July 2007
i What is after-acquired property?
After-acquired property is any property which has been acquired by or devolved upon the bankrupt since the commencement of the bankruptcy proceedings. Section 307 of the Insolvency Act 1986 allows the trustee of the bankrupt’s estate to formally claim such property by notice in writing for the benefit of the estate.
When the bankrupt has been discharged these provisions will not normally still apply, although property which relates to the period before discharge, such as a bequest under a will where the individual who wrote the will died before the bankrupt’s discharge but the property was only received by the bankrupt after his discharge, can still be claimed by the trustee even after the individual has been discharged from bankruptcy.
ii Should the trustee claim all after-acquired property?
Before claiming any property under section 307, the official receiver as trustee should be satisfied that the realisation will produce a net benefit to the estate, although a small margin for error is permissible in case the agent’s valuation is over-optimistic or realisation costs are higher than expected.
The trustee may not claim any items which would not have formed part of the bankrupt’s estate if they had been in existence at the date of the bankruptcy order. This means that the usual exemptions for tools of trade, household equipment and some motor vehicles will still apply.
For further information see Case Help Manual part : Exempt Property
iii What will happen if no trustee has been appointed yet?
The legislation states that the trustee may claim after-acquired property for the estate. If, the official receiver whilst receiver and manager, becomes aware that there is property which could be claimed, he/she should inform the bankrupt that once the official receiver is appointed trustee he/she will contact him/her with regard to the property which the trustee may choose to claim for the estate and that, although the bankrupt has been allowed to retain the property, no steps should be taken to dispose of the property in question in the meantime.
If the official receiver is unhappy about the safety of the property, especially where the bankrupt is being unco-operative , all steps necessary to protect it should be taken, including taking it into safe custody if this is deemed to be the most appropriate course of action. However, the official receiver as receiver and manager may not dispose of the property without the leave of the court and thus should seek his/her appointment as trustee as soon as possible.
iv How does the trustee discover after-acquired property?
Often a creditor or other third party will contact the official receiver if they believe that the bankrupt has acquired property of which the trustee is unaware. HMRC may also correspond with the official receiver directly regarding a possible income tax refund.
However, the bankrupt has a duty to co-operate with the trustee, specifically as regards notifying the trustee in writing of any after-acquired property within 21 days of becoming aware of its existence. This requirement is set out in NTB2 which is served on the bankrupt in every case and requires a signed copy to be obtained for the office file. Any notification by the bankrupt by telephone, should be followed up and the bankrupt requested to confirm in writing. However, the official receiver should not fail to take any action just because a letter is not received from the bankrupt.
v How long does the trustee have to claim after-acquired property?
Once the trustee is aware that there is after-acquired property, he/she then has 42 days to claim the property for the benefit of the estate. This period may be extended by the court but it is unlikely to do so if the delay in dealing with the matter is the result of an unreasonable delay on the part of the trustee.
Where the official receiver is still receiver and manager of the estate, the 42 day period commences on the day a trustee is appointed, whether the trustee is an Insolvency Practitioner (IP) or the official receiver.
vi How does the trustee claim after-acquired property?
To claim after-acquired property, the official receiver as trustee should serve written notice on the bankrupt by both recorded delivery and ordinary 1st class post with a request for acknowledgement. The bankrupt should be notified that the property being claimed must not be used or disposed of without the official receiver’s prior consent.
Depending on the nature of the property claimed, the bankrupt should then be asked to either deliver up the property to the official receiver or his agents or make it available for collection.
The property vests in the trustee as soon as notice (form ASTCAA) is served on the bankrupt and thus the official receiver should take steps to deal with the property quickly. The property should be insured, if appropriate, and removed to sell as soon as possible.
vii What if the bankrupt no longer has the property in his possession?
If the property in question has been disposed of to a third party, the trustee has 28 days from the date of becoming aware of the new owner’s name and address to claim property on behalf of the estate, which should be done using form ASTCAA. The trustee then has the right to claim the property on behalf of the bankruptcy estate from the third party (known as the disponee). However, if the disponee acquired the property in good faith, for value and without having notice of the bankruptcy order, the trustee has no remedy against him or against anyone else the disponee may have passed the property onto.
However, in such circumstances, the trustee can request the bankrupt to pay to the estate the proceeds of sale or, if this is not possible, a suspension of the bankrupt’s discharge might be sought until such time as the bankrupt has repaid the value of the property to the estate.
viii Can the trustee disclaim property claimed under section 307?
Property previously claimed by the trustee for the benefit of the bankruptcy estate cannot subsequently be disclaimed as onerous without the leave of the court.
Any application for leave to disclaim must be accompanied by a report outlining the details of the property and setting out the reasons why leave to disclaim is now being applied for, when the property in question was previously thought to have been of value to the estate.
