What is the role of the trustee in bankruptcy?

The following article outlines the role of the trustee in a bankruptcy and how this impacts you if you are categorised as a creditor under one of these classifications.

What is a Bankruptcy Trustee?

A trustee is an Insolvency Practitioner or the Official Receiver. An Official Receiver is automatically appointed by the court when a bankruptcy order is made unless a court decides to appoint a specific Insolvency Practitioner (often referred to as an “IP”).

The order will be made after a petition has been issued to the court. A petition can be made by a group of creditors collectively or a creditor individually (who are owed more than £5,000)or the debtor himself.

If the Official Receiver is appointed, the creditors may be asked if they want to appoint an Insolvency Practitioner. The creditors will then be able to vote on the identity of the IP at the creditor’s meeting.

What is the role of the trustee in bankruptcy?

The trustee is appointed to realise and distribute the “bankruptcy estate”. A bankruptcy estate includes all property (stock, chattels and debts etc) that is owned by the debtor/bankrupt at the date of the bankruptcy order.

In addition, there may be equity in the residential property belonging to the debtor.

There are also items that can be excluded. This involves items such as:

any implements or machinery needed to undertake business activities
household belongings – items that are needed for everyday life
motor vehicles – up to a certain and reasonable value.

However, a bankrupt can apply to have assets made exempt. The trustee will look at the application and will decide whether the asset is required to continue business activities or is required in everyday life.

Whilst the job of the trustee is to recover as much of the debt as possible on behalf of the creditors, the trustee has a responsibility to ensure continued business operations in addition to the debtor being able to carry on their everyday life

What are the responsibilities of a trustee in bankruptcy?

The trustee has a duty to dispose of assets at the highest possible price to maximise returns to the creditors.

However, the trustee also has a duty to ensure that the bankrupt’s estate has enough assets remaining to allow them to continue business operations with the ability to also continue their everyday life.

Interestingly, there is no duty to investigate the affairs of the bankrupt. That duty remains with the Official Receiver. An Insolvency Practitioner would only investigate to realise assets. An investigation would not be undertaken unless there was a chance of assets being realised for the benefit of the bankruptcy estate.

What happens with an appointment of a trustee in bankruptcy?

All the debts are frozen at the date of appointment other than debts secured on an asset, debts due to the Student Loans Company and specific other debts excluded by the Insolvency Act 1986. The trustee will ask creditors to submit their claims in the bankruptcy. These claims include all debts – even bills such as utility bills. After the trustee has been appointed, the bankrupt then remains responsible for any other liabilities going forward.

Once the bankruptcy order has been made, the Official Receiver will interview the bankrupt. They will send the bankrupt questions about their financial position including creditors and their number of dependents etc. If an Insolvency Practitioner is appointed, the same procedure happens in that they also send a list of questions. In certain circumstances, a bankrupt may have to complete the list of questions twice.

A bankrupt obtains his discharge from bankruptcy after 12 months unless the period is extended by the Court. Bankruptcy is always noted on an individual’s credit record.

There are several restrictions whilst you are an undischarged bankrupt

You cannot act as a director without a court’s permission.
You are unable to borrow more than £500 before you have to disclose you are bankrupt.
You cannot create, manage or promote a company without the court’s permission.
You can’t manage a business not in your name without telling people you are bankrupt.

How is an Insolvency Practitioner appointed as a trustee?

For an Insolvency Practitioner to become a trustee, they will be appointed by the court or by a meeting of creditors or by the Secretary of State. The creditors can nominate a trustee and the creditors vote to approve the nomination.

What happens to your assets in bankruptcy?

All assets not deemed necessary for the continuation of business operations or the bankrupt’s everyday domestic life will be disposed of by the trustee at the highest possible price to maximise returns to the creditors.

In addition, if it is considered that a bankrupt may have disposed of assets that are seen to be unfair to the creditors, then the trustee can apply to the courts for the return of the assets.

All assets required during the bankruptcy period are reviewed by the trustee. In addition, the bankrupt’s expenditure is reviewed in full by the trustee, and any expenditure considered not essential to the bankrupt and their family, then the trustee will apply to obtain this non-essential expenditure for the benefit of the creditors

What is a creditors committee?

A creditors committee is formed at the first creditors meeting. The trustee will ask if anybody wants to serve on the committee and there has to be between 3 and 5 members.

