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5-11-2020

The bankrupt was in business at the time of bankruptcy as a sole trader cleaning business with 10 employees. With sanction, the trustee in bankruptcy continued to trade the business with the bankrupt as his appointee. The stated purpose was to ascertain whether the trading income could generate sufficient funds over a number of years to pay bankruptcy debts and expenses. Prior to his discharge, the bankrupt had not appeared to have been receptive to the idea of an IVA

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All went well for a number of years until such time as the trustee concluded that the business was no longer viable, the aim to pay debts and expenses could not be achieved. At this time, the bankrupt was asked whether he wished to buy the business.

The bankrupt sought advice and the trustee was countered with many assertions to the effect that the business had not vested in the trustee. The consequence of this, it was said, was that the trustee should account to the bankrupt for the income generated.

The ICC Judge had to examine the purpose of a business vesting in a trustee in bankruptcy, which assets so vested and the tools of trade exemption.

On noting that there was little authority under the 1986 Act on this point, the Judge examined prior case law under the Bankruptcy Act 1914. The clear purpose of continued trading of a sole trade business was for the effective winding up of the business. It was not a power to trade indefinitely.

There had been no wrong-doing on the part of the trustee and the continued trading had been by consent with the bankrupt. It was held that the goodwill of the business was an asset that vested in the trustee. The tools of trade were considered in the light of the decision in Birdi v Price and the need by the bankrupt to establish that the item was necessary for his trade and used personally by the bankrupt. It followed that there were some assets which did vest in the estate and some which did not.

There was discussion as to whether goodwill had any realisable value. Without having to consider what that value might be, the Judge concluded that it did have a value because the bankrupt himself had set up a limited company and contacted customers to advise of the change in trading status but that everything else would stay the same.

On the issue of the income earned, there was discussion about the fact that an income payments order or agreement could only last for 3 years. The trustee had received an income for far longer than that period.

Upon the conclusion that the business should be continued for the efficient winding up of the same, it followed that the trustee had extended the trading period beyond that which would be permitted under the Act. This was in good faith however and with the intention of being able to pay creditors, hopefully, in full. The bankrupt had agreed to this and so there was no basis for the income for the entire period of trading to be considered as for the benefit of the bankrupt.

However, from the point at which the trustee concluded that the continued trading was no longer in the interest of the estate and the business should be sold, the Judge relied upon ex p. James and concluded it would  be unjust to allow the trustee to retain that income. The bankrupt did have to take into account the fact that the trustee and a staff member had supplied valuable assistance to the bankrupt in terms of the continued trading. He would have to provide recompense for that assistance.

Comment

The continuation of a sole trade business is always a difficult judgment call for a practitioner. The decision is clear guidance that the proper purpose of trading such a business can only be for the efficient winding up of the same. It is not a licence to trade indefinitely. This could be considered as unfortunate in that, if there is a business available to a trustee and it could generate an income over a number of years for the creditors, why is it objectionable for a trustee to run that business for however many years it takes?

The other side of the coin, perhaps, is that it creates a degree of parity with the IPO provisions limiting contributions from surplus income to a three year period. One argument which was given no credence by the Judge was the suggestion that allowing the bankrupt to retain the business after a certain period was consistent with the rescue culture. The court did not consider it helpful to try to incorporate company provisions into bankruptcy.

For the trustee now faced with a business which will contain goodwill and some assets which do vest but others that do not, a decision will now need to be taken whether to trade on at all and, if so, for how long. It is perhaps possible that, for many, the route to recovery might be a re-assignment of assets to the bankrupt coupled with a robust income payments agreement?

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