IN THE UPPER TRIBUNAL	Appeal No.  CJSA/526/2009
ADMINISTRATIVE APPEALS CHAMBER

Before Deputy Upper Tribunal Judge Mark

Decision:  The appeal is allowed.  I set aside the decision of the tribunal and I remit the matter to be reheard by a new tribunal in accordance with the directions given below.

REASONS FOR DECISION

1.	This is a supported appeal from a decision of the Leicester Appeal Tribunal given on 8 August 2008 disallowing the claimant’s appeal from a decision of a decision maker issued on 13 September 2007 and finding that the claimant was not entitled to income based jobseeker’s allowance from 28 June 2007 because he had capital in excess of £16,000.

2.	In coming to this conclusion, the tribunal relied entirely on its findings as to capital which it found the claimant had acquired in the years up to 2005.  It totally ignored the fact that the claimant had been adjudged bankrupt in the Leicester County Court, on a creditor’s petition, by an order dated 26 October 2006, two copies of which were in the tribunal file, as was a letter dated 9 May 2007 from the Insolvency Service giving details of the claimant’s trustee in bankruptcy (said to have been appointed on 18 January 2007) and advising that the writer, an examiner, had been trying to make an appointment for the claimant to attend at the offices of the Insolvency Service.  Further, the fact of the bankruptcy, and its effect on any property interests he may have had, had clearly been relied on by the solicitors for the claimant.  

The effect of a bankruptcy order

3.	The relevance of that fact ought to have been immediately apparent.  Under section 284(1)-(3) of the Insolvency Act 1986, where a person is adjudged bankrupt, any disposition of property made by that person from the date of presentation of the petition to the vesting of his estate in a trustee, is void unless made with the consent of the court or subsequently ratified by the court.  That includes payments in cash or otherwise by the bankrupt, so that where a payment is void by virtue of that section, the person paid holds the sum paid for the bankrupt as part of his estate.  “Property” is given a wide definition by section 436 of that Act.

4.	Under section 306(1) of that Act, once a trustee in bankruptcy is appointed, or the official receiver becomes trustee, the bankrupt’s estate vests in the trustee.  The trustee must then distribute the assets available for distribution (that is those which remain after satisfying the claims of secured creditors, so far as their rights remain unaffected by the bankruptcy) in accordance with the order of payment prescribed by the Act in discharge of expenses of the bankruptcy, and the payment of creditors, including lastly the bankrupt’s wife, with interest.  It is only if there is then a surplus that the bankrupt will get anything.

5.	It would appear that in the present case the trustee in bankruptcy was appointed in January 2007, some five months before the first date for which benefit was claimed.  On that basis, the claimant’s property referred to by the tribunal had long since been vested in the trustee in bankruptcy and the claimant’s only interest in it was in any possible surplus (of which there was no evidence and no investigation by the tribunal).  The tribunal was therefore plainly wrong to ignore the bankruptcy and the appointment of the trustee.  I deal below with the enquiries that should have been made by the tribunal, and for this purpose it is necessary to distinguish between the position before the date of the bankruptcy order and that which obtained once that order had been made pending the appointment of the trustee.  This may be relevant in considering possible questions of notional capital when the case is reheard.

6.	While the legal title to the property will only be transferred to the trustee once there is a trustee, the making of the bankruptcy order deprives the bankrupt of the right to deal with his property except with the approval of the court.    Subject to any question that may arise if the bankruptcy were to be annulled, or if there were circumstances showing that the bankrupt was able, or perhaps likely to be able to get the consent of the court to his dealing with property for his own benefit, or that the bankruptcy order was made on the bankrupt’s own petition in circumstances in which he was in fact able to pay his debts as they fell due, the most that the bankrupt could then lawfully deal with as his own would seem to be any surplus to which he may ultimately become entitled.

7.	A similar point was considered by Mr. Commissioner Skinner in CIS/634/92, where, after a bankruptcy order had been made but before a trustee had been appointed, the bankrupt paid £42,281 off his mortgage and disposed of a further sum of £67,100, as he claimed but did not substantiate, gambling and repaying loans to family friends.  Mr. Commissioner Skinner held that the bankrupt’s estate vested in the trustee in bankruptcy only when he was appointed, and that the vesting was not retrospective.  He went on to hold that as the disposals in question were made after the bankruptcy, they were void under section 284 of the Insolvency Act and that in consequence the bankrupt could not be said to have deprived himself of that property for the purposes of regulation 51 of the Income Support (General) Regulations 1987.  Thus far, I would agree with that decision.

