Section 283A and Realising the Bankrupt’s Home

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Lewis – v – Metropolitan Property Realisations Limited (Court of Appeal 12 June 2009) addressed the extremely important question of what constitutes realisation for the purpose of Section 283A Insolvency Act 1986.

 

The facts were that immediately before Mr Lewis’ bankruptcy, Mr and Mrs Lewis jointly owned a property in Stanmore, Middlesex as their home.  The property was said to be worth approximately £1million and had charges of about £720,000 affecting it.  Mrs Lewis claimed an equity of exoneration and, in consequence, argued that the entire equity belonged to her.  The trustees in bankruptcy did not accept that but were unable to take any proceedings to challenge it as there were insufficient funds in the estate and the creditors were not willing to fund it.  The defendant, MPRL, the second largest creditors was dissatisfied with that result and, on the day before the third anniversary of the bankruptcy, took an assignment of the trustees’ interest in return for an immediate obligation to pay £1 and 25% of the net proceeds on any sale.  Whilst the terms of the assignment were unclear nothing turned on that point.

 

The essential question for the Court was whether the assignment amounted to a realisation for the purposes of section 283A(3)(a).  The Lewis’ contended that it did not and in consequence  Mr Lewis’ interest re-vested in him pursuant to section 283A(2).  MPRL contended that the trustees had “realised” the estate’s interest which they, in consequence, validly owned.

 

At first instance the judge found that a trustee who sells the estate’s interest for deferred contingent consideration “realises” the interest within the meaning of Section 283A.

 

On appeal the Court of Appeal found that the proper meaning of the word “realise” was to get in “the full cash consideration for the deal”.  In consequence any deferred or contingent element has to be realised and cash received before the third anniversary of the bankruptcy otherwise there will not have been a “realisation” and, in consequence, the property would re-vest.  The Court of Appeal held that this was in accordance with the scheme of the Act as a whole namely that the Act permitted the trustee to realise the value of the property in that three year window.  The alternatives, for example, of obtaining an order for sale or a charging order all relate to the then value of the property consistent with the philosophy that the trustee cannot sit back and wait to see if  property values rise.  The effect of the assignment was to purport to realise for the benefit of the estate a percentage of a future value.  This was inconsistent with the scheme of the Act.

 

The Court of Appeal was not troubled by the provision in paragraph 3 of Schedule 5 of the Act that a trustee could sell for money “payable at a future time”.  This merely gave a power to the trustee to realise assets for future consideration but the Court of Appeal held that it was a quite different point from the question of when the realisation takes place.

 

The practical implications of the judgment are potentially far reaching. 

 

Firstly, a technique often used by trustees to sell the trustee’s interest in a property to the co-owner (or sometimes a member of the family) cannot include a provision for instalments payable beyond the third anniversary unless there is some additional protection. The bankrupt would probably need to consent to the transaction and agree to waive the re-vesting effect of section 283A(2). 

 

Secondly, the meaning of the word “realised” or “realisations” elsewhere in the Act are highly likely to have the same meaning as in Lewis.  Thus, for example, the entitlement to remuneration under 4.127 (2) of the rules is to a percentage of the assets “which are realised”.  In consequence a liquidator (or other office holder) cannot claim remuneration based upon future instalments as they have not been “realised”.  Office holders may well wish to address this in their remuneration terms. 

 

Thirdly, it is unclear what happens to payments made before the third anniversary when a property revests.  On the facts of Lewis MPRL had paid only a £1 and consequently the point was of little importance but it can be clearly envisaged that a purchaser may have paid very substantial instalments  prior to the third anniversary only to see the property revest.  Our preliminary view is that a trustee should be able to retain any payments received as some consideration was given for the sale / assignment and the law does not generally enquire into the adequacy of consideration but there may be arguments over entering into the purchase contract or assignment under a mistake of law. 

 

Finally, there is the issue of disposals of a bankrupt’s interest that have been entered into on deferred or contingent terms where the third anniversary has not yet been reached. Whether any remedial action can or should be taken on the basis that it is now appreciated that the transaction may not have the desired effect is a matter for each trustee exercising his duties in the interests of the creditors.  The estate does not benefit from re-vesting but may be prejudiced by the non-receipt of instalments or contingent receipts falling due after the third anniversary.  Accordingly, for such matters, it would seem to be appropriate to seek to enter into a supplemental agreement ratifying the existing transaction but with the added features of the bankrupt being a party to the transaction and of a waiver of the right of re-vesting by the bankrupt.

 

Peter Ashford

 

Partner

 

June 2009