EXEMPT PROPERTY GENERALLY
The term ‘property’ includes “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property” [Note 1].
A bankrupt's estate comprises all property belonging to or vested in the bankrupt at the commencement of the bankruptcy [note 2] with the exception of exempt property (see paragraph 30.4 below). A bankruptcy commences with the day on which the order is made, and continues until the individual is discharged [note 3]. Any property that has not been realised at discharge, does not re-vest in the bankrupt. Discharge has no effect on property comprised in the estate.
Certain types of property are considered to be exempt property, and do not form part of a bankrupt’s estate and therefore are not automatically available to the trustee to realise for the benefit of the insolvent estate. This includes;
In addition to exempt property as described in paragraph 30.4, the following property is also excluded:
(a) Property held by the bankrupt on trust for any other person, which would include funds held on trust in an IVA for the IVA creditors [note 7, 8]. It has been held that a lottery win being held by the bankrupt on trust for the ticket purchaser is not part of the bankrupt’s estate [note 9]. Where a trustee realises trust property on behalf of, and with the consent of, the beneficiary, he/she may be entitled to realisation costs out of the trust fund [note 10]. As there is no benefit to the bankruptcy estate in realising trust property, the trustee should only realise trust property in exceptional circumstances. See Chapter 31.0, Part 2 on dealing with third party property.
(b) The right of nomination to a vacant ecclesiastical benefice is also excluded [note 11] (an ecclesiastical benefice is an endowed church office giving income to its holder such as a vicar or rector),
(c) Certain items are excluded by way of non-insolvency legislation, such as a student loan. As student loans are now excluded from the estate, any cash held by the bankrupt directly from the balance of a student loan is also excluded [note 12, 13] (see Chapter 40, paragraph 40.92).
In addition to exempt property excluded from the estate by the Insolvency Act 1986, other items may not be claimed by the trustee as follows:
(a) Certain rights of action if they are personal in nature do not vest in the trustee (see Part 5),
(b) A passport is the property of the Crown rather than the holder of the passport. It cannot be claimed by the trustee, but can be impounded by order of the court until the bankrupt has fulfilled his duties to the court and the trustee, see Chapter 13, paragraph 13.82 [note 14],
(c) Property subject to a restraint order under the Proceeds of Crime Act [note 15].
Where the legal title to a solely owned property, or beneficial interest to a jointly-owned property, has been transferred back to the bankrupt under the low-cost conveyancing scheme (see Chapter 31.3, Part 5 for more information on this) it would not be appropriate for the property to be reclaimed by the trustee as after-acquired property in the same bankruptcy. Once the property has been transferred there is an understanding that, subject to mortgage commitment, the bankrupt is entitled to enjoy unhindered ownership of the property without the official receiver, as trustee, making a claim over it in that bankruptcy. Where a person is declared bankrupt for a second time, the trustee in the second bankruptcy cannot claim a property that re-vests in the bankrupt under section 283A of the Insolvency Act 1986 during his/her second bankruptcy as after acquired property [note 16]. If the property has already re-vested in the bankrupt prior to the second bankruptcy, it will however automatically vest in the trustee of the second bankruptcy in the usual way [note 17].
At the initial stages of a case, the official receiver needs to be aware of whether he/she has been appointed trustee, or merely holds the office of receiver and manager of the bankruptcy estate. The only time the official receiver will be appointed trustee on the making of a bankruptcy order is where all the partners jointly present a petition under Article 11 of the Insolvent Partnerships Order 1994, the official receiver will become the trustee of the members’ estates and also trustee of the partnership. Only a trustee can accept or reject a claim for exempt property or claim exempt property of excess value [note 18], see Part 3 for information on the trustee claiming items of excess value and paragraph 30.20 below regarding the official receiver’s duties as receiver and manager.
When dealing with exempt property, there are two matters to consider:
The official receiver should seek at an early stage to identify any property which could be considered to be exempt from the bankrupt's estate [note 19].
