July 2005

If the directors of a company believe that a tax refund is due or this appears to be a possibility the official receiver should obtain details of the tax office and contact them at the earliest opportunity so that the official receiver's interest in any refund can be noted. Obtaining the refund monies may not be a simple matter. In view of the different types of taxation likely to be paid by a company the advice of an accountant or tax specialist may be required to establish whether a refund is in fact due. There is also the likelihood of set-off in favour of other Government departments.

All bankrupts should be asked to sign form TNIDIS which gives authority for HM Revenue and Customs to release information about the bankrupt's tax affairs to the official receiver and authorises payment of tax refunds to the official receiver/trustee in respect of any year up to and including the tax year in which the bankruptcy order was made.

HM Revenue and Customs receives electronic notification of all bankruptcy orders that are made. This will cause the local tax office dealing with the bankrupt taxpayer’s affairs not only to become aware of the bankruptcy proceedings but also, where appropriate, to identify for payment to the official receiver, or trustee, any refund of tax. When a refund of income tax becomes payable, it will be offered by HM Revenue and Customs (the local office) to the official receiver or trustee automatically. To receive the refund the official receiver must respond to the offer in writing to the address given in the HM Revenue and Customs letter offering the refund and request the payment of the tax refund. At that time a copy of the completed form TNIDIS should be submitted in support of the claim. If a cheque in respect of a tax refund has already been sent to the bankrupt but not yet cashed HM Revenue and Customs should be asked to stop payment of that cheque and issue another made payable to the official receiver.

In the event that, prior to discharge, a tax refund becomes due to the bankrupt in respect of tax years subsequent to that in which the bankruptcy order was made this should be claimed by means of an income payments agreement or income payments order. An income payments agreement or income payments order may either be sought in respect of this "one off" payment or where an agreement or order is already in force an agreement to amend it should be made with the bankrupt or an application should be made to the court for the order to be varied to include the payment of the tax refund by the Inland Revenue to the official receiver, as trustee. See also Chapter 31.7 - Income payments agreements and income payments orders.

It should be noted that the Crown has a general right of set off in respect of all claims due or from any Government department. It may, therefore, be prudent to ascertain whether any debts are owing to other Government departments before accepting any refunds although some Departments have minimum set off limits below which they will not offer funds to other Departments. In most cases the monies should be accepted without further inquiry.

Where a receiver or administrative receiver is in office, he/she should be requested to note the official receiver's interest in any surplus assets after the completion of the receivership. In respect to an administrative receivership, the likelihood of any such surplus should be mentioned in the administrative receiver's report under section 48.

Under the provisions of section 127, in a winding up by the court, any disposition of the company's property, and any transfer of shares, or alteration in the status of the company's members, made after the commencement of the winding up is, unless the court otherwise orders, void. If the original petitioner has withdrawn, it is likely that he has been offered some inducement, financial or otherwise to do so. If a payment has been made to the original petitioner from the assets of the company in liquidation, this could be considered to be a disposition under section 127 and could be set aside.

In most cases any recoveries will be undertaken by the liquidator. However, it is possible that if the assets disposed of were subject to a fixed and floating charge, and there is an administrative receiver in office, the administrative receiver could pursue a recovery under section 127 to restore the charged assets.

Dispositions that may be avoided under the provisions of section 127 are covered in greater detail in Chapter 31.4 - Antecedent Recoveries.

Under the provisions of section 284, where a person is adjudged bankrupt any disposition of property made by that person in the period beginning on the day of the presentation for the bankruptcy order and ending with the vesting of the bankrupt's estate in the trustee, is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court. If the bankrupt made a payment or gave goods to the original petitioner as an inducement to withdraw the petition, such a transaction could be set aside under section 284, unless it was ratified by the court [note 1]. The disposition would be void even if the property disposed of was not part of the bankrupt's estate. Dispositions that may be avoided under the provisions of section 284 are covered in greater detail in Chapter 31.4 - Antecedent Recoveries.

When an enforcement officer receives notice that a winding up or bankruptcy order has been made and he/she holds the insolvent's monies, either seized or received in part satisfaction of an execution, the enforcement officer shall, if required to do so, deliver the money to the liquidator, trustee or official receiver if there is no trustee yet appointed [note 2]. Under an execution in respect of a judgment for a sum over £500, the enforcement officer also has an obligation to hold the proceeds of sale of an insolvent's goods, or monies paid in order to avoid sale, less the costs of the execution for a period of 14 days [note 3]. If during that period he/she receives notice that a winding up or bankruptcy petition has been presented, and an order is subsequently made, he/she must pay the sale proceeds to the liquidator, trustee or the official receiver if there is no trustee yet appointed [note 4]. Notification of the making of the bankruptcy and winding up order, should be sent to the National Information Centre for Enforcement (Nicesheriff) as a matter of course in all cases [note 5]. The notification should be sent by recorded delivery, or delivered by hand [note 6].

