Introduction
i What are ‘book debts’?
(November 2007)
Book debts is the term used for sums of money owed to the bankrupt, partnership or company at the date of the insolvency order, usually for goods or services supplied or work carried out. Sums due under loans may also be treated as book debts as can sums due from partners or directors under any loan accounts they may have had with the partnership business or company, although detailed information must be available regarding the loan etc for it to be collectable.
The fact that an insolvency order has been made does not mean that the sums are no longer due and the official receiver is therefore entitled to claim the amount owed from the book debtor for the estate.
Where the book debts have a realisable value, the official receiver should not seek the appointment of an insolvency practitioner unless requested to do so by creditors. If, however , there are other assets of a complex nature in the estate, the official receiver may consider seeking the appointment of an IP.
ii What is the role of the book debt collection contractor?
The Insolvency Service uses an agent to work on behalf of the official receiver to collect book debts due to companies or partnerships against which a winding-up order has been made or due to individuals (including members of a partnership) subject to a bankruptcy order and also to collect monies due under income payments agreements or income payments orders (IPAs/IPOs).
The current contract is with Clarke Willmott, solicitors, of Blackbrook Gate, Blackbrook Park Avenue, Taunton TA1 2PG. Their telephone number is 01823 442266, fax number 01823 445800, and e-mail address is JDunlop@clarkewillmott.com. The contract manager at Clarke Willmott is Jane Dunlop whose direct line number is 01823 445206.
Clarke Willmott undertake to accept all instructions received from the official receiver for the collection of book debts and IPAs/IPOs regardless of the age of the debts or whether the book debts have been described as irrecoverable by the director, partner or bankrupt.
The debt collection agreement is exclusive and means that Clarke Willmott is the only party currently that the official receiver can instruct to undertake book debt collections and where instructed by the official receiver they must undertake to collect, or attempt to collect, those debts on behalf of the official receiver. The official receiver should make no attempt to actively recover book debts other than through them.
The contractor is paid a fee on all book debts monies it collects. Where the book debts prove to be irrecoverable, no fee is charged. The usual fee stands at 15% + VAT for debts between £10 and £2,500, 10% plus VAT for debts between £2,500.01 and £5,000 and 8% for debts of £5,000.01 and over. However, where an estate comprises a large number of small debts, usually below £10, Clarke Willmott will charge a minimum fee of £1.00 + VAT for each debt realised. This can be applied to milk rounds, for example.
With income payment agreements/income payments orders no fee is payable if a realisation is not made. Otherwise, the fee for the collection of IPAs/ IPOs is fixed at 10% of the sum realised plus VAT.
For more detailed information on the fees that are charged see Technical Manual Chapter 31.1 part 2 paragraph 31.1.32.
Clarke Willmott will pay all book debt receipts into a global dedicated client account in the name of The Insolvency Service and remit weekly by BACS to Estate Accounts Directorate net of the fees charged.
If Clarke Willmott considers any debt to be irrecoverable, they will write to the instructing official receiver within 7 working days and it may then be written off by the official receiver. Clarke Willmott will also write to the instructing official receiver once they have completed the collection in a case These details are included in a quarterly report supplied to the official receiver.
Clarke Willmott also provides an online enquiry facility which allows access to cases for monitoring progress and viewing payments received via their website at http://debtview.clarkewillmott.com/. Each office and RTLU has a login account and password to allow access and instructions for use can be found in OROS Bulletin 2 of 2005 (June 2005) paragraph 18 Annex B.
iii What if the official receiver recovers cheques or they are paid directly to the official receiver?
If the official receiver recovers cheques from the insolvent’s business premises or they are handed over at interview by the bankrupt/director, they should be banked as normal and the official receiver’s usual fees charged if the contractor has not yet been instructed. Care should be taken to ensure that when Clarke Willmott are instructed, they are not asked to apply for the sum(s) already remitted.
Where Clarke Willmott have already been instructed, they should be notified of the remittance received by the official receiver. Only if the official receiver is satisfied that the remittance is a direct result of action by the contractor, such as a letter sent requesting payment, will Clarke Willmott be entitled to commission on the payment.
iv When should Clarke Willmott be instructed?
As the chance of collecting book debts reduces considerably with time, Clarke Willmott should be notified of the details of any book debts as soon as they become available (form ICW). This will normally be after the initial interview when the Preliminary Information Questionnaire (PIQ) has been completed. Clarke Willmott will acknowledge receipt of all instructions to the originating office by e-mail within 48 hours of receipt and will notify book debtors of the official receiver's instruction within 3 working days of receiving the instructions.
