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In a recent High Court judgment in Re John Martin (a Bankrupt), Master Kelly ruled that the damages awarded to a bankrupt in respect of a personal injury claim, most of which was subsequently transferred to the bankrupt’s various relatives, did not constitute property forming part of his estate at the commencement of the bankruptcy.
On 24 July 2010, the bankrupt was involved in a serious road traffic accident in which he sustained life threatening injuries and was rendered permanently blind. After bringing a personal injury action, he was awarded the sum of £719,009.26 in May 2016. This was a global figure including both general and special damages.
On 7 February 2018, HMRC presented a bankruptcy petition against the bankrupt in respect of a significant tax liability and a bankruptcy order was made in September. The bankrupt failed to disclose his previous award of damages to the official receiver, however, the trustee’s statutory investigations revealed details of the personal injury damages received by the bankrupt. The investigations also revealed that the bankrupt had transferred almost all of the damages from his bank accounts to close family members.
The Trustee made an application to the court for directions as to whether these damages constituted property forming part of the bankruptcy estate to be realised for the benefit of the bankrupt’s creditors.
Whilst Article 2(2) of the Insolvency (Northern Ireland) Order provides a very wide and non-exhaustive list of property to be included in the bankrupt’s estate, Article 11 (2) provides for property which is excluded from the bankrupt’s estate.
Damages which arise from any action which is considered to be uniquely personal in nature are excluded from forming part of a bankrupt’s estate. Long established case law has drawn a clear distinction between actions which are personal to a bankrupt and those which relate to property rights. Erle J in Beckham v Drake (1849) described a personal action as one which makes “reference to pain felt by the bankrupt in respect of his body, mind or character, and without immediate reference to his rights of property.”
In the event that damages awarded for a personal action are converted into some other form of property, this converted property may form part of the bankrupt’s estate.
Master Kelly first addressed the question of whether the bankrupt’s personal injury action was a personal or hybrid action. A hybrid action being part personal and part relating to property.
In order for the bankrupt’s personal injury action to be considered a hybrid action, his claim in respect of care costs would need to be deemed as relating to his rights of property. Considering the detailed evidence provided to the court, the Master agreed with the bankrupt’s argument that the purpose of these care costs were to provide “daily and constant care for the rest of his life.” Additionally, it was shown that the bankrupt’s care was primarily and currently being provided by close family members, including those noted in the trustee’s application as receiving payments from the awarded sums. In the circumstances, the Master concluded that bankrupt’s claim in respect of care costs could not be described as a claim relating to his rights of property. The Master further found;
“I am also driven to conclude that the damages flowing from that claim are personal to the bankrupt and thus excluded from his bankruptcy estate.”
Acknowledging the “unique circumstances of this case” Master Kelly confirmed that the care costs came within the statutory exemption contained within article 11(2) namely, “provisions necessary to satisfy the basic domestic needs of the bankrupt and his family”. Therefore, the bankrupt’s personal injury claim was a wholly personal action and the damages awarded could not constitute property forming part of his estate.
This judgment not only confirms the court’s approach in previous case law when determining whether the damages constitute “property” to be pursued by the trustee in bankruptcy, but also provides clear and concise guidance as to how such a determination is made. Damages awarded for an action, which is uniquely personal in nature, are to be excluded from a bankrupt’s estate but may form part of the estate if converted into some other form of property. In her concluding remarks, Master Kelly commended the trustee who acted responsibly when requesting the court make the determination on such an “important legal issue”.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. For further information about any of the issues raised in this article, please feel free to get in touch with our Dispute Resolution team.