BRIEFING PAPER Number 5819, 3 December 2019 Bankruptcy: trustee's By Lorraine Conway right of inquiry Inside: 1. Role of the trustee 2. Trustee’s investigatory role 3. Trustee’s recovery of assets www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary Number 5819, 3 December 2019 2 Contents Summary 3 1. Role of the trustee 4 1.1 Aims and statutory powers 4 1.2 Collection and realisation of assets 4 2. Trustee’s investigatory role 6 2.1 Powers of inquiry 6 2.2 Use of powers of inquiry 7 2.3 Warrant of arrest 8 3. Trustee’s recovery of assets 9 3.1 Transactions at an undervalue 9 3.2 Transactions at a preference 10 3.3 Court orders in respect of preferred or undervalued transactions 11 Cover page image copyright: Pound coins / image cropped. Licensed under CC0 Creative Commons – no copyright required. 3 Bankruptcy: trustee's right of inquiry Summary Once a bankruptcy order has been made by the court, an official receiver or a private sector insolvency practitioner will be appointed trustee in bankruptcy (“the trustee”). As at the date of the order, the bankrupt’s estate vests in the trustee. The bankrupt’s estate essentially consists of all the assets which belongs to or is vested in the bankrupt at the commencement of the bankruptcy. The main function of the trustee is to collect in and sell the bankrupt’s assets and to make payments to creditors in accordance with the hierarchy set out in the Insolvency Act 1986 (as amended). However, the trustee also has a duty to investigate the conduct and financial affairs of the bankrupt in the period leading up to the making of the court order to establish the causes of the bankrupt's failure. The trustee has wide powers of inquiry into the bankrupt’s dealings and property. The bankrupt also has a legal obligation to provide information to the trustee and attend at the trustee’s office as and when reasonably required. As part of the trustee’s inquiry into the causes of the bankruptcy, the trustee can also ask third parties for information. Significantly, the trustee can apply to the court for an order for the private examination in court of the bankrupt’s spouse, partner or any other “connected” third party. Individuals are often aggrieved to be asked to disclose detailed information and documentation about their financial affairs to a trustee or to a court in respect of another person’s bankruptcy. They question the legal basis on which the trustee in bankruptcy is entitled to investigate their financial affairs, and whether there should be evidence of a financial connection with the bankrupt before the trustee is entitled to examine their finances. This briefing paper provides an outline of the right of inquiry of a trustee in bankruptcy. In the process, it also summarises the trustee’s general aims and statutory powers. The information contained in this paper applies only to England and Wales; Scotland has its own separate legal procedure for individual insolvency called “sequestration”. Number 5819, 3 December 2019 4 1. Role of the trustee 1.1 Aims and statutory powers As at the date of the bankruptcy order, the bankrupt’s estate vests in the trustee (see Box 1 below). Creditors can no longer pursue the debtor for payment; payment becomes the responsibility of the trustee. Box 1: Vesting of bankrupt’s estate in his/her trustee in bankruptcy Section 306 of the IA 1986: (1) The bankrupt's estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee. (2) Where any property which is, or is to be, comprised in the bankrupt's estate vests in the trustee (whether under this section or under any other provision of this Part), it shall so vests without any conveyance, assignment or transfer. The bankrupt has 21 days from the date of the bankruptcy order in A bankrupt is under a which to provide the trustee with information relating to his/her statutory duty to financial affairs, including a full list of their assets (including property, provide information pensions, insurance policies etc.) and a full list of their debts. to the trustee and to attend at the The function of the trustee is to get in, realise and distribute the trustee’s office as bankrupt's estate in accordance with the Insolvency Act 1986 (“the IA and when reasonably 1986”). In carrying out this function and in the management of the required. bankrupt's estate the trustee is entitled, subject to the IA 1986, to use his own discretion. In addition, the trustee has a duty to investigate the conduct and financial affairs of the bankrupt for the period leading up to his/her bankruptcy, to establish the causes of the bankrupt's failure and to ensure that no assets have deliberately been “put out of the reach” of creditors1 (see section 3 below.) 1.2 Collection and realisation of assets The “bankrupt’s estate” is the term used to describe that body of the bankrupt’s assets that pass to the trustee on his appointment for sale and distribution to the creditors (see Box 2 below). The bankrupt’s estate consists of all the property which belongs to or is vested in the bankrupt at the commencement of his/her bankruptcy (i.e. the date on which the bankruptcy order is made). Box 2: The bankrupt estate Section 283 of the IA 1986 defines the bankrupt’s estate as: (a) All property belonging to or vested in the bankrupt at the commencement of the bankruptcy; or (b) any property which is or is treated as being comprised in the estate by virtue of the provisions of the Act which relate to the insolvency of individuals. 1 Section 289 of the Insolvency Act 1986 5 Bankruptcy: trustee's right of inquiry Under section 436 of the IA 1986, the term “property” is defined widely, it includes: ...money, goods, things in action, 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. Although the “bankrupt’s estate” is defined by reference to the date of the bankruptcy order, the statutory definition of “property” draws into the estate future and contingent interests so long as they exist as proprietary interests at that date. It is clear there is no geographical restriction on the property which comprises the bankrupt’s estate. It should be noted that property in the bankrupt’s estate is held by the trustee subject to the prior legal right of any person (other than the bankrupt) in such property. For example, a freehold interest in a property owned by the bankrupt falls within his estate and can be sold by his/her trustee for the benefit of creditors. However, if all or part of the property has been mortgaged, the property passes to the trustee in bankruptcy subject to the mortgagee’s interest and, importantly, subject to the mortgagee’s right to take possession even after the bankruptcy and to exercise all the other rights of a mortgagee (including the right of sale). In certain circumstances, assets disposed of by the bankrupt before the making of the bankruptcy order can be reclaimed by the trustee for the benefit of creditors. Such disposals, known as “undervalue or a preference transactions”, are then treated as part of the bankrupt estate (see section 3 below). Number 5819, 3 December 2019 6 2. Trustee’s investigatory role 2.1 Powers of inquiry Once a bankruptcy order has been made, the appointed trustee has a statutory duty to investigate the bankrupt’s conduct and financial affairs to establish the causes of their failure. This may involve inquiries into the bankrupt's financial affairs over several years, although the trustee will usually concentrate on the period immediately before and after the bankrupt became insolvent.2 Under insolvency legislation, the trustee in bankruptcy has wide powers The trustee in of inquiry into the bankrupt’s property and past dealings. The trustee bankruptcy has wide can obtain accounts and other relevant documents. Importantly, the powers of inquiry. bankrupt has a statutory duty to cooperate with the trustee, to provide information and to attend at the trustee’s office as and when reasonably required. In addition, the trustee has the statutory power to apply to the court for an order for the private examination in court of the bankrupt’s spouse, partner or any other “connected” third party (see Box 3 below). Box 3: Trustee inquiry into the bankrupt’s dealings and property Section 366 of the IA 1986 states: 366. (1) At any time after a bankruptcy order has been made the court may, on the application of the official receiver or the trustee of the bankrupt's estate, summon to appear before it - (a) the bankrupt or the bankrupt's spouse or former spouse, (b) any person known or believed to have any property comprised in the bankrupt's estate in his possession or to be indebted to the bankrupt, any person appearing to the court to be able to give information concerning the bankrupt or the bankrupt's dealings, affairs or property. The court may require any such person as is mentioned in paragraph (b) or to submit an affidavit to the court containing an account of his dealings with the bankrupt or to produce any documents in his possession or under his control relating to the bankrupt's dealings, affairs or property.