Are Income Payment Agreements and Income Payment Orders mutually exclusive?

Frances Coulson, a partner at Moon Beaver, examines the decision in Re Edmondson where the bankrupt entered an income payment agreement and the court had to decide whether the trustee could obtain a further income payment order.

Original news

Re Edmondson Thomas and another (joint trustees in bankruptcy of Stephen John Edmondson) v Edmondson [2014] All ER (D) 96 (May), [2014] EWHC 1494 (Ch)

The Chancery Division held that, on the true construction of s 310 of the Insolvency Act 1986, the fact that an income payments agreement (IPA) had been made in respect of a bankrupt, did not mean that a court had no jurisdiction to grant an income payments order (IPO) under the Act.

What issue did this case raise?

The bankrupt had entered into a five month nil tax only IPA with the Official Receiver. One issue which did not seem to give rise to any problem was that this IPA was entered into by the Official Receiver one day after bankruptcy trustees had been appointed. The Trustees then sought an IPO of some £10,000 per month for three years from the date of the order.

The bankrupt argued that under the Insolvency Act 1986, the section 310 (the order route) and section 310A (the agreement route) were mutually exclusive. It was not possible to have both he said.

The District Judge considered they were not entitled to an order in addition to agreement. The trustees appealed with the additional safety amendment of seeking an order in the alternative to vary the income payment agreement - a very wise back up plan.

The High Court listened to clearly very able arguments put forward by both sides on legislative interpretation as to whether the two regimes of IPO and IPA’s were mutually exclusive. One key argument raised by the bankrupt was that, if each could be allowed, there would be the potential situation whereby a bankrupt could enter into an IPA and then be subject to an IPO extending the time period for payment beyond three years.

The court had some sympathy with this argument but concluded that the two regimes were not mutually exclusive. There was no reason to interpret the implementation of section 310A by the Enterprise Act 2002 as amending or limiting the jurisdiction under section 310. The only amendment to section 310 by the 2002 Act had been to limit the period of the order to a maximum of three years.

The argument that treating the sections as independent could lead to payments lasting for longer than three years could easily be dealt with. If it was the intention that bankrupts should only make payments for a period of three years and no more, the court when exercising its discretion upon making an income payments order could ensure that the length of time for which payments would be made would not exceed three years.

Although the court did not say so, presumably as the debtor has already made five months of payments, the IPO should be for a term of no longer than two years seven months so that the three year payment limit was not breached.

Why is the decision helpful to restructuring and insolvency professionals?

The decision is useful for clarification that a trustee can apply for an income payments order when there has been a prior income payments agreement. This is particularly so when the Official Receiver is keen to implement nil tax only IPAs within the first tax year after bankruptcy and it would have been unfortunate for creditors if this nil tax only IPA prevented a further IPO from being obtained.

Further reading

If you are a LexisPSL Subscriber, click the links below for further information on IPAs and IPOs:

Income Payment Agreements (Subscriber access only)

Income Payment Orders: What is an IPO, who can apply when, what can be cuaght and how much can the trustee claim? (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you.

Relevant Articles
Area of Interest