Vehicle hire purchase agreements and tools of the trade in bankruptcy (Mikki v Duncan)

This article was first published on Lexis®PSL Restructuring & Insolvency

Original news

Mikki v Duncan [2016] EWCA Civ 1312, [2017] All ER (D) 157 (Feb)

The Court of Appeal, Civil Division dismissed an appeal by a bankrupt against a decision not to allow him to purchase his car back from the hire purchase company as a tool of the trade under section 283 of the Insolvency Act 1986 (IA 1986). In so doing the court held that it could not be said that the benefit of the hire purchase contract vested in the bankrupt.The benefit remained with the trustee and he was therefore obliged to realise it to the best advantage of the creditors.

What are the practical points to take away from this decision?

The takeaways are the guidance that this gives to trustees as to how to deal with vehicles held under hire purchase agreements. The approach taken at the moment by trustees—that is to allow the hire purchase company to take the vehicle and sell it (realising the equity in the agreement or more likely giving rise to an unsecured debt provable in the bankruptcy)—has been approved.

What was the background to this appeal?

Mr Mikki is a photographer who specialises in weddings and also portraits. In 2010, he was adjudicated bankrupt on an HMRC petition—the amount owing has now amounted to around £100,000. When he was first interviewed, Mr Mikki disclosed that his camera equipment was a tool of his trade and therefore asked that it be exempted from the estate which vested in the trustee on his appointment. Relevant to the appeal, when Mr Mikki was made bankrupt he had a bank account and a relatively expensive car. The bank account had funds of around £1,500 which he continued to operate after bankruptcy and all the money was spent. However, shortly after the bankruptcy Mr Mikki received a deposit for a wedding of around £3,000 and paid that money into the account. He continued to operate the bank account until it was frozen by which point there was around £1,500 left in the account. The bank paid that money to the Insolvency Services Account (ISA). There followed lengthy investigations into whether and how that money could be claimed or used for the benefit of creditors. It was ultimately determined that it probably could not and was returned before the start of the claim against the trustee. Interest was tendered (but not accepted) at the rate earned in the ISA, an amount of £17 odd. Mr Mikki argued that the interest rate should have been punitive at 8% and claimed some £260. As to the car, he held the car under a hire purchase agreement. He had no property in the car but a right to use it under the hire purchase agreement in the usual way. Unusually though, there was equity in the agreement, that is that the car was more valuable than the amount outstanding under the hire purchase agreement. By the time of appointment the agreement had been terminated (under the bankruptcy condition) and the hire company were seeking to recover the car so that it could be sold. Mr Mikki sought to pay the amount outstanding under the hire purchase agreement so that he could retain the vehicle. The trustee refused that route (because there would have been no recovery for the estate) and allowed the vehicle to be recovered and sold. Some £2,500 was returned to the estate for the benefit of creditors. Around three years later, Mr Mikki argued that the vehicle was a tool of his trade and the trustee should not have allowed the hire purchase company to repossess and sell the vehicle. The second issue in the appeal was whether the bundle of rights which gives a hirer a right to possession of a vehicle (which would be exempted as a tool of the trade were it owned by the hirer) could qualify as a tool of the trade and be exempted from vesting in the trustee. There was an evidential issue of whether the vehicle could have amounted to a tool of the trade in any event, but the Court of Appeal proceeded on the assumption that it would have been.

What were the main legal arguments put before the Court of Appeal? What did the Court of
Appeal decide, and why?

Interest was dealt with (as it had been below) in this way. The trustee had decided, when he determined to repay the £1,500, that interest should be paid at the rate of 0.5%—that being the rate earnt in the ISA. The court determined that that was a decision and reviewed it under IA 1986, s 303—they deemed the decision not to be perverse thus should not be interfered with. The court applied the test in Bramston v Haut [2012] EWCA Civ 1637, [2012] All ER (D) 127 (Dec) and approved it. In terms of the car, it was a new point of law on which no authority existed. It consequently came down to the interpretation of the statute. The trustee argued that the statute was plain—tools of the trade were physical items used by a bankrupt in their trade. What was plainly not included, pursuant to the statutory language was a bundle of rights (a chose in action) by which a bankrupt had the right to possession of something that could be a tool of the trade if he owned it. Mr Mikki argued that the statutory language should be construed or extended to include a bundle of rights by which he had a right to possession of the vehicle. The court determined that the statute should not be construed as Mr Mikki suggested and that the proper interpretation was the restricted interpretation, ie that the tools of the trade exemption only applied to physical assets owned by the bankrupt at the time of the bankruptcy.

To what extent is the judgment helpful in clarifying the law in this area?

This judgment is extremely helpful—there was no authority on the vehicle hire purchase issue so this is new law. Furthermore, the Insolvency Service’s technical manual suggests that vehicles held under hire purchase contracts can be tools of the trade and can be exempted from the bankrupt’s estate in some circumstances—this will need to be re-written as a consequence of this decision.

The decision on interest also confirms Bramston v Haut yet is not new.