DEALING WITH THE FRUITS OF A RIGHT OF ACTION
The Part of the chapter gives guidance and advice on dealing with the ‘fruits’ of a right of action. Usually, this will be monies received following the settlement of a claim (see Part 5), but the monies may have come from the successful litigation of a claim (see Part 7).
Generally speaking, any dispute as to the distribution of the fruits of a legal action will arise in a bankruptcy case and this Part concentrates largely on those areas. Paragraphs 31.9.187, 31.9.209 to 31.9.212 and 31.9.216 have consequence in company cases, also.
The advice in this Part of the chapter is given on the basis that the judgment following a successful litigation has been converted into monies (whether following enforcement, or not).
Advice on enforcing a judgment is given in paragraph 31.9.154.
Where the fruits of the right of action result from a right of action that is not a ‘hybrid’ right of action/claim (see paragraph 31.9.43) there will be no difficulty in apportioning the funds (see paragraph 31.9.189) and the official receiver should have the funds remitted to the estate, dealing with any agent’s (solicitor’s) fees in the normal way.
In circumstances where an award is made or settlement reached in respect of a ‘hybrid’ claim (see paragraph 31.9.43), there is the issue of apportioning the monies between ‘personal’ (where the monies are held by the official receiver, as trustee, on trust for the bankrupt - see paragraph 31.9.200) and ‘property’ elements.
Where an award is made following litigation (see Part 7), it ought to be possible to establish the apportionment between ‘personal’ and ‘property’ elements of the claim. Details of the award can often be found in the judgment or order given by the court or, where there is a ‘global’ award (with no breakdown), the apportionment may be calculable from the papers filed in court in respect of the claim.
Apportioning monies in settlement (see Part 5) of a claim may be more difficult than monies awarded following litigation (see paragraph 31.9.190). Where the settlement follows the bringing of legal proceedings, the portions into which the monies should be divided should be calculable from the papers filed in court in respect of the claim.
In the case that the settlement precedes the issuing of proceedings, the apportionment of the settlement monies may prove to be more problematic as the claim may not have been fully made out at the point of settlement.
Where there is evidence to show the division of the claim between ‘personal’ and ‘property’ elements, the official receiver, as trustee, should maintain a position that the settlement monies should be apportioned pro-rata in the same ratio unless this obviously looks perverse.
Where there is no such evidence, there is a principle that the monies should be divided equally between ‘personal’ and ‘property’ elements [note 1]. If this point is put to the solicitors acting for the bankrupt it may encourage them to assist in the formulation of figures to assist with a more accurate apportionment – particularly where the personal element of a typical hybrid claim is greater than the property element.
Often, in correspondence or papers relating to a claim the official receiver will see reference to ‘special damages’ and ‘general damages’.
Generally speaking, special damages are ‘property’ and general damages are ‘personal’.
The official receiver, as trustee, should request that the monies awarded following litigation or following a settlement of a hybrid claim should be remitted to him/her whilst the apportionment (see paragraph 31.9.191 to 31.9.192) is decided. The monies can be held on a suspense account pending the agreement of their division. This way, the bankrupt has an incentive to attend to matters and not to let it them drift.
Where the official receiver, as trustee, is unable to resolve matters of dispute or doubt connected with the ascertainment or distribution of ‘personal’ funds held on constructive trust (see paragraph 31.9.200) or the apportionment of a ‘global’ settlement, he/she may, following the agreement of Technical Section, apply to the court for directions [note 2] [note 3].
Monies awarded for ‘personal’ elements of a claim following litigation or secured in a settlement after the making of the bankruptcy order may not be claimed by the official receiver, as trustee, unless those monies change character during the period of bankruptcy [note 4].
There is no statutory or precedent definition of a change of character but, typically, it would be characterised by the purchase of an asset such as a motor vehicle. In that example, the vehicle may then be claimed as after acquired property (see Chapter 31.8). The spending of the monies on the general living costs of the bankrupt and his/her family would not be a change of character [note 5].
There is doubt as to whether the negotiation of the funds (for example, the movement of funds from a current account to a savings account, or similar) might constitute a change of character, the advice of Technical Section should be sought.
Where the action has proceeded to judgment prior to the making of the bankruptcy order, any monies awarded and paid to the bankrupt (including ‘personal’ monies) would form part of the bankruptcy estate. Where the judgment has yet to be converted into cash the advice of Technical Section should be sought.
It has been held that a part of any award of compensation in respect of a ‘personal’ right might be claimed for the bankruptcy estate. The relevant case [note 6] did not give any indication when it would be appropriate, or correct, to claim such an award.
Whilst it is possible that the official receiver may seek to claim such an award, the position that should be taken is that ‘personal’ awards might only be claimed if they change character (see paragraph 31.9.196).
Sometimes, the defendants to a claim will offer interim payments to assist the claimant with ongoing expenses, general living costs, etc. Unless, there is evidence to the contrary, these payments should be apportioned pro-rata between ‘personal’ and ‘property’ elements of the claim (and claimed accordingly) using the same methodology as outlined in paragraphs 31.9.190 to 31.9.192).
