The risk for a CHO when a client becomes bankrupt

This article was posted by DAC Beachcroft today.


I suspect that, as the government pandemic support begins to unwind, they are hedging their bets on an increase in insolvencies amongst consumers and peddling their advice to curry favour with defendant insurers and eliminate a Claimant’s financial obligation to a CHO.


This article looks at how to deal with bankrupt Claimants and the effect that their bankruptcy has on both pre and post litigated claims, where the Credit Hire Organisations (CHOs) may continue to pursue the claim. We have focused on the law surrounding bankruptcy including what types of claim remain vested in a Claimant as well as how to deal with such a claim and issues that may arise.


It is important to note that this guidance relates only to bankrupt Claimants, and not those subject to an IVA. An IVA will not have any effect on the Claimant’s ability to pursue their claim for damages.


The law of bankruptcy

  • Bankruptcy is defined as a legal process applicable to individuals and not companies, where the bankrupt’s estate is realised and distributed by a trustee.

  • An individual can be identified as being bankrupt by conducting a search on the Individual Insolvency Register (IIR). This will confirm details of any bankruptcy orders that have ended in the last 3 months, any ongoing IVA or any ongoing bankruptcy order.

  • Once an individual is declared bankrupt, their estate will vest in a trustee immediately upon their appointment taking effect (or upon becoming trustee in the case of the official receiver).

  • A bankrupt’s estate includes all property belonging to or vested in the bankrupt at the time of commencement of the bankruptcy.

  • Therefore, with the exception of personal effects, ownership of any “property” held by the Claimant at the point of bankruptcy will pass to the trustee by operation of law, without the need for any assignment.

Are credit hire and vehicle related damages ‘property’ or ‘personal’ heads of loss?

  • ‘Property’ includes legal rights against others known as ‘things in action’. It includes claims for money, goods, things in action, land and every description of property wherever situated. It is therefore considered that vehicle related losses including credit hire charges are ‘property’ heads of loss and automatically vest in the trustee upon the Claimant becoming bankrupt.

  • Certain damages belonging to the Claimant are classed as ‘personal’ heads of loss and remain with the bankrupt; they do not transfer to the trustee. These will include claims for damages by reference to pain felt in body, mind or character and without immediate reference to rights of property, for example claims for defamation or assault (see Heath v Tang [1993] 3 All ER 694).

  • An issue may arise in respect of ’hybrid‘ claims whereby the Claimant has a claim for ‘property’ heads of loss, i.e. vehicle damage, and also ‘personal’ heads of loss such as personal injury which will not be unfamiliar to a Defendant dealing with motor claims.

  • In Ord v Upton [2000] Ch. 352, the Court of Appeal confirmed that there could only be a single cause of action and so in the event of a hybrid claim, the claim vests in the trustee but any personal damages recovered would be held on trust for the bankrupt.

  • In addition to potential claims for injury, the CHO may seek to argue that a claim for loss of use damages are classified as a personal claim which would not vest in the trustee, thus allowing them to pursue the claim through this avenue.

  • To combat this, the Defendant could rely upon Lagden v O’Connor [2004] 1 AC 1067 which confirmed that where the Claimant hires, their claim for general damages of loss of use convert to a claim for special damages, and thus becomes a ‘property’ claim. This is further supported by extracts from the Insolvency Direct Technical Manual.

  • Because of this, the Defendant should be able to successfully argue that credit hire and vehicle related losses are ‘property’ heads of loss, not ‘personal’, and as a result no longer belong to the Claimant when they are declared bankrupt.

The effect of a bankrupt Claimant

  • Becoming bankrupt means that the Claimant is stripped of any financial interest in the outcome of their claim. Whilst the CHO may be able to threaten the Claimant’s estate for the damages should the Claimant be uncooperative, practically speaking, the CHO is unlikely to recover anything from the estate as their priority as a creditor is likely to fall towards the bottom of the pecking order.

  • Once a Claimant becomes bankrupt, they cannot commence any legal proceedings in respect of ‘property’ claims. Any ongoing proceedings must be stayed for the trustee to take over.

  • Given that the Claimant has no such financial interest, the CHO is not in a position to negotiate or seek to recover the damages from the Defendant.

  • Unless the CHO has reached an agreement with the trustee to pursue the claim on the Claimant’s behalf, or has purchased the debt from the trustee, the CHO will have no locus to negotiate settlement.

  • Should the CHO be seeking to negotiate without any such transfer or authority, their validity and authority to do so should be challenged. The question should be asked as to who they are purporting to represent.

  • The Defendant should be careful to enter into any such negotiations if this is a concern as negotiating with the CHO will put the CHO in a better position than that of the Claimant’s other creditors and the trustee could seek to take further action to prevent this.

How to deal with a bankrupt Claimant

  • Once a bankrupt Claimant has been identified, consider whether you are in a position to negotiate settlement with the CHO or not; do you have knowledge of assignment of the debt or authority for them to negotiate?

  • The trustee may be open to selling the Claimant’s claim to pay other creditors and may do so at a lower price in order to recover some money for the Claimant’s estate.

  • The CHO would be entitled to purchase the claim from the trustee, in turn allowing them to pursue the Defendant along the usual route of recovery.

  • In an attempt to avoid paying the CHO or being pursued by either the trustee or the CHO, the Defendant could look to purchase the claim from the trustee themselves.

  • Purchasing the claim from the trustee could prove to be a cheaper method of bringing the claim to an end (the trustee typically may accept a lower figure) and avoid litigation and payment of costs in addition.

  • Beware however, that the trustee may well notify the CHO that the Defendant has made a bid for the debt and this could lead to the CHO entering a bid also, increasing the price.

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