19 January 2017
Recent High Court decision: Secretary of State fees are not payable on third party funds in bankruptcy
The recent High Court decision of Safier v. Wardell and Others  EWHC 20 (Ch) has clarified the issue as to whether Secretary of States fees are payable on third party monies received by a trustee to settle bankruptcy debts and expenses prior to an annulment application being made.
Pursuant to Regulation 20(1) of the Insolvency Regulations 1994, a trustee is under a duty to pay into the Insolvency Services Account (“the ISA”), all money received by him in the course of carrying out his functions.
Section 305 of the Insolvency Act 1986 (“IA1986”) sets out the function of a trustee; that is to “get in, realise and distribute the bankrupt’s estate”.
Paragraph 4 and Schedule 2 to the Insolvency Proceedings (Fees) Order 2004 provide that, subject to the bankruptcy ceiling, the Secretary of State administration fee is payable on all sums paid into the ISA (save for any amounts paid out to secured creditors in respect of their securities or in carrying on the business of the bankrupt).
It has long been accepted by practitioners that payments received by a trustee from a third party to settle bankruptcy debts and expenses in full prior to an annulment application being made, fall outside of the regulation as they do not form part of the bankrupt’s estate and are thus not received by a trustee in the course of carrying out his functions. It followed therefore that such funds were not required to be paid into the ISA meaning that no Secretary of State fee would be payable. This was the case whether or not the bankrupt had other assets which could be realised by the trustee.
However uncertainty has arisen recently as the Official Receiver (“the OR”) appears to have changed its stance on the treatment of third party funds received by a trustee where the bankrupt has assets which could have otherwise been realised. The OR contends that in these circumstances, the third party funds should be paid into the ISA and the Secretary of State fee should be charged on the full amount on the basis that the trustee is discharging his duties by accepting third party monies in lieu of the realisation of assets. The OR has asserted that, whilst as a matter of practice, the Insolvency Service has previously agreed not to charge the fee where third party funds are paid into the ISA to discharge the bankruptcy debts and expenses in circumstances where there are no assets in the bankruptcy and no possibility of any realisations, where the funds provide no additional benefit because there would otherwise have been realisations, the fee should still be payable.
Following its change in practice, the Official Receiver intervened in a number of recent annulment applications to object to an annulment order being made where provision was not made for Secretary of State fees by the third party providing the funds for the annulment.
The issue has now been determined in the High Court by His Honour Judge Behrens in the case of Safier v. Wardell and Others  EWHC 20 (Ch). In this case, the bankrupt solely owned a property with substantial equity. The trustees applied for possession and sale of the property however in order to prevent the property being repossessed, the bankrupt’s brother agreed to pay the debts and expenses of the bankruptcy in full. Following receipt by the trustees of the funds, the bankrupt applied to annul the bankruptcy under Section 282(1)(b) IA1986 on the grounds that the bankruptcy debts and expenses have been paid in full or secured to the satisfaction of the court. The OR objected to the application on the grounds that, although it was agreed that the third party funds did not form part of the bankrupt’s estate, the funds were received by the trustees in the course of carrying out their functions and should therefore be paid into the ISA and thus subject to the Secretary of State fee.
It was argued on behalf of the Trustees that in accepting the funds from the bankrupt’s brother, the Trustees were not “getting in realising and distributing the bankrupt’s estate”. In reality they were merely acting as a conduit for the purpose of satisfying the Court that the requirements of Section 282(1)(b) IA1986 could be met from those monies in hand. The crucial point is that the funds were not part of the bankrupt’s estate. The fact that there were assets in the estate does not affect this. The Judge agreed with this argument and held that the receipt of third party funds does not form part of the trustee’s function and as such, the monies are not payable into the ISA (irrespective of whether or not there are assets in the estate). It follows therefore that no fee is payable in respect of them.
This decision provides welcome clarification on the point for practitioners and bankrupts alike however it should be noted that the decision is likely to be subject to an appeal.
It should further be noted that on 21 July 2016, the previous fee regime was abolished by the Insolvency Proceedings (Fees) Order 2016. For bankruptcy petitions presented after this date, the previous regime does not apply and as such, this case will be of most relevance to bankruptcies in respect of which the petition was presented before 21 July 2016.
- Applicant (Bankrupt) - Mohammed Safier
- First Respondent - Wendy Jane Wardell & David John Standish of KPMG LLP (Trustees in Bankruptcy). Represented by Shulmans together with Louis Doyle of Kings Chambers
- Second Respondent - Official Receiver
For any further information about this case, please contact Lucy Clark, an associate and member of our Business Recovery & Insolvency team, on 0113 297 3794 or at firstname.lastname@example.org.