At the same time as instructing Clarke Willmott, it is important that the relevant bankrupt/partner/director is notified of Clarke Willmott’s involvement as they may need to co-operate in the collection of the debts if they have additional information that may be of assistance (form BDTLTB).
Where the official receiver considers it necessary, Clarke Willmott can be instructed, even if the notices have not yet been issued and the official receiver is not yet trustee/liquidator. If the official receiver feels that the book debts are at risk and should be protected for the estate, the contractor should be instructed to begin the collection process whilst the official receiver is still receiver and manager. Such action should only be taken on the receipt of specific instructions from the examiner.
However, where an insolvency practitioner has been appointed by the court on the making of an insolvency order or has been appointed by the Secretary of State shortly after the order, the contractor should not be instructed by the official receiver as he/she is not the liquidator or trustee.
v What information do Clarke Willmott need?
Book Debts
Successful debt recovery is dependent on the official receiver supplying Clarke Willmott with as much information as possible as early as possible.
Clarke Willmott will need the following information in every case:
In the event that this information is not available to the official receiver or where the contractor needs further information, the contractor must be prepared to make further enquiries at their own expense.
Income Payments Agreements/ Income Payments Orders
Where the official receiver instructs Clarke Willmott to act in the collection of an IPA or IPO, the following information must be supplied in every case:
Clarke Willmott should be instructed by e-mail using form ICW addressed to bbreports@clarkewillmott.com and a copy of the instruction should be forwarded to the RTLU with the rest of the case papers. There is no need to copy the IPA/IPO, bankruptcy order or estate ledger print-out to the collection agents.
vi The role of the RTLUs
In an NFI case where the “no meeting” notices have been issued and there are no other court proceedings pending or no other assets in the case that would justify the appointment of a trustee , the case should be passed to the appropriate RTLU for them to monitor the book debt and IPA/IPO collection. It is imperative that LOIS screens 8 and 15 are fully completed to date as the RTLU will carry out its work based solely on those instructions. All instructions completed by the exporting office should be signed off before the case is transferred to the RTLU.
Where the case is sent at an early stage, immediately after the RTC has been issued, it may be appropriate to send the whole case file to the RTLU. Otherwise, only those papers relating to the outstanding instructions such as the book debt collection should be sent. The transfer front sheet should be completed for each case. The case will then be transferred into the RTLU using LOIS screen 41.
For further information see the RTLU webpage to be found on the regional homepages on the About Us page of the Intranet.
vii What if the book debtor is resident abroad or cannot be traced?
Clarke Willmott can still collect from book debtors based outside the UK. They will pass details of the account to a local agent in that country. This will inevitably result in a greater commission being charged. If it is considered worthwhile, Clarke Willmott may also employ tracing agents to locate missing book debtors and this will be done at no charge to the estate unless realisations result, when a charge may be made in addition to the usual commission.
If either of these situations arise, refer to the examiner since fees will need to be agreed in advance of the pursuit of the debt.
viii What if a book debtor offers to pay a reduced figure or in instalments?
On occasion, a book debtor may offer a compromise, which means that they will offer a lesser sum than the outstanding amount in settlement of the debt. Where the debt in question is less than £3,000, Clarke Willmott will have the discretion to decide whether to accept the offer and will advise the official receiver within 7 working days of their acceptance.
Where the debt exceeds £3,000, they will refer the matter to the official receiver with advice as to whether they consider that the proposal is acceptable. This should be referred to the examiner for a decision.
Where there is full admission of a debt by any book debtor who then offers to pay the full sum in instalments, Clarke Willmott may exercise their discretion as to whether to accept the proposals for settlement. All such matters should be reported to the official receiver within seven working days of their acceptance.
ix Legal Action to recover Book Debts
If Clarke Willmott believe that there is a good chance of recovering a book debt, but cannot progress the recovery without funding, for example to commence legal action, all relevant details should be supplied to the official receiver. The official receiver will consider the request for sanction to institute legal proceedings within six weeks of receipt during which time creditors may be consulted .
The official receiver will decide whether or not to ask the creditors in the case if they are willing to fund the action. If the official receiver decides not to refer the matter to creditors, or if he/she does so and the creditors are not willing to fund the action, the matter will be concluded.
If the creditors are willing to fund the action, on receipt of the funds, the official receiver may instruct the contractor, in writing, to continue with the recovery. The contractor will act as solicitors on behalf of the official receiver and they will be entitled only to recover their legal fees not the fees they would be entitled to as collection agents.