Any such items are likely to be detailed at Q2.1 of the bankruptcy preliminary information questionnaire [note 20], or at 3.1 of the debtor’s petition statement of affairs [note 21] under "Machinery, plant and equipment", “Tools of your trade” or "Motor vehicles". The questionnaire does not ask specifically which items are necessary to the bankrupt for use personally by him/her in his/her employment, business or vocation, so this will have to be ascertained by additional questioning at the first interview, or by taking a statement at a later date. Stock, work in progress and trading premises are not considered to be exempt property [note 4].
The concept of exempt property and the trustee's ability to claim exempt property of excess value should be explained to the bankrupt. This is also covered in the “Guide to Bankruptcy” leaflet which is available at the court offices and at the official receivers’ office and on our website and should also be offered at the initial contact stage (see paragraph 4.38).
The official receiver should use his/her discretion to take action which is practical and expedient but which is also in the interests of the estate and of The Service in keeping administration costs down. The facts should be considered on a case-by-case basis. Where items may be considered excessive in value (see Part 3), it may be more beneficial for the creditors if the bankrupt retains that asset, allowing them to continue earning a living and providing a larger income payments agreement/order with a return greater to the estate than if the asset were sold and replaced with something cheaper (see paragraph 30.34 for guidance). The official receiver will need to use his/her judgement where an asset is on the margins of being considered excessive in value.
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 in the circumstances which exist at the time and be satisfied 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. A note should be made in the telephone interview notes [note 22] or narrative statement or additional questions as appropriate [note 23], that the exempt property provisions have been drawn to the bankrupt’s attention. A record should be made in the examiner’s instructions to insolvency case officers and on the file that the exempt provisions have been considered and do not apply.
When property is identified as exempt, the examiner should ensure that a record is made of the bankrupt’s claim in the telephone interview notes [note 22], narrative statement or additional questions as appropriate [note 23]. Where the asset is straightforward to deal with, the notice accepting the bankrupt’s claim can be sent as soon as the official receiver becomes trustee [note 24]. This notice should be sent in relation to all items of exempt property identified. Items may be grouped together, provided that an estimated value for the whole group of items is included (e.g. household furniture, £1,000). Value is not a relevant factor in deciding whether or not at item of property is exempt (See paragraph 30.4 for guidance on exempt property). If there is any doubt as to whether an asset is exempt, or whether it is of excess value, the matter should be discussed with line management before notice is sent to the bankrupt. The bankrupt should not be led to believe that an asset is exempt property in cases where an insolvency practitioner trustee is likely to be appointed, as any decision is for the trustee to make.
Where the bankrupt has claimed an asset as exempt, and the official receiver, as trustee, is rejecting that claim, notice should be sent to the bankrupt [note 24, 25]. For more information regarding rejecting a claim, and the bankrupt’s right to appeal that decision, see Part 3, particularly paragraphs 30.46 and 30.56.
All details relating to the decision to exempt an asset such as statements or letters from the bankrupt, notes of telephone calls, discussions with line management and a record of the decision reached should be recorded on the official receiver‘s file as a point of reference in the event that difficulties arise later.
A trustee can claim certain property, which would not normally be included in the bankrupt's estate [note 19, 26], if that property can reasonably be replaced producing a surplus for the estate (see Part 3). Under the legislation property is considered to be a reasonable replacement if it is reasonably adequate for meeting the needs met by the other property [note 27].
If the bankrupt subsequently sells an asset that has been claimed as exempt, then as the item has changed character, it may no longer be needed or considered as exempt. The official receiver should consider whether the funds from the sale of the exempt asset are being used to purchase a new item which would also satisfy the same exemption criteria. The bankrupt should be asked to provide evidence that he/she has in fact purchased a replacement item. If the funds are not being used to provide a replacement item, then the official receiver should consider claiming such monies as after acquired property (see Chapter 31.8, Part 3).