Dealings with enforcement officers are also covered in more detail in Chapter 9 Part 2 - Action against property of insolvent.

31.5.77 Client accounts, and monies held by other third parties

Solicitors or accountants acting for an insolvent may hold funds on a client account. If the holder is a creditor in the proceedings, he/she may claim a lien (see Chapter 9 Part 5 - Action against the property of the insolvent.) If the holder is not a creditor, then he/she has no right to the monies and the monies should be recovered without difficulty.

Where a trustee has been appointed in a bankruptcy any banker or agent of the bankrupt, or any other person who holds any property to the account of, or for, the bankrupt has to pay or deliver to the trustee all the property in his/her possession or under his/her control which forms part of the bankrupt's estate and which he/she is not by law entitled to retain as against the bankrupt or trustee [note 7].

A person in possession of money, which forms part of a bankrupt's estate, is not entitled to retain the proceeds of profitably investing those monies. At common law, the trustee in bankruptcy can trace those profits and assert his/her claim to them in an action for money had and received [Trustee of the property of F.C.Jones and Sons (a firm) V Jones (1996) 3WLR 703].

In cooperation with the Fish Producers Organisations, HM Revenue and Customs has introduced a scheme whereby a percentage of a share fisherman’s income will be placed in a special interest bearing account at Barclays Bank PLC, PO Box 13, Lemon Street, Truro, Cornwall, TR1 2YY and will be used to meet the individual’s tax liabilities and to pay Class 4 national insurance contributions. The money cannot be withdrawn from the account for any other purpose. A share fisherman is self employed and his/her income is a percentage of the boat’s catch.

It has been agreed with HM Revenue and Customs that were a bankruptcy order to be made against a share fisherman who has one of these accounts, the monies in the account would constitute a vesting asset and the account would be closed in the usual way (on notice to the bank).

It is likely that another account would be opened for the individual enabling him/her continued participation in the scheme post bankruptcy. Whether monies in the new account could have been claimed as after acquired property will have to be considered on a case by case basis.

Where a defendant pays money into court, either voluntarily or pursuant to an order, and subsequently becomes bankrupt or goes into liquidation, the plaintiff becomes a secured creditor in the insolvency proceedings, and the court will not order payment out upon the defendant's application. [W A Sherratt Ltd V John Bromley (Church Stretton) Ltd (1985) 1 AELR 216]. In such cases, it is usual for the official receiver to consent to the plaintiff having the benefit of the funds paid into court, except to the extent that they exceed the claim against the bankrupt or company in liquidation.

Cases where there are bills of exchange with a value are likely to be dealt with by an insolvency practitioner. There may of course be occasions where an insolvent's sole asset is a bill of exchange with a low value, or there are bills which are unlikely to be met on presentation. Additionally, although outside the scope of this chapter, a bill of exchange may be submitted in support of a proof of debt. See also Chapter 16 Part 5.

A bill of exchange is defined in the Bills of Exchange Act 1882 as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer. A cheque is a special form of a bill of exchange.

Most bills include a term of credit, i.e. they are payable in the future. Such bills are called term bills.

A creditor (or drawer) will draw up the bill of exchange. This is then sent to the debtor (or drawee.) The bill is accepted by the debtor, by signing their name vertically across it.

The debtor may accept the bill indicating that when the bill is presented for payment it should go to their bank. In this case they would write across the bill the words... "Accepted payable at XYZ Bank", followed by their signature.

The drawer may specify that the bill be accepted by an accepting house rather than by the debtor personally; the bill may also be drawn with the name of an accepting house as the drawee. Put simply, an accepting house is a deposit or merchant bank which accepts bills of exchange on behalf of others. The accepting house pays the bill when it becomes due, the debtor then pays the accepting house, plus any commission charged. A bill of exchange drawn on and accepted by an accepting house or bank with an unquestioned financial standing is known as a prime bank bill; the expression "bill on London" may also be used to describe a bill drawn on an established London accepting house.

