Distress And Executions
January 2008
Please note that these matters can be of a highly technical nature and should generally be dealt with in conjunction with an examiner.
Introduction
i What is meant by distress?
Distress is a remedy available only to certain specified creditors where the creditor takes into his/her possession the property of a debtor (which may be a company or an individual), without a specific court order, to satisfy a debt or demand for payment.
Distress developed as a common law remedy of landlords and can be traced back to before the 13th century. Common law distress has developed through case law over the centuries.
Statutory distraint is a power to seize goods granted under a particular statute. Distress is the remedy. The creditor who carries out the act of distraint or levies distress is referred to as the distrainor. Distraint can only be halted by the debtor at one of two specific stages. The debtor can pay the sum owed before the seizure of his property or before the sale of the seized goods in order to halt the distraint. At no other time can the debtor halt the distraint.
ii Who has the right to levy distress?
The right to levy common law distress is available to:
landlords, to recover rent arrears in the main;
The right to levy statutory distress is available to the following :
Her Majesty’s Revenue and Customs (HMRC) - for the collection of taxes
local authorities, - for the collection of unpaid non-domestic (i.e.business) rates and unpaid council taxes (but only once a liability order has been made by the Magistrates Court)
magistrates for any unpaid fines
local parking authorities – unpaid road traffic penalties
The Child Support Agency(CSA) – unpaid child support maintenance
For further guidance on the details of what specific types of debt are covered please see Technical Manual Chapter 9 part 1, paragraphs 9.10 – 9.13.
It is usual for the above creditors to use a bailiff to levy distress on their behalf. A bailiff must be certificated by a county court judge and any person acting without a valid certificate acts unlawfully. Please note, howewer, that a county court bailiff also has the power to levy execution on behalf of a judgment creditor so it should not be assumed that distress has been levied where a bailiff is acting.
iii Landlord’s right to distress
When a landlord seeks to levy distress on goods, the official receiver must be satisfied initially that :
there was an existing lease or tenancy agreement between the insolvent and the landlord at the time of distress, under which rent is in arrears. It is now common for an express right to distrain to be included in lease agreements.
the landlord has not obtained a court judgment for the arrears. If so, Execution is the appropriate action (see part II below).
In bankruptcy cases, the landlord can only levy distress for 6 months arrears of rent up until the date of the order, the amount of rent which the landlord can keep being dependant on when the distress was levied (see vi and vii below). If the official receiver becomes aware that the landlord has goods or sale proceeds in excess of the 6 month debt, he/she should initially ask the landlord to hold the goods or funds to the official receiver’s order and, on becoming trustee, should recover those goods or funds from the landlord as soon as possible.
On occasion, distraint may be sought for an outstanding debt other than rent arrears, for example, mortgage repayments. For this to be valid, there must have been an express agreement to that effect with the insolvent at the time the original agreement was created and the agreement must have been registered, either with the Registrar of Companies in the case of a company, or as a bill of sale in a bankruptcy. Where the agreement has not been so registered, the official receiver should attempt to recover the goods/proceeds of sale for the insolvency estate.
For more detailed information relating to distress levied by the landlord see Technical Manual Chapter 9, part 1 paragraphs 9.38 and 9.42-51.
iv What initial action is required by the official receiver ?
The official receiver should at an early stage in the insolvency establish from the directors, bankrupt (or in the absence of these, the insolvent’s employees) whether any distress has been levied against any of the insolvent’s property.
Once distress has been levied, the goods are within the custody of the law and the official receiver should not attempt to remove them until the distraining creditor, and any bailiff acting on his/her behalf, have agreed that the official receiver may deal with them as part of the insolvent’s estate. Written notification of the making of the insolvency order and the appointment of the official receiver should immediately be sent to the distraining creditor and to any bailiff acting on his/her behalf using form NORD1(Notice of Order).
