Wednesday, 10 March 2010

Consultation letter from the Insolvency Service on the function of the Official Reciever - Monday 31st May deadline

Mr Stephen Lenster, policy director at the Insolvency Service, has sent out a 'Consultation Letter' to interested parties on the Official Receiver becoming trustee of the bankrupt’s estate on the making of a bankruptcy order and removal of the requirement to file a ‘no meeting’ notice in certain company winding up cases. Mr Lenster notes:

"I am seeking your views on three proposals designed to simplify and streamline the

bankruptcy and company case administration process.


The proposals are as follows:


1. That the official receiver automatically becomes trustee of a bankrupt’s estate upon

the making of the bankruptcy order, and remains in office unless and until such time

as an insolvency practitioner - as is the case now - is appointed trustee in his or her

place. This change is suggested in order to bring bankruptcy into line with other

insolvency procedures.


2. As a consequential change, the term ‘interim receiver’ should be changed to

‘receiver’.


3. Remove the requirement to file a ‘no meeting’ notice in cases where a secretary of

state appointment has been made shortly after the making of the company winding

up order.


I set out below the background and details of the proposals, together with a summary

Impact Assessment.


Overview

Bankruptcy is the only court initiated insolvency procedure that provides an initial period

during which the official receiver’s duties are restricted just to protecting the estate. For

example, when a winding up order is made against a company, if an insolvency practitioner is not named as the liquidator, the official receiver immediately becomes liquidator of the company. Similarly, the official receiver becomes liquidator when a winding up order is made against a partnership, and he or she is also appointed trustee by the court where bankruptcy orders are made against any of the members of a partnership.1


In making this proposal, our primary objective is to simplify the administration of

bankruptcy. For example, this would not only make the bankruptcy process clearer,

more transparent and consistent with other insolvency procedures, but would also help

deliver savings to all those affected by a bankruptcy - whether as creditors, the official

receiver or the bankrupt him/herself - by encouraging the most efficient use of time and

operational resources. For instance, under this proposal it would no longer be

necessary for the official receiver to prepare, send to creditors and file at court a notice

that no meeting of creditors is being called. This would currently happen in cases where

the official receiver is purely seeking to apply to the secretary of state for the

appointment of an insolvency practitioner to act as trustee in bankruptcy in his or her

place. In these circumstances, this additional administrative duty builds in an artificial

component to the process, and adds resource implications.


Detail

Currently, on the making of either a bankruptcy order or an insolvency administration

order2, the official receiver becomes receiver and manager of the bankrupt’s estate3.

Thus, between the making of the bankruptcy order and the time at which the bankrupt’s

estate vests in a trustee, the official receiver is the receiver and (subject to the

appointment of a special manager4) the manager of the bankrupt’s estate5.

As receiver and manager, the official receiver is responsible for protecting the assets of

the insolvent person, which involves taking immediate steps to secure any property or

assets which are comprised in the bankruptcy estate. The official receiver is therefore

limited to protecting the assets and value of the estate for the benefit of those entitled to

it, principally the creditors. This can include seizing and disposing of perishable goods

comprised in the estate, the value of which is likely to diminish if they are not dealt with

quickly. However, the property of the debtor remains vested with the bankrupt, albeit

subject to the control of the official receiver, until such time as a trustee is in office to

deal with the debtor’s affairs. This position can cause confusion and in some cases

additional expense when dealing with some assets, particularly rights of action and

trading businesses. The official receiver is also prevented from dealing with onerous

1 Insolvency Partnership Order 1994

2 The Administration of Insolvency Estates of Deceased Persons Order 1986

3 Section 287 Insolvency Act 1986

4 Section 370 Insolvency Act 1986

5 Section 287 Insolvency Act 1986


property between the making of the bankruptcy order and the trustee taking office.

Consequently, the powers and scope of the official receiver in his duty as receiver and

manager to safeguard the bankruptcy estate are limited.


With the exception of a vacancy in office6, there are currently two ways in which a

trustee can come into office when the official receiver is acting as receiver and

manager7.


The first instance is where the official receiver has given notice to the court of his or her

decision not to call a meeting of creditors for the purpose of appointing a trustee8.

