Anyone who has had any involvement in a personal insolvency estate over the last 10 years will be aware of the Asset Realisations Charge (ARC) provisions. Regular readers of this newsletter will also recall that we have previously made comment of some aspects of the mechanics of this charge. This article discusses circumstances that recently arose in two of our files.
The background is easy. The Bankruptcy (Estate Charges) Act 1997 imposes a “Realisations” charge on estates. The Act reads:
BANKRUPTCY (ESTATE CHARGES) ACT 1997
Section 6 Realisations charge
(1) A charge, calculated in accordance with sections 7 and 8, is imposed in respect of amounts received by a person (including the Official Trustee) who, during a charge period:
(a) is the trustee of the estate of a bankrupt under the Bankruptcy Act 1966 ; or
(aa) is the trustee of a composition or scheme of arrangement under Division 6 of Part IV of the Bankruptcy Act 1966 ; or
(b) is controlling trustee in relation to a debtor whose property has become subject to control under Division 2 of Part X of the Bankruptcy Act 1966 ; or
(c) is the trustee of a personal insolvency agreement executed in relation to a debtor under Part X of the Bankruptcy Act 1966 ; or
(d) is the trustee of the estate of a deceased person under Part XI of the Bankruptcy Act 1966.
The first circumstance arises and highlights the difference between the words “realisations” in the heading and “in respect of amounts received” in subsection (1). The point we wish to make is not related to amounts of ARC charged against the sale of assets or amounts recovered under legal actions. It relates to amounts received under a costs order granted in a successful claim.
The imposition of a cost order against a losing party is meant to defray some of the legal costs spent by the successful party in prosecuting the claim. It is a reimbursement of legal costs spent by the estate and not a realisation or recovery of property. But due to the words “amounts received”, this amount is subject to ARC. Our opinion is that this effectively charges these monies twice.
Consider receiving monies from the sale of an asset and paying ARC, then using the balance of these monies to fund a successful legal action. You receive the amount claimed in the action and a costs order for the monies spent in legal fees. ARC is payable on the reimbursement of the legal fees, even though it simply replaces an amount that has already been subject to ARC. Legally the Act does impose this charge, but maybe that should be reviewed.
The second circumstance arises from a exclusion granted by section 6A. This sections says that ARC is not payable on surpluses in bankrupt estates. A surplus arises after all creditors and costs of the estate have been met. The section reads:
BANKRUPTCY (ESTATE CHARGES) ACT 1997 – SECT 6A Charge not payable on estate surplus
(a) the person receives an amount in respect of a bankrupt’s estate; and
(b) as a result of receiving the amount, the person becomes able to pay off all the bankrupt’s debts;
then the following amounts are not taken into account in determining the amount on which charge is payable:
(c) any excess of the received amount over the amount needed to pay off all the bankrupt’s debts;
(d) any amount later received by the person in respect of the estate.
The section is fair, expect that it only applies to bankrupt estates. We recently had a Part X estate that resulted in a surplus after all creditors and costs were met, but this surplus was subject to ARC. The same would be true to surpluses under agreements entered into under section 73. The same situation in a bankruptcy would not have attracted that charge on the surplus.
This inequity is probably (hopefully) unintended, but impacts on the monies returned to the debtor. It could be remedied by simply referring the exclusions on surpluses to the types of estates detailed in section 6.