40.102 Overpayment of state benefits

Overpayment of state benefit may be made as a result of mistakes, change of circumstances or fraud. Where overpayments are made, the authority which made the overpayment has the right to recover the overpayment, for example:

• Housing benefit - Overpayments of housing benefit may be recovered [Note 7] and the overpayment can be recovered by deductions from ongoing housing benefit entitlement [Note 8] although there is a limit on the amount that may be so recovered.
• Jobseekers allowance - Overpayment of income based jobseeker's allowance may be recovered [Note 9] by deduction from prescribed benefits including incapacity benefit [Note 10]. There is a limit on how much can be recovered by this method.
• Tax credits - Overpayment of tax credit may be recovered from any award of tax credits payable to the person upon whom the notice of overpayment was served [Note 11] or by direct collection where there is no ongoing award of tax credits or where the ongoing award has ceased.

40.102A Categorisation of overpayments of state benefits

In the case of R. (on the application of Steele) v Birmingham City Council [Note 12] the court categorised the steps leading to recovery of overpayments in relation to the bankruptcy order date, in to three steps; when the award was made; when it was paid; and when the determination on recovery of the overpayment was made.

This resulted in the court further categorising overpayments in to 4 types as follows:

• Category 1 - The benefits are awarded and paid to the claimant before the date of the bankruptcy order. The decision that the overpayments are recoverable is also issued before the bankruptcy order date.
• Category 2 - The benefits are awarded and paid to the claimant before the date of the bankruptcy order. The decision that the overpayments are recoverable is issued after the bankruptcy order date.
• Category 3 - The benefits are awarded to the claimant before the date of the bankruptcy order. The benefits are paid to the claimant after the date of the bankruptcy order. The decision that the overpayments are recoverable is issued after the bankruptcy order date.
• Category 4 - The benefits are awarded and paid to the claimant after the date of the bankruptcy order. The decision that the overpayments are recoverable is also issued after the bankruptcy order date.

40.102B Recovery of overpayments of state benefits

There has been significant recent case law regarding the extent to which benefit overpayments can be recovered by the relevant benefit authorities following the making of a bankruptcy order.

In the case of R. (on the application of Steele) v Birmingham City Council [Note 12] which was subject to an appeal by the Secretary of State [Note 13] it was concluded that category 2, and category 3 overpayments, are not contingent liabilities for the purposes of the Insolvency Act and Mr Steele was under no obligation or liability to repay the overpaid benefit until the Secretary of State had made his/her determination to recover the overpayment. Category 2, 3 and 4 overpayments of benefit are not therefore bankruptcy debts and the benefit provider should not be included on the list of creditors. Consequently, these debts are not released on discharge and the benefit provider may decide to take any appropriate recovery actions available to them.

The position with regard to category 1 overpayments was clarified in the case of R. (Balding) v Secretary of State [Note 14] wherein the court found that the overpaid benefit was recoverable by virtue of the determination made before the making of the bankruptcy order and thus there was a liability to pay money under an enactment for the purposes of section 382(4) of the Insolvency Act 1986 and it was in all respects a bankruptcy debt. Category 1 debts are bankruptcy debts and should be included in the list of creditors. Category 1 debts are released upon discharge, unless incurred by fraud [Note 15]. The benefit provider may, however, continue to make deductions from ongoing benefits until the date of discharge [Note 16].

40.102C Summary of the treatment of overpayments of state benefits

The following table provides a quick reference table for dealing with overpayments of state benefits in relation to the making of the bankruptcy order (“BO”):

*If the category 1 overpayment arose as a result of fraud the debt is provable in the bankruptcy proceedings but would survive discharge and the debt would still be enforceable against the bankrupt [Note 15].

40.102D Category 1 – treatment of tax credit overpayments

In relation to the recovery of overpaid tax credits falling within category 1 (see paragraph 40.102A), where the final award notice (for repayment) was issued before the date of the bankruptcy order, HM Revenue and Customs (HMRC) state that they will adhere to the following policy:

• Where recovery of the overpaid tax credits was intended to be taken via direct collection rather than from ongoing awards HMRC will submit a proof of debt in the bankruptcy.
• Where recovery of the overpaid tax credits was intended to be taken via ongoing awards, HMRC will continue collection until discharge; no proof of debt will be submitted in the bankruptcy and the balance of the debt will be written off upon discharge.

Should the official receiver be approached by a bankrupt, who objects to the recovery of overpayments by HMRC after the bankruptcy order date, they should be referred to HMRC without further comment by the official receiver. 