The accepted bill, now known as an acceptance, is returned to the creditor. Once the payment date arrives the bill is presented for payment either to the debtor personally, or to his/her bank, or to an accepting house.

A creditor may use a bill to pay off a debt he/she owes to a third party. In this case the bill may be drawn up indicating that payment should be made to that party, and the accepted bill would be sent to them, after its return by the debtor.

A bill can also be endorsed so that payment is made to another party. The bill can be endorsed by the payee writing his/her name on the back (in blank), and it will then become payable to anyone who is in possession of it (the bearer). A special endorsement specifies the person to whom or to whose order a bill would be payable. A restrictive endorsement e.g "pay X only" destroys the transferability of the bill, stopping the bill being passed on to anyone else. The bill could have been drawn up restrictively at the outset.

A bill payable on demand is to be paid as soon as it is presented. The bill may start "Pay bearer on demand". The words "at sight" may be used instead of "on demand". As there is no term there is no need for an acceptance, so the bill is presented once only, for payment.

All bills drawn abroad and payable in this country, and all bills drawn in this country and payable abroad, are foreign bills. Bills both drawn and payable in this country are inland bills.

If the bill has been drawn, but not sent to the debtor for acceptance, and it can be established from the insolvent's records that there is a debt due, it is likely that the quickest route to recovering the debt will be to pursue the debtor like any other debtor rather than send the bill for acceptance, as the payment date will be some time in the future.

If it cannot be established from the insolvent's records that there is a debt due, it may be necessary to make a judgement as to whether the debt should be pursued based on the adequacy of the records in other areas, the bankrupt or director(s) own recollection, and the size of the debt. If the records are generally well maintained, and/or the bankrupt or directors confirm that no debt is due, it is likely that there is no debt due and if the bill is for a small amount, the debt should not be pursued. If the records are inadequate, and/or the bankrupt or directors are unable to assist, or the bill is for a large amount, it would be preferable to make contact with the drawee of the bill to establish the correct position.

If the bill has been accepted, it should be presented on the payment date either at the debtor's bank, to the accepting house or to the debtor personally. If payment is not made, i.e. the bill is dishonoured, the debtor should be pursued in the same manner as any other debtor, using the accepted bill as evidence that there is a debt due. It is very unlikely that a bill presented to an accepting house will be dishonoured.

If the insolvent is the payee only, they will obtain the bill after acceptance. The bill should be presented for payment when the payment date arrives. If the bill is dishonoured, the official receiver may pursue the other parties to the bill. To summarise the duties of the parties to a bill as defined in the Bills of Exchange Act 1882 , each person who signs his/her name on a bill in effect guarantees that it will be paid. If a bill is unpaid on presentation the holder may pursue any previous party for the sum, that is anyone whose signature appears on the bill in whatever capacity, that could be any endorsers, the acceptor, even the drawer.

Where a bill has been drawn on or accepted by an accepting house or bank, and the drawer is also of good financial standing, the bill will be readily saleable on the money market.

Potential purchasers include other banks, discount houses, and the Bank of England. Dealing in commercial bills is a highly specialised business, and specialist advice should be obtained before embarking on any such dealings.

More detailed information concerning the operation of the money markets is contained in Chapter 59 Unusual Assets and Businesses.

A promissory note is in effect a formal "I.O.U". The definition of a promissory note given in the Bills of Exchange Act 1882 is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person, or to a bearer. Promissory notes issued by private individuals are now rarely seen.

The writer of a promissory note is a maker. The note is incomplete until it has been delivered to the payee or bearer. Where an insolvent holds a promissory note, it should first be established whether it is payable on demand or in the future.

In all cases the maker should be contacted in writing, and informed that the official receiver now holds the promissory note, and payment should be made to the official receiver. A copy of the promissory note should be enclosed with that communication.

If the promissory note is payable on demand, the letter should also include a request for immediate payment, or the maker's proposals to settle the debt if payment cannot be made immediately. If the maker fails to respond, they should be pursued in the same manner as any other debtor. If the promissory note is payable in the future, the letter should contain a request for payment on that date, or the maker's proposals to settle the debt if payment cannot be made on that date. Again, if the maker fails to respond by the date payment is due, they should be pursued in the same manner as any other debtor.

As bills of exchange and promissory notes are highly liquid, and could be paid to anyone unless drawn restrictively, they should be safeguarded as if they were cash, and kept in the office safe. If necessary copies should be taken if they are needed for day to day reference.

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