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An Income Payments Order (IPO) may be issued to an employer in the event of the bankruptcy of an employee. The Order is issued by the High Court or a County Court and is sent to the employer by the person responsible for the bankrupt's estate, either the official receiver, i.e. a civil servant from the Insolvency Service, or a trustee, i.e. a licensed insolvency practitioner.
Where an undischarged bankrupt has income in excess of normal domestic expenditure, the Enterprise Act 2002 provides for the official receiver/trustee and the bankrupt to enter into an Income Payments Agreement (IPA), under which the bankrupt is required to make regular payments, e.g. following the receipt of each monthly salary. Such arrangements do not require any involvement of the courts and, as a result, are quick and easy to set up.
However, if the bankrupt is not prepared to enter into an IPA or does not make the agreed payments, the official receiver or trustee may ask the courts to approve an Income Payments Order (IPO), under which the payments must be deducted by the employer from the bankrupt's wage or salary and paid over to the official receiver or trustee. As IPOs are a last resort, they are only issued infrequently.
The statutory basis for IPOs
- in England and Wales is section 310 of the Insolvency Act 1986. The rules governing the operation of IPOs are set out in Part 16 of The Insolvency Rules 1986, in rules 6.189 to 6.193.
- in Northern Ireland is article 283 of the Insolvency (Northern Ireland) Order 1989.
Equivalent arrangements apply in Scotland, under the provisions of section 32 of the Bankruptcy (Scotland) Act 1985. In Scotland, the IPO is known as an Order for Contributions and is issued by the Sheriff Court if the permanent trustee and the bankrupt cannot agree on voluntary payment arrangements.
An IPO accompanies a formal letter from the official receiver or trustee, or from an agent of the receiver or trustee, to the bankrupt's employer. The letter states that, as ordered by a named court, the employer is required to make a deduction of a stated amount each pay period, to be paid direct to the receiver's, trustee's or agent's bank account. The Order itself specifies the amount of the deduction and the period (of up to three years) during which the deductions must be made. Deductions continue even after the bankrupt is discharged.
The employer must apply the Order from the first possible pay run. An administration fee of up to 50p may also be deducted from the employee's earnings for each deduction.
The amount that the court has ordered to be deducted each pay period is determined after taking into consideration the bankrupt employee's "reasonable domestic needs", full details of which should have been provided by the bankrupt. If, on receiving an IPO, there is a current attachment of earnings order in force, the receiver/trustee should be contacted immediately. Debts that are the subject of AEOs should have been included in the bankruptcy proceedings and should be withdrawn or varied by the court issuing the IPO.
However, if there is a Deduction from Earnings Order (DEO) or a Student Loan deduction in force, the deductions should continue. Child support payments and Student Loans are treated as continuing obligations, not debts, and cannot be cancelled by bankruptcy. The amount of the deductions due under the IPO should have been calculated so that the DEO or Student Loan deductions and the IPO can be taken together.
The employer should continue to make the deductions and pay them over immediately after they are made. If the employee's earnings reduce, the employer should continue to deduct the amount ordered by the court. It is for the employee to notify the receiver/trustee of a change in circumstances that would make it necessary for the level of the IPO deductions to be reviewed. The employer should only change the rate of deduction if a new Order is received. If the employee leaves, the employer should notify the receiver/trustee/agent that the deductions have ceased.
During the tax year in which the bankruptcy occurs, HMRC commonly instructs the bankrupt's employer to operate an NT(W1) tax code (other than in Scotland). The effect of this will have been taken into consideration in calculating the amount of the IPO deduction. The employee is given a regular tax code in the next following tax year.
...back to 11 May 2006
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For Payroll and Human Resource Professionals