8.	Mr. Commissioner Skinner then went on to hold that the claimant had not provided a satisfactory account as to how he disposed of the £67,100, that it was therefore capital possessed by him until the appointment of the trustee in bankruptcy, and that he was not a constructive trustee of that sum.  It is at this point that I am compelled to question the approach of Mr. Commissioner Skinner.  As he had found, any disposition of the money was void under section 284.  It was not an asset that the claimant had any interest in or could legally use as his own capital.  It may have been possessed by the claimant, but it was not his to do as he wanted with it, and, subject to any order of the court, it had to vest in his trustee in due course.   If he had not disposed of it, he could still have applied for income support and explained that he was unable to realise or use any part of the money because of the bankruptcy order.  It may, as Mr. Commissioner Skinner found, have been unnecessary to resort to the concept of constructive trust because of the protection given to the property by the Insolvency Act, but, all else being equal, the effect of that Act was to make the property worthless to the claimant once he had been adjudged bankrupt because he could not dispose of it, and it would have to be used in due course to pay his creditors.  His only legal entitlement was to such sums, if any, as the court may allow him in the meantime, and to the surplus, if any at the conclusion of the bankruptcy
.
9.	A similar question was considered by Judge Turnbull in CJSA/1556/2007, where a restraint order had been made against the Claimant preventing him from dealing with specified property. The order was made by a High Court Judge under s.77 of the Criminal Justice Act 1988.  Judge Turnbull considered the effect of such an order on the status of the property as capital of the claimant.  He set out the position as follows:

“22.	There are obvious close similarities between a restraint order and a freezing order (formerly known as a Mareva injunction) made by the Court under the powers in Part 25 of the Civil Procedure Rules. As noted by Mitchell Taylor & Talbot on Confiscation and the Proceeds of Crime, para. III.021:

“Obviously, as the purpose of the restraint order is to prevent disposal of assets, similar principles and practice have arisen between restraint orders and conventional civil freezing orders. In some cases under the confiscation legislation the court has specifically referred to the similarity.” 

The authors cite a number of cases in support of that, including DPP v Scarlett [2000] 1 WLR 515. 

23.	There is clear authority that a freezing order “gives the applicant no proprietary right in the assets seized and no advantage over other creditors of the defendant” (Supreme Court Practice, Vol. 2 para. 2555): see Cretanor Maritime v Irish Marine Management [1978] 1 WLR 966; Derby v Weldon [1990] Ch 65. Gee on Commercial Injunctions, 5th Ed, summarises the position as follows: 

“A Mareva injunction does not affect the defendant’s proprietary interest in his assets. The claimant gains no priority over any other creditor of the defendant and no proprietary interest in or charge over the assets which are subject to the injunction.” (p.132).

24.	However, although I have not been referred to it by either party, I should also consider Re M (restraint order) [1992] 1 All ER 537. It concerned the interplay between the jurisdiction (under s.8(1) of the Drug Trafficking Offences Act 1986 in that case) to make a restraint order and the court’s jurisdiction in bankruptcy. A restraint order had been made against the debtor under that Act. When his creditors pressed for payment of their debts the defendant applied to the Court and obtained an interim order under s.252 of the Insolvency Act 1986 authorising a nominee appointed under a voluntary arrangement with his creditors to realise sufficient of his assets to discharge all debts to creditors. By s.252(2) such an order had the effect that no proceedings, execution or other process might be commenced or continued against the debtor or his property without the leave of the court. 