The bankrupt will have provided a valuation of the assets in the debtor’s petition statement of affairs, the questionnaire or at interview. If there is any doubt as to the accuracy, or if the value appears to be high, the examiner should obtain a telephone valuation from the official receiver's agents to act as a rough guide. The agents should also be asked to provide an estimate of their charges for selling such an item.
Where the items are of a specialist nature, or are otherwise difficult to describe, consideration should be given to incurring the cost of an agent's formal valuation. It should be considered likely that there will be a net gain to the estate after payment of agent's costs, insurances, and the costs of providing a replacement (if necessary).
If the assets are of no value, no further action should be taken even if the assets are no longer needed. The exception to this relates to motor vehicles where real action must be taken to deal with any vehicle notified to the official receiver. In exceptional circumstances a vehicle may be disclaimed (see Chapter 31.2, paragraph 31.2.66).
(Amended February 2014)
If an exempt asset is considered to be of excess value and a net gain to the estate is considered likely, the official receiver should take steps to insure assets where it is appropriate to do so pending the appointment of a trustee (see Chapter 49). If the official receiver is likely to become trustee, then consideration should be given to taking the asset into custody, or to the official receiver becoming trustee and dealing with the asset earlier to avoid the expense of obtaining insurance cover (see paragraph 30.51). Where the official receiver insures the property he/she must make arrangements to review the need for continued insurance. Once it is no longer required the insurance should be cancelled as per the instructions in Paragraph 49.27B.
(Amended February 2014)
Even though exempt property can only be claimed by a trustee, (see paragraph 30.9) while acting as receiver and manager of the bankruptcy estate, the official receiver is required to take steps to protect property which the trustee may on appointment claim for the estate [note 28]. The official receiver must consider how reasonable a bankrupt’s claim to exempt property is. The bankrupt must convince the official receiver that the item concerned is truly necessary for use personally by him/her in his/her employment, business or vocation or to satisfy the basic domestic needs of him/her and his/her family. 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, including insuring the property where appropriate (see paragraph 24.31). If a dispute arises, the official receiver may apply to the court for directions, see paragraph 30.51.
It is important that the official receiver as receiver and manager believes (and has reasonable grounds for believing) that he/she is entitled to seize or dispose of items not considered to be exempt property, in order to gain protection against any liability for loss or damage where he/she seizes or disposes of property which is not in fact comprised in the estate [note 29].
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 [note 30].
Where bankruptcy orders are made against individuals trading in partnership, the official receiver may need to apply for the consolidation of those cases and for an order that Article 11 of the Insolvent Partnerships Order 1994 shall apply to the winding-up of the partnership [note 31] to deal with any partnership property. In a recent case, a district judge refused to allow the consolidation on the grounds that had one of the bankrupts traded on their own, the van that belonged to the partnership would have been considered exempt [note 32]. On appeal, it was found that the judge had erred in taking into account the perceived injustice in the case. If a person chose to trade, with another, through a partnership, and the relevant tools of trade were assets of that partnership, they were liable to be realised for the benefit of creditors in the event of the insolvent winding-up of that partnership.
If a decision that a bankrupt is to be allowed to retain exempt property of excess value has been made before the issue of the report to creditors [note 33], the information about exempt property should be included in the report. Similarly all other assets, which have been judged to be exempt property, should be identified in the report to creditors. Items which are generally exempt in every case, such as household goods and furniture, may be listed in a note at the bottom of the report to creditors and grouped together as such, but items that are likely to give rise to queries, such as a motor vehicle or higher value items, should be individually listed. All other enquiries from creditors about exempt property matters should be dealt with as they arise.
If an insolvency practitioner is appointed trustee, the official receiver should provide them with details of all items that he/she considers may be exempt property. Details of any action taken by the official receiver should also be given in the trustee’s record book [note 34]. See paragraph 30.59 for further details.