Where the bankrupt is due monies under a ‘hybrid’ claim (or an entirely personal claim), the official receiver the official receiver may claim the funds as after-acquired property were they to change character (see paragraph 31.9.196) but may only do so whilst the bankrupt remains undischarged (see Chapter 22) from the proceedings.
Monies awarded to a bankrupt for ‘personal’ damages in a hybrid action (see paragraph 31.9.43) do not form part of the bankrupt’s estate and are, instead, held on constructive trust for the bankrupt by the official receiver, as trustee of the bankrupt’s estate.
In simple terms, a constructive trust is a trust that is not expressly created and instead comes into existence to deal with property held by a person where it would be inequitable for that person to assume full beneficial ownership of that property [note 7].
To relate it to the situation of a hybrid claim, the official receiver, as trustee, comes into possession of the personal monies as an inadvertent effect of him/her being the ‘owner’ of the right of action.
The bankruptcy estate cannot benefit from the monies held under a constructive trust in these circumstances (see paragraph 31.9.200) and, therefore, the official receiver, as trustee, should pay over those monies to the bankrupt at the earliest opportunity.
In many cases, the official receiver will never come into actual possession of the monies and, in such cases, he/she should agree to the monies being paid to the bankrupt by those holding the funds (for example, the bankrupt’s solicitors).
Where a claim is settled or concluded by litigation prior to the making of the bankruptcy order, the monies, received or awarded, would form part of the estate simply as ‘cash at bank’, whether or not the damages were ‘personal’ [note 7a].
Where a ‘property’ claim (see paragraph 31.9.43) is settled or concluded by litigation prior to the making of the bankruptcy order, any monies awarded but not paid will form part of the bankruptcy estate.
The position is less certain where a ‘personal claim (see paragraph 31.9.43) is settled or concluded by litigation prior to the making of the bankruptcy order. Where the official receiver encounters this situation the advice of Technical Section should be sought.
Assuming that the claim was a vesting claim, or was, unusually, claimed as after-acquired property, any monies awarded would form part of the bankrupt’s estate even if they were awarded or paid after discharge (with appropriate division for ‘hybrid’ claims (see paragraphs 31.9.190 to 31.9.192)) and consequently should be claimed by the official receiver, as trustee.
A successful claim may result in a judgment or order requiring the defendant to make payments to the claimant on a periodic basis. Whether, and how, these monies may form part of the estate (or be claimed for the estate) will largely turn on the facts of the case.
Where the judgment is simply a lump sum payable by instalments then the lump sum and the right to receive the instalment payments would form part of the estate and should be claimed accordingly (split between ‘personal’ and ‘property’ elements as appropriate – see paragraphs 31.9.190 to 31.9.192) [note 8].
Where the judgment is an award that provides for the damages to replace lost income on a periodic basis, it is likely that the payments would constitute income within the meaning of The Act [note 9] and would, therefore, be available for inclusion of a calculation for an IPO/IPA [note 10] [note 11] (see Chapter 31.7).
In both cases, this would be subject to any monies being ‘personal’ to the bankrupt (for example, periodic payments being made to enable the bankrupt to have care relating to a personal injury). Whilst, technically, the income-type claim would not be affected by the restriction on claiming (see paragraph 31.9.196), it is unlikely that a court would make an IPO on those terms.
Where the bankrupt receives an award that is intended to allow the purchase of items to assist with his/her medical care, it would not be appropriate to claim these items as after-acquired property, under the ‘change of character’ situation (see paragraph 31.9.196).
A claim for permanent disability benefit under a life policy (or similar) would vest in the official receiver, as trustee, as the claim arises from a contract. It has been held that it is of no consequence that the claim is conditional on the claimant having suffered pain and injury. The payment is dependant upon a contractual right to a sum of money and the policy proceeds do not represent recompense to the bankrupt for personal loss or damage, but rather payment on satisfaction of a contractual prospect [note 12].
In cases where the insolvent has a claim against a creditor, any award will be subject to automatic set-off and the official receiver’s claim, as liquidator or trustee, over the monies will extend only to any surplus after set-off. Set-off only applies where there are mutual credit and debits as at the date of the insolvency of the company or date of bankruptcy so, in cases where a claim is against a creditor and that debt has been sold on by the creditor prior to that date, set-off would not apply [note 13] [note 14].
Set-off is mandatory and will normally be automatically applied by the creditor. In some cases (particularly in PPI claims – see Chapter 31.9A, Part 5), the creditor may choose to forgo the right of set-off and, in such a case, the official receiver should claim the monies awarded. (see Chapter 40 Part 3).
It may be the case that the insolvent has engaged a claims-handling company, particularly in ‘complaint’ type cases such as those for PPI mis-selling (see Chapter 31.9A, Part 2).
It is open to the official receiver, as liquidator or trustee, to continue to retain the services of those agents, but this must be on the clear understanding that any fees must come from monies the agents secure by their actions. The fees will not be paid by the official receiver or from the estate without there being an underlying realisation. The official receiver should also confirm that the fees the agent charges/intends to charge are reasonable in the circumstances. The decision to retain the agents should be considered against the value of the service provided (including the ease with which the official receiver could successfully conduct the work himself) against the likely return to the estate. See Chapter 31.9A, paragraphs 31.9A.39 to 50 for case handling fee guidance on PPI policy complaints.
