Managing partners, probate practitioners and other practice staff involved in:
- obtaining grants of representation of estates; or
- the administration of estates; or
- advising personal representatives.
Personal representatives who make a distribution out of the estate of a deceased person to a bankrupt beneficiary may be making the distribution to the wrong person, and, if so, will not receive a good receipt.
In such cases, if the bankrupt puts the assets beyond the reach of the trustee in bankruptcy, there is a real risk that the trustee in bankruptcy, on behalf of the bankrupt's creditors, will claim compensation against the personal representatives.
The claim would be equal to either:
- the amount of the payment to the bankrupt; or
- the value of the assets transferred to the bankrupt.
Where personal representatives have wrongly distributed assets to a person who was or is an undischarged bankrupt, it may be difficult for the personal representatives to succeed in a claim to recover those assets because of the restrictions placed upon bringing proceedings against bankrupts by section 285 of the Insolvency Act 1986.
This practice note provides advice for practitioners acting under these circumstances.
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Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
For queries or comments on this practice note contact the Law Society's Practice Advice Service.
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Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- Outside of a regulatory context, good practice for most situations in the Law Society's view.
- In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
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When a trustee in bankruptcy is appointed, all property (which is defined very widely in section 436 of the Insolvency Act 1986) belonging to the bankrupt automatically vests in the trustee in bankruptcy: section 306 of the Insolvency Act 1986. The statutory definition of 'property' includes 'things in action'.
The benefit of this asset vests in the trustee in bankruptcy in the same way as other assets of the bankrupt.
The recent decision in Re Bertha Hemming Deceased, Raymond Saul & Co. v Holden [2008] EWHC 2731 (Ch) confirms that in such cases the 'thing in action' which vests in the trustee in bankruptcy is a composite right made up of:
- the right to have the estate administered; and
- the right to have the assets comprised in the distribution paid over or transferred at the conclusion of the administration of the estate.
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A beneficiary who, at the date when the bankruptcy order is made, is entitled to undistributed property under the will or on the intestacy of a deceased person is entitled to a 'thing in action', namely, the right to compel the due administration of the estate.
It makes no difference whether the assets are in the form of money, chattels, or other property. It is the trustee in bankruptcy who is entitled to receive the assets comprised in the distribution under the will or on the intestacy of the deceased, and not the beneficiary.
The trustee in bankruptcy's right to receive the assets is not affected by the subsequent discharge of the bankrupt beneficiary from bankruptcy. In these cases, the 'thing in action' vests in the trustee in bankruptcy under section 306 of the Insolvency Act 1986 at the time of the bankruptcy, and the question of after-acquired property does not arise.
A beneficiary who remains the subject of a bankruptcy order may become entitled as a beneficiary to an interest in property passing under the will or intestacy of a deceased person.
In such cases, the 'thing in action' (ie the composite right to have the estate administered, and the right to have the assets comprised in the distribution paid over at the conclusion of the administration of the estate) constitutes 'after-acquired property' (see section 307 of the Insolvency Act 1986).
After-acquired property vests, in the first place, in the bankrupt.
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Section 333 of the Insolvency Act 1986 requires the bankrupt to give notice to the trustee in bankruptcy of any property which devolves upon him or her of which he or she has acquired or any increase in income, since the commencement of the bankruptcy, within 21 days of the devolution, acquisition or increase.
A failure by the bankrupt to meet this obligation is punishable as a contempt of court, section 333(4) of the Insolvency Act 1986.
The trustee in bankruptcy may then claim such 'after-acquired property' by either:
- serving notice on the bankrupt within 42 days of first becoming aware of the devolution, acquisition or increase; or,
- serving such notice on the bankrupt after 42 days from first becoming aware of the acquisition, but only with the permission of the court.
See section 307(1) of the Insolvency Act 1986.
The trustee in bankruptcy is entitled to after-acquired property only after he or she has served such notice.
See also Vickers v Mitchell [2004] All ER (D) 414 and Solomon v Williams [2001] All ER (D) 299 as to the effect of failure by the trustee in bankruptcy to serve the section 307(1) notice promptly.
Where the personal representatives are aware that the beneficiary became bankrupt before the time of the deceased's death, they can, before making any distribution to the bankrupt, properly insist on seeing the notice regarding the after-acquired property constituted by the interest in the deceased's estate which the bankrupt is required by section 333(2) of the Insolvency Act 1986 to give to the trustee in bankruptcy.