If a notice to elect is received, which is a notice set out in particular form requiring that, within 28 days, the official receiver decides whether to disclaim a property or not, the normal 28 day period will need to be extended by the court to enable the application for leave to disclaim to be considered.
For further information see Case Help Manual part : Disclaimers
ix Are there any assets which are exempt for the purposes of section 307?
Any assets that would have been exempt under the provisions of section 283(2) as at the date of the bankruptcy order will normally still be exempt property for the purposes of section 307. This includes such items as tools of trade, household equipment and some vehicles, although where the trustee feels an item that would be exempt ordinarily is of excessive value, he/she can claim it as after-acquired property and replace it with an item of less value purchased with funds from the estate.
The trustee may not claim compensation paid to the bankrupt under the Criminal Injuries Compensation Scheme for personal injury, although there is a possibility that the trustee can claim any award for loss of earnings. The matter should be referred to the examiner for advice.
Redundancy payments can be claimed under the provisions of section 307, as the payment is compensation for the loss of a job and thus should be treated as property rather than income.
However, payments in lieu of notice or for arrears of wages are in effect a substitute for some failure to pay income and they are not to be claimed as after-acquired property.
Compensatory awards made by Industrial Tribunals are considered to be property rather than income and can thus be claimed as after-acquired property.
A bankrupt retains his right to pursue any action for physical or mental suffering, from either injury to his/her person or his/her reputation. If the bankrupt is successful and awarded compensation in the form of damages as the result of such action, the trustee may not be able to claim those damages as long as they remain in the form of damages, although once they have been invested or used to purchase property, the trustee can claim the property as after-acquired.
Not all pension benefits vest in the trustee and thus they may not be claimed as after-acquired property as a matter of course, although the pension payments can be taken into account for IPA/IPO purposes. For further information see Case Help Manual part : Pensions
If you are unsure whether an item can be claimed under section 307 or not, refer the matter to the examiner.
x Can tax refunds be claimed as after-acquired property?
The official receiver cannot claim tax refunds as after acquired property. Instead, refunds due for tax years prior to the date of the bankruptcy order and for the tax year in which the bankruptcy order was made can be claimed using the bankrupt’s duly completed Income Tax and National Insurance disclosure authority form TNIDIS. Any refund in respect of tax years after the tax year in which the bankruptcy order was made may be claimed by means of an income payments agreement/income payments order (IPA/IPO) where the bankrupt remains undischarged. When a bankruptcy order is made against an individual who is subject to PAYE a “NT” tax code IPA/IPO may be applied for.
For further guidance see Case Help Manual parts : Income Payment Agreements, Income Payment Orders and Tax Refunds.
xi Can the trustee claim property due under a will?
The trustee can claim an interest under a will which devolves upon the bankrupt before discharge. This means that if the author of the will (the testator) dies during the period prior to discharge of the bankrupt, the trustee can generally claim property bequeathed to the bankrupt under the provisions of section 307.
However, if the will sets up a protective trust the trustee will not be able to claim any property covered by the trust for the bankrupt’s estate. A protective trust usually gives an individual a limited right over something and allows them to use it without giving the right to sell the item in question. It is most commonly used in relation to freehold or leasehold property and allows the beneficiary under the will to live in the property, usually for life, without allowing them the right of sale. Legal advice may be needed to decide whether a protective trust has been created or not.
In all cases, notice of the bankruptcy order (NORD1) must be given to the trustees/executors of the will as soon as possible. If the official receiver becomes trustee a second notice should also be sent in duplicate, with the trustees of the will being asked to return one copy receipted for the file (form NEXE).
Notwithstanding the bankruptcy order, a bankrupt retains his/her right to challenge the provisions of a will under The Inheritance (Provision for Family and Dependants) Act 1975 and the trustee plays no part in such proceedings.
xii Trading after bankruptcy
Where a bankrupt continues to trade after the bankruptcy order, he/she should be asked to provide the official receiver with details of the business including figures for sales or services supplied by him/her, the cost of purchases or services for which he/she has been charged and the profit or loss resulting together with details of any assets which may have been acquired. The information should be reviewed in a more active way than those from individuals in paid employment. Whilst the income that a self-employed person receives may be variable, it should still be possible to identify if the bankrupt has a surplus of income after allowing for reasonable expenditure.
The official receiver as trustee can then consider whether he/she feels that any property could be claimed under section 307 or, more likely, whether an IPA/IPO should be set up.
For more detailed guidance see Technical Manual chapter 31 paragraph 31.7.8.
If a capital sum acquired by the bankrupt personally is invested in the business, the trustee may claim the monies or assets acquired with those funds if they can be traced. Otherwise, an order could be obtained to suspend discharge until such time as the after-acquired property is restored to the estate.
Notes
Where can I find out more?
