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Definition of the bankruptcy estate and which assets vest in the trustee in bankruptcy - overviewThe bankruptcy estate - what it is

The bankruptcy estate is set out and defined in Insolvency Act 1986, ss 283–283A. The bankruptcy estate is, broadly speaking, the property which belonged to the bankrupt (or where the bankrupt held an interest in it) prior to being declared bankrupt. By virtue of the IA 1986, the bankruptcy estate will be left for the trustee in bankruptcy (the trustee) to deal with and will be divisible among the bankrupt's creditors. This is because, in principle, bankruptcy is a two-way process. On the making of a bankruptcy order, the bankrupt is no longer liable to pay the debts (and the creditors are entitled to prove for them in the bankruptcy process), the bankrupt will also be released from the debts on discharge. However, in return for this, any assets or property (subject to some exceptions) which belonged to the bankrupt at the time of the bankruptcy order will be left for the bankrupt's trustee to deal with in order to pay a dividend to the bankrupt's creditors.

The property which will make up the bankruptcy estate is also widely defined in IA 1986, s 436 and includes 'money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property'. This statutory definition is sufficiently broad to cover a wide spectrum of property, both tangible and intangible and wherever situated (albeit with real estate, the usual rules of international law provide that the trustee will require an order from the court where that property is situated to secure and enforce their rights).

In addition, the trustee will be able to claim assets as part of the bankruptcy estate if the bankrupt acquires an interest in that property after the bankruptcy order is made, but before discharge from bankruptcy, and where the trustee has (within the prescribed time-limit) served a notice on the bankrupt (IA 1986, s 307).

Vesting - what it is and how it operates

The process by which assets are transferred to the trustee on appointment is called vesting. Vesting takes place under IA 1986, s 306, which provides that the bankrupt's estate will vest in the trustee immediately on their appointment. Therefore, vesting takes place by operation of the law and without the need for a formal transfer or assignment. Where the bankrupt holds property solely (ie they own a property both legally and beneficially on their own), the entire legal and beneficial interests will vest in the trustee. Where the bankrupt holds property jointly with other persons, the bankrupt and the other persons will hold the property on trust for the trustee and the other persons with an equitable interest.

Where the entire legal and beneficial interest in the asset/property vests in the trustee, they are able to transfer the legal estate into their own name. Examples of this would include real estate and shares.

Assets which will vest in the trustee in bankruptcy and assets which won't

Assets which will typically vest in the trustee include:

  • the bankrupt's family home/sole or principal residence (IA 1986, s 283)

  • any other freehold property (IA 1986, ss 283 and 436)

  • any cash/cash deposits belonging to the bankrupt at the time of the bankruptcy order (IA 1986, ss 283 and 436)

  • any shares or stock held by the bankrupt (IA 1986, ss 283 and 436)

  • Examples of assets which typically will not vest include:

  • the bankrupt's pension if the bankruptcy petition was presented on or after 29 May 2000 and the pension is an approved scheme (Welfare Reform and Pensions Act 1999, s 11)

  • certain causes of action, such as claims for pain and suffering and libel (Heath v Tang [1993] 4 All ER 694)

  • the bankrupt's domestic and household items, which are necessary for satisfying the basic needs of the bankrupt and their family (IA 1986, s 283)

  • the bankrupt's tools of trade, or items/equipment necessary for the bankrupt to use in their employment, business or vocation (IA 1986, s 283)

  • How long the assets vest in the trustee in bankruptcy

    The assets which vest in the trustee will do so for as long as it takes the trustee to realise their interest in them. There are some exceptions to this, the most common being the bankrupt's sole or principal residence (IA 1986, s 283A). This asset will vest in the trustee for a period of three years from the date of the bankruptcy order. If the trustee fails to realise their interest in that property within the three years, or fails to apply to court to realise/secure their interest in the property, the interest will revert back to the bankrupt.

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