Within 12 weeks of the making of the bankruptcy order, the official receiver must decide

whether to summon a general meeting of creditors to appoint a trustee or to issue a

notice informing creditors that a meeting will not be held. On filing the notice of his or

her intention not to call a meeting at the court (which is also sent to all known creditors)

the official receiver becomes trustee in bankruptcy and is able to exercise his or her

powers as trustee in the protection and realisation of the bankruptcy estate. Only as

trustee is the official receiver then able to apply to the secretary of state who can

appoint an insolvency practitioner to act as replacement trustee. In addition creditors

have the right to requisition a general meeting9 , which under our proposals, would

remain.


The second instance is if the official receiver calls a first meeting for the purpose of

appointing a trustee. The first meeting must be held no later than four months from the

date of the bankruptcy order10. This allows creditors the opportunity to express their

views and to be involved in the decision of which insolvency practitioner will be

appointed as the trustee in bankruptcy.


Thus, unless an insolvency practitioner is appointed at a first meeting of creditors, the

official receiver is currently unable to apply for the appointment of an alternative trustee,

nor is he or she able to act as trustee until the notice of ‘no meeting’ has been prepared

and filed at court. This serves to add a further delay in dealing with the administration of

the bankruptcy estate, which, with the development of insolvency legislation and

practice, adds limited benefits to the personal bankruptcy case administration process.

Background to the current position and the benefits of change

6 Section 300(2) Insolvency Act 1986

7 This excludes the court’s powers of appointment under s. 297(4) and 297 (5) Insolvency Act 1986 which apply only on the making of the

order.

8 Section 297(6) Insolvency Act 1986

9 Section 294 Insolvency Act 1986

10 Rule 6.79(1) Insolvency Rules 1986



Prior to the Insolvency Act 198611, entry into bankruptcy involved a two-stage process.

On receipt of a petition, the court would first make a receiving order under which the

official receiver would become receiver and manager of the insolvent’s estate. After

some initial inquiries as receiver and manager, the official receiver would then apply to

the court for an adjudication of bankruptcy. Whilst the new legislation introduced the

concept of an immediate bankruptcy order, it retained the old concept of a receiver and

manager followed by the subsequent appointment of a trustee.


As the bankruptcy process and case administration procedures have developed and

changed, so too has the need for a receiver and manager. Providing for the official

receiver to become trustee on the making of a bankruptcy order would offer consistency

and certainty in the case administration process for the benefit of creditors, the bankrupt

and insolvency practitioners. It would also remove the complication in the process of

making applications to the secretary of state for the appointment of a trustee in cases

where assets need to be dealt with urgently.


Currently, even if the appointment of an insolvency practitioner is desired urgently in

order to deal with assets, the official receiver has to still first become trustee before an

appointment could be made by the secretary of state. Under our proposal, there would

no longer be a need to file the notice of ‘no meeting’ at court in order for the official

receiver to become trustee, offering resource and administrative savings for official

receivers (over £1.1 million) , the court services and creditors who receive the

paperwork. The attached Impact Assessment summarises the main savings.


If the official receiver were to become trustee on the making of the bankruptcy order, the

official receiver would be able to use the wider powers of a trustee in circumstances

where immediate action is needed. For example, where assets are in jeopardy and

would be better protected or a better realisation value could be achieved by an

immediate sale without the added delays of needing to demonstrate the property as a

diminishing asset; or where assets continue to be stored or protected through insurance

and any related charges would in effect reduce the net value of the bankruptcy estate.

Our proposals would also bring personal insolvency in England and Wales in line with

current Scottish legislation. Under the Bankruptcy (Scotland) Act 1985, where the

Accountant in Bankruptcy or sheriff grants a bankruptcy order and does not appoint a

person to be the trustee, the Accountant in Bankruptcy automatically becomes trustee of

the bankrupt’s estate12.

