England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
IN BANKRUPTCY
IN THE MATTER OF MOHAMMED SAFIER
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

		The Court House Oxford Row Leeds LS1 3BG
		13/01/2017

Judge Behrens:

1 Introduction

1. This is an application by Mr Mohamed Safier ("Mr Safier") for the annulment of a bankruptcy order made against him on 20 June 2013. The application is made under s 282(1)(b) of the Insolvency Act 1986 ("the 1986 Act"). Mr Safier contends that the bankruptcy debts and expenses have since the making of the bankruptcy order been paid. There is no serious dispute between the parties that the debts and expenses have been paid and that Mr Safier is entitled to the order for annulment. There is, however, a dispute as to the extent of the expenses that have to be paid by Mr Safier.
2. It is not in dispute that Mr Safier had assets within the bankruptcy estate and which vested in the Trustees and which could have been used to satisfy the costs and expenses. The largest of these was a property in Dewsbury with a value of £200,000. None of these assets were in fact used to pay off the bankruptcy debt. Instead the funds were provided by a third party - Mr Safier's brother, Mr Hyder. As a result, the Trustees contend that the fee ("the Fee") which might otherwise have been payable to the Secretary of State is not payable. The Official Receiver does not agree. He contends that where, as here, there are assets in the estate, it makes no difference that the moneys are paid by a third party. He accordingly contends that the Fee is payable.
3. The sum involved in this dispute is not large. The Fee payable has been calculated to be £7,372.92. However, it raises a point not covered by authority and I am told that there are a number of other cases that will be affected by the result in this case. Accordingly, the matter has been transferred to the High Court for determination.

2 The facts

4. There is no dispute as to the primary facts which can be taken from the skeleton arguments as amplified in a letter dated 21 November 2016 sent on behalf of the Trustees.
5. On 18 February 2013 Kirklees District Council presented a bankruptcy petition against Mr Safier in respect of unpaid council tax. A bankruptcy order was made against Mr Safier on 20 June 2013. On 8 October 2013 Wendy Wardell and David Standish of KPMG LLP were appointed as joint trustees of Mr Safier's estate (the "Trustees").
6. On 15 October 2013 the court ordered the suspension of Mr Safier's discharge from bankruptcy. That order remains in force and Mr Safier has not been discharged from bankruptcy.
7. £2,200.50 cash at bank was realised by the Trustees and paid into the ISA on 8 May 2014. The Official Receiver believes Mr Safier's other assets are a Mercedes with a personalised number plate (valued at around £4,000) and a solely owned, unencumbered freehold property with an estimated value of £200,000 at 24 Headfield Road, Savile Town, Dewsbury ("the Property").
8. On 27 May 2016 the Trustees applied for possession and sale of the Property. The first hearing of the application on 14 July 2016 was adjourned to 8 September 2016; the application remains adjourned pending the determination of the annulment application.
9. In order to prevent the possession and sale of the Property, Mr Safier's brother, Mr Hyder, entered into discussions with the Trustees with a view to paying Mr Safier's bankruptcy debts and expenses. In the course of those discussions the Trustees informed Mr Hyder that if the costs and fees of the bankruptcy were settled by third party funds, the Fee would not be payable.
10. On 18 July 2016 Mr Safier made the present application for annulment under section 282(1)(b) of the 1986 Act on the grounds that the bankruptcy debts and expenses have all been paid or secured to the satisfaction of the court.
11. On 11 July 2016 the Trustees' solicitors received £44,624.30 from two limited companies owned and controlled by the bankrupt's brother, Mr Hyder - £20,000 from Highgate Beds Limited and £24,624.30 from Hyder Properties Limited. After the deduction of £9,931.20 in respect of costs, the Trustees deposited the balance of £34,693.10 in the ISA. The Trustees had confirmed to the bankrupt (and Mr Hyder) that they would request that the £34,693.10 was placed into a suspense account, as that would not attract the Fee. It is not in dispute that the Trustees did so request. The status of such a request will be referred to below.
12. The Trustees have informed the Official Receiver that the sums paid by Mr Hyder are sufficient to pay all of the bankruptcy debts and expenses, provided the Fee is not payable. If the Fee is payable, there would have been a shortfall. The amount of the Fee in the present case is £7,372.92.
13. Since the institution of this application further funds have been made available by Mr Hyder or companies under his control. Those funds are sufficient to pay the Fee and any additional costs payable to the Trustees. In the result it is now common ground that, whether or not the Fee is payable, sufficient funds have been made available to the Trustees to enable the whole of the debts, the interest and expenses of the bankruptcy to be paid.
14. In those circumstances (and without objection from either the Trustees or the Official Receiver) I ordered that the bankruptcy be annulled and the petition dismissed.