HMRC will claim set-off in respect of monies it owes to the bankrupt if available [Note 17]. HMRC will also pursue the non-bankrupt claimant where tax credits have been claimed jointly. Where the intended recovery is via direct collection HMRC will also submit a proof of debt in the bankruptcy, but will not recover more that 100p in the £ of its debt; Where the intended recovery is via ongoing awards to the joint claimant, recovery will continue but a proof of debt will not be submitted.

40.102E Contact with HMRC with regard to tax credit overpayments

Where a bankrupt has listed the Tax Credits Office as a creditor within his/her statement of affairs or similar creditor list, HMRC have requested that this address be ignored as any claims to be submitted will be prepared and lodged by the Insolvency Claims Handling Unit (ICHU). Correspondence should therefore be directed to:

HM Revenue and Customs

Debt Management ICHU

Room BP 2302

Benton Park View

Longbenton

Newcastle upon Tyne

NE98 1ZZ

40.102F Social fund loans

The Social Fund is a benefit scheme the intention of which is to assist people whose income is insufficient to meet their needs. There are two distinct schemes within the social fund:

• A regulated scheme, which provides entitlement to maternity, funeral, cold weather and winter fuel payments for people who meet the qualifying conditions. These payments are not loans, but benefit entitlements which are not repayable.
• A discretionary scheme under which people may be entitled to claim a community care grant (not repayable), budgeting loan or crisis loan, depending upon their personal circumstances and the urgency of their needs. The official receiver may however, in the course of his duties, deal with claims for outstanding sums due for both budgeting loans and crisis loans.

The repayment terms applicable to social fund loans are notified to and agreed with the beneficiary prior to payment of the award and are therefore repayable with effect from the date they are paid [Note 18]. Repayments usually start, through deductions from ongoing benefits, within a few weeks of the award being paid, although they may be deferred in cases of hardship.

40.102G Treatment of social fund loans

Overpayments from the social fund including loans and the other payments detailed at paragraph 40.102F above are recoverable from ongoing benefit payments [Note 19]. Any social fund overpayments encountered by the official receiver should be categorised and treated in accordance with paragraphs 40.102A to 40.102C above to establish whether or not they are provable debts in bankruptcy.

Any social fund loans outstanding at the bankruptcy order date should be treated in a similar manner to category 1 benefit overpayments, as detailed in paragraph 40.102C above, this is because they are repayable on the same date that they are awarded and paid. Category 1 debts are released upon discharge, unless incurred by fraud [Note 15] however the benefit provider may continue to make deductions from ongoing benefits until the date of discharge [Note 16].

40.103 Assigned debts

A debt or right of action can be made over to another person, i.e. assigned. The assignee - the person to whom the debt is made over - has the same rights as the original creditor [Note 20]. Assignments can be by deed or by operation of law. The assignment of a debt must be in writing. An example of assignment by operation of law is when an administrator is appointed to a deceased’s estate.

An equitable assignment may be in any form and need not be in writing.

An assignee of a debt owed by a company has the right to present a winding-up petition, even if the assignment is an equitable one [Note 21]. Where the assignment takes place after the presentation of the petition, the court can amend the petition and substitute the assignee as petitioner [Note 22] but the court may have regard to the purpose of the assignment in exercising its discretion whether to make an order on the petition (see also Chapter 45 - Proceedings up to order, paragraph 45.18).

Once one creditor has sold a debt to another creditor, the assignee creditor should thereafter be considered to be the creditor for dividend purposes. This should not be confused with the use of collection agents who do not adopt the debt as their own but for a fee, attempt to collect it on behalf of the original creditor.

Where a debt has been sold any proof of debt lodged by the original creditor should be ignored unless the assignee creditor has not submitted a proof of debt, in which case the original proof of debt can be dealt with, but the dividend should be paid to the assignee.

40.103A Gambling debts

Following the implementation of the Gambling Act 2005 on 1 September 2007 gambling contracts made or any right arising from an agreement made after this date are now to be treated in a similar manner to other contracts in law [Note 23].

The effect of this is that the official receiver may now deal with claims submitted for unpaid gambling debts. It is not expected that the official receiver will see a large number of petitions for gambling debts due to the restrictions imposed by section 81 of the Gambling Act 2005 on the extent to which licence holders, including casino and bingo operators, are able to permit the use of credit facilities for gambling purposes [Note 24].

The National Lottery and any associated lotteries are not considered as gambling for the purposes of the Gambling Act 2005, except in so far as the provisions for enforceability of gambling debts under section 335 apply and section 42, which creates the offence of cheating, apply [Note 25].