Alternatively, the creditors may choose to appoint an insolvency practitioner as liquidator or trustee of the estate to deal with the matter. The official receiver should notify the contractor of the appointment. It will then be up to the insolvency practitioner to decide whether to continue with the recovery and whether he/she will continue to use the contractor to recover the book debts.
x What if there are legal proceedings pending?
There may be occasions where legal proceedings in pursuit of book debts have already been instigated by a solicitor formally instructed by the insolvent. Clarke Willmott will attempt to obtain their file in order to review and report on the merits of the case. Where they require additional information not available from the official receiver, they will make further enquiries of the bankrupt/director. This will be done at no charge to the estate initially, unless realisations result.
In any event, these matters should be referred to the examiner for a decision. For further information see Technical Manual Chapter 31 part 2 paragraph 31.1.23.
xi Book debts subject to a fixed or floating charge
Book debts are a current asset and whether or not there can be a valid fixed charge on book debts has been the subject of much legal discussion. In the decision of the House of Lords in National Westminster Bank plc v Spectrum Plus Limited (In Voluntary Liquidation) and others [2005] UKHL 41 it was suggested that a fixed charge over book debts could be created in one of four ways; these are set out in T27/05.
In practice, in the majority of situations of fixed charges being claimed over book debts the official receiver is likely to encounter will involve the collection of the book debts by the company, the payment of the proceeds of realisation into an account operated for the company by the bank debenture holder and then the drawing on that money by the company for use in its business. These are characteristics of a floating charge, not of a fixed charge, notwithstanding the description of the charge as being a fixed charge security. As such, the charge should be treated as if it were a floating charge, not a fixed charge, and the proceeds of the collection of book debts, and other assets which the company may have been permitted to deal with in the same way, should be subject to the claims of the preferential creditors, see paragraph xiii.
It is suggested that in such cases, before applying the proceeds of the book debts in this way, official receivers, when acting as liquidator, should write to the charge-holder notifying this view with reference to this judgment, just in case an alternative view is taken by them. In cases of difficulty, reference should be made to Technical Section.
xii What if the book debts are covered by a valid fixed charge?
Where there is a valid fixed charge over the book debts (one of the four criteria as set out in >T27/05 is fulfilled) and there is no prospect of any funds becoming available for the estate once the charge-holder has been paid, the official receiver would not usually be expected to realise the book debts on behalf of the charge-holder. The charge-holder may appoint a receiver to realise the book debts or take direct action to collect them but if he/she is not prepared to do so, then he/she cannot assume that the official receiver will collect them for him/her. The action to be taken should be agreed in writing between the official receiver and the charge - holder.
Although the official receiver should not normally expend resources on collecting debts subject to a fixed charge, the debts must not be neglected by both the charge-holder and the official receiver. Where the charge-holder takes no action, the official receiver should obtain the charge-holder’s consent to the proposed instruction of Clarke Willmott. It should be pointed out to the charge-holder that the official receiver’s use of the contractor will result in additional costs in the form of Clarke Willmott’s fee and that the official receiver will also charge remuneration together with VAT on that remuneration and that those charges will be deducted from any sums realised before any payment is made to the secured creditor.
If the charge-holder agrees to the use of the contractor, the official receiver can then instruct Clarke Willmott to collect the book debts. Clarke Willmott should be informed that the debts are subject to a fixed charge. The collected debts should then be remitted to the official receiver to be put through a fixed charge account (on LOLA).
xiii What if the book debts are covered only by a floating charge?
Where a receiver has not been appointed under a floating charge it falls to the liquidator of the company (including the official receiver when he/she occupies that position) to realise any book debts covered by the floating charge. The official receiver should instruct the contractor to collect the debts in the usual way.
When the official receiver instructs Clarke Willmott ,he/she must make the contractor aware of that fact that the debts are covered by a floating charge. The charge-holder must be informed that there will be additional costs involved in the form of the contractor’s fee together with the official receiver’s usual realisation fee and VAT that the charge-holder will be liable for. The preferential creditors will also be paid out of the proceeds before the charge-holder. The charge-holder should be asked for confirmation that he/she wishes the official receiver to proceed in these circumstances.
Please note that this situation arises only rarely and should be referred to the examiner for advice.
xiv What is a factoring agreement and how does it affect the official receiver’s position?
Where a business has a factoring agreement its sales invoices are sent to the factoring company as soon as they are raised and the factoring company advances a percentage of the debt to the business immediately. This means that the business gets cash instantly rather than having to wait for the customer to pay. The factoring company collect the debt and remit the balance due, less a standard rate of commission charged, to the business. Many factoring companies deal with the whole of a business's sales ledger and credit control functions.
