Statutory Order of Payment

Statutory Order of Payment

Statutory Order of Payment

Statutory Order of Payment in insolvency proceedings is a post about the division of duty between the duty to realise assets and the duty to distribute them.

It is a stand-alone duty of the Insolvency Practitioner in Liquidations, Administrations and Bankruptcy to realise the assets, to realise ‘property’ including ‘things in action’.

This is, in essence, separate from the duty to ‘account’ for the fruits of the realisations.

So if the claim is a good one it should be brought even if there is no return to creditors at the end of it. This would be somewhat consistent with the notion that an asset of value should be realised. Of course, that does depend upon avoidance of prejudicing any of the existing returns to creditors without them having a say in the matter. That position prevails regardless of whether or not it is known to be the potential position at the commencement of any such litigation. This does not compel the Insolvency Practitioner (“IP”) to bring the claim if they do not wish to place themselves at personal risk.

Commercial considerations will come into play because it would be difficult for the IP to progress litigation if an award of damages would be dwarfed by the costs (after anticipated recovery of legal costs from an opponent). Lawyers would in all likelihood be unwilling to act in such a matter. Indeed it is likely that the Insolvency Practitioner would be unwilling to devote time to a matter for which they would not recover their own time costs.

Bowe v Bowe [1997] BPIR 747 (“Bowe”) and Official Receiver v Negus [2011] EWHC 3719 (Ch) (“Negus”) suggests that it is in the interests of creditors that the expenses of the insolvent estate be discharged. The statutory order of payment places the expense creditors at a higher priority to that of the unsecured creditors and therefore it would odd if expense creditors (such as the Insolvency Practitioner) were to be put into a worse position.

In Bowe the following was said:

In my judgment, it is clear that the bankrupt’s creditors have an interest in an order for sale being made, notwithstanding that it may be the case that the entirety of the bankrupt’s share in the net proceeds of the property may be swallowed up in defraying the expenses of the bankruptcy. If that be the case then the interests of the creditors under s 336(5) will prevail over the other factors listed in that subsection.
The reason why, in my judgment, the bankrupt’s creditors have an interest in an order for sale being made, notwithstanding that the order may not result in any direct distribution to them, is that it is in the interests of the creditors that the expenses of the bankruptcy, as defined in the 1986 Act, which will in any event include the costs of the petitioning creditor, be discharged so far as possible out of the assets of the bankrupt. In the first place I accept Mr Sellers’ submission that if there be after-acquired property, or a possibility of after-acquired property coming to light, then plainly the discharging of the expenses of the bankruptcy, which inevitably will take priority to the preferential or other provable debts, is in the interests of the creditors, who may find themselves in receipt of a distribution following the realisation of any such after-acquired property.
In the second place, even if there be no question of after-acquired property to be brought into account – and I have to say in this case there is no evidence of the existence of any future property, or any further property, of the bankrupt – in my judgment it remains in the interests of the bankrupt’s creditors that the expenses of the bankruptcy, including the remuneration of the official receiver and the remuneration of the trustee (who the creditors themselves have appointed and who has carried out his statutory duties as effectively their representative in the context of a bankruptcy process devised for their benefit) should be discharged so far as possible out of the assets of the bankrupt.

In Negus the following was said:

It is noteworthy, moreover, that, in the context of s 336, the ‘interests of creditors’ have been held to include ‘their interest in having the expenses of the bankruptcy discharged so far as possible out of the assets of the bankrupt’, even where there is ‘no question of after-acquired property to be brought into account’: see Trustee of the Estate of Eric Bowe (A Bankrupt) v Bowe [1997] BPIR 747, [1998] 2 FLR 439, at 754 and 446 respectively.
[11] Secondly, the scheme of the 1986 Act provides no warrant for treating the fees payable to the Official Receiver and Secretary of State as less important than the claims of unsecured creditors. To the contrary, Parliament has chosen to give the fees priority over unsecured debts. Had Parliament instead decided that the fees should rank no higher than unsecured debts, the district judge’s concerns could not have arisen: an income payments order would have been likely to benefit creditors as well as the Official Receiver and Secretary of State. It would be very odd if the Official Receiver and Secretary of State were in a worse position as a result of the priority they have been given. Parliament can hardly have intended that to be the case.
[12] A third point is that the bankruptcy regime is not concerned exclusively with the distribution of assets among creditors. It has a public aspect. As was pointed out in the Report of the Review Committee on Insolvency Law and Practice Cmnd 8558 (1982) (at para 1734), insolvency proceedings ‘have never been treated in English law as an exclusively private matter between the debtor and his creditors; the community itself has always been recognised as having an important interest in them’. Bankruptcy also has the advantage from the bankrupt’s point of view that he is released from his debts. It does not strike me as inconsistent with the ‘idea … of bankruptcy’ (to use the district judge’s words) that a bankrupt should be required to contribute to the costs associated with his bankruptcy if his income exceeds the level ‘necessary for meeting the reasonable domestic needs of the bankrupt and his family’ (to quote from s 310(2) of the 1986 Act). That is especially so where (as in the present case) the bankrupt presented the bankruptcy petition himself, presumably with a view to securing the benefits that the regime affords to debtors.
[13] A fourth point, though I think one of lesser significance, is that, even if the sums payable under an income payments order are not of themselves going to be sufficient to allow a distribution to be made to unsecured creditors, they could prove to be of benefit to such creditors if the ‘bankrupt’s estate’ were otherwise augmented, for example by a claim for after-acquired property under s 307. Mr Head argued that a person in Mr Negus’ position is unlikely to acquire property within the scope of s 307, but the possibility cannot be excluded. Even the impecunious sometimes win money on the lottery, for instance.

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