Mikki v Duncan

In bankruptcy, the benefit of a hire-purchase agreement is separate property from the vehicle itself. It therefore falls within the bankrupt’s estate under the Insolvency Act 1986, even where the vehicle would otherwise qualify as a necessary tool of the bankrupt’s trade. The statutory exemption for tools, vehicles and equipment does not extend to the contractual benefit without clear support from the Act’s policy or purpose. The trustee may realise that benefit for creditors, including any surplus produced on sale. A challenge to the trustee’s decision under section 303 is governed by the stringent perversity or bad-faith test. Section 35A of the Supreme Court Act 1981 does not apply where the debt was paid before proceedings.

Mr Mikki, a bankrupt photographer, appealed decisions concerning two matters. First, a vehicle used for his wedding-photography business had been acquired under a hire-purchase agreement. After the agreement was terminated, the vehicle was sold and the surplus was paid to the trustee in bankruptcy. Mr Mikki argued that the benefit of the agreement was protected as a tool of his trade under section 283 of the Insolvency Act 1986.

Secondly, the trustee had retained money pending consideration of set-off and later paid it to Mr Mikki with interest at 0.5 per cent. Mr Mikki claimed interest at 8 per cent. Deputy District Judge Adams rejected the challenges. Rose J granted permission to appeal but dismissed both appeals on 18 June 2014. The central issues in the Court of Appeal were whether the hire-purchase benefit vested in the trustee and whether the interest decision was properly challengeable.

1. Hire-purchase agreement. The appeal on the vehicle issue was dismissed. Section 283(1) of the Insolvency Act 1986 vests in the trustee all property belonging to or vested in the bankrupt at the commencement of bankruptcy. Under section 436(1), property includes choses in action, obligations and every description of interest arising out of or incidental to property. The contractual benefit under a hire-purchase agreement is a chose in action distinct from the vehicle. It therefore prima facie vests in the trustee.
2. The exemption in section 283(2) covers specified chattels, including necessary tools and vehicles, but its natural meaning does not extend to the contractual benefit of a hire-purchase agreement. The wider interpretation was not required by the statutory scheme or its policy. The Cork Report supported rehabilitation through retention of assets necessary for work, but assumed ownership of the relevant goods and gave no support to extending the exemption to conditional-purchase contracts. The practical guidance in the Insolvency Service Technical Manual did not amount to authority.
3. The contractual liabilities remained bankruptcy debts within section 382 and were provable under Insolvency rule 12.3(1) and section 322. The statutory scheme contained no implication excluding such liabilities merely because the relevant goods might otherwise be exempt tools or household items. Section 308, which contemplates replacement of physical exempt property, also provided no support for extending section 283(2) to contractual rights.
4. Because the hire-purchase benefit vested in the trustee, the trustee was entitled, and arguably obliged, to realise it for the estate. The appeal therefore failed even on the assumption that the vehicle itself would have qualified as a tool of trade.
5. Interest. The appeal on interest also failed. The decisions below correctly treated the issue as a challenge under section 303(1). The court may interfere only for bad faith, perversity, fraud, or conduct so unreasonable and absurd that no properly advised trustee or reasonable person could have acted in that way. The trustee’s payment of interest at 0.5 per cent did not meet that threshold.
6. Section 35A of the Supreme Court Act 1981 did not apply because the debt had been paid before proceedings were issued. Although Sempra Metals Ltd v HMRC recognised possible common-law claims to interest as damages or restitution, that issue had not been argued and was unsuitable for introduction on a second appeal. Both grounds failed and the appeal was dismissed.

• Court of Appeal (Civil Division): appeal from the decision of Rose J, delivered on 18 June 2014, dismissed both grounds of appeal. Rose J had granted permission to appeal from decisions of Deputy District Judge Adams but dismissed the appeals.
• Canterbury County Court: Deputy District Judge Adams determined the bankruptcy applications against Mr Mikki, including the challenge concerning the vehicle and the claim to enhanced interest.