"THE MELANCHOLY CONSEQUENCES OF DEBT AND IMPROVIDENCE WITH WHICH EVERY CIVILISED SOCIETY HAS BEEN FAMILIAR."
The trend of increasing Individual Insolvencies in England & Wales continues to gain momentum with 10'465 registered in November 2022 representing a 11.4% rise against the previous year and an 8.9% upsurge compared to November 2019's pre-pandemic figures. With 612 individual bankruptcy orders made in January 2023, this article will look at a bankrupt's most important asset, the Family Home.
THE FAMILY HOME
Bankruptcy commences upon the making of a bankruptcy order and lasts until the bankrupt is either discharged or the order is annulled. Unless the court orders otherwise, the Official Receiver (OR) is immediately appointed to act as the first Trustee In Bankruptcy (TIB) pending the possible appointment of an Insolvency Practitioner (IP) to act as the TIB.
The primary function of the TIB as defined by s.305(2) Insolvency Act 1986 (IA 1986) is to collect and realise the bankrupt's assets, distribute the proceeds to creditors and return any excess to those who are entitled to it. These assets are collected into the 'Bankruptcy Estate' which immediately vests in the TIB and comprises of all property in which the bankrupt had a beneficial interest at the date of their bankruptcy order.
The bankrupt's family home (being their sole or principal residence) or their interest in the sole or principal residence of their present or former spouse or partner, is usually the most valuable asset in a bankrupt's estate. Consequently, in the event that the bankrupt's beneficial interest is >£1000 the TIB can take steps to realise their interest.
KEY POINTS
The sale of the family home (hereafter 'the Property') requires a court order. This application is undertaken by the TIB whom applies to the court for an order for vacant possession and sale.
The 'interest of creditors must prevail' is the general principle of insolvency law and there is a presumption in favor of the sale providing the application is made within the 1st year of the TIBs appointment. Thereafter, 'exceptional circumstances' are required.
Should the Property be jointly owned, s.14 the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996) will apply. This simply means that the rights and interests of any spouses or civil partners (including former spouses and civil partners) and the rights of any children or dependents will be considered by the court under the applicable provisions of the Family Law Act 1996 (FLA 1996). The test is broadly similar to when the spouse or civil partner do not own a share in the Property and is contained in sections 335A–337 of the Insolvency Act 1986.
The TIB's interest in the Property is subject to any charge over the Property in favor of a spouce pursuant to the Family Law Act 1996. The practical effect of such a charge allows the bankrupt's spouse to continue occupying the home pending a final divorce proceeding but, it does not create any form of propriety interest superior to the TIBs.
It is not uncommon for a spouse with children to be faced with eviction in circumstances where the realisation of their beneficial interest will not result in sufficient funds for them to buy a comparable home or, indeed, elsewhere. This does not prevent the sale.
Even if there are 'exceptional circumstances', the court still has the power to order the sale and will consider the conduct of the spouse / former spouse or civil partner in the bankruptcy.
THE TEST
The court will consider sections 335A-337 IA 1986 when assessing whether an order for possession and sale should be made. This is a 2 stage process where at the first hearing the court will simply confirm whether the correct parties have been identified as respondents and if they have been given notice of the hearing?
Due to the bankrupt's rights in the Property becoming vested in the TIB at the making of a bankruptcy order, the bankrupt itself will have minimal to no involvement in the hearing. Their part is simply to be bound by the court's order.
Providing the above criteria has been met, the court will list directions for the final hearing where it shall have regard to:
The beneficial interest of the parties in the Property
Any rights of occupation under the provision of the FLA 1996.
The factors set out in ss.335A-337 IA 1986.
Section 335A refers to when the Property is jointly owned, s.336 applies to the rights of a spouse or civil partner where they do not own a share in the Property and s.337 relates to any children or other dependents of the bankrupt. Regardless, the tests are broadly similar and the court will examine:
The interests of the bankrupt's creditors.
Where the application is made in respect of a dwelling that is or has been the home of the bankrupt or the bankrupt' spouse or civil partner, former or civil partner:
The conduct of the spouse or civil partner, or former spouse or civil partner of the bankrupt so far as contributing to the bankruptcy.
The needs and resources of the spouse or civil partner or former spouse or civil partner of the bankrupt.
The needs of any children.
All the circumstances of the case other than the needs of the bankrupt.
No particular weight is given to any particular factor. The court is required to make an order as it this is just and reasonable having regard to all the factors listed above.
THE PRESUMPTION OF A SALE
There is a general presumption in favor of the sale, providing that the application is made within the first 12 months of the TIB's appointment unless, there are 'exceptional circumstances'. What constitutes 'exceptional circumstances however; is not defined by statute and the test lies in the common law.
