What are the duties of a trustee in bankruptcy? And how is one paid? Caroline Clark of RMCSC explains what you need to know about trustees in bankruptcy.

What is a trustee in bankruptcy?

A trustee in bankruptcy is an insolvency practitioner (IP) tasked to deal with the complex situations that can arise when someone becomes insolvent. The trustee in bankruptcy effectively takes control of the assets of an insolvent person and distributes funds to creditors according to the law.

Bankruptcy is the oldest and possibly the least understood way of dealing with personal insolvency. It is only appropriate for someone who:

• is insolvent
• has assets worth less than their liabilities
• cannot pay their debts as they fall due

In this situation, someone - either the insolvent person or a creditor of the insolvent person - petitions for the insolvent person to be made bankrupt. This can now be done online and leads to a bankruptcy order and the appointment of a trustee in bankruptcy.

What happens to your assets in bankruptcy?

The trustee in bankruptcy manages the bankruptcy ‘estate’ (money, property and possessions). Any assets owned by the insolvent person ‘vest’ in the trustee in bankruptcy, meaning they are no longer owned by the insolvent person.

If the insolvent person owns a property, that will vest in the trustee in bankruptcy. However, it's not the case that you and your family will find yourself homeless as soon as you’re declared bankrupt. Alternatives to selling your home should be considered and you should be given time to make other living arrangements. If the trustee in bankruptcy does not sell the property within three years of the bankruptcy order, then the property will no longer be part of the bankruptcy estate and it will become the property of the insolvent person once again.

It should be noted that you will not lose items necessary for a basic living for you and your family. Tools of trade needed for work should also be exempt, and it's not even necessarily the case that you’ll automatically lose your vehicle. Cars used to get you to and from work, for example, should be secure if they're worth under £1,000.

What are the responsibilities of a trustee in bankruptcy?

The trustee in bankruptcy immediately takes over all dealings with the creditors. Once discharged from bankruptcy, usually a year after the bankruptcy order, the insolvent person ceases to be liable for these debts and can put them in the past and start again.

The trustee in bankruptcy has detailed powers listed in Schedule 5 of the Insolvency Act 1986. These powers enable the trustee in bankruptcy to manage the bankruptcy estate and carry out investigations and bring legal action to improve realisations for the benefit of the creditors. They include the power to:

• carry on the business of the insolvent person
• bring or defend any legal action regarding the bankruptcy estate
• make compromises with creditors
• sell any property comprised in the bankruptcy estate, including goodwill
• employ an agent
• bring legal proceedings because of preferences, transactions at an undervalue or extortionate credit transactions

How are trustees in bankruptcy paid?

Trustees in bankruptcy are paid from the funds in the bankruptcy estate and they are entitled to be paid before any dividend is paid to the creditors. The fee paid to trustees in bankruptcy therefore must be approved by the creditors before it is drawn. This, along with the calculation of the trustee in bankruptcy’s fee, is something that is strictly regulated.

There are insufficient assets and realisations in some bankruptcies for the fees of the trustee in bankruptcy to be paid. In these cases, the trustees in bankruptcy will have to record a loss for the bankruptcy. Trustees in bankruptcy do not have the right to approach the insolvent person for payment of their fee.

How will the Coronavirus (COVID-19) affect bankruptcies in the UK?

Financial failure is sadly an economic reality. However, it doesn't automatically mean that the person concerned is a failure, as the misfortune could be caused by something as unexpected as the Coronavirus.

Everyone will continue to manage their finances to the best of their ability in these difficult times. For some - if they are insolvent, without a reliable income and with mounting debts - bankruptcy could be what twentieth century legislation always intended it to be; a way of bringing the financial problems to an end and starting again. The trustee in bankruptcy will be the person who makes this happen.

About the author

Caroline Clark is director of RMCSC, a fellow of the Insolvency Practitioners Association and R3, and has an MBA. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti money laundering legislation.

See also

Bankruptcy or an IVA - which is best?

How can I find out if someone has entered bankruptcy?

What restrictions are there during bankruptcy?

Find out more

Insolvency Act 1986 (Legislation)

Individual Insolvency Register (Gov.uk)

Image: Getty Images

Publication date: 23 April 2020