Guidance

The functions of a trustee or liquidator

Updated 6 April 2017

1. Overview

One of the main purposes of an insolvency process is to ensure a fair distribution of the insolvent’s assets to the creditors. The assets of a person in bankruptcy are looked after by a trustee, while a liquidator oversees the assets in liquidation. During the insolvency process, the trustee or liquidator realises (sells) the insolvent’s assets to make payments to creditors.

The official receiver (OR) will act as the trustee or liquidator initially unless the court has already appointed a private sector insolvency practitioner (IP) to act. The OR may seek the appointment of an (IP) as trustee or liquidator if the OR considers, in the circumstances of the case an IP appointment is required. The creditors can also appoint an IP.

Even though an IP may be appointed, the OR remains responsible for looking into the affairs of the bankrupt or company. Any bankrupt or company officer (both current or former) has a duty to co-operate with the trustee or liquidator in addition to a duty to co-operate with the OR.

ORs are civil servants employed in the Insolvency Service and officers of the county court and, in some cases, the High Court. IPs are usually accountants or solicitors in the private sector who are authorised by a regulator through the Insolvency Act 1986

2. Appointment of an IP as trustee or liquidator

The IP is appointed by the creditors as trustee or liquidator by one of a number of procedures, outlined below. The OR can also ask the Secretary of State to make the appointment. A trustee can be appointed even after the bankrupt is discharged if there are still bankruptcy assets to deal with.

The decision procedures by which an IP can be appointed are as follows:

• correspondence with creditors
• a virtual meeting of creditors
• by electronic voting by creditors
• a physical meeting of creditors
• the deemed consent of creditors

The OR will choose the most appropriate method, depending on the circumstances of the case, but only the creditors can ask for the decision to be made at a physical meeting.

The OR will notify the bankrupt if an IP is appointed. An IP must also advertise their appointment in the Gazette as outlined in rule 10.74 of the Insolvency (England and Wales) Rules 2016. If the Secretary of State makes the appointment, the IP must notify the creditors individually or, if the court allows, by an advertisement.

3. Functions of a trustee or liquidator

The main function of a trustee or liquidator is to:

• realise the assets of an individual in bankruptcy or a company in liquidation for the best possible price
• distribute money to creditors in a strict order of priority

The trustee or liquidator has a duty to dispose of assets at the highest possible price to maximise the amount available for creditors. They may apply to court to restore property that a bankrupt or company have disposed of in a way that is unfair to their creditors (for example if, before bankruptcy, a property had been transferred to a relative of the bankrupt for less than its full value).

A trustee may claim property obtained by a bankrupt during the bankruptcy. They can also ask them, using a court if necessary, to pay part of their wages, salary or other income to the trustee for a maximum period of three years, if that income is more than the bankrupt and their family need to live on.

A liquidator can take action against directors or former directors personally for the benefit of creditors. For example if the liquidator can show the directors continued to lose money when they knew the company could not recover they can be required to personally make payments to the liquidator for the creditors.

Certain items are excluded from a bankrupt’s estate, although the trustee can sell and replace an individual item if the value is more than a reasonable replacement. Excluded items include:

• tools, vehicles and items that a bankrupt needs to continue their work
• domestic items such as clothing, furniture, bedding and household equipment necessary for the basic needs of the bankrupt and their family

4. Creditors’ or liquidation committee

A committee can be appointed to protect and promote the creditors’ interests. The trustee or liquidator must report to the committee and is accountable to it for their costs and expenses. They must also tell the committee if they hire a solicitor to help them or if they dispose of any property of the bankrupt or company to someone related to the bankrupt or company.

5. Powers of a trustee or liquidator

The powers of a trustee or liquidator are set out in the Insolvency Act 1986.

6. Payment of a trustee or liquidator

A trustee or liquidator is entitled to be paid for the work they do. This can be paid as a percentage of the assets realised or distributed, on an hourly rate or for a fixed sum. The basis of the payment can be agreed by a creditors’ or liquidation committee or by an appropriate decision procedure (other than deemed consent). When agreeing payments, creditors should consider:

• the complexity of the case
• any extra responsibility that is required of the trustee or liquidators
• how effectively the trustee or liquidator is carrying out their duties
• the value and nature of assets that the trustee or liquidator has to deal with

The hourly rate is set by the trustee or liquidator but they must provide in advance a full estimate of the fees that will be charged where they wish to use an hourly rate. When a trustee or liquidator seeks payment during a bankruptcy or liquidation, they must provide evidence of expenses, progress made and, where appropriate, time spent on the case. The Statement of Insolvency Practice (SIP) 9 sets out the principles that IPs should apply when providing information about and estimates of their fees, and sets out key compliance standards.

The trustee or liquidator will provide updates on what work has been done and why, and what further fees and expenses have been incurred in annual progress reports.

If the basis on which a trustee or liquidator is to be paid is not agreed by the creditors , they will automatically be paid 18 months after they take up office based on the assets realised and money distributed to creditors.