Having been provided with such notice, the personal representatives would then need to confirm with the trustee in bankruptcy whether the trustee in bankruptcy had served a notice on the bankrupt under section 307(1) of the Insolvency Act 1986, or intended to serve such a notice.
If the trustee in bankruptcy had served a section 307(1) notice, or intended to do so and did so, within the time allowed, then the personal representatives could properly distribute the property only to the trustee in bankruptcy. The trustee in bankruptcy could then give the personal representatives a good receipt.
If (unusually) the trustee in bankruptcy had not served, and did not intend to serve, a notice under section 307(1), then the personal representatives could properly distribute the property to the bankrupt and the bankrupt could give the personal representatives a good receipt.
The trustee in bankruptcy has no claim only where the bankrupt has already been discharged at the time of death of the testator or the intestate under whose estate the former bankrupt benefits.
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Whilst the position of personal representatives who are aware that the beneficiary has been made bankrupt may be relatively straightforward, the position is more difficult if they are unsure whether the beneficiary is bankrupt.
In relation to after-acquired property, section 307(4) of the Insolvency Act 1986 now makes clear that, whether before or after service of a notice under section 307 (1), where a person acquires property in good faith, for value and without notice of the bankruptcy, the trustee in bankruptcy is not entitled to any remedy against that person, or against any person whose title to the property derives from that person.
If the beneficiary has been made bankrupt, section 307(4) does not protect the personal representatives, who have not 'acquired' the relevant property but transferred it to the beneficiary.
The transfer by the personal representatives will not have been made for value, but under a purported legal obligation to the beneficiary. In the absence of protection from section 307(4) personal representatives who wrongly transfer property to a bankrupt beneficiary, will not obtain a good receipt.
If the bankrupt succeeds in putting the assets out of reach of the trustee in bankruptcy, the personal representatives will risk facing a claim for compensation by the trustee in bankruptcy, to whom the distribution should have been made.
The enactment of section 307(4) means that you can no longer rely on previous authorities which state that someone dealing in good faith with a bankrupt and without notice of the bankruptcy cannot be sued by the trustee in bankruptcy to recover the value of after-acquired property transferred to the bankrupt.
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The personal representatives may directly ask a beneficiary whether they are, or ever have been, bankrupt. However the beneficiary may provide misleading information or false information or even refuse to answer the question. It is therefore risky to rely on information gained in this way without carrying out further investigations.
The personal representatives may ask a beneficiary to provide details and evidence (in the form of copies of birth or marriage certificates, or deeds poll) of his or her true names and of any other versions of names the beneficiary uses.
If a bankrupt knowingly fails to disclose to his or her trustee in bankruptcy all the property, books, papers and records forming his or her estate or relevant disposals of such property, he or she will be committing a criminal offence: section 353(1) and (2) of the Insolvency Act 1986.
A bankrupt is also required by section 333 (2) of the Insolvency Act 1986 to give notice to the trustee in bankruptcy of any after-acquired property to which he or she becomes entitled while his or her bankruptcy remains undischarged.
Further, the bankrupt will be guilty of a criminal offence if he or she causes the making of false entries in or omissions from any book, document or records relating to his or her affairs: section 355(2)(c) and (3)(a) of the Insolvency Act 1986.
All of the above offences are punishable by a fine, imprisonment, or both: section 350(6) of the Insolvency Act 1986.
You may wish to consider drawing these offences to the attention of beneficiaries before questioning them as to their affairs.
If the bankrupt complies with his or her legal obligations, the trustee in bankruptcy will ordinarily notify the personal representatives that any distribution from the deceased's estate should be made to the trustee in bankruptcy, and not to the bankrupt, and that the personal representatives can safely make the distribution and get a good receipt where:
- the bankruptcy order was made before the date of the deceased's death and the trustee in bankruptcy has provided evidence that he or she has served a s307(1) notice on the bankrupt; or
- the bankruptcy order was made after the date of the deceased's death.
Where the personal representatives know that the beneficiary is a bankrupt, the personal representatives should contact the trustee in bankruptcy before making any distribution in order to obtain confirmation that the proposed distribution will be made to the person entitled in law to receive it.
