Does a Bankrupt have standing to ask his/her Trustee in Bankruptcy to decide whether they are going to issue a Notice of Disclaimer?

August 21, 2017

When an individual is adjudicated Bankrupt, pursuant to Section 306 of the Insolvency Act 1986 (“the Act”) and its NI equivalent, Article 279 of the Insolvency (Northern Ireland) Order 1989 (“the Order”), all of the bankrupt’s property automatically vests in his/her Trustee in Bankruptcy (“Trustee”). Property is defined in the legislation and includes a chose in action.

It is not unusual for there to be property comprised in an insolvent estate which has no value or further, may be a potential liability to a Trustee. Section 315 of the Act and Article 288 of the Order; allows a Trustee to disclaim his/her interest in any “onerous” property. The definition of “onerous” is set out as being any unprofitable contract, or, any other property comprised within the Bankrupt’s estate which is unsaleable or not readily saleable, or is such that it may give rise to a liability to pay money or perform any other onerous act.

A Trustee can serve a Notice of Disclaimer of their own volition following investigations. Alternatively, under Section 316 of the Act and Article 289 of the Order; a party with an “interest” in the property in question can serve a Notice on the Trustee giving the Trustee 28 days to decide whether to issue a Disclaimer or not.

In the recent case of Frosdick v Fox and another [2017] EWHC 1737, the High Court in England and Wales considered whether a Bankrupt had standing to serve a Section 316 Notice on his Trustee.

Prior to his adjudication in Bankruptcy, the Bankrupt had been involved in a car accident. The Bankrupt advised his Trustee that he had a professional negligence case against his former solicitor who had been instructed to pursue the personal injury claim on his behalf. The Bankrupt alleged that he was due circa €18m in damages and also €782k in damages for loss of profits/earnings.  This claim vested in his Trustee.

The Official Receiver (“OR”) was initially appointed as Trustee and later, a private Trustee was appointed. The Bankrupt wrote to both the OR and the Trustee asking them to agree to either pursue the professional negligence claim or else assign it back to him. In terms of the consideration payable for the proposed assignment, the Bankrupt advised the OR that a third party was prepared to pay £75k and he advised the Trustee that a “substantial sum” could be paid.

The Trustee did not disclaim within 28 days from the Bankrupt’s purported Notice but did later do so. The Bankrupt challenged the Disclaimer on the basis that it was invalid and ineffective as it was served outside the 28 day time frame and further, claimed that the Disclaimer acted as a “fraud on his creditors” because the claim represented a valuable asset in the estate which they had not been told about.

The High Court held that a Bankrupt did not have standing to issue a Notice pursuant to Section 316. This was because the legislation specifically stated that a person with an “interest” in the property could issue such a notice. The impact of the vesting provisions in Section 306 meant that a Bankrupt very clearly no longer had an interest in the property. The Judge held that the “interest referred to cannot be mere intellectual curiosity; it must be some sort of interest recognised in law”. The Court stated that “Section 316 is not there to protect Bankrupts; it is there to protect other persons who have, or may have, an interest in property which is the subject of insolvency”. The Court accepted that the interest in the claim did fall within the definition of onerous property due to the potential costs exposure for the Trustee if he pursued the claim.

Whilst this case will only be persuasive in NI, this case will be of great interest to Insolvency Practitioners who receive Article 289 Notices from Bankrupts, and should give them comfort that a Bankrupt has no “interest” in order to validly serve same.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Insolvency Team at Cleaver Fulton Rankin for further advice or information.