These types of agreements are governed by the Factors Act 1889 and will remain valid notwithstanding the making of an insolvency order. Only if the factoring company was prepared to re-assign the debts back to the original owner, could the official receiver instruct Clarke Willmott to realise them.
See Technical Manual Chapter 31.1 part 5 paragraphs 31.1.39-31.1.41 for information on the Sale and Assignment of Book Debts
xv What if an IP is subsequently appointed?
Where a trustee or liquidator is appointed, he/she must be notified of Clarke Willmott’s involvement as soon as possible (IPHBP). Clarke Willmott should also be made aware of the insolvency practitioner’s appointment (NACT) urgently since Clarke Willmott may wish to re-negotiate their employment with the insolvency practitioner. The official receiver will be invoiced for any recoveries up to the date of the insolvency practitioner’s appointment.
Notes
Where can I find out more?
Insolvency Act 1986
Section 344 - Avoidance of general assignment of book debts
Section 287(3) – receivership pending appointment of trustee
Technical Manual Chapter 31.1 – Book Debts
Technical Notice T27/05 issued July 2005
Service Level Agreement between Clarke Willmott,Solicitors and The Insolvency Service
Forms to be used:
ICW – Instructions to Clarke Willmott
BDTLTB – Book Debts letter to bankrupt or company
IPHBP–IP appointment Handover by Post
NACT –Notifying Agent of Case Transfer
Click HERE to view the Flowchart for Book Debts
Procedure
LOIS screen references are given in brackets eg (DO 73)
1. Receive instructions to realise book debts/IPA/IPO.
Book Debts
2. Send letter to Clarke Willmott (ICW) instructing them to act in the collection of book debts. Ensure that the name and court details of the relevant case, together with the name of the official receiver and details of his/her office and the full name, address, telephone number of the bankrupt, director or partner are included.(DO73)
3. Photocopy the list of book debtors included in the preliminary examination booklet for inclusion in the letter.
4. Prepare any documentary evidence in support of the claim for inclusion in the letter. Where the case in question is subject to an ongoing investigation, invoices and the like should be photocopied and the copies sent to Clarke Willmott.
5. Send letter (BDTLTB) informing the bankrupt/director/partner of Clarke Willmott’s involvement. (DO 73)
IPAs/IPOs
6. Instruct Clarke Willmott by e-mail using form ICW and include the name and court details of the relevant case, together with the name of the official receiver and details of his/her office,the name and address of the bankrupt, date of the bankruptcy order and the date and terms of the IPA/IPO, amount of payments and frequency of expected payments and the date first payment due.
7. If the case is NFI , and the RTC and no meetings notice have been issued, and there are no court proceedings outstanding, transfer the case to the appropiate RTLU to monitor the book debt and IPA/IPO collection.
8. Ensure that LOIS screens 8 and 15 are up to date. Send either the relevant papers or the whole file , as appropriate, to the RTLU with a completed front sheet.
9. Complete LOIS screen 41, transferring the case to the RTLU using the transfer code C (for closing or filing).
If Case transferred to another court
10. Send letter (NACT) notifying Clarke Willmott of the transfer. (DO73)
If Trustee/Liquidator appointed
11. Prepare and send letter (IPHBP) notifying insolvency practitioner of Clarke Willmott ‘s appointment. (DO 73)
12. Prepare and send letter (NACT) notifying Clarke Willmott of the insolvency practitioner’s appointment. (DO73)
13. If Clarke Willmott suggest legal action, tracing agents etc refer to examiner for instruction.
14. Where Clarke Willmott advise a debt to be irrecoverable, ensure that it is formally written off.
If Case to be closed
15. Check the book debts realised/written off against the original list. The progress of collection of book debts and of payments of IPAs/IPOs in open cases can be viewed via the website at http://debtview.clarkewillmott.com/
If instructions received to collect book debts on behalf of secured creditor
16. Check that written confirmation has been received from secured creditor that they have no objection to the official receiver instructing Clarke Willmott to collect the debts.
17. Instruct ClarkeWillmott in the usual way (ICW). Ensure that at “other relevant information”, a note is made that the debts are being collected by the official receiver on behalf of a secured creditor. (DO73)
18.Where the book debts are subject to a fixed charge, an appropriate fixed charge account should be opened on LOLA whereas for book debts secured under a floating charge, payments should be made via the estate account.