In all other cases, the personal representatives should, before making a distribution to any beneficiary in England and Wales, carry out a bankruptcy-only search at the Land Charges Department of Her Majesty's Land Registry against the name of each beneficiary to whom it is proposed to make a distribution.
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Immediately after a bankruptcy petition has been filed, the court must apply to the Land Charges Department to register the petition against the name of the respondent in the register of pending actions under section 5(1)(b) of the Land Charges Act 1972.
Immediately after the court has made a bankruptcy order, the Official Receiver must apply to register it against the name of the bankrupt in the register of writs and orders under section 6(1) of the Land Charges Act 1972.
Searches carried out at the Land Charges Department will be able to establish whether, within the previous five years, the beneficiary was subject to a bankruptcy order, unless a court order cancelling the registration has been made.
The search can be conducted online or by using Form K16. The current fee is £2 per search against each name. This can be charged as an administration cost against the residue of the estate.
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Registration in the Land Charges Department remains effective for a period of five years: section 8 of the Land Charges Act 1972, but then ceases to have effect unless it is renewed.
You should be aware that the discharge of the bankrupt from bankruptcy does not cause the registration to be cancelled, unless a court makes an order cancelling the registration.
There is therefore an element of risk in any case in which the administration of an estate has taken five years or more before the making of any distributions, or if an order has been made cancelling the registration before the end of the five year period.
The Insolvency Service retains details of all bankruptcies in England and Wales which are current, or which have terminated within the previous three months.
Section 279 (1) of the Insolvency Act 1986 provides that a bankrupt is discharged from bankruptcy at the end of the period of one year starting with the commencement of the bankruptcy. The trustee may however apply to the court for an order that the specified period of one year should cease to run, on the grounds that the undischarged bankrupt has failed or is failing to comply with an obligation under his or her bankruptcy.
You should note that searching at the Land Registry is more likely to produce relevant information about a bankrupt beneficiary than searching at the Insolvency Service because an entry at the Land Registry will, unless a court otherwise orders, remain on the register for a period of five years after it was first made.
Therefore, except in cases where the court has ordered that the specified period of a year should be substantially extended, a Land Registry search is likely to be the better option.
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Personal representatives may have to carry out more than one search in respect of a single beneficiary in case they are known under more than one name, or one spelling of a name. Searches should therefore be conducted against:
- the name of the beneficiary as shown on any relevant will;
- the full name of the beneficiary both with and without any name by which he or she is or has been generally known;
- the first forename and family name of the beneficiary.
You should note that the search process recognises only exact matches and cannot be relied upon where spelling errors have been made.
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A search should be made immediately before making a distribution to a beneficiary, since earlier searches will not reveal a bankruptcy petition filed, or a bankruptcy order made between the search and the date of the distribution.
Example
Ted died on 5 January 2009. He left half of the residue of his estate to his nephew, Ben. Ben was declared bankrupt on 12 January 2009, and received his automatic discharge on 12 January 2010. Ted's personal representative was in a position to distribute the residue of Ted's estate in May 2010. Because Ben's bankruptcy was discharged in January 2010, the Insolvency Service will have ceased to record it in April 2010. However, a search at the Land Registry will, unless a court makes a contrary order, continue to disclose that Ben was made bankrupt until January 2014.
If a Land Registry search provides a positive result, it may be sensible to carry out an Insolvency Service search as well as this will disclose the identity of the court dealing with the relevant bankruptcy and the case number.
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Where the searches reveal no entry in the appropriate register and the personal representatives have no knowledge of the beneficiary's bankruptcy, it is safe to proceed with making the distribution.
The fact that a beneficiary is known to have substantial debts is not a reason for not making a distribution to which he or she is entitled.
If the bankruptcy search reveals that a bankruptcy petition has been served, but no bankruptcy order has yet been made, then it is unsafe for the personal representatives to make a distribution to the beneficiary unless the bankruptcy petition is dismissed.
Under section 284(1) of the Insolvency Act 1986 any disposition of property made by a bankrupt is void unless it was made by consent of the court or subsequently ratified by the court. This applies from the date of the presentation of the bankruptcy petition until the vesting of the bankrupt's estate in the trustee in bankruptcy: section 284(3).
The personal representatives should therefore always await the outcome of the hearing of the bankruptcy petition before making any distribution.
