The Court of Appeal handed down its judgment in the appeal for Lewis -v- Metropolitan Property Realisations Ltd on 12 June 2009 concerning section 283A of the Insolvency Act 1986, the so-called “use it or lose it” rule, designed to avoid former bankrupt’s from losing their homes as a result of their bankruptcy many years after receiving their discharge from bankruptcy.
In most cases, where a bankrupt has an interest in a dwelling-house which at the date of the bankruptcy order is the sole or principal residence of the bankrupt or the bankrupt’s current or former spouse or civil partner, the Trustee has three years from the date of the bankruptcy order to make a decision. The Trustee can either realise the interest or apply to the Court for an order for possession, sale and/or a charging order in respect of the house, failing which the interest will cease to be comprised in the bankrupt’s estate and will revest in the bankrupt.
In Lewis, the Trustee assigned his interest in the bankrupt’s property to Metropolitan for £1 and on terms that, in the event that Metropolitan effected the sale of the property, on completion 25% of the net proceeds would be paid back by Metropolitan to the Trustee.
The Court of Appeal allowed the appeal of the bankrupt and his wife, holding that “realise” did not include effecting a sale for future cash consideration, at the stage before that cash is received – a distinction must be made between the concepts of “sale” and “realisation”. The Court of Appeal stated that its reasoning depended on the fact that not all the cash to be obtained from the transaction was received within 3 years. On that basis the Court found that the interest in the bankrupt’s home had not been realised within 3 years and, as a result, it revested in the bankrupt at the end of that period so that Metropolitan did not own any interest thereafter.
Had the Trustee sold his interest to Metropolitan for a lump sum which was received in full prior to the end of the 3 year period, the interest in the bankrupt’s home would have been “realised” so as to prevent revesting in the bankrupt under section 283A. However as not all the cash from the transaction was received within the 3 year period (albeit that Metropolitan’s obligations were contingent in nature), the interest had not been “realised” and the interest reverted to the bankrupt.
The Court of Appeal did acknowledge that it was possible for the interest (within the 3 year period) to be sold to someone, other than the bankrupt or the civil partner / spouse, at a price payable and paid on sale (which would be a realisation). However it went on to suggest that there is no market in beneficial interests in matrimonial homes; in general the only likely cash purchasers are the co-owner, or perhaps a member of the family.
This case is extremely important for Trustees who, in the current depressed property market are faced with many factors affecting their decision whether to press for realisation of their interest in the bankrupt’s home, including uncertainty as to the value of the interest by the time a buyer can be found. There may be mortgagees who could bring their own possession proceedings, whilst the clock is “ticking down” towards the third anniversary of the bankruptcy order and the prospective revesting in the bankrupt of what is frequently the only “asset” in the bankruptcy estate.
This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.