Bankruptcy is a legal status that provides relief to individuals and businesses struggling with debt. Anyone can declare bankruptcy if they are unable to pay their debts. This includes individuals, sole traders, and partnerships.
In England and Wales, this process involves several key steps and key players, including the trustee who plays an important role in managing the bankrupt individual’s assets and ensuring that creditors are treated fairly.
In this article, we’ll break down the appointment process of a trustee in bankruptcy, outline their responsibilities, and explain how they interact with both debtors and creditors.
Whether you’re facing bankruptcy yourself or are a creditor trying to understand your rights, by the end of this article you will have a clearer understanding of how trustees work within the bankruptcy system, which will help you make informed decisions and understand what to expect.
Table of Contents
- What is a trustee in bankruptcy?
- What are the key responsibilities of a trustee in bankruptcy?
- What powers does a trustee have?
- Who appoints the trustee in bankruptcy?
- What criteria are used to select a trustee in bankruptcy?
- What is the role of the Official Receiver in bankruptcy?
- What is the trustee’s role in dealing with a debtor’s assets and liabilities?
- How does the trustee communicate with creditors?
- How do trustees help debtors in bankruptcy?
- How are assets distributed in bankruptcy?
- What investigations does the trustee conduct?
- How does the trustee report to the court?
- Can trustees be challenged in bankruptcy?
- How can Lawhive help?
What is a trustee in bankruptcy?
A trustee in bankruptcy is an individual or entity appointed to manage the estate of a bankrupt person.
The trustee’s primary role is to oversee the administration of the bankruptcy process, ensuring that the bankrupt individual’s assets are identified, collected, and distributed to creditors fairly and legally.
What are the key responsibilities of a trustee in bankruptcy?
The key responsibilities of a trustee are to:
Identify and take control of the bankrupt person’s assets
Sell or liquidate those assets
Communicate with creditors about the bankruptcy process and provide updates
Distribute funds from the sale of assets to creditors according to the legal priority of claims
Investigate the bankrupt person’s financial affairs for fraudulent activity or misconduct.
Report any misconduct to the Financial Conduct Authority if the bankrupt individual was recognised by the FCA.
Pay all sums over £5,000 into the government’s Insolvency Service Account, with a deduction for an ad valorem duty.
Report to the court on the status of the bankruptcy case.
Trustees must also give public notice of their appointment in the London Gazette.
What powers does a trustee have?
Trustees have the power to:
Take control of and manage all assets that form part of the bankruptcy estate
Sell or otherwise dispose of assets to convert them to cash
Demand access to the bankrupt individual’s financial records and bank statements
Summon the bankrupt individual, their family members, business associates, or anyone else to provide information, produce documents, or attend interviews under oath
Take legal action to reverse transactions and recover assets
Challenge and recover preferential payments made to certain creditors before the bankruptcy
Initiate legal proceeds to recover debts owed to the bankrupt individual or challenge fraudulent activities
Settle claims or disputes involving the bankruptcy estate
Distribute proceeds from the sale of assets to creditors
Take control of the business operations if the bankrupt individual was running a business and continue trading or wind down the business
Apply for an income payments order, requiring the bankrupt individual to make contributions from their future income towards the bankruptcy estate
Who appoints the trustee in bankruptcy?
In most cases, the Official Receiver who is a government official responsible for administering bankruptcies and company liquidations initially acts as the trustee.
However, they may appoint an insolvency practitioner to take over if the case is complex or if there are significant assets to manage. The appointment of an insolvency practitioner is usually done at the first meeting of creditors or by the Secretary of State.
Creditors may also have a say in the appointment of the trustee. At the first meeting of creditors, they can vote to appoint an insolvency practitioner of their choice as the trustee, replacing the Official Receiver. This happens if the creditors feel that a particular insolvency practitioner would better serve their interests in managing the bankruptcy estate.
What criteria are used to select a trustee in bankruptcy?
Trustees in bankruptcy must be:
An insolvency practitioner licensed by recognised professional bodies such as the Insolvency Practitioners Association or the Institute of Chartered Accountants in England and Wales.
Experienced in handling bankruptcy cases.
Impartial, with no conflicts of interest that could affect their ability to manage the bankruptcy estate fairly.
The selection of the trustee may require approval by the Official Receiver or the creditors.
What is the role of the Official Receiver in bankruptcy?
Initially, the Official Receiver will take control of the debtor’s assets and look into their financial affairs. This includes reviewing their income, debts, and property.
If the Official Receiver decides to appoint an insolvency practitioner, they will transfer these responsibilities to the appointed trustee, who will then take over the management of the case.