If a search reveals that a bankruptcy order has been made before or after the date of death of the deceased, then personal representatives cannot safely make any payment to the beneficiary, even if the bankruptcy has been discharged by the time of the proposed payment.
Only if the bankruptcy is annulled and all the bankruptcy search entries are removed is it safe for the personal representatives to make a payment to the beneficiary.
If, however, the death of the deceased occurs only after the date of discharge of the bankrupt beneficiary, and the beneficiary is not subsequently made bankrupt again, then the personal representatives, having made the appropriate searches, may safely make a distribution to the discharged bankrupt.
Discharge from bankruptcy means that the discharged bankrupt may again acquire and dispose of property on his or her own account.
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Personal representatives are not obliged to comply with unusual requests for payment by a beneficiary, for example, into an account maintained offshore, or into an account in the name of a third party in circumstances that suggest an intention to improperly divert the funds from the trustee in bankruptcy.
Personal representatives should consider declining such requests in order to reduce the risk of exposing themselves to a claim by the trustee in bankruptcy.
If personal representatives are uncertain whether to make payment to one or other of two parties they may apply for directions to court. If they act reasonably in doing so and have not made such application for their own benefit, they should not have to bear the costs of such an application personally. But if the court determines that the answer is clear, and the application was unnecessary, the personal representatives may be ordered to pay for the costs personally.
If the personal representatives do not maintain a neutral position in the application but advance a particular case which is unsuccessful, they are at risk of being ordered to pay the successful party's costs: Re Bertha Hemming Deceased, Raymond Saul & Co. v Holden [2008] EWHC 8565 (Ch).
If personal representatives are unsure as to whom they should make a payment, they may, as a last resort pay the funds in question into court under section 63 of the Trustee Act 1925. Again, there is a potential risk of an adverse costs order if the court determines that there was no obvious uncertainty and that the payment into court was unnecessary.
The procedure for paying funds into court is set out in the Civil Procedure Rules Practice Direction 37 paragraph 6.
See also the Civil Procedure Rules Practice Direction 37 paragraphs 3 and 7 for the procedure for applying for payment out of funds held by the court.
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Individual voluntary arrangements (IVAs) may in some cases, avoid a debtor being adjudicated bankrupt, but the law also allows debtors to submit proposals for an IVA after a bankruptcy order has been made. The details of any particular IVA has to be considered before a decision can be made about the correct person to whom the personal representatives should make a payment.
In an IVA case in which a bankruptcy petition has been presented and a bankruptcy order made, sections 306 and 307 of the Insolvency Act 1986 apply, and personal representatives remain at risk if they make payment to the wrong party.
In general, for IVA cases in which no bankruptcy petition has been presented, or in which a petition has been presented but has been dismissed at the time when the distribution is made, the existence of the IVA will not affect the beneficiary's right to receive the payment and give a good receipt.
Under an IVA made between the debtor, the creditors and the supervisor of the IVA, the debtor usually covenants to disclose any windfall which he or she may receive to the trustee of the IVA, but sections 306 and 307 of the Insolvency Act 1986 do not apply where no bankruptcy petition has been presented or the petition has been dismissed and no bankruptcy order is made.
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If a beneficiary who is, or who becomes, bankrupt is based outside England and Wales, the rules of English law set out above may not apply. Lawyers qualified in England and Wales are not competent to advise on bankruptcies governed by the law of other jurisdictions.
Therefore, a personal representative may have to seek legal advice from an insolvency lawyer who is qualified in the jurisdiction in which a beneficiary has his or her centre of main interests or is otherwise subject to insolvency proceedings.
If the relevant beneficiary or bankrupt beneficiary has his centre of main interests (COMI) in the UK or in another EU State (other than Denmark), Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings (the EC Regulation) will apply. The COMI of a company or individual must be identified by reference to factors that are both objective and ascertainable by third parties.
According to Article 3(1) of the EC Regulation, if the COMI of a beneficiary is in the UK, the relevant courts of England and Wales, Scotland or Northern Ireland will have jurisdiction in respect of the opening by a creditor of bankruptcy proceedings and the relevant part of UK law will apply: see Article 3(1) of the EC Regulation.
If the beneficiary has already been made bankrupt in the UK, the relevant law of the UK will apply to his or her bankruptcy.
The treatment of beneficiaries who are based in England and Wales is different to that of beneficiaries based in Scotland or Northern Ireland.