"The melancholy consequences of debt and improvidence which every civilised society has been familiar."
While there are a range of cases that consider whether the circumstances of a particular case should be considered 'exceptional' the broad test is contained in Dean v Stout [2004] EWHC 3315 (Ch), [2004] All ER (D) 72 (Dec) where Laurance Collins J summarised the principles:
The presence of exceptional circumstances is a necessary condition to displace the presumption that the interests of the creditors outweigh all other considerations, but the presence of 'exceptional circumstances' does not debar the court from making an order for sale.
Typically, the exceptional circumstances in the modern cases relate to the personal circumstances of one of the joint owners, such as a medical or mental health conditions.
The types of exceptional circumstances are not categorised or defined and the court makes a value judgement after considering all the circumstances.
The circumstances must be ‘exceptional’ and this expression was intended to apply the same test which concerned bankruptcy cases decided prior to the IA 1986 that is, ‘exceptional’ or ‘special circumstances’ that are outside “the melancholy consequences of debt and improvidence’ (in the words of Nourse LJ) or ‘compelling reasons not found in the ordinary run of cases.’
It is not uncommon for a spouse with children to be faced with eviction in circumstances where the realisation of their beneficial interest will not result in sufficient funds for them to buy a comparable home or, indeed, elsewhere. Such circumstances, while engendering a natural sympathy cannot be described as ‘exceptional’ and it was in that context that Nourse LJ referred to the ‘melancholy consequences of debt and improvidence with which every civilised society has been familiar.’
For the purposes of weighing up the interests of the creditors, they have an obvious interest in the order for sale being made, even if the whole of the net sale proceeds will go towards the expenses of the bankruptcy and the fact that they will be exhausted in paying those expenses is not an exceptional circumstance justifying the displacement of the presumption that the interests of the creditors outweigh all other considerations.
The aforementioned principles were subsequently applied in Turner v Avis [2008] BPIR 1143 and remain good law to this day.
In all circumstances a bankrupt, dependent or creditor would benefit from legal advice as to whether their circumstances would be considered 'exceptional' and the prospects of the Property being sold.
SECTION 313 CHARGES
An alternative to an application for a sale is a 'Section 313 Charge'.
This is the power of the TIB pursuant to s.313(1) IA 1986 to apply for a court order that a charge be imposed on any property consisting of an interest in a dwelling house occupied by a bankrupt and their spouse and comprised in the bankrupt's estate.
The amount caught under a s.313 Charge is the value of the TIB’s interest in the Property at the date the s.313 charge is made, plus interest from the date of the order at the prescribed. Further, the charge will be subject to the provisions of s.3 Charging Orders Act 1979 (CoA 1979). Consequently, the court can in effect impose conditions as to the manner in which s.313 becomes enforceable at a later stage.
Generally speaking, applications seeking s.313 charges are normally made where it is not possible—at the time of the application—for the TIB to realise their beneficial interest in the Property or obtain an order for possession and sale:
Neale v Parkins; Re Parkins [2014]: is a good example of the wide scope of when a s 313 charge can be applied for. In this case a s 313 charge was made where there was a question over (a) the validity of the bankruptcy order (despite an application to rescind the order being unsuccessful) and (b) a question mark over the validity of the major creditor's claim. The trustee was concerned that because of these factors, an application for possession and sale would be heavily disputes and expensive. Therefore, an application for a s 313 charge was made and the court made the order.
However, in most circumstances the needs of the creditors will require a dividend from the bankruptcy estate as soon as possible and where the courts are faced with a 'judgement debt' i.e. a debt pursuant to a court order, there will be no dispute as to the debts validity and an order for sale will be the most likely route.
HOW WE CAN HELP
Unlike most law firms, our standard retainer includes a commitment to support clients past judgement and through enforcement. Our dedication to you does not cease with judgement but until you have received your court ordered damages/compensation in full and recovered with the costs of the litigation.
Prior to commencing any litigation, we undertake a detailed search of your opponents assets in order to ensure the cost of litigation never outweighs its benefits. Thereafter, we maintain a watchful vigil over these resources so you can be secure that you will receive your due judgment.
Gavin Renwick has successfully dealt with fraudulent debtors many of whom have supplied false information to county court bailiffs, High Court Enforcement Officers and/or made false representations in the Insolvency Courts in a bid to frustrate enforcement, hinder judgement and inflict further financial pressure on their creditors.
We are intimately familiar with matters concerning the conduct of the spouse and cases where the debtor has attempted to hide assets in faux-companies family run companies or through sham-divorces and fake addresses.
We have successfully advised and appeared for creditors at bankruptcy hearings. Should you require any legal advice whether as a debtor or creditor then contact us for confidential legal advice.
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