If distress has been levied then the official receiver should ascertain:
the date of seizure
the name and address of the distraining creditor the name and address of the bailiff who levied distress (if distress was not carried out by the creditor himself)
the amount for which distress was levied
details of the goods seized and their present whereabouts, if removed.
obtain the notice of distress that the distraining creditor should have left with the insolvent. This notice should have written details of the amount for which distress was levied, the goods which have been seized and their location if moved
The official receiver will have to consider whether the goods may be claimed for the benefit of the insolvency estate and it is likely that further inquiries will be required before such a decision can be made.(See Technical Manual Chapter 9, part 1 paragraph 9.30-31)
Please note that it is for the examiner in conjunction with the assistant official receiver to decide whether any distrained goods are available for realisation in the insolvency.
v Is the levying of distress always valid ?
The official receiver should generally assume that the distress was levied in a valid manner unless informed to the contrary. Certain restrictions apply when levying distress and will render the distress wrongful, if not complied with. These include :
attempting to distrain on a Sunday or public holiday
forcible entry to premises (unless the creditors are Crown Departments, where forcible entry may be permitted with an appropriate warrant)
seizure of certain goods, including those necessary for basic domestic needs of the debtor (this does not apply to HMRC)
For further detailed guidance on these restrictons see Technical Manual Chapter 9 part 1, paragraphs 9.5 - 9.15.
The landlord has a right to levy distress against any goods found on the premises. Certain remedies are available to owners of third party goods which are under threat of distress, as detailed in Technical Manual Chapter 9 part 1, paragraph 9.8. If any of the goods seized are third party goods, the official receiver should inform the third party of the distress and provide details of the distraining creditor. The third party should then take their own action to recover the property.
Though rarely used, the official receiver can pursue a legal action known as “replevin” for wrongful distress, allowing for the recovery of any unsold goods, which the court will allow if the debtor or owner of the goods gives an undertaking to bring a separate legal action to challenge the legality of the distress and to seek damages.
The official receiver should only consider this course of action where there are adequate funds in the insolvency estate to cover the costs of the action, together with any possible adverse costs and once he has obtained sanction from Technical Section.
vi What if Distress was levied more than 3 months prior to insolvency order ?
Where distress was levied more than 3 months before the making of the order, the distraining creditor is entitled to any goods that may still be held by him at the date of the order. unless distress was levied after the commencement of the winding up is void (see paragraph viii and Technical Manual chapter 9 part 1, paragraphs 9.34 and 9.36).
vii What if Distress was levied within 3 months of insolvency ?
If distress was levied by any person within three months prior to the winding-up order or bankruptcy order (i.e. the goods were seized in that period), then the goods or their proceeds of sale are charged for the benefit of preferential creditors to the extent that any assets comprised in the insolvent’s estate is insufficient to meet the preferential creditor’s claims.
The distraining creditor who has to surrender goods or the proceeds of sale will be subrogated as a preferential creditor for the value of the goods surrendered or the proceeds of sale of the goods. The distraining creditor and the preferential creditors will rank equally in respect of any distribution.
Where there are other assets comprised in the estate which would enable the preferential creditors to be paid in full then the distaining creditor is entitled to retain the goods or proceeds of sale
It should be noted that Crown departments will retain their preferential status in such circumstances, notwithstanding the abolition of the general right to preferential status contained within the provisions of EA2002.
viii What if distress was levied after the winding up petition or bankruptcy order ?
In a company case, any distress levied after the presentation of a winding up petition is void against the liquidator, except with leave of the court. It is extremely unlikely that any court would grant leave and allow a distraining creditor to gain advantage over the other creditors in such a way and, unless informed that there is such an order, the official receiver should attempt to recover the goods/proceeds of sale.
In a bankruptcy, the right to distrain other than for unpaid rent is exercisable at any time, including after the bankruptcy order and even against property comprised in the bankrupt's estate. The making of a bankruptcy order therefore, does not affect a creditor’s right to either seek to recover a debt by levying distress even if title to the goods has vested in the trustee or levy for an amount due before the bankruptcy order, against exempt property (subject to restrictions) or any after-acquired property whether or not this has been claimed by the trustee.
HMRC have agreed that where they have levied distress after the date of the bankruptcy order, the goods distrained upon, or their proceeds of sale, will be passed to the official receiver upon notification of the bankruptcy order and receipt of a request for the goods or the proceeds of sale. Both departments have also agreed that they will not exercise their rights to levy distress after they become aware of the bankruptcy order unless the other creditors entitled to distrain after the making of the bankruptcy order have done so to their detriment or the debtor continues to trade and incurs further debt.
