‘Tools of the trade’: how do you know whether a bankrupt is entitled to retain them?
’Tools of the trade’ is a glib phrase that rolls off the tongue in every day parlance, often referring to know-how rather than a physical item. However, the interpretation of this phrase in personal insolvency is important when assessing whether a bankrupt is entitled to retain his ’tools of the trade’.
Generally determining whether ’such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation’ is straightforward. The bankrupt is normally entitled to retain a tool of his trade, as the law recognises the need for the bankrupt to be able to earn a living. For example, a self-employed carpenter is likely to need his chisels, saws etc to be able to continue his trade as a carpenter. The benefit for creditors is that if the bankrupt is able to make a sufficient living, then an income payments order or income payment agreement may be made to increase recoveries into the bankruptcy estate. If an item does not form ’tools of the trade’ then a trustee is entitled to claim the item as part of the gathering in and distribution of the bankrupt’s estate, with the item being sold to raise funds for the bankruptcy estate.
Difficulties can lie in determining whether an item is a tool of the trade where, for example, a bankrupt runs a business, owns the item but others that he employs use the item. If there is disagreement between trustee and bankrupt as to whether an item is a tool of the trade, the court is asked to balance the creditor’s rights against those of the bankrupt. In the recent case of Birdi v Price 2018, the High Court set out useful guidance on the approach to take:
- the bankrupt bears the burden of proving that he is entitled to claim the exception and that he is entitled to retain items, needing to satisfy each element of the exception;
- questions determinative as to whether an asset is a tool of the trade are decided by reference to the factual situation at the date of the commencement of the bankruptcy, and considering whether at that time the item was necessary to the bankrupt;
- whether an item is a ’tool, book, vehicle or other item of equipment’ used ’personally’ by a bankrupt in his ’employment, business or vocation’ is decided by using these words in ordinary language applied to the facts of each case;
- each case is likely to be different and applying the test will be highly fact-sensitive;
- in deciding whether an item is a tool of the trade, it is important to remember why a bankrupt is entitled to retain such an item, namely so that a bankrupt can ’draw a line’ under his ’debts and liabilities’ but, ’at the price of ensuring all current assets are made available’ to satisfy the claims of his creditors;
- whether an item is ’necessary’ is important. For example, just because a particular item is owned by the bankrupt does not automatically make it necessary for him to use it in his employment, business or vocation. Again, this all depends on the particular circumstances. Necessity is not the same as convenience or desirability; and
- normally the item must be used personally by the bankrupt, but if an item is in shared use, for example owned and used by the bankrupt but also used from time to time by his employees, it may also fall within the exception and be retained by the bankrupt. Again, each case will be fact-sensitive.
Evidence to help establish what the true position was as at the date the bankruptcy commenced may be gleaned from debtor’s own books and records, depending on how detailed and how well they have been kept,. This in addition to interviews with the Official Receiver and the bankruptcy questionnaire, together with interviews with the trustee, not forgetting the information available in any IVA proposal that may have been put forward.