Winning the lottery? How the trustee in bankruptcy deals with ‘after-acquired’ property

A UK ticket-holder last week won the EuroMillions jackpot of £109.9 million. A life-changing sum of money for anyone; not least for an individual who has been made bankrupt (the bankrupt).

In fact, it was a little over a year ago that Katie Price attempted to resolve her money woes through buying one hundred scratch cards in the midst of her bankruptcy. Unfortunately, luck was not on Ms Price’s side, as she only managed to pocket £20 despite purchasing the tickets for four times as much.

It does beg an interesting question: what would have happened had she won the jackpot during her bankruptcy? Would she have been entitled to keep her winnings? Or would the prize money be used to pay off her creditors?

How, and with what assets, are the creditors in a bankruptcy paid?

After being made bankrupt by a court order, all the assets held by the bankrupt at the date of that order pass over to the trustee in bankruptcy. The trustee has a duty to investigate the financial position of the bankrupt, collect all their assets (collectively known as the bankruptcy estate), and realise those assets to make payments to creditors. 

The trustee has an overriding duty to creditors. To this end, the Insolvency Act affords the trustee some enhanced powers to increase the value of the bankruptcy estate and subsequently maximise distributions to creditors, including the ability to make claims for after-acquired property.

What is after-acquired property?

After-acquired property refers to any property (excluding income) which is acquired during the bankruptcy. The bankruptcy refers to the period between the making of the bankruptcy order and the discharge of the bankrupt.

A bankruptcy usually lasts one year after which the bankrupt is automatically discharged, unless the court suspends discharge on an application from the trustee. In general, suspension is only sought in circumstances where the bankrupt has been un-cooperative or is deliberately delaying or obstructing investigations and realisations.

The trustee is able to make a claim for any property acquired by the bankrupt during this time, including a lottery win or a received inheritance.

If that claim is successful, the property will form part of the bankruptcy estate and will be ultimately distributed to creditors. Otherwise, if the bankrupt is lucky enough to hit the jackpot following discharge, the proceeds can be kept by them in full.

What steps should the bankrupt take in the event of obtaining after-acquired property?

If the bankrupt comes into any windfall before their discharge, they are under a duty to notify the trustee. The notice must be given in writing within 21 days of becoming aware of their entitlement to the after-acquired property.

After being notified of the after-acquired property, the trustee must decide whether to make a claim against the bankrupt within 42 days. This is a discretionary exercise and, in exceptional circumstances, the trustee may permit the bankrupt to keep some (or all) of the after-acquired property if there are reasonable grounds to do so.

If the trustee decides not to pursue a claim, or has not served a notice claiming the after-acquired property within this period, then the asset does not form part of the bankruptcy estate and can remain with the bankrupt.

What action can the trustee take if the bankrupt fails to comply?

 Any failure to comply with the obligation to notify the trustee without a reasonable excuse will mean the bankrupt is guilty of contempt of court.

There are various ways that this can be handled by the court, following an application by the trustee:

• make an order requiring the bankrupt to provide relevant information about the property

• hold a public or private examination (essentially an interview before a Judge) and, in the event of non-attendance by the bankrupt, the bankrupt’s discharge can be suspended

• make an order suspending the bankrupt’s discharge, or

• in exceptional circumstances, make an application for a warrant for the arrest of the bankrupt. This is generally sought if other enforcement actions have proven unsuccessful and in serious circumstances i.e. alleged fraud.

Closing thoughts

For any bankrupt in the throes of a bankruptcy, a winning scratch card would offer the hope of a fresh financial start. However, there is a real risk that any financial gain during a bankruptcy will be subjected to the rules governing after-acquired property and distributed to creditors.