No such agreement has been reached with local authorities and in protecting the assets, the official receiver should do all that he/she can to prevent the situation arising. The official receiver should ensure that all the bankrupt’s property is dealt with promptly in order to avoid distress being levied after the date of the bankruptcy order, by a creditor whose debt is not provable in the bankruptcy. If a local authority levies distress after the bankruptcy order date, the official receiver should consider a request for the return of the goods or sale proceeds. If the local authority is unwilling to do so, the official receiver should not pursue the matter further.
Any fine imposed by a magistrates court or a maintenance assessment made under the CSA will be a non-provable debt in a bankruptcy and distress may be levied after the date of the bankruptcy order against property in the bankrupt’s estate.
ix What if an Insolvency Practitioner is to be appointed?
In any case where there is likely to be an insolvency practitioner appointed, and the goods distrained upon are recoverable, the official receiver may seek to recover them from the distraining creditor, or any bailiff acting on his behalf, at the earliest possible date if additional costs, such as storage costs, are being incurred, subject to the possibility of having that agent sell the goods for the bankruptcy estate. If the proceeds of sale are being held by the distraining creditor, or any bailiff on his behalf, the official receiver should request that the funds be held by that party to the order of the official receiver pending the possible appointment of an insolvency practitioner trustee/liquidator.
Introduction
i What is meant by execution?
Execution is the seizure of goods to enforce a civil court judgment.The major difference between execution and distress is that, in the case of execution, there must be a court order and in distress, no court order is required.
ii What is a Warrant of execution?
Where a creditor has obtained judgment for a debt of more than £600 and the debtor has not satisfied the judgment, the creditor may apply to the court for a warrant of execution.
If the judgment debt is for more than £5,000, the creditor must make application to the High Court for the warrant of execution(referred to as a writ of fi fa) and cannot apply to a county court, although for a debt between £600 and £5000, the creditor has the choice to apply either in the county court or the High Court. This does not apply to the enforcement of an agreement regulated under the Consumer Credit Act 1974, which may only be enforced in the county court.make application to the High Court for the warrant of execution.
This warrant gives the High Court enforcement officers, or the bailiff in a county court, the power to seize goods within his/her district/county, that belong to the debtor in order to pay the judgment debt and any costs incurred in their sale.
For more information on warrants of execution see Technical Manual Chapter 9 part 2, paragraphs 9.56-9.59.
iii How is the execution warrant acted on?
The officer charged with the execution can levy anywhere within the district or county to which the warrant of execution relates. A creditor may obtain warrants of execution in more than one district or county if it is believed that the debtor has goods in more than one district or county. The warrant of execution gives the officer charged with the execution the power to seize and sell sufficient goods to satisfy the sum claimed on the warrant. The officer charged with the execution should execute the warrant as soon as possible. He/she is liable for damages to the creditor if he/she fails to levy through neglect, connivance or omission.
Once the goods have been located, the officer charged with the execution may take actual possession or “walking possession” of them (see paragraph v). County court bailiffs must allow 5 days after the assets have been seized for the debtor to pay the judgment debt plus costs. During this time, the officer charged with the execution may still arrange for the sale of the assets
For further details on the seizure and sale of goods see Technical Manual Chapter 9 part 2, paragraphs 9.63-9.67.
If no payment is received from the debtor during this 5-day period, the sale of the assets can then go ahead. The sale proceeds, less the costs of the sale and the officer charged with the execution’s costs are forwarded to the judgment creditor, although sale proceeds exceeding £500 in a company case or £1000 in a bankruptcy case, must be held by the officer charged with the execution for 14 days.
iv Initial action by official receiver
High Court Enforcement Officers (formerly known as Sheriffs and Under-Sheriffs) are no longer bound by geographical restrictions and may accept instructions to act in any part of the country where they have chosen to carry on business. Consequently, there is no longer any certainty about exactly which High Court Enforcement Officer (HCEO) will hold any High Court writ of execution. They have a central register and database, ‘NICEShefiffs’ containing information relating to the execution of High Court writs, set up by the High Court Enforcement Officers Association.
