Joint tenancy — Joint tenant insolvent at death — Administration order over estate — Whether joint tenancy severed — Relation back
Mr Gavin
Hilary Palmer was in partnership as a solicitor with a Mr Brill until October 5
1990. In November 1990 Mr Brill reported defalcations on Mr Palmer’s part and
in November 1990 Mr Palmer died. His will was proved by a Mr Myers who, in
August 1991 presented a petition for an insolvency order which was made on
August 17 1991. The applicant was appointed trustee in October 1991. There were
large claims against the estate. In January 1989 Mr Palmer and his wife, the
respondent, bought a house which was conveyed to them as joint tenants at law
and in equity. The trustee contended that the effect of the administration
order was to sever the joint tenancy with retrospective effect so that an
undivided moiety of the beneficial interest in the house devolved as part of Mr
Palmer’s estate and this would meet most of the claims against the estate.
the Insolvency Act 1986 the trustee’s title relates back to the date of the
bankruptcy order and the appointment of a trustee follows automatically after a
bankruptcy order has been made and, during the interval between the making of
the bankruptcy order and the vesting of the debtor’s property in the trustee,
the official receiver is constituted the receiver and manager of the bankrupt’s
estate with power to take all necessary steps to preserve the property. The
effect is to impose on the debtor’s property at the same time when the the
bankruptcy
tenancy.
The following
cases are referred to in this report.
Debtor,
A, Re (No 1 of 1987) [1989] 1 WLR 271, CA
Dennis,
Re [1992] 3 WLR 204; [1992] 3 All ER 436
Gunsbourg,
Re [1920] 2 KB 426; [1920] All ER 492; (1920) 36
TLR 485, CA
Hirth,
Re, ex parte The Trustee [1899] 1 QB 612
Morgan v Marquis (1853) 9 Exch 145
Pollitt,
Re, ex parte Minor [1893] 1 QB 455
Ponsford
Baker & Co v Union of London & Smith’s
Bank Ltd [1906] 2 Ch 444; [1904-7] All ER Rep 829; 22 TLR 812, CA
Rhodes v Dawson (1886) 16 QBD 548
Smith (a
bankrupt), In Re, ex parte Braintree District Council [1990] 2 AC 215; [1989] 3 WLR 1317; [1989] 3 All ER 897, HL
Smith v Stokes (1801) 1 East 363
Thomason v Frere [1808] 10 East 418
Warren,
Re, ex parte Wheeler v Trustee in Bankruptcy
[1938] Ch 725; [1938] 2 All ER 331; 159 LT 17, 54 TLR 680, DC
This was the
hearing of an originating summons by the applicant, the trustee of the estate
of Gavin Hilary Palmer, a deceased debtor, against the respondent, Mrs Avril
Palmer, for a declaration that the estate included an undivided moiety of the
proceeds of sale and of the rents and profits until sale of 147 Wigton Lane,
Alwoodly, Leeds.
John Briggs
(instructed by RC Moorhouse & Co, of Leeds) appeared for the applicant;
Alexa Hilliard (instructed by Bury & Walker, of Leeds) represented the
respondent.
Giving
judgment, VINELOTT J said: This application raises a short but important
question as to the effect of an insolvency administration order upon the
devolution of property in which the deceased had an interest as joint tenant in
equity immediately before his death. The facts are shortly as follows. A Mr
Gavin Hilary Palmer died on November 22 1990. He was a solicitor and had at one
time practised in partnership with a Mr Ian Brill. The partnership was
terminated on October 5 1990 and Mr Palmer then became a partner in another
firm. In November 1990 Mr Brill claimed that Mr Palmer had been guilty of
serious defalcations. He reported them to the Law Society. Mr Palmer died very
shortly thereafter while inquiries by the Law Society were being pursued. By
his will he had appointed Mr Brill and another solicitor, a Mr Myers, to be his
executors. Mr Brill renounced probate and the will was proved by Mr Myers
alone.