3 The Statutory Provisions

15. I am extremely grateful to Mr Parfitt for setting out the statutory provisions in his skeleton argument. Much of this section of the judgment is taken from that argument.
16. The statutory basis for the Fee is section 415 of the 1986 Act, which provides for fees to be set by the Lord Chancellor with the sanction of the Treasury for (inter alia) the performance by the Official Receiver or the Secretary of State of his functions under Parts 7A-11 of the 1986 Act. These parts of the 1986 Act contain the provisions relating to personal insolvency.
17. The relevant statutory instrument arising from this section is the Insolvency Proceedings (Fees) Order 2004 (SI 2004/593) (the "Fees Order"). Paragraph 4 of this order provides (so far as material):

Fees payable in connection with bankruptcies, individual voluntary arrangements and winding up

4.— (1) Subject to paragraphs (2) and (3) and article 8, the fees payable to the Secretary of State in respect of proceedings under Parts I to XI of the Act and the performance by the Official Receiver or Secretary of State of functions under those Parts shall be determined in accordance with the provisions of Schedule 2 to this Order.

18. Schedule 2 to the Fees Order provides (so far as material, and as amended by the Insolvency (Fees) (Amendment) Order 2010 (SI 2010/732)):

SCHEDULE 2

FEES PAYABLE IN INSOLVENCY PROCEEDINGS

1. (1) In this Schedule—

"the bankruptcy ceiling" means in relation to a bankruptcy, the sum which is arrived at by adding together—

(a)the bankruptcy debts required to be paid under the Rules

(b)any interest payable by virtue of section 328(4); and

(c)the expenses of the bankruptcy as set out in Rule 6.224 other than—

(i)any sums spent out of money received in carrying on the business of the bankrupt; and

(ii)fee B2 in the Table set out in paragraph 2;

"chargeable receipts" means those sums which are paid into the Insolvency Services Account after first deducting any amounts paid into the Insolvency Services Account which are subsequently paid out to secured creditors in respect of their securities or in carrying on the business of the company or the bankrupt; and"the insolvency legislation" means the Insolvency Act 1986(1), the Insolvency Rules 1986(2) and the Insolvency Regulations 1994(3).

(2) In this Schedule, references to the performance of the "general duties" of the official receiver on the making of a winding-up or bankruptcy order—

(a) include the payment by the official receiver of any fees, costs or disbursements except for those associated with the realisation of assets or the distribution of funds to creditors; but

(b) does not include anything done by the official receiver—

(i) in connection with the appointment of agents for the purposes of, or in connection with, the realisation of assets or

(ii) anything done in connection with or, for the purposes of, distributing assets to creditors.

2. Fees payable to the Secretary of State in respect of proceedings under Parts I to XI of the Act and the performance by the official receiver and the Secretary of State of functions under those Parts shall be determined in accordance with the provisions of the Table of Fees set out below—…

Fees payable in bankruptcies only

Designation of fee	Description of fee and circumstances in which it is charged	Amount of fee or applicable %
B1	Bankruptcy – Official receiver's administration fee For the performance by the official receiver of his general duties as official receiver on the making of a bankruptcy order there shall be payable a fee of—	£1,625
B2	Bankruptcy—Secretary of State's administration fee applicable to bankruptcy orders made on or after 6 April 2010 For the performance of the Secretary of State's general duties under the insolvency legislation in relation to the administration of the estate of each bankrupt, there shall be payable a fee calculated in accordance with the following scale as a percentage of chargeable receipts relating to the bankruptcy (but ignoring that part of the chargeable receipts which exceeds the bankruptcy ceiling) at the rate of---	0% of the first £2,000 100% of the next £1,700 75% of the next £1,500 15% of the next £396,000 1% of the remainder, subject to a maximum of £80,000.

19. This case is not concerned with the Official Receiver's administration fee (the B1 fee). The issue concerns the Secretary of State's administration fee (the B2 fee). The figures and the percentages in the above table have been amended from time to time. The above figures are those in force in 2013 when Mr Safier was adjudged bankrupt. However, it is common ground that the outcome of this application does not depend on the actual figures.
20. The Insolvency Regulations 1994 (SI 1994/2507) (the "Regulations") provide at paragraph 20 as follows, so far as material:

Payments into the Insolvency Services Account

20.— (1) Subject to regulation 21 below, the trustee shall pay all money received by him in the course of carrying out his functions as such without any deduction into the Insolvency Services Account kept by the Secretary of State with the Bank of England to the credit of the bankrupt once every 14 days or forthwith if £5,000 or more has been received.

21. On 21 July 2016 the previous fee regime was abolished by the Insolvency Proceedings (Fees) Order 2016 (SI 2016/692). For bankruptcy petitions presented after this date, the previous regime does not apply; the present case is accordingly of most relevance to bankruptcies in respect of which the petition was presented before 21 July 2016. Under the new regime, some fees appear to be payable from 'chargeable receipts' paid into the ISA^[1], and some are payable without reference to chargeable receipts^[2]; the questions arising in this case will accordingly continue to have wider relevance.