A creditor can contest any fees in court if they have support of over 10% in value of the unsecured creditors. If a trustee or creditor considers the amount they are paid too low, they can ask creditors, or apply to court, to have it increased. Guidance on trustee or liquidator disbursements (payments) are given in SIP9; those involved directly in the resolution of the insolvent’s affairs require no approval, while those that include elements of shared or allocated costs are subject to approval.

Where the trustee or liquidator is the official receiver, this fee for acting as trustee or liquidator is set by Parliament at 15% of the assets realised.

6.1 Further fee information

A trustee or liquidator (other than the OR) must provide an annual progress report to creditors, including details of their remuneration. A creditor with support of at least 5% in value of unsecured creditors can ask for further information within 21 days. Unless reasons are given for not doing so, this must be provided within 14 days or the creditor can apply to court.

A bankrupt or creditor can ask, free of charge, for a breakdown of the hours and rates of pay of staff who have worked on a case. This can be up to the most recent six-month period from the initial appointment of the trustee or liquidator.

7. Expenses of bankruptcy or liquidation

A trustee or liquidator distributes money from the assets of a bankrupt or company in a strict order.

Expenses of the bankruptcy or liquidation are paid first in the following order:

1. expenses incurred in realising the assets of the bankrupt or company
2. fees payable to the official receiver
3. the costs of the petitioner
4. any necessary disbursements made by the trustee or liquidator
5. the payment of anyone employed to perform services in the bankruptcy or liquidation as required under insolvency law
6. the remuneration (payment) of the trustee or liquidator
7. Capital Gains Tax liability arising on the disposal of assets

8. Payments to creditors in a bankruptcy

After the expenses have been paid, if there is money left the creditors are paid in the order outlined in the steps below until there is no money left. At each step if there is not enough money to pay those creditors in full, money is paid in proportion to the amount owed. This is described as a dividend of pence in the £, where 100p in the £ equals payment in full.

1. Claims of preferential creditors – these are mainly claims by employees for unpaid wages, holiday pay and contributions to occupational pension schemes.
2. All debts that are not preferential or postponed (see below) – these are debts of unsecured creditors, who will include trade and expense creditors.
3. Interest on debts – if the debts of the preferential and unsecured creditors are paid in full, they are entitled to interest on their debts from the date of the bankruptcy order. The rate of interest paid is the greater of: the statutory rate of interest at the date of the bankruptcy order, and the rate of interest the bankrupt would have had to pay if they had not been made bankrupt. Since 1 April 1993 the statutory rate of interest has been 8%.
4. Debts to postponed creditors – this is money owed to a person who was the spouse or civil partner of the bankrupt at the date of the bankruptcy order.

Any surplus money left over after paying all of the above is returned to the bankrupt.

9. Payments to creditors in a liquidation

After the expenses have been paid, money from the assets of a company in liquidation are paid in the order outlined in the steps below until there is no money left. At each step if there is not enough money to pay those creditors in full money is paid in proportion to the amount owed. This is described as a dividend of pence in the £, where 100p in the £ equals payment in full.

1. Claims of preferential creditors – these include claims by employees for unpaid wages and holiday pay and contributions to occupational pension schemes.
2. Floating charge – instead of, or as well as, having a mortgage or charge over - specific asset(s) of a company, a creditor may have a mortgage or charge over all or part of the assets of the company known as a ‘floating charge’. From the proceeds of assets subject to a floating charge, preferential creditors will be paid first (to the extent that they have not already been paid from the company’s general assets that are not subject to the charge). Where the charge was created on or after 15 September 2003, part of the proceeds from the sale of these assets will be set aside for distribution to unsecured creditors. Any surplus will be paid to the secured creditor holding the floating charge.
3. All debts that are not preferential or postponed (see below) – these are debts of unsecured creditors, who will include trade and expense creditors.
4. Interest on debts – if the debts of the preferential and unsecured creditors are paid in full, they are entitled to interest on their debts from the date of the winding-up order. The rate of interest paid is the greater of: the statutory rate of interest at the date of the order, and the rate of interest the company would have had to pay if it were not in liquidation. Since 1 April 1993 the statutory rate of interest has been 8%.
5. Claims of postponed creditors – these include claims where the company has been carrying on unauthorised investment or banking business.

Any surplus money left over after paying all of the above is returned to the shareholders of the company.

10. Secured creditors

If a creditor holds a mortgage or charge over an asset of a bankrupt or company, if that asset is sold, the secured creditor receives the proceeds. If there is a surplus after the asset is sold, the trustee or liquidator receives any balance. If the debt is not paid in full, the balance is an unsecured debt in the bankruptcy or liquidation.

11. Completion of the administration by a trustee or liquidator

When a trustee or liquidator has distributed all the assets, they will report to creditors on what they did during the insolvency and will give a summary of their receipts and payments. They will also seek their release from office. The creditors have a right to object to the release of the trustee or liquidator.

12. Complain about an Insolvency Practitioner

You can complain about an insolvency practitioner using the complaints gateway.