Do Trustees in Bankruptcy really understand ‘Use it or Lose it’

In the recent case of LEWIS AND LEWIS V METROPOLITAN PROPERTY REALISATIONS LTD the Court of Appeal has handed down further guidance to Trustees in respect of the impact of section 283A of the Insolvency Act 1986. Previously a Trustee could register their interest in a property forming part of the bankrupts estate and do nothing until such time as the value picked up sufficiently to give the creditors of that estate a reasonable return. In effect this could take place many years after the bankrtuptcy leaving the bankrupt and his family with many years of uncreatainty over their ownership. The Enterprise Act 2003 sought to deal with this ‘unfairness’.
In essence the Trustee now has three years in which to liquidate the property and create a return to creditors or risk losing the interest in it, with it automatically reverting to the bankrupt on that date.
As you would expect with many technical issues such as this the Trustee in this case attempted to work around the rules by selling the property to a third party for a nominal sum with a future entitlement on resale of 25% of the net proceeds of sale (the sale was in effect that of the unencumbered share the bankrupt had in the property). Had this succeeded than the meaning, impact and spirit of the changes created by th Enterprise Act 2003 would have been changed by the courts.
Many a law student has wrestled with the process of court interpretation of statutory provisions and this case demonstrates this process in vivid detail.
In effect the court used a number of tools available to it and the reports on it show what was done extremely well: –
“(1) The issue was the construction or interpretation of the word ‘realises’ in s 283A(3)(a) of the Act in its proper context. The question was whether, in its context, it was capable of covering a transaction where there was a deferred monetary consideration during the period before that consideration came in.

(2) The dictionary definition and the examples of the uses of the word ‘realise’ in the Act tended to support a definition of ‘converted into cash’.

(3) The scheme of s 283A of the Act was as follows: (i) The section only applied to that part of the bankrupt’s estate comprised in his or his spouse/civil partner’s or former spouse/civil partner’s dwelling-house. It did not apply to other property. (ii) The trustee had 3 years to decide what to do where the estate had such an interest. (iii) If he did nothing, then, subject to the provisions of s 283A(6) of the Act, the estate lost the property interest. (iv) If the interest were of low value (within the meaning of the Act) the trustee, while technically owning the interest, would in practice have no enforcement mechanism available to him. If he did nothing, the interest reverted to the bankrupt under s 283A of the Act. If he started proceedings (whether for an order for sale or a charging order), that would technically keep his interest alive while the proceedings were pending but, under s 283A(4) of the Act the interest would revest when the proceedings were dismissed. (v) If the interest was of significant value, the trustee could (a) apply for an order for sale (giving the co-owner the opportunity to buy the trustee out at the then value, alternatively the property would be ordered to be sold and the trustee would recover the then value); (b) apply for a charging order (securing
[2009] BPIR 820 at 821

the then value to the trustee, with future increases going to the bankrupt); (c) reach an agreement with the bankrupt, in effect selling to the bankrupt (recovering the then value for the trustee and securing future increases for the bankrupt); (d) sell the interest to someone other than the bankrupt or the civil partner/spouse at a price payable and paid on sale (securing the then value, with future increases accruing to the purchaser); or (e) agree with the co-owner to sell (recovering for the trustee the then value).

(4) ‘Realise’ in s 283A(3)(a) of the Act did not include effecting a sale for future cash consideration, at the stage before that cash was got in. Re A Debtor (No 29 of 1986) and Re Byford (Deceased), Byford v Butler [2003] EWHC 1267 (Ch) considered.

(5) The reasoning of the judge failed to distinguish between the concepts of sale and realisation, and the differing significance of the powers of a trustee in bankruptcy and the limits placed on the exercise of those powers, and was thereby flawed.

(6) By the assignment, not all the cash to be obtained from the transaction was got in within 3 years. The sale from the trustees to M was not therefore within s 283A(3)(a) of the Act. L’s interest in the property had reverted to him and M no longer had any interest in it.”

Use or Lose it really means that – the Trustee should not try to use devices to prolong the period of sale so as to take the benefit of potential house price increases. On the other hand it is essential that the owner or other owners take proactive steps where possible to purchase the Trustees share.

 

This entry was posted in Insolvency, Trusts. Bookmark the permalink.