When a bankruptcy order against an individual is made the file is handed to the Official Receiver to administer the bankruptcy. The Official Receiver works for the Insolvency Service and is also attached to the court. They will also be the trustee in bankruptcy (TiB) unless an Insolvency Practitioner is appointed to take over that role. The TiB’s job is to realise (sell) any assets with a view to paying the bankrupt’s creditors.
When an individual is made bankrupt most of their personal property will automatically be handed over to the TiB. The bankrupt is only allowed to retain the tools of their trade, essential clothing, furniture, household items and bedding belonging to them and their family. Any interest the bankrupt has in any property they own will also pass to the TiB. Obviously, there may be other people with an interest in the property, for example a spouse or cohabitee. A TiB must deal with the bankrupt’s house within 3 years from the date of bankruptcy (where relevant). A partner, relative or friend may be able to buy an interest in the home from the trustee. This may prevent the sale of the house by the TiB in the future. However, if this occurs, a TiB may obtain a charging order over your interest in the property (which may have to be repaid from the sale of proceeds when the property is sold). The TiB usually cannot sell the bankrupt’s home within 12 months from the date of the bankruptcy order, and they can only come after the bankrupt’s “beneficial” interest in the property, that is to say that if the property is owned with others, their share is protected. With limited exceptions, no further action can be taken against the bankrupt by their creditors to enforce payment of the debt.
Generally, the bankrupt will automatically be discharged from bankruptcy within 12 months from the date of the bankruptcy order. Alternatively, they may be discharged immediately from bankruptcy if they pay off all their debts and expenses relating to the bankruptcy order.
In a recent case the High Court (HC) decided that the rights of discharged bankrupts to payment under a government compensation scheme did not form part of their bankruptcy estates.
As most people are aware from the news, many postmasters were victims of the Horizon scandal. Several years ago the Post Office started using the Horizon accounting software system, and all postmasters and sub-postmasters were required to use it. As a result of serious issues with Horizon many postmasters were criminalised, prosecuted, jailed, and a number of them ended up being declared bankrupt.
After relentless campaigning led to the exposure of the serious issue with Horizon and a group of postmasters, including discharged bankrupts, brought claims against the Post Office. The parties settled these claims, but because of the postmasters' litigation funding arrangements, they each only received a small amount of money. To address this issue, the government created a compensation scheme for the postmasters to try to, in some way, address the injustice which they had suffered.
However, the trustees of the discharged bankrupt postmasters tried to claim these compensation payments on the basis that the relevant rights had vested in them on the making of the bankruptcy orders. They therefore felt that these amounts should form part of the bankrupts estates and made available to pay their creditors. In order to resolve this the government decided to seek directions from the court as to how the compensation should be paid, and to who.
In this case the HC held that the rights to compensation payments had not vested in the trustees, and did not form part of the discharged postmasters' bankruptcy estates. For something to be "property" under the relevant insolvency legislation, and therefore to form part of the bankrupt’s estate, it had to exist on the making of the applicable bankruptcy order.
In these cases the rights to compensation did actually exist at the time the relevant bankruptcy orders were made, which were between 2007 and 2015. However, the relevant compensation scheme was not established until March 2022. The court decided that although at the time each bankruptcy order was made, each postmaster might have hoped that they would ultimately be compensated by the government, this hope was not enough to be considered "property" for the purposes of bankruptcy law.