Court clarifies key point on Trustee in Bankrupt’s ability to vary an income payment order
27th May, 2022
Income received by a bankrupt individual after the date of the bankruptcy order does not form part of their bankruptcy estate.
However, any surplus income above that needed by the bankrupt individual to meet his/her reasonable domestic needs can be claimed by a Trustee in Bankruptcy for the benefit of the bankruptcy estate (and therefore for creditors) for a period of up to 3 years. This is done using an Income Payments Agreement (“IPA”) or an Income Payments Order (“IPO”).
IPAs and IPOs are highly utilised tools within bankruptcy. As the 3 year period progresses a bankrupt’s income may increase as he/she gets back on her feet again. The insolvency legislation allows a Trustee in Bankruptcy to vary the amount the bankrupt must pay to the bankruptcy estate, either by agreement with the bankrupt or by asking the Court to vary it.
With backlogs caused at least in part by the pandemic, it can take several months for an application to vary an IPA/IPO to be heard by the Court, which could result in the bankruptcy estate (and creditors) losing out in the meantime. However, a recent court decision has confirmed that variations can take effect from date the application is lodged with the Court, as opposed to the date the Court makes its decision.
Re Lorrell (in bankruptcy)  EWHC 443 – The Facts
Mr Lorrell was declared bankrupt in 2019. Prior to being adjudged bankrupt he had worked as a solicitor and barrister until he was suspended by the Solicitors Regulation Authority and the Bar Standards Board in 2018 for two years and five months respectively.
The Trustee and Mr Lorrell entered into an IPA. The IPA provided for Mr Lorrell to pay an initial sum of £100 per month for three years from 1st December 2019. The IPA also included an obligation on the part of Mr Lorrell to notify the Trustee of any increase in income within 21 days and a provision for the IPA to be varied by written agreement or by order of the court.
The periods of suspension had ended, and Mr Lorrell had recommenced practise at the bar. The Trustee alleged that Mr Lorrell had failed to make all of the payments he was obliged to make under the IPA and had failed to notify the Trustee of his increase in income.
The Trustee applied to court to vary the IPA in order in June 2021, with the application being heard by the court in late February 2022.
The court held that the evidence had shown that Mr Lorrell had a surplus income of £2,187 per month and accordingly, it was appropriate to vary the IPA so that the monthly amount Mr Lorrell was required to pay to his Trustee in Bankruptcy increased from £100 per month to £2,100 per month.
Importantly, the Court also ordered that the variation of the IPA would take effect from the date the application for variation was issued and not from the date of the original IPA or the date of the Court order (which was some 8 months after the application had been filed with the court). Mr Lorrell was therefore required to pay the increased monthly amount from 18 June 2021 to 23 October 2022.
Why is this important?
Prior to this case there was no authority on the question of the date upon which a variation of an IPA should take effect. Section 310A of the Insolvency Act 1986 (which deals with IPAs) is silent on the point.
As noted above, in the event that a bankrupt’s income increases significantly during the term of their IPA, a Trustee is able to vary the monthly payments due under the IPA and the variation can take effect retrospectively. This could result in a greater dividend for a bankrupt’s creditors and is particularly important given the delay to applications being heard by the Court that has been caused by the pandemic.
It is also an important reminder that if an individual is declared bankrupt, the financial effect continues beyond the date of the bankruptcy order and potentially continues to affect them even after they have been discharged.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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