4 The Insolvency Service – Dear IP Letter.

22. In October 1997 the Insolvency Service gave guidance to the profession in relation to the payment of Third Party Funds into the ISA. The relevant part of that guidance reads as follows:

As insolvency practitioners frequently ask whether third party monies have to be paid into the Insolvency Services Account (ISA), this article explains the position regarding payment of funds into the ISA.

A liquidator or trustee is under a duty to pay monies into the ISA in the circumstances set out in regulation 5 and 20 of the Insolvency Regulations 1994. Whether the circumstances apply depends upon the facts in each case. It is primarily for a liquidator or trustee to form a view as to whether the Regulations do or do not apply to particular monies. However, in cases of difficulty CAU is willing to discuss the matter with the insolvency practitioner.

Regulation 5 (1) (winding up by the court) and regulation 20 (bankruptcy) require that, subject to the exception for local bank accounts, a liquidator or trustee is required, at specified times, to pay all monies received by him in the course of carrying out his functions as such into the ISA. In the case of a voluntary winding up regulation 5 (2) requires the liquidator, at specified times, to pay into the ISA the balance of funds in his hands or under his control relating to the company.

Such functions are, for the purposes of regulations 5(1) and 20, set out in section 43·and·305(2) of the Insolvency·Act·1986 and relate only to "the assets of the "company" and the "bankrupt's estate" respectively. Therefore, if, on the particular facts of a case, monies are received by a liquidator or trustee which do not belong to the company, or the bankrupt's estate, then those monies are not received by the liquidator or trustee "in the course of carrying out his functions as such". Where a liquidator or trustee receives monies to which a third party claims he is entitled, and genuine doubt exists as to whether the monies received belong to the company or bankrupt, those monies should be paid into the ISA pending resolution of the third party claim.

For the purpose of regulation 5(2) any monies in the hands or under the control of a liquidator which do not belong to the company are not funds "relating to the company".

Generally speaking, this means that where monies are received by a liquidator or trustee which do not arise from the realisation of assets belonging to a company, or the bankrupt's estate, they should not be paid into the ISA. The fact that funds received by the liquidator or trustee are used to discharge insolvency expenses or for payment to creditors does not necessarily mean that they were received in the course of carrying out his statutory functions.

Where a liquidator or trustee forms the view that the monies received fall outside the regulations he should ensure that the reasons for that decision are fully documented. CAU do not need to be advised of the decision, but in voluntary winding up cases the liquidator must separately identify in his section 192 returns any third party funds held outside the ISA. Failure to do so may result in unnecessary ISA default letters being sent.

Requests by insolvency practitioners to CAU to open a suspense account in the ISA, without Secretary of State Fees being charged, must be supported by a. written explanation of the reasons why a suspense account is required, and why fees should not be charged.

(First published in Dear IP no. 39, October 1997)

23. A number of points can be made about this guidance. First, there is nothing in the regulations which authorises the existence of a suspense account. In his submissions Mr Parfitt described it as an extra-statutory practice. Second, it is not in dispute that the Trustees attempted to invoke this practice on this occasion. They specifically requested that the funds be placed in a suspense account. Third, the guidance does not distinguish between the position where there are other assets belonging to the debtor and the position where there are none.
24. As set out above the guidance suggests that third party funds do not form part of the bankrupt's estate and thus the moneys received from the third party are not received in the course of his functions as trustee. This would be the position whether there were assets in the estate or not.
25. It follows that if the guidance is correct the third party moneys are not payable into the ISA and no fee is payable

5 Submissions and Discussion

26. Mr Doyle on behalf of the Trustees submitted that the guidance in the Dear IP Letter is correct. He submitted that the crucial question is whether the £34,693.10 constitutes, for the purposes of paragraph 20(1) of the Regulations, "money received by [the trustee] in the course of carrying out his functions as such." He referred me to s.305(2) of the 1986 Act which provides:

[Function of trustee] The function of the trustee is to get in, realise and distribute the bankrupt's estate in accordance with the following provisions of this Chapter; and in the carrying out of that function and in the management of the bankrupt's estate the trustee is entitled, subject to those provisions, to use his own discretion.

