A Trustee in Bankruptcy is granted a wide statutory power under section 366 of the Insolvency Act 1986 (“the Act”) to ask the Court, at any time after the Bankruptcy Order has been made, to privately examine any person believed to be in possession of the Bankrupt’s “property” or of information relating to his affairs, to assist with his or her statutory investigations.
The Trustee in Bankruptcy is entitled to take possession of all of a Bankrupt’s “property”, as defined in section 311 of the Act, to carry out his or her statutory duties. Such “property” may include (amongst other asset classes) all books, papers and other records, including those which may be privileged from disclosure in other proceedings in certain circumstances.
Section 312(3) of the Act provides that any person who holds property for the Bankrupt is obliged to deliver up the same to the Trustee in Bankruptcy, and that failure to do so constitutes contempt of Court.
What does section 366 of the Act provide?
Under section 366(1) of the Act, the Trustee in Bankruptcy of a Bankrupt has the power, at any time after a Bankruptcy Order is made, to make an application to the Court to request that the party who is failing to cooperate with his or her requests for information to appear before the Court for private examination under oath. The scope of the persons who are capable of being summoned before a Court is wide, and includes:-
- The Bankrupt (irrespective of whether he or she is discharged from bankruptcy);
- The Bankrupt’s spouse or former spouse;
- Any person known or believed to have any property comprised in the Bankrupt’s estate in his possession or to be indebted to the Bankrupt; or
- Any person appearing to the Court to be able to give information concerning the Bankrupt or the Bankrupt’s dealings, affairs or property.
It is commonplace that the Trustee in Bankruptcy will usually write to the party who he or she believes is likely to hold information or documents relating to the Bankrupt’s dealings, affairs or property, before such proceedings under section 366 of the Act are issued.
If, however, cooperation with the Trustee in Bankruptcy is not forthcoming, the Trustee in Bankruptcy has the option of making an Application under section 366 of the Act.
Once an Application is brought under section 366 of the Act, a Trustee in Bankruptcy will be entitled to examine the Respondent in Court regarding any documentation relating to the Bankrupt’s property, dealings or affairs. The Trustee in Bankruptcy may ask the Respondent questions relating to the content of the documentation or question why the Respondent has not delivered up such documentation to him or her upon request.
Where does the Trustee in Bankruptcy stand in relation to legal privilege?
A Trustee in Bankruptcy can exercise their rights under section 311 of the Act to take possession of all books, papers and other records which relate to the Bankrupt’s estate or affairs, and which belong to him or are in his possession or control.
In the event the Trustee in Bankruptcy obtains legal documents containing information that is legally privileged, a careful analysis needs to be undertaken to assess whether legal privilege has in fact transferred to the Trustee in Bankruptcy, or whether it has been retained by the Bankrupt.
Legal privilege itself is only capable of transferring to the Trustee in Bankruptcy where the advice contained within the legal document relates to property which forms part of the Bankrupt’s Estate. In other circumstances where legal privilege has been retained by the Bankrupt, and the Trustee in Bankruptcy has taken possession of papers which are subject to that privilege, the Trustee in Bankruptcy will have a duty to protect the privilege and will not have the right to disseminate the privileged information in those legal documents, nor waive the Bankrupt’s legal privilege without the Bankrupt’s consent (see Shlosberg v Avonwick Holdings Ltd  EWCA Civ 1138).
What happens when a section 366 Application is issued?
A Respondent to an Application issued under section 366 of the Act should receive notification of a hearing date which the Court will list before a judge for the Application to be heard.
The first hearing is usually a directions hearing, during which the Court (if it is satisfied that the same is appropriate) will direct that a formal examination of the Respondent take place at Court at a future a date, and/or that books and records sought by the Trustee in Bankruptcy be delivered up.
A Respondent to a section 366 Application is expected to attend this first hearing and any subsequent hearings listed in respect of the Application, unless they have a reasonable excuse not to attend. If applicable, such reasons should be communicated to the Trustee in Bankruptcy and the Court at the earliest opportunity, to establish whether there is a prospect of adjourning the hearing to another date in the event a resolution cannot be reached with the Trustee in Bankruptcy regarding his or her request for information and/or documentation.
If the main Respondent is a company or partnership, the Trustee in Bankruptcy will often make an individual (who might be the managing director or managing partner) an additional Respondent to the Application, for the purposes of summoning an individual to Court.
In circumstances where a Respondent to a section 366 Application does not attend a hearing listed without reasonable excuse when summoned to do so, or where there are grounds to believe that the Respondent is about to abscond to avoid examination, the Court has the power to issue a warrant for the arrest of that Respondent, or for the seizure of any books, papers, records, money or goods in that Respondent’s possession.
In the event such a warrant is issued by the Court and subsequently executed by the Trustee in Bankruptcy, the Court has the discretion to authorise that the Respondent be kept in custody and for anything seized under the warrant to be held, until that person is brought before the Court under the warrant or until such other time as the Court may order.
The consequences of failing to attend without reasonable excuse can therefore be very draconian, should the Court exercise its discretion to use make such Orders.
In addition to the Court’s powers to list a hearing for the examination of the Respondent in Court (and to assist the Trustee in Bankruptcy in conducting the examination) and its powers to order delivery up of documentation (under section 367 of the Act) to the Trustee in Bankruptcy, the Court may also (under section 367 of the Act) make an Order that any person pay to the Trustee in Bankruptcy a sum of money (where the Court is satisfied that a person is indebted to the Bankrupt), at such time and in such manner as the Court may direct.
Costs of the section 366 Application
It is a costly step for the Trustee in Bankruptcy to issue an Application under section 366 of the Act. This step is however frequently taken by the Trustee in Bankruptcy as a last resort in circumstances where there have been several unsuccessful attempts by him or her, and often their instructed solicitors, to retrieve the information and documentation requested of the Respondent, due to the failure on the part of the Respondent to provide the same without reasonable excuse.
In the event a Trustee in Bankruptcy issues an Application under section 366 of the Act, then he or she will be likely to additionally seek an Order from the Court that the Respondent pays his or her costs of the Application, which could be significant.
Any Respondent to a section 366 Application therefore places him or herself at risk of receiving an adverse costs Order, if he or she resists the Application and are unsuccessful at Court, or if they do not attend the hearing listed without reasonable excuse.
What are the practical implications of section 366 of the Act?
The Trustee in Bankruptcy is, in most cases, legitimately entitled to information, documentation and other property in order to carry out effectively his or her function; which is to gather in and distribute the assets of the Bankrupt’s estate. Section 366 of the Act gives the Trustee in Bankruptcy and the Court wide powers to obtain information relating to the Bankrupt’s affairs and provides a useful mechanism for a Trustee in Bankruptcy to use to further his or her statutory investigations with Court assistance.
It is a contempt of Court for the Bankrupt or any other person to decline to hand over documentation or other property to the Trustee in Bankruptcy without reasonable excuse. It is therefore prudent for any party in receipt of a request for information or documentation from a Trustee in Bankruptcy, to deal with this request as soon as possible, and take independent legal advice if necessary, to ensure that these types of requests are properly dealt with and costs are not incurred unnecessarily by the Trustee in Bankruptcy and the party in receipt of the request for disclosure of information.