PAYMENT OF THE SECRETARY OF STATE’S ADMINISTRATION FEE

In Re Safier, the court considered whether the Secretary of State’s administration fee is payable where third party funds are used to pay all of a bankrupt’s debts and expenses prior to or in connection with an annulment application.  The court held that for bankruptcies where the bankruptcy order was obtained prior to 21 July 2016, the Secretary of State’s fee was not payable in respect of such funds.

The judgment helpfully clarifies what had become a somewhat fraught area of law. There were many other bankrupts in positions similar to Mr Safier, whose annulments will not be able to proceed without having to pay the Secretary of State’s fees.

The practical lesson is that if third party funds can be obtained, there will be substantial savings compared to obtaining an annulment after realisation of the bankrupt’s property. The fees would otherwise be calculated on a sliding scale subject to a maximum of £80,000.

What was the background to the case?

Mr Safier was bankrupted for failing to pay council tax on 20 June 2013. His discharge from bankruptcy was suspended, and he remained subject to the bankruptcy order at the time of the hearing. The total of his bankruptcy debts and expenses was relatively modest, compared to the value of his major asset, a house estimated to be worth £200,000, which was unencumbered.

His trustees in bankruptcy applied for possession and sale of the house. Mr Safier’s brother attempted to fend off this application by offering to pay all of Mr Safier’s debts and expenses from funds within his control (the money was to come from two companies he owned). £34,000 or so was received by the trustees in bankruptcy and paid into the Insolvency Services Account at around the time of the annulment application.

This amount was enough to pay the bankruptcy debts and expenses if the Secretary of State’s fee was not payable, but if the fee was payable, there would be a shortfall and Mr Safier would not be entitled to his annulment without a further payment (calculated at around £7,700).

What were the legal issues the judge had to decide?

The judge had to decide whether the Secretary of State’s fee was payable in these circumstances.

The fee is payable as a percentage of ‘chargeable receipts’ as set out in Schedule 2 to the Insolvency Proceedings (Fees) Order 2004 (SI 2004/593). Chargeable receipts are defined in that Order as the sums paid into the Insolvency Services Account by a trustee in bankruptcy.

Pursuant to paragraph 20 of the Insolvency Regulations 1994 (SI 1994/2507), a trustee in bankruptcy is required to pay all money received by him ‘in the course of carrying out his functions as such’ into the Insolvency Services Account.

The ‘function’ of a trustee in bankruptcy is defined in section 305(2) of the Insolvency Act 1986 as the getting in, realisation and distribution of the bankrupt’s estate.

It was not in dispute that the third party funds did not form part of the bankrupt’s estate. The question for the judge was whether the receipt of the third party funds nevertheless fell within the scope of the trustee’s functions as such and/or whether their payment in to the Insolvency Services Account was sufficient to make the fee payable.

What did the judge decide, and why?

The judge decided that the receipt of the third party funds did not fall within the functions of the trustee, which meant the trustee was not obliged to pay the funds into the Insolvency Services Account. He further held that where there was no obligation to pay funds into the Insolvency Services Account, the fee was not payable on any funds actually paid in. The judge rejected an argument that the receipt of the third party funds did form part of a trustee’s functions where there was an alternative course involving the realisation of the bankrupt’s estate, and preferred a narrower understanding of paragraph 20 of the Regulations.

The judge took into account a ‘Dear IP’ letter of October 1997, which stated that this was the way the Act and the Regulations were supposed to work in relation to third party funds.

To what extent (if any) is this judgment relevant to the change in July 2016 to the fees charged for bankruptcy and company insolvency?

The judgment has less relevance for bankruptcies occurring after 21 July 2016, although its discussion of the meaning of ‘chargeable receipts’ remains important as this definition is carried through in the new provisions applicable after this date. The value of the fees calculated by reference to chargeable receipts is much reduced under these provisions, so the benefit of using third party funds will be less significant. In particular, the bulk of the fees charged in bankruptcies will be accounted for by the Official Receiver’s general fee of £6,000, which is payable without reference to chargeable receipts.

Barristers
Matthew Parfitt