11 Bankruptcy Act 1914

12 Section 2(1B), (1C) and (2) Bankruptcy (Scotland) Act 1985



Change of term ‘interim receiver’ to ‘receiver’

As a consequence of this first proposal there would also be a requirement to change the

term ‘interim receiver’. Between the presentation of the bankruptcy petition and the

making of the order, to ensure the protection of the debtor’s property in necessary

cases, the court has the power to appoint an interim receiver13. In a company winding

up, the interim receiver equivalent, who would either be the official receiver or an

insolvency practitioner, is a provisional liquidator14. With the removal of the function of

the receiver and manager in bankruptcy cases, I am also proposing to change the term

‘interim receiver’ to simply ‘ receiver’. This is intended to better describe the role of the

official receiver or insolvency practitioner (this is the subject of a separate proposal to

remove the current restriction of only allowing the official receiver to act in this office)

appointed prior to the making of the bankruptcy order but after the presentation of the

petition.


Removal of requirement to file ‘no meeting’ notices

In all circumstances, the secretary of state has the power to appoint an insolvency

practitioner in place of the official receiver as trustee or liquidator15. In some cases there

may be an urgent need to appoint a trustee or liquidator other than the official receiver

to deal with particular assets or property. There may not be time for convening and

holding a meeting of creditors. Before the official receiver makes such an application,

the views of a majority of the creditors' must have been sought and adhered to and in

bankruptcy cases, as described above, a notice of ‘no meeting’ must be filed at the court

to give the official receiver status as trustee before an application for a secretary of state

appointment can be made. Furthermore, in company cases where the official receiver is

already liquidator, a notice of no meeting must still be filed in every case16.

I am proposing that in cases where secretary of state applications for company cases

are made within the period in which a decision to call a meeting or not must be made,

the official receiver will no longer be required to give formal notice of ‘no meeting’ to the

court. This is designed to streamline the administration in such insolvency cases.

The statutory report to creditors will still be issued17, so that creditors are informed of the

action taken by the official receiver. Additionally, the trustee or liquidator (as the case

may be) will still be required to inform creditors of their appointment.

What is not changing

13 Section 286 Insolvency Act 1986

14 Section 135 Insolvency Act 1986

15 Section 296 and 137 Insolvency Act 1986

16 Section 136 Insolvency Act 1986

17Rules 4.43(1) and 6.73(1) Insolvency Rules 1986



As outlined above, these proposals would not alter the exchange of information between

the official receiver and creditors through, for example, the report to creditors. The right

of creditors to express their views regarding the appointment of a trustee would also

remain unchanged, as would the creditors’ right to requisition a first meeting for the

purpose of appointing an insolvency practitioner as trustee18.


Presently, the official receiver as trustee may summon a general meeting at any time in

order to ascertain the wishes of creditors in any matter regarding the bankruptcy,

including to appoint a trustee other than the official receiver19 and this would still be the

position under our proposal. As an alternative to holding a meeting of creditors, the

secretary of state’s power to appoint an insolvency practitioner as trustee would also

remain20. The official receiver would also still seek the appointment of an insolvency

practitioner as trustee in every case where that is appropriate, as is the case now.


The three questions this consultation letter poses, therefore, are:

1. Should the official receiver be appointed trustee of the bankrupt’s estate on the

making of a bankruptcy order?

2. Should the term ‘interim receiver’ change to ‘receiver’ to better reflect his or her new

function?

3. Should the need to file the ‘no meeting’ notice be removed for company cases where

a liquidator is appointed by the secretary of state in the period between the making

of the order and the time when the official receiver is required to inform creditors of

his/her decision on whether, or not, to call a meeting ?


I would welcome hearing your comments and would be grateful for your views on any

consequences not already identified, which could result from the proposals put forward

in this letter. If you are aware of anyone else who you think may have an interest,

please feel free to pass on a copy of this letter as appropriate.


All views should be sent to The Insolvency Service Policy Unit at policy.unit@insolvency.gsi.gov.uk or by post to The Insolvency Service, Zone B, 3rd Floor, 21 Bloomsbury Street, London WC1B 3QW

by Monday 31st May 2010.


18 Section 292(1)(a) and section 194 Insolvency Act 1986

19 Rule 6.81 Insolvency Rules 1986

20 Section 296 Insolvency Act 1986"

Picture Credit: The Insolvency Service.

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