Will – Application of assets – Residuary legatee – Trustee in bankruptcy – Sole residuary legatee under will becoming bankrupt – Bankruptcy automatically discharged before administration of estate completed – Whether assets forming net residuary estate vesting in trustee in bankruptcy – Declaration made
The testator (B) died leaving a will that left the entire residue of her estate to her son (H), who was also named an executor. At the time of her death, in July 2003, B and H owned a farmhouse and a cottage as tenants in common in equal shares. H was adjudicated bankrupt in September 2003 and the second defendant was appointed trustee in bankruptcy in October 2003. H obtained a grant of probate as the sole executor of his mother’s will in February 2005 and was automatically discharged from bankruptcy on 1 April.
In May 2005, the cottage was sold for £125,000 and half the net proceeds (H’s personal interest in the cottage) were paid to the second defendant. The balance (B’s interest) was retained by the claimant, which was acting as the solicitor for H in his capacity as executor. In July 2005, the second defendant wrote to the claimants requesting the release of a further sum from the moneys it held in order to pay the balance due in H’s bankruptcy.
The claimant refused on the ground that H would have no legal or equitable interest in the assets of the estate until the administration had been completed. Furthermore, even when the estate had been fully administered, the second defendant would not be able to claim the assets because H had been discharged from his bankruptcy and an after-acquired property notice could not be served in respect of any property that the bankrupt acquired after his discharge.
The second defendant rejected that analysis. The claimant applied to the court for a declaration as to whether it should pay the residue of the estate to H, as residuary beneficiary, or to the second defendant as his trustee in bankruptcy. H died after the issue of the claim. The first defendant, who was the sole executor by appointment of H’s will, was substituted for him as a party to the proceedings. The first defendant was also the executor of B’s estate by succession.
Held: A declaration was made accordingly.
The right of the residuary legatee was a composite right to have the estate properly administered and to have the residue (if any) paid to him as and when the administration was complete. That composite right was a chose in action, which was transmissible, and accordingly fell within the first limb of the definition of “property” in section 436 of the Insolvency Act 1986. It followed that when a residuary legatee became bankrupt, the chose in action that vested in his trustee in bankruptcy was a composite right, which included the right to have assets comprised in the residuary estate paid to him at the end of the administration of the estate. Once that right vested in the trustee, it would not re-vest in the bankrupt unless and until his bankruptcy debts and costs had been paid; the right would be capable of being asserted by the trustee in bankruptcy against the executors so as to preclude them from giving priority to any rival claims to the assets comprising the residue at the end of the administration: Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694; Dr Barnardo’s Homes National Inc Association v Special Commissioners of Income Tax [1921] 2 AC 1; Lord Sudeley v Attorney-General [1897] AC 11; Marshall (Inspector of Taxes) v Kerr [1995] 1 AC 148; and Re Leigh’s Will Trusts [1970] 1 Ch 277 considered.
The law had long recognised that a residuary legatee had an immediate “interest” in the assets that would in the future form the residuary estate of a testator. The precise nature of the interest was unclear, but at the least it must give the holder of the interest the right to receive the residue (if any) as and when ascertained. Whatever the precise nature of the interest, it would be entirely consistent with the statutory purpose of the bankruptcy legislation to conclude that it vested in the trustee in bankruptcy by virtue of section 306 of the 1986 Act. The transmission of that interest to the trustee must therefore operate to give the trustee an entitlement to receive whatever was ascertained to be the residuary estate, in priority to the bankrupt: High Court of Australia in Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 considered.
Peter John (instructed by Raymond Saul & Co) appeared for the claimant; Robert Denman (of Holden & Co) appeared for the first defendant; Constance Mahoney (instructed by Moon Beever) appeared for the second defendant
Eileen O’Grady, barrister