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If the EC Regulation is applicable and the COMI of the beneficiary is in the UK, in order for the courts of England and Wales to have jurisdiction, it must be established that one of the criteria in section 265 of the Insolvency Act 1986 is applicable, ie that the debtor is:
- domiciled in England and Wales;
- is present in England and Wales on the day the petition is presented; or
- in the three years ending with that day was ordinarily resident or carried out a business in England and Wales.
If the beneficiary does not fall within any of the section 265 criteria (i.e they are based in Scotland or Northern Ireland), any bankruptcy proceedings by a creditor must be commenced in the relevant part of the UK where the required nexus exists.
The rules that apply to both the vesting of property in the trustees in bankruptcy and to after-acquired property are likely to be the rules of the part of the UK in which the bankruptcy order was made.
The personal representatives should therefore take advice from a lawyer with expertise in the law of that part of the UK, as to the vesting rules and how the after-acquired property rules work within that jurisdiction before making a distribution out of the estate.
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Where a beneficiary has his COMI in another Member State within the EU (except Denmark, until such time as it signs up to the EC Regulation), the courts of England and Wales must refuse jurisdiction to open main bankruptcy proceedings in England or Wales, unless the beneficiary has an establishment in England or Wales, as defined in Article 2(h) of the EC Regulation. The appropriate course of action for a creditor would usually be to take proceedings to make the individual bankrupt in the Member State in which he or she has his or her COMI.
The law of the Member State in which insolvency proceedings are opened should be the applicable law: see Article 4 of the EC Regulation. The proceedings are opened at the time of the court order, ie the date of the bankruptcy order for individuals. Therefore, where a beneficiary has his or her COMI in another EU Member State and is made bankrupt there, the law that will be applied to his or her bankruptcy is likely to be the law of that Member State.
The rules relating to the vesting of property in the trustee and relating to after-acquired property that are applied are likely to be the rules of the Member State in which the bankruptcy order was made.
Again, the personal representatives should take advice from a foreign lawyer within that jurisdiction as to the vesting rules and how the after-acquired property rules work within that jurisdiction before making a distribution out of the estate.
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In cases where a beneficiary is based outside of the EU or in Denmark, the EC Regulation does not apply to the determination of what is the applicable law for the opening of bankruptcy proceedings.
Where the EC Regulation does not apply, the relevant country is free to apply its national laws of jurisdiction, choice of law and recognition and enforcement of judgments.
If a bankrupt or potential bankrupt is resident in and/or may have a COMI in another jurisdiction outside the EU (or in Denmark), the personal representatives should take advice from a lawyer in that country as to:
- the jurisdiction of their courts; and
- the laws regarding the vesting of property in the trustee in bankruptcy and the after-acquired property laws in respect of bankruptcy within that jurisdiction.
If the courts of England or Wales take jurisdiction in respect of a beneficiary with a connection to England or Wales pursuant to section 265 of the Insolvency Act 1986 in a situation where the beneficiary has connections to other foreign jurisdictions, the beneficiary may become subject to bankruptcy proceedings in more than one jurisdiction, especially where their assets are located in multiple jurisdictions.
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Personal representatives should be aware that judgments of courts outside of England and Wales relating to insolvency law will be recognised and enforced by the courts of England and Wales.
An order made by a court in any part of the UK in the exercise of jurisdiction in relation to insolvency law shall be enforced in any other part of the UK (i.e Scotland or Northern Ireland) as if it were made by a court exercising the corresponding jurisdiction in that other part (save for orders relating to property situated in that part): see section 426 of the Insolvency Act 1986.
Any judgment opening insolvency main proceedings handed down by a court of a Member State which has jurisdiction pursuant to Article 3 of the EC Regulation will be recognised in all other Member States (i.e. a judgment making a person bankrupt in France will be recognised in all other Member States, the authority of the French trustee in bankruptcy will be similarly recognised and consequently French law will apply to the bankruptcy: see Article 4, Article 16 and Article 18 of the EC Regulation).
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The recognition of bankruptcies which have been opened outside of the UK will be governed by:
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The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
Solicitors Regulation Authority's Professional Ethics Helpline for advice on conduct issues.
The Law Society wishes to thank members of the Wills & Equity Committee for their assistance in drafting this practice note.
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