Income Payment Orders

I’m not sure if you saw a decision of the Court of Appeal in England in Azuonye -v- Kent ( that was published on Friday, 19th July, 2019. It is extremely interesting for IPs dealing with English bankruptcies and relevant for IPs dealing with Scottish sequestrations.

The decision revolves around an Income Payment Order (“IPO”) made against a bankrupt and how it ranks in a subsequent bankruptcy if that occurs after the bankrupt has been discharged from the earlier bankruptcy. In England, section 335 of the Insolvency Act, 1986 (the “1986 Act”) specifically vests in the trustee of a subsequent bankruptcy any order in favour of a trustee in an earlier bankruptcy, if the bankrupt has not been discharged from the earlier bankruptcy. There is no provision made in England for what happens to an IPO if the bankrupt has been discharged from the bankruptcy in respect of which the IPO has been made.

The outcome was that the Court of Appeal decided that the unpaid amount of the IPO ranked as a claim in the subsequent bankruptcy and that the trustee of the earlier bankruptcy could not pursue the bankrupt for the unpaid instalments of the IPO after the subsequent bankruptcy.

Whilst the 1986 Act (unlike the 2016 Act) doesn’t specifically exclude a bankrupt’s income from vesting in a trustee (cf. section 85 of the 2016 Act), it is not part of the estate of the bankrupt at the date of the bankruptcy and so, as in Scotland, does not vest in the trustee. In light of this, it is interesting that it was decided that payments from income that had not yet been received and the amount of which could be varied by the Court were provable debts which resulted in a claim by the trustee of the earlier bankruptcy against the estate of the subsequent bankruptcy. This meant that, as a result, they could not be pursued after the subsequent bankruptcy order was made. That said, the decision was very much based upon the practical, deleterious effects that the alternative decision would have had, given the surrounding legislative framework and the decisions of other courts in different cases and circumstances.

The question is, however, what would the position be in a Scottish sequestration in terms of the 2016 Act? It is worth analysing some of the differences between the two regimes.

Firstly, there is no provision in the 2016 Act analogous to that contained in section 335 of the 1986 Act. (For Scottish practitioners, bear in mind that we are not talking about “concurrent” bankruptcies, here – sections 17 & 18 of the Bankruptcy (Scotland) Act, 2016 – the “2016 Act”.) The trustee in a subsequent sequestration doesn’t immediately “fall heir” to any order made in favour of the trustee in an earlier sequestration if the debtor has not had their discharge from that earlier sequestration. Indeed, the position in Scotland is that a sequestration creates a trust which is “closed” (consisting of the defined assets and subject to the claims of the then-existing creditors) and a subsequent sequestration doesn’t remove the assets from the earlier trust and vest them in the subsequent trust (whether or not the debtor has been discharged from the earlier sequestration). In England, however, section 335 vests any undistributed assets held by the earlier trustee, including contributions received under an IPO, in the subsequent trustee if the bankrupt has not yet been discharged. The case that I refer to, above, now extends the effect of that provision to “cutting down” the right of the trustee to pursue an IPO that has already been granted (but, notably, not “transferring” it to the subsequent trustee – the subsequent trustee must seek their own IPO).

Secondly, the fixing of a contribution to be paid by the debtor in a sequestration is a much less court-centric process. It is, in the main, fixed by reference to a “common financial tool” (however that is defined, by Statutory Instrument, from time-to-time). As a result, the amount payable can be varied far more easily, by way of administrative decision, resulting in the commitment of a debtor to pay a specific amount being far less certain. Would, therefore, a Court allow a trustee in the earlier sequestration to continue to collect (and, if necessary, pursue) the unpaid instalments of an IPO? Or, would a Court require the trustee to “roll up” the unexpired payments, capitalise them (akin to the unpaid rental obligations in a lease, perhaps?) and submit a claim in this amount to the trustee in the subsequent sequestration?

Thirdly, following on from this, would a pre-existing IPO in a sequestration be an allowable expense for the debtor in terms of the subsequent sequestration, reducing the surplus income from which any contribution could be paid to the trustee of the subsequent sequestration?

In light of these issues, therefore, is there the possibility that the position in Scotland is the exact opposite of that in England? Food for thought!


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