA where the bankruptcy order occurs on or after 1 April 2004 [Note 28].  If under a re-financing scheme the creditors are paid without monies being paid into the ISA, the fee does not become chargeable. This means that, where, under any re-financing scheme, the court is content for the monies generated by the scheme not to be paid into the ISA, the Secretary of State Fee will not be pursued. Where monies are rightly paid into the ISA, the fee will be charged and collected.

 

6A.53 Charging of Secretary of State fee where a surplus is held in the ISA following a paid in full annulment
Note:  The following applies not only to all cases where the petition was presented and the order made on or after 6 April 2010, but also to cases where the petition was presented up to and including 5 April 2010 but the order was made on or after 6 April 2010.

When the bankruptcy debts and expenses are paid in full, and a surplus arises to be paid to the bankrupt, or at their order, there will be a need to consider rebating the Secretary of State’s administration fee according to a formula set out in The Insolvency Proceedings (Fees) Order 2004, schedule 2, article 1. This should be applied whether the surplus arises from the realisation of assets, the receipt of third party funds paid into the ISA or a combination of both. This is undertaken by reference to the bankruptcy ceiling which comprises:-

  1. the bankruptcy debts (as required to be paid under the Rules)
  2. any statutory interest as payable under sections 328(4) and 329(2)(b) (see paragraphs 6A.22, 6A.27 and 6A.37 to 6A.43)
  3. the expenses of the bankruptcy as set out in Rule 6.224, other than

i. any sums spent out of money received in carrying out the business of the bankrupt

ii. and fee B2 (Secretary of State fee)

It will be possible to ascertain the Secretary of State’s administration fee to be retained by calculating the bankruptcy ceiling (a+b+c) minus £2,000 (the first £2,000 of chargeable receipts are not subject to the Secretary of State fee) multiplied by the percentage rate charged as the Secretary of State fee. The percentage rate charged will depend upon the amount received into the ISA. The total amount that can be charged as the Secretary of State’s administration fee is capped at £80,000.

The following is an example of this calculation, using sample figures, where prior to a paid in full annulment, monies have been remitted to the ISA as a result of the realisation of bankruptcy estate assets. The various percentage rates charged as the Secretary of State fee are shown in this example: 

 

  Description

£

Secretary of State’s administration fee where £50,000 paid into the ISA prior to annulment:

 

0% charge on the first £2,000

100% charge on the next £1,700                        (1,700.00)

75% charge on the next £1,500    (£1,500 x 0.75 = 1,125.00)

15% charge on the next £396,000     (£44,800 x 0.15 = 6,720.00)

1% charge on the balance (not applicable in this example)

9,545.00

Bankruptcy ceiling = £25,215 comprising :

 

  • proved bankruptcy debts and statutory interest £20,000
  • petitioning creditor’s deposit and costs £3,500
  • official receiver’s administration fee of £1,715

 

Re-calculation of Secretary of State’s administration fee to be retained:

 

0% charge on the first £2,000

100% charge on the next £1,700                                   (1,700.00)

75% charge on the next £1,500         (£1,500 x 0.75 = 1,125.00)

15% charge on the next £396,000   (£20,015 x 0.15 = 3,002.25)

1% charge on the balance (not applicable in this example)  

 

 (5,827.25)

Excess Secretary of State’s administration fee to be rebated:    

3,717.75

 

 

6A.54 Secretary of state fee not charged in debit balance cases

In accordance with long standing practice, the Secretary of State’s administration  fee will not be charged when monies are paid into the ISA to meet the debit balance on official receiver cases.  This does not mean that the Service is prepared to waive a fee where it is properly payable or that the ISA may not be used where the legislation requires it to be used.

 

6A.55 Undisclosed liabilities 

Where an annulment order is obtained on the grounds of debts and expenses paid or secured [Note 1], and further claims are discovered or notified, the official receiver should take steps to draw the existence of the debts to the attention of the former bankrupt with a request that he/she pays the additional claims directly. The official receiver should explain to the additional creditors that they retain their normal rights of recovery and refer them to the former bankrupt for payment. If the former bankrupt fails to discharge the claims, the official receiver should consider whether, in the circumstances, he/she should apply to the court for directions [Note 29]. Where surplus monies have already been returned to the former bankrupt, prompt payment of the undisclosed debts will have to be considered by the former bankrupt or a refund of sufficient money to the official receiver to discharge the debts together with the relevant fees (see LOLA desk instructions). This is not an easy situation to deal with as the former bankrupt might not be co-operative and creditors that have been paid will feel under threat.

 

6A.56 Ability for creditor to pursue under new proceedings 

If a creditor with a provable claim in the proceedings fails to give notice of his/her claim [Note 21] prior to an annulment order being obtained on the grounds of ‘payment in full’ [Note 1], it does not deprive him/her of a claim against the former bankrupt which could be pursued outside the bankruptcy proceedings in the normal manner at a later time were the bankruptcy order to be annulled.

NOTE: Due to the updating and restructuring of the advice and guidance in this part, paragraphs 6A.57 to 6A.59 no longer exist. However, as the previous guidance continues to be available at Annex 1, changes have not been made to the paragraph numbering in parts 4 to 7.

 

 

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