Insolvency Act 1986:
section 283(2) and (3) Definition of bankrupt’s estate
section 287 official receiver as receiver and manager
section 307 After-acquired property
section 309 Time limit for notice
section 310(7), 310A(4) Definition of income for IPA/IPO purposes
section 312(1) and (4) Bankrupt’s obligation to surrender property to trustee
section 315(4) Leave of court required to disclaim
sections 334 and 335 Adjustment between earlier and later bankruptcy estates
section 376 Right of court to extend time limits
section 436 Definition of property
Insolvency Rules 1986:
rule 6.182 Application for leave to disclaim
rule 6.183(3) Court’s right to extend 28 day period re notice to elect
rule 6.200 Duties of bankrupt in respect of after-acquired property
rule 6.201 Trustee’s recourse to disponee of property
Administration of Insolvent Estates of Deceased Persons Order 1986,
Schedule 1, Part II, Para 23
Technical Manual
Chapter 31.7.8 Income Payments Agreements
Chapter 31.8 - Realisation of After-acquired Property
Chapter 54 – Deceased insolvents
Case Help Manual
Discharge from Bankruptcy - Part II
Forms to be used :
NORD1 – Notice of order
NTB2 – Notice to bankrupt
ASTCAA – Asset claim to non-excluded or after-acquired asset
TNIDIS – Tax and NI disclosure
NEXE – Notice to Executor
Click HERE to view flowchart for After Acquired Property
Procedure
LOIS screen references are given in brackets e.g. (DO73)
1. Receive note that bankrupt is believed to have after-acquired property.
Since there are time limits within which the official receiver must claim after acquired property, correspondence and replies must be dealt with promptly.
2. Where official receiver is still only receiver and manager, write to bankrupt instructing him/her not to dispose of the property in question and informing him/her that the trustee of his estate will contact him/her in due course to investigate the matter further.
3. If an IP has previously been appointed trustee, forward the correspondence to him.
4. Where the official receiver is trustee and the information has not come from the bankrupt himself/herself, immediately write to the bankrupt for full details.
5. Diarise reply and if no satisfactory response is received from the bankrupt, refer the matter to the examiner for further instructions.
6. Where the bankrupt informs the official receiver of a change of circumstances in disposable income send form IPOQ (IPO, questionaire) for completion. On receipt of reply refer to examiner to consider an application for IPA/IPO or if an IPA/IPO is already in place, to consider varying the agreement or order.
7. Where the property consists of an interest under a will, write to the trustees of the will using form NEXE (DO73) and await reply.
8. If the bequest takes the form of a protective trust, no further action can be taken. Note the file and LOIS where appropriate (CA08/CA15).
9. If there is some uncertainty regarding the value of the property under consideration, ask agents to prepare a valuation. If the property has little or no value and is unlikely to result in a net benefit to the estate, inform the bankrupt that the trustee will not be claiming the property as an after-acquired asset.
10. Note the file and LOIS, where appropriate (CA08/CA15).
11. If property is to be claimed, serve the bankrupt with notice (form ASTCAA) claiming the property under the provisions of section 307, using both recorded delivery and ordinary 1st class post.
12. Await return of signed copy. Chase up, if necessary.
13. Ask the bankrupt to deliver up the property to the official receiver or arrange for the agents to remove it where applicable. Ask the examiner whether the property should be insured.
14. If the property consists of solely owned land make usual enquiries of any mortgagees and if appropriate, prepare form LRCBI (DO73), application for registration of a bankruptcy restriction, and send to the Land Registry.
15. Where the property is jointly owned land make usual enquiries of any mortgagees and if appropriate prepare form LRCLET (DO73), application for Form J restriction and related letters, and send to Land Registry.
16. If the land is not currently saleable, prepare papers and pass to RTLU.
17. Once the property claimed under section 307 has been sold, note LOIS if appropriate (CA08/CA15).
18 If the bankrupt states that the property has been passed to a third party, write and ask bankrupt for the new "owner’s" name and address.
19. Write to disponee and claim the property in question for the bankruptcy estate using form ASTCAA
20. If the disponee obtained the property from the bankrupt in good faith, without being aware of the bankruptcy order and for value, the trustee has no course of action against him/her. Note LOIS if appropriate (CA08/CA15).
21. Write to the bankrupt explaining the situation and asking for the proceeds of sale to be paid over to the official receiver as trustee. If the bankrupt refuses, refer the matter to the examiner to decide whether to suspend discharge.
22. If it appears that the property previously claimed under section 307 ought to be disclaimed, or where notice to elect has been received in respect of the property, obtain confirmation from the examiner that a disclaimer is required.
23. Draft application to court for leave to disclaim together with report outlining the reasons for the disclaimer. Send signed application to court.
24. If the court grants leave to disclaim the property, prepare disclaimer papers in the usual way. For further information see Case Help Manual part : Disclaimers
25. If no leave to disclaim granted, pass the papers to the examiner to deal with.