Spread betting is not dealt with specifically under the Gambling Act 2005 and is subject to regulation under section 22 of the Financial Services and Markets Act 2000 [Note 26]. 

40.104 Guarantees

A guarantee is a promise to answer for the debt or default of another person and cannot be enforced unless it is in writing.

A creditor in respect of guarantee may be:

1. A person to whom the insolvent has given guarantees of third-party obligations;
2. A co-guarantor of third-party obligations; 
3. A guarantor of the insolvent’s own obligations;
4. A person to whom the insolvent has given a warranty in respect of goods or services.

40.105 Guarantee of third party obligations

When a proof is submitted in respect of a guarantee given by the insolvent for a debt of a third party, the official receiver should obtain a copy of the guarantee and, if it was given within the two years preceding the insolvency proceedings, satisfy himself that it does not constitute a transaction at an undervalue [Note 27]. If there are no grounds for applying for the guarantee to be set aside, the official receiver should admit the creditor's claim.

The liability under the guarantee will normally be dependent on the principal debtor's failure to pay. The creditor must take into account all sums received from the principal debtor up to the time he/she submits his/her proof but need not adjust his/her claim if he/she receives further sums from the principal debtor subsequently (subject to the overriding principle that he/she should not recover more than 100p in the £ from the principal debtor and the guarantor). If the liability under the guarantee is subject to a maximum, the proof cannot exceed the agreed maximum sum. If the guarantee is for ‘all sums due’ from the principal debtor to the principal creditor, the guarantee will also extend to any of the principal debtor's liabilities under guarantees it has itself given the principal creditor, e.g. in a group of companies where each company cross-guarantees the bank overdraft the guarantor will be liable for any default on the whole group not just the holding company [Note 28].

40.106 Co-guarantors

Where the insolvent and others have guaranteed the same debt due from a third party, subject to any contrary agreement among the parties, in the event of default the principal creditor may seek payment from such of the guarantors as he/she may decide but, as among themselves, the guarantors should bear the burden of any liability equally.

Where one guarantor has discharged the whole amount due to the principal creditor, he/she may therefore claim ‘contribution’, or a payment of a proportionate share, from the other guarantors and may be substituted as a creditor. Where one or more of the other guarantors is insolvent and therefore unable to pay his/her share in full, the under-recovery must be shared proportionately by the remaining guarantors.

A co-guarantor with the insolvent of a debt due from a third party who has discharged the debt of the third party in full may therefore prove in the proceedings for:

1. The insolvent’s proportionate share of the debt discharged; plus
2. A proportionate share of those amounts due from co-guarantors which cannot be recovered because of their insolvency.

40.107 Guarantee of insolvent’s debts

A person who has guaranteed a debt due from the insolvent, and paid it in full, may submit a proof in the proceedings for the amount he/she has paid. He/she is also subrogated to any rights the principal creditor may have had against the insolvent in respect of his/her debt, including any rights to security or to preferential treatment for dividend purposes.

Where a guarantor has only guaranteed part of the insolvent’s debt he/she may submit a claim when he/she has paid that part of the debt in full even though the principal creditor can prove for the remainder of the debt. See paragraph 40.37 for an explanation of the rule against double proof where a guarantor submits a claim.

40.108 Warranties

A product or service guarantee given by the insolvent can give rise to a contingent claim in the proceedings. It is unlikely that a proof will be lodged unless the customer is dissatisfied with the product, e.g. where it is faulty and needs replacement or repair. As the insolvent is unlikely to be in a position to deal with the complaint, the provable claim will be for the cost of rectifying the fault or a replacement from another source.

Where a trade association, e.g. ABTA, or an insurance company guarantees the insolvent’s obligations under a warranty, their claims should be dealt with as a guarantee of insolvent’s debts (see paragraph 40.107). This is common in the double glazing trade where the quality guarantee on the product and its fitting is backed by an insurance policy taken out by the insolvent. The insolvent’s customers who are unhappy with the product, can claim the cost of repair or replacement direct from the insurance company, who will be entitled to claim in the proceedings in respect of the total claims made under the insurance policy.

A claim under a product guarantee or warranty is an unsecured claim.

40.109 Leasing

The rights of an insolvent under a leasing agreement may simply be a right to possession and use while rental payments are up to date. On the making of an insolvency order the owner will normally repossess the goods and make an unsecured claim for any outstanding lease payments up to the date of the insolvency.

