Is a car bought by hire purchase contract a tool of trade?
The Court of Appeal has considered whether a car purchased through a hire purchase contract would be excluded from vesting in a trustee as a tool of trade. David Menzies reviews the decision and its implications.
The Court of Appeal has considered the issue of whether a car being financed by hire purchase and used by an individual who was a wedding photographer was a tool of trade, and therefore was exempted from vesting in the trustee, concluding that it was not.
The case of Mikki v Duncan  EWCA Civ 57 considered points where there was no previous authority under either consumer credit or insolvency legislation.
Mr Mikki is a photographer with a speciality in wedding photographs. He was declared bankrupt on a petition brought by HM Revenue and Customs in June 2010. At that time, he had a car (a BMW) which he was acquiring on a hire-purchase contract.
On Mr Mikki's bankruptcy the finance company terminated the HP agreement. The finance company wrote to the Official Receiver ("OR"), who was the trustee at that time, saying it had ended the agreement and requested the return of the vehicle. However, if the OR wished to purchase the vehicle he could do so for £7,298. This was understood to be the shortfall on the agreement, assuming it ran for its full term and the option to purchase was exercised, or the amount necessary to pay it off.
The OR confirmed that he did not wish to adopt the contract and was content for the finance company to exercise its rights, paying any surplus on sale to the OR, or proving for any shortfall.
The finance company reported shortly afterwards that Mr Mikki had tendered the £7,298 himself (having raised the money from third parties), but the OR's authorisation was required to allow that. The OR did not agree to that because he considered that the vehicle was worth about £12,000, so there was equity in the vehicle, which he wished to claim. Mr Mikki's attempt to purchase was thwarted.
In due course the finance company repossessed the vehicle, sold it and accounted to the trustee for the surplus of £2,652, which the trustee claimed as part of the estate.
Mr Mikki subsequently claimed, nearly three years later, that the car had been a tool necessary for his trade or business within s283 of the Insolvency Act 1986 (the Act), which therefore did not vest in the trustee, and made various claims in respect of it.
Previous court decisions
Mr Mikki argued that the decision not to allow him to purchase the car from the finance company was perverse.
His view was that if the trustee had thought that the car was valuable, and more than Mr Mikki needed, the trustee could have invoked s308 of the Act, had the car sold and he could have purchased a more appropriate replacement. By allowing the finance company to sell the car the trustee prevented him from doing that, and wrongly deprived him of a car, without which he could not get to weddings to photograph them.
The District Court and subsequent appeal hearing both agreed that this argument failed. It was accepted that the car did not fall to be treated as a non-vesting tool of Mr Mikki's trade because he never owned the car. What he owned was the benefit of the HP agreement.
Permission to appeal was granted because "the treatment of vehicles held under hire purchase arrangements also raises a point of principle". The real question was whether the benefit of the HP contract vested in the trustee, or in other words, was the benefit of the HP contract to be treated as a tool of the trade for the purposes of s283 and thus retained by Mr Mikki.
As a matter of literal construction, the Court of Appeal considered that answer would appear to be, no. The benefit of the HP contract is a chose in action which falls within the definition of "property" under the Act, and which is distinct from the car itself. What vests in the trustee is "all property belonging to or vested in the bankrupt", and what is excluded by s283(2) is certain types of property, all of which are chattels. The benefit of the contract would prima facie vest in the trustee, and would not be taken out by subsection (2) because it is not the same thing as the vehicle.
This is challenged however by the view of the Insolvency Service. In its Technical Manual for the guidance of its staff it says:
"30.155 Exempt vehicle with outstanding finance
The exempt property provisions apply to items acquired by the bankrupt whether for cash or with a finance agreement (including a hire-purchase or conditional sale agreement). The provisions apply even if there is no equity in the agreement. The finance company should be notified if the official receiver accepts the bankrupt's claim that a vehicle be treated as exempt property. If the company is dissatisfied with the position, it may choose to exercise its rights to repossess the vehicle under the terms of the agreement."
The Court of Appeal therefore considered that there were three possible results which must be considered:
- The literal wording of the section applies and the bankrupt is not entitled to the benefit of the contract because that is not one of the tools of his trade.
- The benefit of the contract remains in the bankrupt as one of the tools of his trade, but accrued liabilities are liabilities in respect of which the finance company can prove.
- Neither the benefit nor the burden of the contract devolves on the estate.
The Court of Appeal quickly dismissed the third possibility. It also considered that the second option would require an extended interpretation of s283. It concluded that while there was nothing to support such an interpretation at the same time there was nothing in the Act which would make an extended interpretation inconsistent with that. The question was then whether the policy of the Act required the extended interpretation.
Consideration was given to the content of the Cork Report which was the basis for recommendations implemented in the Act. The relevant section of the report however apparently assumed that the debtor is the owner of the tools and provides no reference to any form of conditional sale agreement even though such agreements were not uncommon at that time.
Although speculation, the Court of Appeal thought it likely that the Cork Report did not think that the exemption should apply to goods held under such an agreement (or, more accurately, to the benefit of the contract). It concluded that the Report gives no support at all to the view that the benefit of the contract would be capable of being left outside the bankruptcy while the liabilities would be provable.
It therefore concluded that the first option was the only option which could be applied and the appeal of Mr Mikki was dismissed.
The judgment provides clarity to a common situation and confirms that the benefit in a HP agreement vests in a trustee. Although this case looked at the situation in relation to a vehicle it is likely to have a much wider application.
The judgment applies only to England and Wales. Provisions under the Bankruptcy (Scotland) Act 2016 (and prior to the that 1985 Act) do however have broadly similar effect on limitation of vesting.
Trustees should carefully consider matters where a debtor is party to an HP Agreement (or similar) and should ensure that they notify the finance provider of their appointment. If necessary, a copy of the agreement should be obtained to ascertain the full contractual terms and what, if any, the value of the benefit of the agreement is. The trustees interest in the agreement should be appropriately dealt with.