Registry Trust Limited are now the owners of the ‘NICESheriffs’ database, to which The Insolvency Service (the Service) forwards, by electronic notification, details of all insolvency orders made. There is no need to routinely forward by post form NTSH, LOIS (DO73) ‘Notice to sheriff ‘
The initial notice form NTSH, informs the HCEO of the making of the order and asks that they hold any goods still in their possession to the order of the official receiver or, where the goods have been sold, instructs them to hold the sale proceeds to the official receiver’s order. In return, their costs incurred in levying execution are a first charge on the proceeds of the sale.
However, should rule12.19 of the Insolvency Rules of 1986 apply, (Execution overtaken by judgment debtor’s insolvency), rule 12.19(2) requires that notice shall be in writing and delivered by hand at, or sent by recorded delivery to the HCEO dealing with an execution.
It has been agreed with Registry Trust Limited that if the electronic notification will not be accepted as the appropriate notification by the relevant HCEO, the ‘NICESheriffs’ system will generate an alert to Registry Trust Limited. The official receiver will then be requested to send form NTSH, LOIS (DO73) to the HCEO acting in the execution. In that way goods and money will be preserved for the insolvency estate.
The address for delivery of written forms NTSH is, NICESheriffs, Registry Trust Limited, 173-175 Cleveland Street, LONDON, W1T 6QR, or DX 137592, EUSTON 4 DX.
The district judge of the county court for all areas in which the bankrupt/partner is known to have carried on business or resided in the last six months should be sent form NTSH, LOIS (DO73) accompanied by a schedule of executions levied form. (The schedule should be completed and returned by them to show whether any goods/monies over which the official receiver may have a claim were seized on behalf of a judgment creditor.)
v What is walking possession?
The debtor’s goods may be impounded on or off the debtor’s premises. If the assets are too large or heavy to remove, for example, and have to remain on the premises, what is known as “walking possession” will be taken. Walking possession is a process whereby the debtor or a responsible person acting on their behalf, has to give an undertaking (usually in writing) that :
the goods will remain on his/her premises and will not be sold;
to advise appropriate third parties of the distress;
to pay the bailiff a small daily fee; and
to permit re-entry for the removal of the goods if this is later considered necessary by the creditor or the bailiff acting on his behalf.
The purpose of walking possession is to provide a breathing space during which arrangements to pay the debt can be explored.
vi Recovery of goods seized
Where the officer charged with the execution is holding goods, the official receiver should request that they be surrendered so that he/she can arrange for their disposal. The official receiver must ensure that no third party has a prior claim to the goods, for example a retention of title claim, or a landlord (in bankruptcy cases only). The bankrupt/partner/director should be asked whether any third party goods are amongst those seized.
The official receiver may agree to an arranged sale of the goods by the officer charged with the execution, if it will result in a more beneficial realisation, for instance to avoid the burden of extra costs by removing the goods and arranging a sale later. However, the officer charged with the execution should not be allowed to proceed with a sale if only part of the insolvent’s assets have been seized and the sale of the whole of the assets together would be more advantageous.
A sale should also be prevented if there is the likelihood that an insolvency order may be rescinded, appealed, stayed or annulled. The official receiver may continue with the sale if there is likely to be a delay in the hearing and the official receiver has the agreement of the judgment creditor, bankrupt, partner, director. If such an agreement cannot be obtained and the official receiver is concerned at the storage costs involved, the official receiver may wish to apply to court for directions.
The costs of an execution, whether a sale has been arranged by the official receiver or the officer charged with the execution, are a first charge on the proceeds of the sale.
vii Recovery of payments
Where the insolvent had agreed to pay a debt by instalments in return for an execution not been carried out, the judgment creditor may retain any payments made prior to the commencement of the insolvency. The same applies to any single payment made to avoid seizure. However, if the official receiver discovers that only a claim form (formerly a writ or summons) has been issued and there has been no judgment, any payments that have been made after the commencement of winding up can be recovered by the official receiver.