25.	When the prosecution applied for the appointment of a receiver pursuant to s.8(6) of the Drug Trafficking Offences Act, the defendant argued that s. 252(2) of the Insolvency Act prevented the prosecution from pursuing such an application. However, Otton J. held that an interim order under s.252 did not prevent the prosecution from applying for the appointment of a receiver in respect of property which was subject to a restraint order which had been made before the s.252 order, because the property to which a restraint order applied was no longer to be considered as part of the debtor’s estate. Otton J. said (p.543): 

“The property to which the restraint order applies is no longer to be considered a part of the defendant’s estate. He holds only notional title to such property. All dealings with such property are to be held in abeyance until such time as the defendant is acquitted or a confiscation order is made and satisfied. Any doubt is removed by consideration of the purpose of the Drug Trafficking Offences Act 1986, which is to be found in s.13 ……. The purpose, in short, is to make available the value of the realisable property and, by its realisation, to satisfy the confiscation order. 

Here Mr M is a defendant. He has been charged with a drug trafficking offence. The High Court on two previous occasions has been satisfied that there exists a reasonable likelihood that he will be convicted. It has made a restraint order pursuant to s.8 of the 1986 Act. All property rights in the property to which the order relates lie in abeyance. The property can no longer be considered part of his estate until the outcome of his criminal trial.” 

26.	Those statements, although made in a different context, would appear to provide quite strong support for an argument that assets of a claimant which are subject to a restraint order are not the claimant’s capital for the purpose of calculating his entitlement to income support/JSA. 

27.	I have come to the conclusion that it unnecessary for me to decide whether  that is so or not, for two reasons. First, if (as I am strongly inclined to think) such assets remain his capital, their “market value” (and therefore their value for the purpose of means tested benefits (see, in the case of JSA, reg. 111 of the Jobseeker’s Allowance Regulations 1996)) must surely be nil. An asset which a person is prohibited by court order from disposing of must surely be treated as having no market value. “

10.	Judge Turnbull then went on to deal with the fact that in that case the restraint order allowed periodic payments to be made out of the property which was the subject of the order, and the effect of those payments on the claimant’s entitlement to benefit.  For present purposes, I note that there is an apparent difference between the view of Otton J that the property could no longer be considered to be part of the estate of the person against whom the order had been made, and Judge Turnbull’s view that the assets remained part of the claimant’s capital but with a nil value.  That difference would not have any practical effect in the present context.  In either case the property would not have been taken into account in calculating the claimant’s capital for benefit purposes even before the trustee was appointed, contrary to the view of Mr. Commissioner Skinner in CIS/634/92.  That is a factor that may be relevant in considering any alleged dealings between the bankruptcy order and the appointment of the trustee if any such dealings are relied on for the purposes of any issue as to deprivation of capital.  It is not, as I have already pointed out, relevant to the assessment of the claimant’s actual capital at the first date of his claim, in June 2007, five months after the trustee in bankruptcy was appointed and the claimant’s property vested in him.

11.	My own inclination would be to agree with Judge Turnbull in relation to the case of the restraint order, but to say that in the context of the bankruptcy proceedings, where the provisions of the Insolvency Act are designed to transfer the property automatically to the trustee as soon as the necessary formalities have been gone through to appoint a trustee, the claimant has been stripped of his beneficial interest in the property once the bankruptcy order has been made, and the provisions invalidating subsequent transactions by him are designed to protect the interests of the trustee and the creditors.

12.	It is unnecessary for me to come to any firm conclusion on the question whether it remains capital with a nil value or ceases to be capital at all, as the effect on the claimant’s entitlement to benefit will be the same in either case, and the point has not been argued before me.  

13.	That conclusion also appears to me to be a reasonable one, as a bankrupt ought not to be at a disadvantage because there is a delay in appointing a trustee.  The purpose of the provisions as to capital is to ensure that the state does not provide benefit to somebody with capital assets over a certain amount out of which he can legally provide for himself.  It ought not to be able to say that the claimant cannot legally spend the money and at the same time that he is not entitled to benefit because he can spend it unlawfully.

14.	In failing to deal with this central issue of the bankruptcy and the appointment of a trustee in bankruptcy, the tribunal was plainly in error of law and its decision must be set aside.  It is clear that the claimant had little or no capital following the appointment of the trustee in bankruptcy and that subject to the possible application of the rules as to notional capital in rule 113 of the Jobseeker’s Allowance Regulations 1996, there is nothing in the evidence before the tribunal to indicate that the claimant had any significant capital

15.	My findings on this point do not affect the decision in CH/3670/2008, where Judge Jacobs was dealing with payments by a claimant of £75,000 in circumstances where the payments were made in November 2005, but the bankruptcy order was only made on the claimant’s own petition, on 3 February 2006, and the issue was whether the payments could brought into play the notional capital provisions under the Housing Benefit Regulations.  In that case the payments were made at a time when there was no legal restraint of any kind on his dealing with the capital and the payments were found to be capable of being capital of which the claimant had deprived himself of the full value of £75,000.

