Income Payment Agreement and Order in Bankruptcy

The High Court, in the case of Thomas and another (Joint Trustees In Bankruptcy of Stephen John Edmondson) v Edmondson [2014] EWHC 1494 (Ch) (12 May 2014), has considered whether the Court has jurisdiction to make an Income Payments Order (IPO – made by the court) against an undischarged Bankrupt who has already entered into an Income Payments Agreement (IPA – agreed between the Bankrupt and the Trustee).

A Bankrupt’s income does not automatically form part of their Bankruptcy Estate but can be claimed by the Trustee in Bankruptcy under an IPO or IPA.

IPOs and IPAs must specify the period for which they apply: a maximum of three years. This period may end after discharge of the Bankrupt.

The issue determined was whether an IPO could be made against a Bankrupt (and therefore extend the time of the Income Payments regime) where he has already entered into an IPA. Having reviewed the historical legislative context and intention, the Court held on a plain reading that an IPA did not deprive it of the discretion to make an IPO: they are not mutually exclusive.

This decision arose from the Bankrupt having entered into an IPA with the Official Receiver to pay the additional income he was expected to receive as a result of a change to his tax code. Where a person is made Bankrupt, HMRC will usually apply a nil tax code and claim in the Bankruptcy Estate as a Bankruptcy creditor for the tax payable until the end of the tax year. The Official Receiver will often seek an IPA shortly after the making of the Bankruptcy Order to avoid any potential loss to the Bankrupt’s Estate or windfall for the Bankrupt. Joint Trustees in Bankruptcy were subsequently appointed and sought to agree a new IPA for the Bankrupt’s surplus income. He refused on the basis of his previous IPA and the Trustees therefore applied for an IPO before the Bankrupt was automatically discharged from Bankruptcy. Following discharge from Bankruptcy, the power to seek a new IPA or IPO is lost and any ongoing payment arrangement must be varied by the Court (or, in the case of an IPA, by agreement between the parties). In making its decision, the High Court overturned an earlier County Court declaration that the Trustees were not entitled to an IPO on the basis of the Bankrupt’s earlier IPA.”

If you are facing insolvency or bankruptcy, contact Peter Harling, an insolvency law specialist at peterharling@chadlaw.co.uk or by telephone on 01924 379078.