On August 1
1991 Mr Myers presented a petition for an insolvency administration order and
the order was made in Leeds County Court on August 17 1991. The applicant was
appointed the trustee of the estate on October 25 1991. I understand that it is
common ground that there are very large claims against the estate by clients of
Mr Palmer’s former firm for which Mr Brill is also liable as his partner and
that there are also outstanding claims for tax in respect of the partnership
income for which again Mr Brill is liable and for which he has a claim for
contribution from the estate. In January 1989 Mr Palmer and his wife, the
respondent Mrs Avril Palmer, had together bought a house at Alwoodly, near
Leeds. It was conveyed to them as joint tenants at law and in equity. It is
conceded on her behalf that the joint tenancy was capable of being severed by
the means prescribed or permitted by the proviso to section 36(2) of the Law of
Property Act 1925 — that is, that there was no contractual bar to severance.
The question is whether the effect of the administration order was to sever the
joint tenancy with retrospective effect so that an undivided moiety of the
beneficial interest in the house devolves as part of Mr Palmer’s estate. His
interest in the house (if any) was his only substantial capital asset and I
understand that if a half-share devolves as part of his estate it will suffice
largely, if not wholly, to meet the claims against his estate.
The
administration of an insolvent estate is not governed by the Insolvency Act
1986 itself but by regulations contained in an order, the Administration of
Insolvent Estates of Deceased Persons Order 1986 (SI 1986, no 1999), which was
made under the powers conferred by section 421 of the 1986 Act. The order, in
effect, applies the provisions of the 1986 Act relating to individual
insolvency to insolvent estates with modifications, which are set out in
Schedule 1 to the order. It will be convenient first to summarise the relevant
provisions of the 1986 Act which are so modified and then to explain the way in
which they are modified:
The 1986
Act
Section 278
provides that:
The
bankruptcy of an individual against whom a bankruptcy order has been made —
(a) commences with the day on which the order is
made.
Section 283(1)
reads as follows:
(1) Subject as follows, a bankrupt’s estate for
the purposes of any of this Group of Parts comprises —
(a) all property belonging to or vested in the
bankrupt at the commencement of the bankruptcy; and
(b) any property which by virtue of any of the
following provisions of this Part is comprised in that estate or is treated as
falling within the preceding paragraph.
There are
exceptions in subsection (2) relating to equipment necessary for the bankrupt’s
employment, business or vocation and household equipment. It is unnecessary to
refer to these provisions or to other specific exceptions in subsections (3),
(4) and (5).
Section 284
then avoids dispositions made by the debtor during the period to which section
284 applies; that period is defined in section 284(3) as the period beginning
with the presentation of the petition and ending with the vesting of the
bankrupt’s estate in the trustee. Subsections (4) and (5) then except and
protect, in broad terms, payment made before the commencement of the bankruptcy
in good faith for value and without notice of the petition and certain payments
made after the commencement of the bankruptcy for the purpose of discharging a
debt incurred before the commencement of the bankruptcy.
Section 286
gives the court power, if necessary for the protection of the debtor’s
property, at any time after the presentation of the bankruptcy petition and
before making a bankruptcy order to appoint the official receiver or, where an
insolvency practitioner has been appointed on the debtor’s petition, the
insolvency practitioner to be the interim receiver of the debtor’s property;
subject to any restriction imposed by the court the interim receiver has the
same rights, powers, duties and immunities as a receiver and manager appointed
under section 287.
Under section
287(1) the official receiver is constituted the receiver and manager of the
bankrupt’s estate between the making of the bankruptcy order and the time at
which the bankrupt’s estate vests in the trustee; the function of the official
receiver is to protect the estate and he is given the same powers as if he were
a receiver and manager appointed by the court and also has powers to dispose of
perishable goods.
The
appointment of a trustee is dealt with in chapter 3, sections 292-300. Leaving
aside cases where a certificate for the summary administration of the
bankrupt’s estate is in force and criminal bankruptcies, which are not material
to an insolvency administration order, the power to appoint a trustee is
exercisable by a general meeting of the bankrupt’s creditors or, under sections
295(2), 296(2) or 300(6), by the Secretary of State. It is the duty of the
official receiver after a bankruptcy order has been made as soon as practicable
in the period of 12 weeks beginning with the day on which the order was made to
decide whether to summon a general meeting of the bankrupt’s creditors for the
purpose of appointing a trustee (see section 293(1)); under section 293(2) if
he decides not to summon a meeting he must give notice of his decision to the
court and to every known creditor; as from the giving of notice to the court he
is the trustee of the bankrupt’s estate: see section 93(3). Where the official
receiver has not summoned or has decided not to summon a general meeting of the
bankrupt’s creditors any creditor may request him to summon a meeting for the
appointment of a trustee; if it
of not less than one quarter in value of the creditors it is the duty of the
official receiver to summon the meeting: see section 294.
