Problems with insolvency

Introduction

The recent case of Abdulla v Whelan [2017] EWHC 605 (Ch) reminded me of the problems that Conveyancers can have with – and confusions that can be caused by – bankruptcy and particularly when one of two co-owners has become insolvent. We all know, of course, that when an individual becomes insolvent i.e. a bankruptcy order is made, all his or her assets vest automatically in the trustee in bankruptcy (or the Official Receiver, if no Trustee is appointed). There is no need for any TR1 or alteration in the name of the registered proprietor in the Register of Title. So obviously the bankrupt registered proprietor can no longer sell the property. Only the Official Receiver/Trustee in Bankruptcy can sell. However, as this case confirms, in the case of jointly owned property the situation is somewhat different.

The Case

This was an action between a creditor of the bankrupt and the Bankrupt’s trustee in bankruptcy involving the operation of the disclaimer provisions in sections 315 to 321 of the Insolvency Act 1986 in the case of jointly owned leasehold property. Again as conveyancers will know, a trustee in bankruptcy has the power to disclaim ‘onerous obligations’ of the bankrupt. This can include leasehold property which does not have a capital value, the onerous obligation being the payment of rent. But how does this work with jointly owned property? If one of the joint tenants becomes bankrupt, does the Trustee have the power to disclaim that lease? This was the question for the High Court judge.

The Decision

The lease was vested in the bankrupt and another person. In all cases of co-ownership, a trust of land is implied so the lease was held on trust for the bankrupt and the other tenant. Section 283(1) of the Insolvency Act defines what property is within a bankrupt’s estate. Section 283(3) sets out two exceptions, one of which is: “(a) property held on trust for any other person”. The creditor had argued that as the lease was held on trust for the bankrupt herself, the lease did not fall within this exception; it was not held on trust for any other person. But the judge (Mr John Male QC sitting as a Deputy Judge) did not agree. The lease was held on trust for another person as well as the bankrupt and thus was within the exception. Because of this, the lease did not fall within the bankrupt’s estate and so did not vest in the Trustee in Bankruptcy. And as it had not vested in the Trustee, he could not disclaim the lease under sections 315 to 321 of the 1986 Act.

Implications

Obviously, most long leases of residential property will have a capital value and so will not be at risk of disclaimer on bankruptcy anyway, but the importance of the decision is the confirmation that the lease did not vest in the trustee in bankruptcy because of the trust rule.in section 283(3). And this is where the confusion comes in.

The writer has seen several sales this year already where one of two co-owners has been made bankrupt and his or her trustee in bankruptcy is purporting to sell the property – sometimes with and sometimes without the other co-owner joining in the sale as well. The case confirms that in the case of co-owned property (whether as joint tenants or as tenants in common), where one joint proprietor is made bankrupt, only the bankrupt’s equitable interest will vest in the trustee, NOT the legal ownership.

So the co-owners remain the legal owners and only they can sell the property. The buyer is protected by the usual overreaching machinery as long as he pays the purchase price to all the trustees etc.. There is no need to obtain the consent of the Trustee in Bankruptcy for the sale or for the Trustee to join in the transaction in any way. Indeed, a buyer may well not even know of the bankruptcy as no Bankruptcy Notice or Restriction can be registered. against the bankrupt co-owner. Apparently, this rule about the property not vesting in the trustee in bankruptcy even applies if BOTH co-owners are bankrupt and have the same trustee in bankruptcy; see for example Hawk Recovery Ltd v Hall [2016] EWHC 3260 (Ch).

However, following the bankruptcy, the Trustee in bankruptcy should apply for a restriction to be entered on the Register in standard form J:

‘No disposition of the registered estate, other than a disposition by the proprietor of any registered charge registered before the entry of this restriction, is to be registered without a certificate signed by the applicant for registration or their conveyancer that written notice of the disposition was given to [name of trustee in bankruptcy] (the trustee in bankruptcy of [name of bankrupt person]) at [address for service].’

The usual Form A tenants in common restriction may also be entered (bankruptcy acts as severance of a joint tenancy).

Obviously, on any sale by the Registered Proprietors, these Restrictions must be complied with in the normal way. But note that the certificate of compliance with the Form J  restriction is to be given by the applicant’s (i.e. Buyer’s) conveyancer and just requires notice to be given.to be given to the trustee – not consent If the restriction is complied with, the Purchaser will be registered in the usual way and the Restriction – and any Form A restriction –  removed.

Hopefully, these reminders will avoid any future confusion when co-owners become bankrupt.

 

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