Bankruptcy – Underlease – Disclaimer – Appellant appealing against county court decision that disclaimer of underlease by trustee in bankruptcy not preventing landlords from proving for rents due after date of service – Whether exception to property in bankrupt’s estate applying to lease – Whether underlease capable of being disclaimed as unprofitable contract – Whether court should adopt flexible approach to effect of disclaimer – Whether approach in earlier case supporting conclusion that legal estate in underlease could be disclaimed – Appeal dismissed
The appellant was the husband of the fourth respondent bankrupt. He claimed to be her creditor, although his proof had not yet been accepted or rejected by the first respondent trustee in bankruptcy. At the time of the bankruptcy order, the fourth respondent was a joint tenant with E of business premises in Kingston-upon-Thames held under the terms of an underlease. The second and third respondents were the landlords under the underlease.
The first respondent served a notice of disclaimer pursuant to section 315 of the Landlord and Tenant Act 1954 disclaiming “all my/our interest in leasehold property under the terms of [the underlease] in respect of [the property]”. The respondents took the view that the notice did not end the legal estate in the underlease and that the estate of the fourth respondent remained liable for the payment of rent until the expiry of the term. The appellant contended that the notice of disclaimer was effective to disclaim all of the bankrupt’s interest in the underlease and that the estate was liable for no further rent after the disclaimer.
The appellant appealed against the decision of the county court that the disclaimer did not prevent the landlords from proving for rents falling due after the date on which it was served. The appellant contended that: (i) the exception to property within a bankrupt’s estate of “property held on trust for any other persons” in section 283(3)(a) of the Insolvency Act 1986 did not apply because the underlease was held by the fourth respondent on trust for herself and she was not “any other person”; (ii) the first respondent was entitled to disclaim the underlease because it was an unprofitable contract within section 315(1)(a) of the 1986 Act; (iii) the court should take a more flexible approach to the effect of the disclaimer and not apply a strict property law approach; and (iv) the assumption of the courts in Lee v Lee (a bankrupt) [2000] BCC 500, which had proceeded on the basis that the trustee in bankruptcy had disclaimed the lease, supported the conclusion that the fourth respondent’s legal estate in the underlease could be disclaimed.
Held: The appeal was dismissed.
(1) The legal estate in the underlease had been vested in the fourth respondent and E as joint legal owners on trust for themselves. The effect of section 283(3)(a) of the 1986 Act was that the legal estate in the underlease was excepted from the property comprised within the fourth respondent’s estate and remained at all times in the names of the fourth respondent and E. Therefore, the words “held on trust for any other person” did not assist the appellant and the legal estate in the underlease did not vest in the first respondent trustee: Re McCarthy (a bankrupt) [1975] 1 WLR 807 applied.
(2) Under section 315 of the 1986 Act, the trustee could only disclaim what was comprised in the bankrupt’s estate. In the present case, since the legal estate in the underlease was not vested in the fourth respondent’s estate, it could not be disclaimed. A trustee in bankruptcy could not disclaim something which was not in his ownership. Further, any step taken in relation to trust property, such as a disclaimer in relation to the legal estate in the underlease, would need to be taken by the two trustees acting together, i.e. by the fourth respondent and E; nor could a joint tenancy at law be severed. A trustee could only disclaim contracts or property which formed part of a bankrupt’s estate. As the legal estate in the underlease was not vested in the first respondent, he could not rely upon section 315(1)(a).
(3) Parliament had made clear in the insolvency legislation that property held on trust, such as the legal estate in the underlease, was to be excluded from a bankrupt’s estate. If the legal estate in the underlease was excluded from the fourth respondent’s estate, both as a matter of logic and of the language used in section 315, it could not be disclaimed. In short, it was neither necessary nor possible for the legal estate to be disclaimed. That conclusion was supported by the fact that the obligation to pay rent was a contractual, legal obligation which flowed from the legal interest in the underlease and not from the beneficial interest: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 EGLR 94 distinguished.
(4) The decision in Lee did not support the appellant’s case since the point now in issue was neither taken nor argued. As it was far from clear whether, at the date of the disclaimer, the appellant in Lee had ever intimated a claim that she was entitled to a beneficial interest in the property, it was not surprising that the trustee in bankruptcy disclaimed the lease. It appeared that her concern was with the proceeds of sale and not with the different interests in the property. It was understandable that the courts assumed the correctness of the point at issue in the present appeal: Lee v Lee (a bankrupt) [2000] BCC 500 considered.
Bridget Williamson (instructed by Brechers LLP, of Maidstone) appeared for the appellant; Samuel Laughton (instructed by Coleman & Betts, of Kingston-upon-Thames) appeared for the first respondent; Joseph Ollech (instructed by Carter Bells LLP, of Kingston-upon-Thames) appeared for the second and third respondents.
Eileen O’Grady, barrister
Click here to read transcript: Abdulla v Whelan (as trustee in bankruptcy of Amin) and others