Under section
295 if a meeting summoned under section 293 or section 294 is held, but no
appointment of a trustee is made it is the duty of the official receiver to
decide whether to refer the need for an appointment to the Secretary of State
and if he makes such reference the Secretary of State must either make an
appointment or decline to make one; if the official receiver decides to not to
refer the need for an appointment to the Secretary of State, or if the
Secretary of State declines to make an appointment, the official receiver must
give notice of his decision, or the Secretary of State’s decision, to the court
and as from the giving of such notice, as where no notice has been given under
section 293(2), the official receiver is to be the trustee of the bankrupt’s
estate. Under section 296 the official receiver may at any time while he is the
trustee apply to the Secretary of State for the appointment of a person as
trustee in his place; on such an application being made the Secretary of State
must either make an appointment or decline to make one; where a trustee has
been appointed by the Secretary of State whether under section 296 or otherwise
the trustee must give notice to the bankrupt’s creditors of the appointment or
if the court so allows advertise his appointment.
Section 298
deals with the removal and in certain circumstances the replacement of a
trustee other than the official receiver and with the release of a trustee who
ceases to be a trustee. Section 300 deals with the case where an appointment
fails to take effect or there is otherwise a vacancy in the office; the
official receiver is constituted trustee until a vacancy is filled and there
are provisions for the summoning of a general meeting and a reference of the
need for the appointment to the Secretary of State and for an appointment by
the Secretary of State or if no appointment is made continuing the official
receiver’s office as trustee, which are similar to the provisions in section
295.
It is clear
from the provisions which I have summarised that the intention of the
legislature was to ensure that when a bankruptcy order is made, and is not
annulled or discharged, the making of a bankruptcy order will always be
followed by the appointment of a trustee.
The
administration of the bankrupt’s estate is dealt with in chapter 4. It is
necessary to refer only to section 305(2), which imposes a duty on the trustee
to get in, realise and distribute the bankrupt’s estate, and to section 306,
which I should read in full.
Vesting of
bankrupt’s estate in trustee.
(1) The bankrupt’s estate shall vest in the
trustee immediately on his appointment taking effect or, in the case of the
official receiver, on his becoming trustee.
(2) Where any property which is, or is to be,
comprised in the bankrupt’s estate vests in the trustee (whether under this
section or under any other provision of this part), it shall so vest without
any conveyance, assignment or transfer.
The order
I must turn
now to the way in which the 1986 Act is applied to insolvent estates. Articles
3, 4 and 5 deal respectively with the situation where a petition is presented
after the debtor’s death, where an insolvent estate is administered otherwise
than in bankruptcy (the common case is the administration of an estate in the
Chancery Division) and where the debtor dies after the presentation of a
petition. Where the insolvent estate is being administered otherwise than in
bankruptcy the bankruptcy provisions as to the rights of secured and unsecured
creditors, as to debts and liabilities provable, as to the valuation of future
and contingent liabilities and as to the priorities of debts and other payments
are to apply save only that reasonable funeral, testamentary and administration
expenses are given priority over preferential debts and section 292(2) (which
provides that no person can be appointed a trustee unless he is a qualified
insolvency practitioner) is not to apply.
Where the
debtor dies after a petition has been presented proceedings are to continue as
if he were alive subject only to modifications set out in Schedule 2 and save
that reasonable funeral and testamentary expenses are again given priority over
preferential debts. The court may order service of the petition on his personal
representatives.
Returning to
the first of these three situations, that is where a petition is presented
after the death of the debtor, Article 3 provides that the relevant provisions
of the 1986 Act are to apply, subject to the modifications set out in Schedule
1 to the order.
Part 1 of
Schedule 1 sets out in tabular form in one column expressions used in the 1986
Act and in the opposite column the expression which is to be substituted for
the purposes of the order. To understand the order it is necessary to set these
out in full and it will be convenient to do so in a series of subparagraphs.
