In the recent decision of Mikki v Duncan (as Trustee in Bankruptcy of Mr. Mikki) [2017] EWCA Civ 57, CA, 3 February 2017 the Court of Appeal was asked to consider whether a car being purchased by the bankrupt through a hire purchase agreement was exempted from property which vests in a trustee in bankruptcy under Section 283 of the Insolvency Act 1986 (“the Act”).

The vesting provisions under Section 283 of the Act exclude assets such as tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment and such clothing, bedding, furniture and household equipment as are necessary for satisfying the basic needs of the bankrupt and his family.

Facts

In this case the bankrupt, Mr. Mikki (M) was a photographer who took wedding photos and portraits. M was adjudged bankrupt on 9 June 2010, his photographic equipment was claimed as exempt under Section 283(1) and (2) of the Act, however, he also had a BMW car which he was acquiring on an HPA, and no similar claim to exemption was made.

The finance company terminated the HPA and, in February 2011, sold the car, producing a surplus of £2,652 which it paid to the Official Receiver pending the appointment of a trustee in bankruptcy. Two years later, in 2013, but not before, M claimed that the car was a tool necessary for his trade or business which did not vest in his trustee. The second point in the appeal related to the interest on a sum of £1142 odd which had ultimately been paid by the trustee to M and falls outside the scope of this article.

At first instance, the District Judge found against M, as did Rose J on appeal (who had identified the relevant property as the benefit of the HPA, rather than the car itself, but who also thought (obiter) that the car could have been a tool of M’s trade). M appealed further to the Court of Appeal.

Decision

On the exemption point, the Court of Appeal identified the question as being “can the benefit of an HP contract for the hire purchase of something which would, of itself, be capable of being a tool of the trade, remain vested in the bankrupt via section 283(2), or does it vest in the trustee?”.

It concluded that the exemption from vesting for tools of a trade set out in Section 283(2) of the Act meant physical property, which did not include choses in action arising, for example, under a HPA. On whether the policy of the Act required an extended interpretation so as to include within the exemption from vesting a chose in action concerning an item which was capable of being a tool of trade, the Court of Appeal decided that such an extended meaning was not required.

Conclusion

The decision of the Court of Appeal provides welcome clarification for insolvency practitioners where vehicles are acquired on an HPA by persons who become bankrupt. Lewison LJ had given permission to appeal on the footing that “the treatment of vehicles held under hire purchase arrangements also raises a point of principle”. Although in practice may have little relevance as it is a rare case in which there exists equity in an HPA.

The approach of the court in this bankruptcy case, in resisting an extended interpretation of Section 283 of the Act seems consistent with those cases in which hirers of capital assets seek relief from forfeiture by the equipment lessor on early termination, so is not perhaps all that surprising.

For any insolvency and restructuring enquiries please contact Lauren Hartigan-Pritchard on 01905 677051 or lhartiganpritchard@thursfields.co.uk

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