Chapter 40

February 2006

PART 10

40.147 Where debts bear interest

Where a debt is interest-bearing, the interest is provable as part of the debt in respect of any period up to :-   

• In bankruptcy cases, the date of the bankruptcy order [note 1]
• In company cases, the ‘relevant date’. This is the date the company went into liquidation  unless the liquidation was immediately preceded by an administration in which case it is the date that the company entered administration [note 1A]

A debt, e.g. a loan agreement or mortgage, may include future interest payments. These are not provable except in so far as they relate to the pre-insolvency period.

40.148 Partly- Secured creditor

Where a secured creditor has realised his/her security the proof must be limited to the amount due for principal and interest at the date of the commencement of the proceedings after deducting the proceeds of the realisation. The proceeds cannot be applied in payment of interest subsequent to that date [note 2].

40.149 Default notice under Consumer Credit Act 1974

Where a default notice under the Consumer Credit Act is served prior to the bankruptcy order, the whole amount of interest on the debt becomes due and payable and is provable in the proceedings [note 3].

40.150 Non interest- bearing debts (amended July 2010)

In the following circumstances a creditor's claim may include interest for periods before the bankruptcy order or liquidation, although not previously reserved or agreed [note 4]: - 

• If the debt is due by virtue of a written instrument, and payable at a certain time, interest may be claimed for the period from that time to the date of the bankruptcy order or when the company went into liquidation.
• If the debt is due otherwise, interest may only be claimed if, before the presentation of the bankruptcy petition or before the company went into liquidation, a demand for payment was made in writing by or on behalf of the creditor, and notice was given that interest would be payable from the date of the demand to the date of payment. In that case interest may be claimed for the period from the date of the demand to the date of the bankruptcy order or the date when the company went into liquidation.  

In company cases, where the petition was presented on or after 6 April 2010, references to the date of liquidation or the date when the company went into liquidation should be replaced with the “relevant date”. See paragraph 40.147 and Rule 4.93A1.

40.151 The Late Payment of Commercial Debts (Interest) Act 1998

The Late Payment of Commercial Debts (Interest) Act 1998 provides the right to claim interest on commercial debts for goods and services when payment is made after the agreed credit period, or 30 days if no credit period has been agreed [note 5].

The interest rate is currently set at 8% above the Bank of England base rate.

Interest under these provisions should be admitted in calculating creditors’ claims for both voting and dividend purposes.

The legislation was phased in between 1 November 1998 and 1 November 2002 with all types of business being able to claim interest on all contracts arising since 1 November 2002. If the official receiver is dealing with a case where the contracts were agreed prior to 1 November 2002 he/she should be aware that the Late Payment of Commercial Debts (Interest) Act 1998 may not apply to those contracts. See paragraph 40.152 for contracts agreed prior to 1 November 2002. [note 6].

40.152 Application of late payment interest prior to November 2002

As a consequence of the Late Payment of Commercial Debts (Interest) Act 1998.

• Since 1 November 1998 small businesses have been able to claim interest from large businesses and the public sector, on debts arising from contracts agreed after that date.
• From 1 November 2000 all small businesses are able to claim interest from other small businesses on debts arising from contracts agreed after that date.
• From 1 November 2002 all businesses and the public sector have been able to claim interest from all businesses and the public sector on debts arising from contracts agreed after that date.

A small business is one with 50 or fewer employees on average over the previous financial year; a large business is one with more than 50 employees; and a public sector body is, essentially, any government department or local or public authority.

40.153 Petition costs

If an insolvency order provides for the payment of costs relating to the petition, there is an entitlement to interest on those costs [note 7]; but where this is not the case, such an entitlement does not arise.

40.154 Post-insolvency interest

If there is a surplus remaining after the payment of the debts proved in a winding up or bankruptcy, before being applied for any other purpose, interest is payable on every debt proved in any type of winding up or in bankruptcy [note 8]. All interest ranks equally, whether or not the debts on which it is payable rank equally [note 9].

40.155 Date interest runs from

Interest is calculated on trade debts from the date of the insolvency proceedings and on other debts with a fixed payment date that is after the insolvency (such as loans, bills of exchange and tax liabilities) from the date payment is due [note 8].

40.156 Contingent claims

For contingent liabilities it is suggested that when the contingent claim is admitted and a valuation placed on it by the liquidator or trustee or determined by the court, the amount for which it is admitted should be taken as outstanding when the company went into liquidation or the bankruptcy order was made; but when the amount for which the claim is admissible is adjusted because of the occurrence of the contingency, the debt becomes outstanding when the contingency occurs.

40.157 Order of payment

40.158 Rate of interest

Post-insolvency interest is paid at the ‘official rate’ which is the higher of [note 10]:

• the rate specified in section 17 of the Judgments Act 1838 on the date the company went into liquidation or at the commencement of the bankruptcy (from 1 April 1993 the rate has been 8 per cent on all judgments given on or after that date [note 11]); or
• the rate of interest (if any) which would have been payable on the debt had liquidation or bankruptcy not intervened, i.e. if the debt itself carries interest at a higher rate, it is that rate which is payable.

40.159 Statutory interest and annulment

• where an application for annulment on the grounds of payment in full is made [note 12] and third party funds are used, that should not be used as a vehicle to deny creditors the interest they would otherwise seek to claim under section 328(4).
• in lengthy bankruptcies creditors have been denied their money for a considerable period of time but acknowledged that it was also unfair that debtors should have to carry the burden of interest for the entire period in those cases handled by Protracted Realisations Unit where considerable time had elapsed before the appointment of a trustee.
• whilst it is equitable that debtors should pay some interest, in Protracted Realisations Unit cases only the interest should only be paid for the period from the date of the bankruptcy order until the Official Receiver's release and then from the period from the date of the appointment of a trustee until annulment.

[Back to Part 9 - Foreign debts] [Onto Part 11 - Creditors’ rights]