What is the trustee’s role in dealing with a debtor’s assets and liabilities?
The trustee will investigate the debtor’s assets, ensuring all valuable items are identified and accounted for. Once assets have been identified, the trustee arranges for their sale or liquidation and the proceeds from these sales are used to pay off the debtor’s creditors.
The trustee also reviews all claims from creditors to ensure they are valid and accurate.
How does the trustee communicate with creditors?
Another key role of the trustee in bankruptcy is to communicate with creditors and make sure they are kept informed throughout the bankruptcy process.
From the outset, the trustee informs creditors about the bankruptcy and keeps them updated on the progress of the case. This communication typically includes:
Notifying creditors when bankruptcy is declared and explaining how they can submit their claims.
Organising meetings where creditors can ask questions and discuss the debtor’s assets and liabilities.
Regular updates about the status of asset recovery and distribution of funds.
How do trustees help debtors in bankruptcy?
Trustees guide debtors through the bankruptcy process, helping them understand each step from the initial declaration to the final discharge.
The trustee should explain what will happen to the debtor’s assets, how debts will be addressed, and what the debtor’s obligations are during the bankruptcy.
If the debtor has questions or concerns, the trustee is there to provide answers and support to alleviate some of the stress and anxiety that often comes with bankruptcy.
How are assets distributed in bankruptcy?
In bankruptcy, the distribution of assets is a carefully regulated process. After assets have been identified, collected, valued, and liquidated, the costs and expenses of administering the bankruptcy are paid first. This includes the trustee’s fees, legal costs, and any other expenses incurred in managing the bankruptcy estate.
Then secured creditors are paid up to the amount owed to them. These are creditors who have a legal right or interest in specific assets (such as a mortgage of a property).
After secured creditors, preferential creditors are paid. These are certain debts that are given priority under the law, like unpaid wages to employees (up to a certain amount) and contributions to pension schemes.
Once preferential debts are paid, the remaining funds are distributed among unsecured creditors who do not have any security over the bankrupt individual’s assets. The distribution to unsecured creditors is done on a pro-rata basis, meaning each creditor gets a proportionate share based on the size of their claim relative to the total available funds.
If there are any funds left after paying the unsecured creditors, which is rare, any post-bankruptcy debts can be settled.
What investigations does the trustee conduct?
Trustees conduct a thorough review of the bankrupt person’s financial affairs to identify all assets, including any assets that may have been hidden or not disclosed.
They will also look at any transactions made before the bankruptcy to make sure that no assets were improperly transferred or sold at undervalue to avoid them being included in the bankruptcy estate. This includes looking at gifts or transfers made to friends or family members. If any transactions are found to be improper, the trustee can take action to reverse them.
Challengeable transactions include:
Transactions at an undervalue
Preferential treatment of creditors
Excessive pension contributions
Extortionate credit bargains
Assignment of book debts
Transactions defrauding creditors
Trustees also review the claims submitted by creditors to make sure they are valid and determine the priority of each claim based on the legal hierarchy of debt repayment.
How does the trustee report to the court?
Throughout the bankruptcy process, the trustee must report to the court. This involves regular updates on the status of the case, including details of assets recovered, funds distributed to creditors, and any ongoing investigations.
Can trustees be challenged in bankruptcy?
Both creditors and bankrupt individuals have the right to challenge the actions of a trustee if they believe that the trustee is not acting per the law or their duties. A money, tax, and debt solicitor can support in these kinds of claims.
Grounds for challenging a trustee include:
Misconduct or improper conduct
Breach of duty
Conflict of interest
Disagreement with decisions
Creditors or bankrupt individuals can apply to the court to challenge the trustee’s actions or to seek their removal. If the court finds that the trustee has acted improperly, it can order the removal of a trustee and appoint a new one. In some cases, specific decisions made by the trustee can be reversed or amended if found to be improper.
Complaints about trustees in bankruptcy can also be made to the relevant regulatory bodies, which have the authority to investigate and take disciplinary action if necessary.
How can Lawhive help?
Whether you’re a debtor seeking relief from overwhelming debt or a creditor hoping to recover what you are owed, knowing what to expect can make the bankruptcy process more manageable and much less daunting.
If you’re facing bankruptcy or dealing with a bankrupt debtor, it’s important to seek professional advice to fully understand your rights.
At Lawhive, we specialise in making legal processes accessible and straightforward for consumers and small businesses. Our network of experienced money, tax, and debt lawyers is here to help you get through the process with confidence and clarity, whichever side of the fence you’re on.
Contact us today for a free case evaluation and quote for the services of a specialist lawyer.