Where the claim has come to fruition before the making of the order (or before the official receiver had knowledge of the claim), the official receiver may allow the fees to be paid on the same terms but he/she is not bound by the terms of the contract with the bankrupt. Where the fees are considered to be high in relation to the amount of work carried out consideration should be made to offering a lower fee based on the work carried out. For PPI guidance in this situation, see paragraph 31.9A.41 to 44.
This is subject to any right of set-off (see paragraph 31.9.208).
Where the official receiver, as liquidator or trustee, chooses to retain the insolvent’s solicitors in order to negotiate a settlement (see paragraph 31.9.89), the solicitors’ reasonable costs may only be paid from the settlement (no funds will be made available from the estate and nor will the official receiver, as liquidator or trustee, pay the costs). In ‘hybrid’ claims (see paragraph 31.9.43), the costs should be deducted pro-rata from each element of the settlement (and not, for example, just from the portion of the award due to the estate).
In the very unlikely event that solicitors for the insolvent have been retained to act in litigation (see Part 7), the same principles would apply.
Along with the points made at paragraphs 31.9.90 and 31.9.91, these points should be made clear to the retained solicitor from the outset of the instruction.
Whilst the official receiver, as liquidator or trustee, can agree to the payment of fees incurred in bringing the right of action to a successful settlement (see paragraph 31.9.91), he/she should not allow the monies awarded to be used to pay a debt for fees incurred on an unrelated matter.
If it comes to it, the official receiver should point out to the solicitor claiming the funds that they are under an obligation to surrender the funds, the penalty for non-compliance being contempt of court [note 15] [note 16] [note 17] [note 18].
The official receiver should take care that any monies due to third parties under an equitable charge are paid over. An example of this may be where the bankrupt has been granted free use of a replacement vehicle while the loss to a vehicle is subject to an insurance claim (which would vest – see paragraph 31.9.56). In such as case, the person who provided the hire vehicle may have an equitable charge over that portion of the claim.
In such cases, the official receiver should seek proof that the vehicle (or similar) was provided before agreeing that the claimed amount be deducted from the award.
It is possible that such a claim will have been assigned to the hire company prior to bankruptcy – possibly by a clause in the hire agreement.
A person who is unable to work due to illness, injury or similar may receive support from the Department for Work and Pensions (DWP) in the form of benefits. Where the person is subsequently awarded monies for loss of income for the period that they were receiving benefit support, the DWP may recover those benefit monies under the Compensation Recovery Unit (CRU) scheme (http://www.dwp.gov.uk/publications/specialist-guides/technical-guidance/z1-recovery-of-benefits-and/1.-the-law/). This scheme operates on the principle that the person should not be compensated twice for the same loss. The official receiver, as trustee, should not object to such a recovery.
In some circumstances, the bankrupt’s employer may continue to pay the bankrupt’s wages whilst they are absent from work due to the injury suffered to which the claim results.
In this context, if matters were to be looked at in the round, the bankrupt has not incurred a loss in this matter, it is the employer who has incurred the loss. It can only be fair, therefore, that the official receiver, as trustee, accepts the employer’s claim over the loss of earnings element of the claim as appropriate. The view to take is that the bankrupt is an agent for the employer’s claim. The official receiver should check, though, that the employer is not receiving any monies in excess of those they paid to the bankrupt. Any surplus would represent an asset in the bankruptcy.
Where a court makes an award for the loss of future earnings, the money represents property damages and will therefore vest in the official receiver as trustee [note 19] [note 19a]. This is the case despite the fact that the award was intended to compensate the bankrupt for lost earnings beyond the date of discharge [note 20]. The logic behind this position is that the creditors rely upon the ability of a borrower to be able to work and earn money when they decide to give credit.
This view should, however, be balanced against the principle that bankruptcy is intended to provide a ‘fresh-start’ to the bankrupt. In this regard, it has become normal practice that the official receiver limit his/her claim over the future loss of earnings to those monies representing the lost earnings in the period ending three years after the commencement of bankruptcy. This brings the official receiver’s claim to the monies in line with the period that he/she would have been able to claim the monies under an IPO/IPA.
A ‘Smith v Manchester’ award refers to a type of award made where the claimant’s injury is not severe enough to prevent him/her from working, but compromises his/her ability to undertake a full range of tasks [note 21]. The award is intended to recognise that, whilst the claimant is still able to carry out his/her current job (and there is, therefore, no immediate loss of earnings), he/she will experience difficulty in obtaining a new job were the current one to be lost, or a better job, due to his/her injury-related restricted ability [note 22].
Following the principle outlined in paragraph 31.9.215, a ‘Smith v Manchester’ type claim is a ‘property’ claim, vesting in the official receiver as trustee. As the award is speculative in nature, any such award should be claimed in full by the official receiver.
Where an award is made in a vesting right of action and the person against whom the award is made has entered into formal insolvency, the official receiver should ensure that the claim is lodged with the relevant office-holder.