Where payments have been made by the officer charged with the execution to the judgment creditor after a bankruptcy order has been made but before notice to the officer charged with the execution has been issued, the official receiver should try to recover such funds. The official receiver should consult Technical Section if he/she encounters any difficulties.
viii Recovery of proceeds of sale
Whenever the judgment debt exceeds £500 in a company case or £1000 in a bankruptcy case, the officer charged with the execution must hold the sale proceeds for 14 days from the date of sale. The officer charged with the execution must also hold the proceeds where the amount due to the creditor is less than £500 but with the addition of legal expenses it would amount to more than that sum.
If during this 14-day period the officer charged with the execution receives notice that an insolvency petition or notice of a voluntary winding up has been presented, he/she must hold the funds for the liquidator or trustee should an insolvency order subsequently be made. If notice is received after the 14 days have expired, the judgment creditor is entitled to receive the proceeds of sale.
In company cases, the official receiver should only recover funds to which the liquidator is entitled if an insolvency practitioner(IP) is unlikely to be appointed. In bankruptcy cases, however, even if there is likely to be an IP appointed, the official receiver should recover any monies held by the sheriff because if a landlord has a claim against the bankrupt, the landlord can still serve notice on the sheriff making a claim for rent even after the bankruptcy order has been made. For further information on a claim by a landlord once execution has been levied see Technical Manual Chapter 9 part 2, paragraph 9.86.
As the costs of the execution are a first charge on the sale proceeds, the officer charged with the execution is entitled to retain the costs of the execution and remit the balance of the sale proceeds to the trustee/liquidator. (see Technical Manual Chapter 9 part 2, paragraphs 9.87-88)
Notes
If the official receiver acting as trustee does not disclaim a rented property and remains in possession of the premises, the landlord may distrain for rent accruing in respect of the occupation from the date of the bankruptcy order from the trustee.
Creditors for debts that are not provable in a bankruptcy, can continue proceedings after the bankruptcy order has been made. Generally, they will still be able to levy execution but only on those goods acquired by the bankrupt after the order date which have not been claimed by the trustee (see Technical Manual Chapter 9 part 2, paragraph 9.89)
Where an officer charged with the execution is in possession of goods under an execution, no creditor with the right to do so can distrain on the goods. However, a landlord can notify the officer charged with the execution of a claim for rent arrears and, if notice is received by the officer charged with the execution before the bankruptcy order is made, he/she must account to the landlord for what is due to him/her up to one year’s rent. Where notice is received after the making of a bankruptcy order, the landlord can only recover 6 month’s rent accrued prior to his/her notice to the officer charged with the execution. The landlord will have to claim in the bankruptcy for any sums due in excess of those periods.
Where can I find out more?
Insolvency Act 1986:
Section 126(1) – Power to stay or restrain proceedings
Section 128(1) – Avoidance of attachment
Section 130(2) – Consequences of a winding-up order
Section 176 – Preferential charge on goods distrained
Section 183 – Effect of execution or attachment
Section 184 – Duties of sheriff
Section 278 – Commencement and continuance
Section 283(2) – Definition of bankrupt’s estate
Section 285 – Restrictions on proceedings and remedies
Section 307 – After-acquired property
Section 346 – Enforcement procedures
Section 347 = Distress etc
Insolvency Rules 1986:
Rule 7.36 – Costs of sheriff
Rule 12.3 – Provable debts
Rule 12.19 – Execution overtaken by judgment debtor’s insolvency
Technical Manual
Chapter 9 - Action Against Property of Insolvent
Case Help Manual:
Forms to be used:
NORD1 Notice of order
NTSH Notice to sheriff
Procedure
LOIS screen references are given in brackets e.g. (DO73)
1. At Initial Contact/Initial Enquiries stage establish from the directors, partners, bankrupt whether any distress or execution has been levied against any of the insolvent’s property.
2. If instructed to do so issue NORD1 (notice of order) to any distraining creditor or bailiff acting on his/her behalf.
3. Issue form NTSH (notice to sheriff) to the county court as instructed. Form NTSH (notice to sheriff) is forwarded electronically for High Court writs.
4. Refer any replies or requests for a written form NTSH to examiner for further instructions
5. If nil return received note LOIS (CA08) and file on office file.