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Petra van Dijk
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Bankruptcy and hire purchase agreements

by Petra van Dijk | Apr 06, 2017 |
Hire purchase agreements for cars
When someone is made bankrupt, all property owned by them, at the date of bankruptcy, forms part of the bankruptcy estate. Property not only includes physical assets, such as goods, land and money, but also intangible assets, such as a cash balance with a bank, debts, benefits under contracts, legacies and causes of action. These assets are known as ‘things in action’. The bankruptcy estate vests in a trustee in bankruptcy upon appointment.

Certain items are exempt and continue to belong to the bankrupt. These include personal items required for the basic domestic needs of the bankrupt and family members as well as “tools of the trade”. That is to say tools, books, vehicles and other items of equipment which are necessary to the bankrupt for personal use in regards to employment, business or vocation.

A car which is owned outright by ​a bankrupt and needed for business purposes or for travel to and from work is therefore a tool of trade. But what is the position when the car is held by a bankrupt under a hire purchase agreement? In today’s world, where many people buy their cars (and indeed other goods) with the aid of financial agreements, the answer to the question is relevant to both bankrupts and their trustees in bankruptcy. This question was recently answered by the Court of Appeal in the case of Mikki v Duncan [2016] EWCA Civ 1312.

The facts

The bankrupt was a photographer and one of his specialities was wedding photographs. He claimed that his car (purchased under a hire purchase agreement) was a tool of the trade (albeit that this argument was not raised until some 2 years into the bankruptcy).

The finance company terminated the agreement upon bankruptcy, under a bankruptcy termination provision despite that all of the payments were up to date, and wrote to the Official Receiver (OR) saying it had ended the agreement and wanted the car back. The finance company informed the OR that he could purchase the car for £7,298, being the purchase price calculated in accordance with the agreement terms. The OR replied saying that he did not wish to adopt the contract and was content for the finance company to exercise its rights, paying any surplus on sale to the OR or claiming in the bankruptcy for any shortfall.  

The bankrupt then offered the amount of £7,298 to the finance company (having raised the money from third parties), but the OR refused to authorise the bankrupt’s purchase. The OR was of the view that the car was worth about £12,000 and that the equity should be paid to the bankruptcy estate for the benefit of the creditors. In the end the finance company repossessed the vehicle, sold it and accounted to the trustee with the surplus of £2,652.

The ruling

The Court first of all distinguished the car (a physical asset) from the benefit of the hire purchase agreement (a thing in action). The Court then considered whether the benefit of the contract was capable of being classed as a tool of the trade. It concluded that it was not. On the basis that things in action falls within the insolvency legislation’s definition of property, the benefit had vested in the trustee in bankruptcy.

In reaching its decision the Court started off by noting that the relevant provision lists physical assets (specifically mentioning vehicles), but is silent with regard to any assets where title remains with the finance company. It then considered the policy behind the exempt items provision and noted that at the time the policy was formulated, the use of hire purchase agreements was not uncommon and indeed mentioned by the policy committee. This lead the court to conclude that the policy committee was of the view that the exemption should not apply to chattels held under finance agreements.   

Conclusion

Whilst the case concerned a car, it is applicable to all goods purchased under hire purchase and means that Trustees will be entitled to claim any equity in those goods for the benefit of the bankruptcy estate, an area of law, which, until this case, has been without authority.

Obiter

The Court was also asked to decide on a challenge made by the bankrupt in respect of interest paid. The trustee had received an amount of £1,500 from the bankrupt’s bank and there had been a debate between the trustee and the bankrupt as to whom was entitled to it. The trustee in the end decided to pay the sum to the bankrupt and offered interest on the amount at the rate earned over it by the trustee, namely 0.5%. The bankrupt argued that a higher rate of interest should have been paid, a claim refused by the lower courts.

The Court of Appeal upheld the decision of the lower courts who had correctly applied the test laid down in Bramston v Haut [2016] EWCA Civ 137. Under the test, a court will only interfere with decisions made by a trustee, if it forms the view that the trustee has acted in bad faith or the decision was so perverse that no trustee properly advised or properly instructing himself would have so acted, or if the trustee has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted in that way. It could not be said that the decision to pay the interest earned by the trustee was perverse or so misplaced as to require the court’s intervention.

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.

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