Possible deprivation of capital

16.	Prior to the making of the bankruptcy order, a claimant may deprive himself of his capital as explained by Judge Jacobs in CH/3670/2008.  He cannot deprive himself of anything of value following the making of the order for the reasons I have given above. 
 
17.	However, it appears to me that a claimant who presents a petition (or possibly fails to resist a petition presented by a creditor) and is declared bankrupt as a result may be found to have deprived himself of capital for the purpose of the various notional capital rules if he has taken this step, or held back from opposing the petition of the creditor if he has done so for the purpose of securing entitlement to the relevant benefit.  The same conclusion may also be come to if the claimant fails to take reasonable steps either to ensure that the debts are paid off and the bankruptcy annulled, or if the claimant fails to co-operate with the trustee in bankruptcy to ensure that the bankruptcy proceeds smoothly, that all liabilities are discharged and that any surplus is paid to him.  

18.	The capital of which he would deprive himself if he allows himself to be made bankrupt in those circumstances would be the capital of which he is deprived by the bankruptcy after taking into account what he would have had to pay to avoid the bankruptcy.  In failing to obtain an annulment or to assist the trustee, the capital of which he would deprive himself would be the capital he would have been entitled to had he acted reasonably and in accordance with his legal obligations, and the deprivation would only be from such date as he could reasonably have been expected to be re-united with the assets in question.

19.	In the present case, it appears to me that the claimant may well not have been co-operating with his trustee, who appears to have been trying to contact him, and there is no satisfactory evidence of the amount for which he was made bankrupt or of the amount of his debts, either secured or provable in the bankruptcy.  In particular, there is no statement of affairs from the trustee in bankruptcy.  Nor are there any satisfactory findings as to the claimant’s assets, or any proper investigation as to whether the claimant may have deprived himself of assets or concealed them prior to the bankruptcy.

20.	The claimant himself has, understandably, been rejected as a credible witness by more than one tribunal.  However, some information should be obtainable from his trustee in bankruptcy, and if he has not co-operated with his trustee in bankruptcy, as suggested by the letter from the Insolvency Service to which I have referred, it may be that the tribunal will be able to draw inferences as to relevant assets that he may have concealed prior to or following the bankruptcy order.      

21.	I express no view as to whether anything relevant may emerge, but it appears to me that some investigation of his bankruptcy is called for, and that the Secretary of State should have the opportunity to consider whether, in the light of any information from the trustee in bankruptcy, there are any further issues as to capital or deprivation of capital that might be pursued.

22.	For that reason, I am remitting this case to a new tribunal.   

Additional grounds of appeal

23.	The representative of the Secretary of State has further contended that the tribunal erred by failing to disregard one of the properties which it took into account (62 R Close) on the basis that at the date of the claim it was occupied by the claimant’s wife and son and so fell to be disregarded under paragraph 5 of Schedule 6 to the Jobseeker’s Allowance Regulations 1996.  I suspect that the tribunal may have disbelieved the claimant as to this, but it certainly did not spell this out as it should have done.  I further note, and the new tribunal may wish to investigate this if it becomes relevant to do so, that although this was said to have been the case, and there appear to have been divorce proceedings, including ancillary relief proceedings on foot, the address of the claimant is now given as 62 R Close by his solicitors in the notice of appeal to the Upper Tribunal.

Powers of the tribunal under rule 43

24.	The new tribunal may wish to consider whether to use its powers under rule 43 of the Social Security and Child Support (Decisions and Appeals) Regulations 1999 to obtain oral or written evidence or documentation from the trustee in bankruptcy and may also wish to consider whether it should require the claimant to give his evidence under oath as empowered to do by the same regulation.  It may also wish to consider recording the evidence that is given.

Michael Mark
Deputy Upper Tribunal Judge
2 July 2009