, Property which the bankrupt keeps despite bankruptcy and what the trustee can do about it part two: leadingcounsel.co.uk
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Property which the bankrupt keeps despite bankruptcy and what the trustee can do about it part two

The next exception from property which vests in the trustee are tools of trade and domestic items. Excepted under section 283 (2) of the Insolvency Act 1986 are firstly "such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation" and also "such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his family.".

This is subject to the potential for challenge by the trustee under section 308. However, before looking at the circumstances in which such a challenge can be made, it is important to remember that that challenge is subject to time limits under section 309. That provides that unless the court gives leave the application under section 308 cannot be made after the end of the period of 42 days beginning with the day on which the property in question first came to the knowledge of the trustee. Although the court can extend the 42 day period, it will only do so if "good cause" for the delay is established. Obviously what is good cause depends upon the facts, but the court will consider the relevant circumstances. Those include the reasons for the delay, the period of the delay, prejudice to the bankrupt and the merits of the application. The court will in particular consider whether the likely benefit to the creditors is really justified having regard to the effect on the bankrupt.

Assuming that the application under section 308 is brought in time, or that the court grants leave, the trustee can by notice in writing claim such property for the bankrupt's estate if it appears to the trustee that the realisable value of the whole or any part of the excluded property exceeds the cost of a reasonable replacement for that property or part of it. If the trustee serves the notice, then the trustee obtains title to the property which relates back to the commencement of the bankruptcy. However this does not affect a purchaser of such property in good faith for value and without notice of the bankruptcy. If the trustee exercises this power the trustee has to buy for the bankrupt a reasonable replacement for any property which is taken and the duty to do so has priority over the obligation on the trustee to distribute the estate. In other words, the trustee has to buy the reasonable replacement in priority to making payments to creditors. However, under the Insolvency Rules 1986 rule 6.188, a third party can offer to and make a payment to the trustee and if the trustee is satisfied that that is a reasonable payment, the trustee can leave the bankrupt in possession of the property which otherwise would be the subject of vesting in the trustee under section 308. In other words for example let us say that the bankrupt has a vehicle which is really worth more than the type of vehicle he or she requires. The trustee might think that it is worth serving the notice, taking the vehicle, and then buying a replacement. (There may be arguments as to what is adequate for these purposes, but that is a question of challenge of the decision assuming it is made in time or otherwise permitted). However a relative might say that they will be prepared to pay 1000 for the trustee to leave the bankrupt alone. The trustee might take the view that it was better to do that than to go through the process because there will be no significant difference to creditors.

Of course if the trustee does purport to serve notice under section 308, the bankrupt may challenge the exercise of power on the basis that the trustee is acting incorrectly. There will also be some issue as regards how far the personal circumstances of the bankrupt should be looked at, and what would be reasonable having regard to the particular bankrupt. In practice a lot of trustees regard this plainly as a bit of a minefield and do not bother pursuing it. Thus applications under section 308 are not that common.

Michael J. Booth QC