The committee will oversee the trustee and the trustee will report back to the committee on a 6 monthly basis as to the realisation of the assets.

The committee approves the trustee’s fee and he outlines the course of action he wishes to take. The committee then decides whether this is a suitable course of action. Any creditor can serve on the committee, but they have to be a legitimate creditor.

There is a duty upon the members of the committee to attend meetings. If they miss three meetings in a row, they will be removed and another will be invited. Committee meetings are normally undertaken by post, in most cases, unless it is a very contentious case.

This process is in place to ensure fairness to all parties – both the bankrupt and the creditors.

How are payments made to creditors in a bankruptcy?

The Insolvency Rules of 2016 decrees the process of how the money is distributed.

The first payment goes to any expenses related to realising the assets. For example, legal fees on selling an asset, mortgages etc. Next are any expenses incurred or made by the Official Receiver. There is a set fee that has to be paid – £8775.

Next in the sequence are the petitioning costs. A creditor may have petitioned for the bankruptcy order to be made. This fee is refunded once assets are sold.

Following this is the trustee and his necessary disbursements and remuneration and any expenses that have been incurred not related to realising the assets.

After that come the creditors. However, within the category of creditors, there is a hierarchy of who gets paid and when. For example, the first tier of preferential creditors includes employees’ wages and holiday pay..

Next is the second tier which includes creditors such as VAT, PAYE and NIC.

Finally, if there are funds available, a distribution will be made available to the unsecured, non-preferential creditors.

How are trustees in bankruptcy paid?

At the beginning of the bankruptcy, the trustee will send the creditors a notice of their appointment. They will convene a meeting of creditors and will present a fee estimate. This is an idea of the trustees’ costs of realising the assets. It is then the responsibility of the creditors to agree to the fee estimate.

This acts as a cap on remuneration – so if a trustee’s time costs are more than their estimate, he cannot charge more than the estimate, without requesting the authority of the creditors. Each year, the trustee reports to the creditors on the progress in the administration of the bankruptcy estate. In that report, he’ll provide details of the costs of the time spent on the administration, the fees and expenses drawn in the period and any other relevant costs such as legal fees.

What are the expenses of bankruptcy?

These are:

The trustee’s remuneration
The costs of realising assets including legal and agents’ fees and valuation fees
There can also be ordinary legal fees. For example where a bankrupt hasn’t disclosed certain information and a solicitor needs to be appointed.
Often a valuation will need to be undertaken if an asset needs to be realised.
In addition, insurance needs to be paid to protect assets and a further bond which is payable in all cases to protect the assets of the bankruptcy estate.
Advertising costs may be included, and some statutory adverts that need to be undertaken by law. For example, if paying a dividend to creditors, an advert needs to be placed for any potential creditors to come forward. This is placed in the London Gazette.
Cheque fees and quarterly banking fees are also included. All monies from the bankruptcy estate are held in accounts operated by the Insolvency Service and fees are levied by the service.
There may also be court hearing fees and land registry fees.

In addition, when a bankruptcy order is made, any equity in the matrimonial home falls into the estate. The trustee has a duty to realise that asset, if there is equity in the property. The trustee will place a restriction at the Land Registry to ensure that the property cannot be disposed of without his knowledge. The trustee will speak to the bankrupt about whether they or a third party would like to make an offer for the property. It is unlikely that anything will happen within the first 12 months of the bankruptcy. The bankrupt remains in their home as much as possible. If the bankrupt hasn’t engaged with the trustee regarding the property, the trustee can apply for possession of the property and sell it.

In all cases, if you are experiencing financial difficulty, you can be supported through this difficult process by experts who understand the pressures you are facing and have experience in working swiftly to deliver a strategy to resolve the issues you face. This is undertaken by seeking prompt advice from an Insolvency Practitioner.

Chamberlain & co offers a free initial one-hour consultation which is discrete and can be held via telephone, face-to-face meeting, or through a digital medium such as Microsoft Teams etc. All matters are discussed confidentially, and the team is used to making discrete enquiries on a no-name basis when working with you to produce a strategy to resolve your issues.

As with all insolvency practitioners, Chamberlain & Co are committed to delivering best advice in all scenarios, and the team’s work has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards.

You can contact us by calling 0113 242 0808; or by emailing us at advice@chamberlain-co.co.uk or by completing our online contact form here.