27. He pointed out that a trustee may receive money outside the estate. In such a case he submitted there is no suggestion that the moneys should be paid into the ISA. He pointed out that the Trustees firm KPMG LLP does not operate a client account. Thus in practice all moneys received are paid into the ISA account where appropriate with a request that they be paid into a suspense account. However, the mere payment into the ISA account should not mean necessarily that the Fee is payable.
28. He submitted that the £34,693.10 paid by the debtor's brother (or companies under his control) did not form part of the debtor's estate. Thus, the Trustees were not "getting in, realising and distributing the Bankrupt's estate". In reality they were acting as acting as a conduit for the £34,693.10 for the purpose of satisfying the Court that the requirements of s.282(1)(b) of the 1986 Act can be met from those moneys in hand.
29. The fact that the £34,693.10 was used to pay or secure bankruptcy debts does not affect this. The crucial feature is that it was not part of the debtor's estate. The fact that there were assets in the estate does not affect this.
30. Mr Parfitt submitted that the £34,693.10 was received by the Trustees in the course of carrying out their functions as such. He accepted that the £34,693.10 did not form part of the bankrupt's estate. He also accepted that if the word "functions as such" in paragraph 20(1) of the Regulations had the same meaning as "function" in s 305(2) of the 1986 Act the receipt of the £34,693.10 from a third party was not part of the Trustees' functions.
31. He submitted, however, that this would be too narrow a reading of paragraph 20(1) of the Regulations. This is because if the money had not been provided the Trustees would have realised assets within the bankrupt's estate to meet the debts and expenses of the bankruptcy.
32. He seeks support for this view from a consideration of the Trustees' remuneration under rule 6.138(1) of the Insolvency Rules 1986. Under this rule the Trustee is entitled to remuneration for his services as such. Mr Parfitt submitted that if the receipt of money from a third party was not a "function" of the Trustee the Trustee would not be entitled to remuneration in respect of it.
33. In paragraph 36 of his skeleton argument Mr Parfitt noted that, 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 in order to discharge bankruptcy debts and expenses in circumstances where there are no assets in the bankruptcy and no possibility of any realisations. He made the point that there is no statutory authority for this concession but it is justified on policy grounds. Third party funds which provide the estate with a benefit it would not otherwise have got are to be encouraged, so no fee is charged; but where the funds provide no additional benefit because there would otherwise have been realisations, the Fee should still be payable.
34. Whilst I see the force of Mr Parfitt's submissions I prefer the submissions of Mr Doyle. As already noted, the regulations do not distinguish between situations where there are assets in the estate and where there are not. Moneys received from third parties are either payable into the ISA or they are not. If they are payable into the ISA they fall within the definition of chargeable receipts and the Fee under paragraph B2 is payable. If they are not it is not. There is, in my view, no basis in law for the concession by the Insolvency Service that moneys are not payable into the ISA if there are no assets. Thus the Court is faced with the stark question of whether moneys paid by third parties are payable into the ISA whether or not there are assets in the estate.
35. I agree with the submission of Mr Doyle and with the view expressed in the Dear IP letter of October 1997. In my view the expression "functions as such" in paragraph 20 of the Regulations is a reference to the definition of function in s 305(2) of the 1986 Act. Thus the receipt of third party funds is not part of the Trustee's function and the moneys are not payable into the ISA account. It follows that no fee is payable in respect of them.
36. I am unimpressed with the reference to rule 6.138(1) of the Insolvency Rules 1986. I accept that it may well be arguable that the Trustee would not be able to be remunerated out of the assets of the estate in respect of the receipt of distribution of moneys received from third parties. However, there is nothing in the Rules which prevents him receiving remuneration out of the third party funds. Thus the argument does not assist in the construction of paragraph 20 of the Regulations.
37. Mr Parfitt also submitted that the Fee was payable if money was actually paid into the ISA irrespective of whether it was payable or not. This would mean that the procedure referred to in the Dear IP letter of opening a suspense account does not prevent the Fee being payable even if the moneys were not in fact payable into the ISA. This is a very unattractive argument especially as the procedure referred to in the Dear IP letter is set up to deal with doubtful cases. It would also mean that if, for example, the Trustee made an obvious error and paid in £100,000 rather than £10,000 the Fee would be payable on £100,000. I do not accept the argument. In my view the Fee is only payable on sums properly payable into the ISA.
38. If, contrary to my view, the Fee is payable, a further argument was raised (without much enthusiasm) by Mr Doyle as to the level of the fee. In summary the argument was that if all the debts and expenses in the bankruptcy are paid by a third party, the bankruptcy ceiling would be zero. Accordingly, all of the chargeable receipts exceed the bankruptcy ceiling and no fee is payable. I do not accept that argument. As Mr Parfitt pointed out in paragraph 35 of his skeleton argument the fee became payable when the money was paid into the ISA, which is the point at which the bankruptcy ceiling is to be assessed. At that stage the bankruptcy ceiling was the full amount of the debts and expenses of the bankruptcy.

6 Conclusion

39. In the result I agree with the Trustees that the Fee is not payable.

Note 1   E.g. the Official Receiver’s administration fee of £2,775, and the trustee in bankruptcy fee of 15% of chargeable receipts realised by the Official Receiver in the capacity of trustee in bankruptcy.     [Back]

Note 2   E.g. the Official Receiver’s general fee of £6,000.     [Back]