Property which the bankrupt keeps despite bankruptcy and what the trustee can do about it part one

When someone becomes bankrupt most of their property goes to the trustee in bankruptcy to be held for the benefit of the creditors. However not everything falls within that category.

The starting point is section 283 of the Insolvency Act 1986. That specifies that subject to the exceptions specified, all property belonging to or vested in the bankrupt at the commencement of the bankruptcy forms part of the bankruptcy estate (and so vests in the trustee in bankruptcy). Therefore the starting point is to look at what property existed at the time the bankruptcy starts.

The first exception which needs to be considered is that where the bankrupt has certain claims that may be pursued in court or before a tribunal, the issue is whether these are regarded as "personal" claims. If they are not personal, they go into the estate and hence to the trustee in bankruptcy to be applied for the benefit of the creditors and to pay the expenses of the bankruptcy. If they are personal, they do not fall within the estate and so the bankrupt retains them. If a claim is partly personal and partly not, then the trustee can pursue the whole claim but will hold the proceeds in respect of the personal claim in trust for the bankrupt.

General claims in respect of property or contract fall into the estate and are not personal. This is so even if the contract might be seen to relate to a personal matter (for example in one case a claim for a critical illness element of a life insurance policy was held to fall within the estate. Whilst the nature of the illness was highly personal, properly looked at this was not a claim about being ill but a claim to enforce a contractual right to payment in certain circumstances, and same principle the fact that those circumstances related to a personal illness made no difference).

However some claims are personal ones. These include what might be called claims for damages in respect of personal reputation (such as damages for slander or for loss of reputation. Thus if someone had said something terrible about you which was not true, if you go bankrupt you are the person who has the right to sue and who can keep the damages if you win). Another area of claim which is personal consists of certain statutory rights or claims. Thus a claim for unfair dismissal under the Employment Rights Act 1996 is a personal claim, this being a statutory right which arises under the legislation. By contrast a common law claim for wrongful dismissal (which is not a statutory claim but which is a claim for breach of contract) arising out of the same circumstances would not be a personal claim. (There is some very old authority which suggests that although the claim for damages for breach of contract is not a personal claim, including a contract of employment, that would not extend to any damages relating purely to mental suffering arising from the breach). Likewise Social Security benefits constituting income payments do not go to the estate, but are personal claims in favour of the person entitled to receive the benefit.

Another illustration is where someone has been injured as a result of criminal conduct. They then have the entitlement to apply to the Criminal Injuries Compensation Board for payment. Obviously if such payment was received before bankruptcy, then the money would be property falling within the bankruptcy. However if there has not yet been any award, this being a discretionary payment (albeit that payment is likely to be made in most cases if the criminal conduct and consequent injury is clear) it does not fall into the estate.

There are also certain other personal claims such as negligence cases in respect of damages for pain and suffering, albeit that the loss of earnings aspect would fall into the estate. Thus if you were hit by a car your damages will consist of those damages designed to compensate you for the pain you suffered or any disability as a result, but some would also compensate you for loss of earnings. If you lose a leg, you get to payment for the pain and suffering and loss of amenity for being a person with only one leg, but if that has affected your employment there will also be additional damages for loss of earnings. The former is personal, the latter not.

Another claim regarded as being personal is a claim for damages for professional negligence in respect of conduct leading to the bankruptcy. That is where the thing being complained of is the thing which led to the bankrupt being made bankrupt in the first place.

In respect of all of these claims of course it is only if the claim existed before the date of bankruptcy that they would fall as a matter of course in the estate unless they were personal claims. The relevant date is the date upon which the rights to sue already existed. Whether proceedings had actually been issued is neither here nor there.

Next week we will look at certain specific matters which are said by section 283 to be outside the bankrupt's estate.