IMPORTANT: This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. Release Date: 24 November 2008

Briefings

Mishcon de Reya's success in the first test of section 283A of the Insolvency Act 1986 will impact on trustees in bankruptcy.

In a ruling handed down on Friday in the High Court, Mrs Justice Proudman provided trustees with an increased range of options for dealing with interests in the bankrupt’s home.  These options now include permitting transactions of a deferred and contingent nature.  In this specific case, the Court confirmed that a trustee could sell his/her interest in a residential property for a right to share in the proceeds of a future sale.

Prior to the introduction of s.283A (via the Enterprise Act 2002, in April 2004) it was possible for a trustee to seek to realise his/her interest in a residential property many years after a bankruptcy.  This practice was particularly common during the 1990s when property prices had fallen and trustees would often wait until the property values went up before taking any action.  Section 283A came into force as a result of pressure on the legislature to change this practice by trustees.

Section 283A states that a bankrupt's interest in his/her own home (the one he or his spouse live in) will re-vest in him/her on the third anniversary of the bankruptcy unless the trustee takes certain steps, one of which is that he/she "realises" his/her interest in the property before the three year deadline ("use it or lose it").

Our case centred on a very narrow point of law namely the interpretation of the word "realises" in s.283A of the Insolvency Act 1986.  However, it is an important ruling because it clarifies the extent of a trustee's ability to deal with the bankrupt’s home, which is usually the main asset in the bankruptcy estate.
 
In this case the Trustees were not prepared to take action in respect of the bankrupt's home and our client (as a creditor) was faced with the prospect of never making a recovery.  As a result we advised our client to make an offer to the Trustees to purchase their interest in the property before the expiry of the three year deadline.  The Trustees agreed and our client entered into an assignment which provided that the Trustees' interest in the property was assigned to our client.  In return our client agreed to pay part of the proceeds of a future sale to the Trustees.
 
Before entering into the assignment we carefully advised the client as to our interpretation of s.283A and the policy behind it.  It was our advice that the amendments to the Insolvency Act were not intended to fetter a trustee's ability to deal with property in the way he/she sees fit in order to provide a return to creditors, but rather the "preferred position" of the trustee (with his/her increased powers) should not be 'held over' the bankrupt indefinitely. 
 
When we took steps to secure and sell our client's interest in the property, the bankrupt (now discharged) and his wife objected and subsequently issued proceedings.  The objection was made on the basis that the word "realises" in the context of s.283A meant that the Trustees had to receive 'cash in hand' for their interest in the property before the end of the three years and therefore that the contingent nature of the assignment meant that the property had automatically re-vested in the bankrupt.

Mrs Justice Proudman agreed with our interpretation and concluded:

"....there is nothing in s.283A requiring any realisation for the purposes of that section to be on terms more restrictive than are available to the trustee generally under the 1986 Act.  In my judgment a trustee who sells the estate's interest for deferred contingent consideration "realises" the interest within the meaning of s.283A(3)(a) ...."