There are two main types of leasing agreement:

1. A ‘conditional sale’ agreement (see paragraph 40.110) or;
2. A ‘hire-purchase’ agreement (see paragraph 40.111).

40.110 Conditional Sale agreements

A conditional sale agreement is an agreement for the sale of goods under which the purchase price, or part of it, is payable by instalments, and the property in the goods is to remain in the seller (notwithstanding that the buyer is to be in possession of the goods) until such conditions as to the payment of instalments or otherwise as are specified in the agreement are fulfilled [Note 29].

40.111 Hire Purchase agreements

A hire-purchase agreement [Note 29] is an agreement, other than a conditional sale agreement, under which:

1. Goods are bailed (delivered) in return for periodic payments by the person to whom they are bailed; and
2. The property in the goods will pass to that person if the terms of the agreement are complied with and one or more of the following occurs:
   i.   The exercise of an option to purchase by that person.
   ii.  The doing of any other specified act by any party to the agreement.
   iii. The happening of any other specified event.

The distinction between hire-purchase and conditional sale agreements is that under a hire-purchase agreement the hirer acquires an option to purchase the goods after complying with the terms of the agreement, whereas under a conditional sale agreement there is no such condition: property in the goods passes only on payment of all the instalments. The distinction is only important in practice if the sale of the goods is to be made prior to the fulfilment of all the terms of the agreement. Under a hire-purchase agreement a purchaser dealing in good faith and without notice of the rights of the true owner can obtain good title to the goods. Where there is a conditional sale agreement a purchaser of the goods can obtain no better title than that possessed by the person selling to him/her.

40.112 Right to repossess

The owner of the goods is entitled to repossess the goods if the terms of the agreement are not met, e.g. instalment payments not made. The official receiver as liquidator or trustee cannot stop the owners of such items recovering them if they wish to do so. In practice, the owners may be prepared to allow the liquidator or trustee to continue using them on payment of the current instalments; the precise conditions on which he/she will be permitted to do so are a matter for negotiation.

The official receiver as liquidator or trustee may pay the amount required to complete the hire-purchase agreement and obtain title to the asset (as calculated by him/her from the hire-purchase agreement or as agreed with the hire-purchase company) [Note 30]. This would be appropriate where the asset has a value significantly greater than the outstanding instalments.

The standard agreements of most hire-purchase companies contain ‘consolidation clauses’ which require the hirer to treat all agreements with the hire-purchase company as one for completion purposes, in which case the official receiver as liquidator or trustee will not be able to complete one agreement with the hire-purchase company without completing them all.

40.113 Claims for damages for early termination

The early termination of a hire-purchase agreement as a result of the insolvency may give the hire-purchase company a claim for damages for breach of contract. Hire-purchase agreements often contain formulae for the calculation of damages and the official receiver as liquidator or trustee will have to decide whether this amounts to genuine liquidated damages or a penalty.

Where the hire-purchase agreement is expressed to terminate on the insolvency of the hirer, it should be remembered that the insolvency is not a breach of the contract (unless specifically prohibited in it) but simply an event on which the parties agreed the contract should come to an end. No question of damages therefore arises, although the agreement may provide for a contractual payment to the hire-purchase company to compensate it for the early termination. Hire-purchase companies are usually prepared to allow a discount for early settlement.

In re Granor Finance v Liquidator of Eastore 1974 S.L.T. 296 a company took machinery under a hire-purchase agreement from a finance company. It was stipulated that voluntary liquidation of the hirer would terminate the agreement and entitle the finance company to repossess the machinery as well as to claim a sum of money. When the hirer did go into voluntary liquidation, the liquidator resisted the claim for money as penal and unenforceable. It was held that there was no breach of contract, therefore the law of penalty and liquidated damages did not apply. The finance company was entitled to enforce the agreement.

40.114 Repayment to finance company made on behalf of insolvent

The payment of instalments by a person other than the hiree under an agreement where ownership may be transferred (e.g. a hire-purchase agreement) does not result in the transfer of any rights or ownership to that person [Note 31]. Any such repayments should be treated as a loan and the person who made them may therefore claim in the proceedings as an unsecured creditor for any repayments for which he/she has not been reimbursed. See also Chapter 31.2 - Motor Vehicles, paragraph 31.2.14.

40.115 Retention of title

A retention of title clause, also referred to as a "reservation of title" or "Romalpa" clause, is a form of security used by a supplier of goods to afford protection against the possibility of the buyer’s default or insolvency. Where a valid retention of title clause is included in the contract the supplier may retain title to the goods until payment is received. The supplier’s claim to any unused goods will be valid against any subsequently appointed liquidator or trustee, provided the clause has been incorporated into the contract. Retention of title claims are dealt with fully in Chapter 63.

40.116 Landlords loss or damage as a result of disclaimer