AVOIDANCE OF GENERAL ASSIGNMENTS OF BOOK DEBTS (BANKRUPTCY ONLY)
Where a bankrupt has been running a business, book debts may have been assigned in an attempt to raise money. The general idea being that monies from the assignment can be used to finance the business immediately, rather than waiting for the debts to be paid to the business in the normal course of events.
Where the assignment is of all the book debts, or a particular class of book debt it is called a “general assignment”.
Where there has been a general assignment of book debts, the assignment is void against the trustee as regards debts which were not paid prior to the presentation of the bankruptcy petition, unless the assignment was registered under the Bills of Sale Act 1878 [note 1]. The provisions do not have any effect on the assignment of specific book debts (see paragraph 31.4B.169).
As the avoidance affects only those book debts that were not paid prior to the presentation of the bankruptcy petition [note 2], the provisions have only partial retrospective effect. The official receiver, as trustee, can recover those book debt payments passed to the assignee where the payment of the debt was after the date of the presentation of the petition and, of course, those book debts that are unpaid would become “free” assets in the estate.
The main reasons for the provisions relating to the avoidance of general assignments of book debts are to encourage registration as, without registration, it can be difficult to establish whether a proper price has been paid in respect of the assignment. Registration also gives persons dealing with the debtor opportunity to check the position of his/her book debts. The lack of registration may give a misleading impression that the debtor’s financial position is healthy in that the book debts may appear to be free of assignment.
So far as the official receiver, as trustee, is concerned, an inspection of the registration documents (see paragraph 31.4B.163) in conjunction with the bankrupt’s accounting records would give the opportunity to assess whether or not the debts were assigned at their true value and, if not, the matter may be pursued as a transaction at an undervalue (see Part 3 of Chapter 31.4A).
(Amended August 2014)
Where the official receiver considers that a general assignment of book debts contravenes the provisions of the Act (see paragraph 31.4B.156), then he/she should issue a letter to the bankrupt’s book debtors instructing them to make payments to the official receiver, which should be held on the estate suspense account. The advice in paragraph 31.4B.160
(Amended August 2014)
The value of the recovery should include both amount to be recovered in respect of debts paid after the presentation of the petition and the value of the remaining, unpaid, book debts.
The following are the areas on which the official receiver should, ideally, obtain information before instructing the contractor and include on the ‘details of conduct/transaction’ section of the ARIA form (see paragraph 31.4B.9):
For the purposes of these provisions, the Insolvency Act 1986 treats the general assignment of book debts as if it were a bill of sale (a document that transfers ownership of property from one person to another) and states that the provisions of the Bills of Sale Act 1878 with respect to the registration of bills of sale apply [note 3].
The Bills of Sale Act 1878 provides that an applicable bill of sale must be registered within seven clear days of its making [note 4], and must be renewed at least once every five years [note 5]. The method of registering the bill of sale is to send, to the High Court, the original bill of sale, together with a witness statement attested in front of a solicitor stating that the effect of the bill of sale has been explained to the person granting the assignment [note 6].
The register of the Bills of Sale Act 1878 contains the particulars of registered bills of sale and an alphabetical list of the names of guarantors.
Following receipt of the documents detailed in paragraph 31.4B.162, the High Court will seal a copy of the assignment, or a schedule to the assignment and return this to the applicant. They will also issue a “debt number” which will be notated on the sealed assignment. This number relates to the assignment’s position in the register. The official receiver should seek to obtain this sealed assignment from the bankrupt to confirm registration of the general assignment.
Where there is doubt as to whether a general assignment of book debts has been registered under the Bills of Sale Act 1878 the official receiver may conduct a search of the register by issuing a letter to the High Court of Justice Enforcement Section. The letter should give details of the persons who may have been party to the assignment, and also such details as are known of the assignment itself (such as the date and the property concerned). The request should be accompanied by a payment of £40 made payable to “HMCS” and should be sent to:
Judgements and Orders Section
Royal Courts of Justice
Tel no: 020 7947 6221
This office will provide a certificate showing details of the registration (if any) and for a further fee of £5 will provide an office copy of the documents provided in support of the application of registration (see paragraph 31.4B.163).
The relevant provisions of the Act apply only to those bankrupts engaged in business [note 7]. The Act defines “business” to include “a trade or profession” [note 8], so the provisions would cover professionals such as doctors, dentists or accountants.
In reality, it is unlikely that a bankrupt who is not a trader would have book debts to assign. Activities carried out purely for pleasure which happen to make a profit would not be considered to be engaging in a business as, under the accepted definition of the term, a business is something capable of making a profit, which is carried out with a view to making a profit [note 9]. The decision as to whether something is a business or not would appear to turn on the original intention of the person carrying on the activity.
The definition of a book debt has been held to mean debts which are “commonly entered in books” [note 10].
Further, it has been held that a definition of “book debts” includes debts which would or could, in the ordinary course of business, be entered in well-kept books and, therefore, the fact that the debts may not have been entered into a book is irrelevant [note 11].
“Assignment” is defined in the Act as including “assignment by way of security or charge on book debts”, so is not limited to assignment by way of sale [note 14].
The granting of a charge over book debts may also be challenged as a preference (see Part 2 of Chapter 31.4A).
The Act [note 15] aims to avoid only transactions detrimental to creditors and so excludes some assignments which are likely to be beneficial. Therefore, a general assignment of book debts as part of the transfer of a business made in good faith and for value is not voidable under these provisions, nor is an assignment for the benefit of creditors generally [note 16].
The provisions of the Act cover only general assignments of book debts, so the assignment of a specific book debt would not fall foul of the provisions [note 17]. For a book debt to be considered a specific debt it would be necessary that the debt is identified with clarity and precision in the document of assignment itself [note 18].
A general assignment does not have to relate to all book debts to be potentially voidable. The assignment could be of a certain class of book debt which have a common factor. For example, an assignment of all debts due from “ABC Ltd” or all debts due during a certain period could fall foul of the provisions. This would be termed a “class” of book debts.
The assignment of book debts most likely to have occurred in a bankruptcy case would be where the bankrupt has entered into a factoring agreement (see Chapter 31.1, Part 5) and, on the face of it, it would appear that this is a general assignment that would fall foul of the provisions of the Act.
Where, however, the agreement with the factoring company requires that each book debt is assigned and approved for payment individually, this would not be a voidable assignment under the provisions as it would be considered that each debt is being assigned specifically (see paragraph 31.4B.169) [note 19]. It is likely that all factoring agreements with recognised factoring companies operate in this way but the official receiver, as trustee, should obtain a copy of any factoring agreement entered into by the bankrupt and check the details.