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Bankrupt’s interest in home – use it, don’t lose it

09 Aug 2011

The recent case of Lewis -v- Metropolitan Property Realizations Ltd, handed down on 21 November 2008, has highlighted a significant weakness in section 283A of the Insolvency Act 1986. This is the so-called “use it or lose it” rule, designed to reduce the uncertainty that former bankrupts and their families could lose their homes as a result of the bankruptcy many years (sometimes more than a decade) after being discharged from bankruptcy.

In most cases, where a bankrupt has an interest in a dwelling-house which is, at the date of the bankruptcy order, 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 either realise that interest or to apply to the Court for an order for possession, sale and/or a charging order in respect of the house. Failing this the interest will cease to be included 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 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 rejected the claim by the bankrupt and his wife that the bankrupt’s interest had reverted back to the bankrupt on the third anniversary of the bankruptcy order, instead holding that the Trustee had “realised” his interest in the property, nothwithstanding that it was for a deferred contingent consideration.

Comment:

This case demonstrates one of the unintended consequences of section 283A (which was added at a late stage of the passage of the Enterprise Act 2002 through Parliament) – there are other anomalies in that section, many of which have not yet percolated into general awareness.

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. These include uncertainty as to the value of the interest by the time a buyer is found, mortgagees who may or may not 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.

Taking no action – and allowing the revesting in the bankrupt – is not without risk for the Trustee, especially if the Trustee does not explore the potential for realising his interest by selling it to a creditor (as Metropolitan was in Lewis) or third party, either for a cash sum or deferred consideration. As the Judge stated in Lewis “An assignment on such terms is also an easy escape route for a trustee at the end of the three-year period in order potentially to salvage something for the creditors“. A Trustee who refuses an offer such as that made by Metropolitan without good reason could be challenged on an application to Court under section 303 of the Insolvency Act 1986.

For further information contact Neil Harrold at Hay & Kilner Solicitors on 0191 232 8345 or email neil.harrold@hay-kilner.co.uk

Please note:
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.