There is to be substituted:
(a) For the expressions ‘the bankrupt’ and ‘the
debtor’ the words ‘the deceased debtor or his personal representative (or if
there is no personal representative such person as the court may order) as the
case may require’.
(b) For ‘the bankrupt’s estate’ the words ‘the
deceased debtor’s estate’.
(c) For ‘the commencement of the bankruptcy’ the
words ‘the date of the insolvency administration order’.
(d) For ‘a bankruptcy order’ the words ‘an
insolvency administration order’.
(e) For ‘an individual being adjudged bankrupt’
the words ‘an insolvency administration order being made’.
(f) For ‘a debtors petition’ the words ‘a
petition by the personal representatives of a deceased debtor for an insolvency
administration order’.
The provisions
of the 1986 Act are then modified by Part II of Schedule 1. It is necessary to
refer to only a few of the paragraphs of Part II.
Para 10
applies section 278 except para (b), but as if for para (a) were
substituted: ‘(a) commences with the day on which the insolvency
administration order is made’.
Para 12
provides that sections 283 to 285 are to apply with the modification that they
are to have effect as if the petition had been presented and the administration
order had been made, ‘. . . on the date of death of the deceased debtor’ and
‘with the following modifications to section 283’.
(a) in subsection 2(b), for the words
‘bankrupt and his family’, there shall be substituted the words ‘family of the
deceased debtor’.
Applying these
modifications to the key provisions in section 278 and section 283, section 278
reads as follows:
The bankruptcy
of an individual against whom an insolvency administration order has been made
(a) commences on the day on which the insolvency
administration order is made.
Section 283(1)
reads:
(1) Subject as follows, the deceased debtor’s
estate for the purposes of any of this group of parts comprises:
(a) all property belonging to or vested in the
deceased debtor or his personal representative (or if there is no personal
representative such person as the court may order) as the case may require at
the commencement of bankruptcy.
However, that
must be read subject to para 12 of Part II of Schedule 1 to the order under
which the insolvency administration order is to be treated as made ‘on the date
of death of the deceased debtor’.
The issues
The general
rule is that a judicial act is presumed to have been made on the first moment
on the day when it was done and takes precedence over other acts on the same
day. The rule is not an inflexible one and if there is competition between two
judicial acts ‘. . . the actual time when each was done can be considered and
priority given to the judicial act earlier in point of time unless there be
some other ground for preferring the one act to the other’: see Re
Warren, ex parte Wheeler v Trustee in Bankruptcy [1938] Ch 725 per
Luxmore J at p739. This general rule must, it seems to me, apply a fortiori
where as here a judicial act, the making of an insolvency administration order,
is to be treated as having been done on (and not from) the date of the debtor’s
death. There is no other point of time to which it can be related and no
judicial act competing with it. It follows that for the purposes of the
definition of the deceased debtor’s estate in section 283 (as modified by the
order) the insolvency administration order must be treated as having been made
on the same day as, but before, the death of the debtor.
The question
is whether the relation back of the trustee’s title to the date on which the
insolvency administration order is to be treated as having been made for the
purposes of the definition of the deceased debtor’s estate has the consequence
that the trustee can rely on it as severing the joint tenancy. This question is
one of general importance. The same question would arise if a petition were
presented and if an administration order were actually made and if the debtor
were then to die before a trustee had been appointed and before the official
receiver had otherwise become trustee of the estate.
Relation
back
It was said by
Nicholls LJ in Re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at p276H
that:
The new code
has made many changes in the law of bankruptcy, and the court’s task, with
regard to the new code, must be to construe the new statutory provisions in
accordance with the ordinary canons of construction, unfettered by previous
authorities.
That approach
to the construction of the 1986 Act was endorsed by Lord Jauncey of
Tullichettle giving the opinion of the House in In Re Smith (A Bankrupt), ex
parte Braintree District Council [1990] 2 AC 215 at p238. However, some of
the fundamental concepts governing the operation of the old bankruptcy code are
reflected in the 1986 Act and it is, I think, permissible to look at the older
authorities to elucidate those principles.
Under the old
law the title of the trustee, whether taken by assignment from the commission
in bankruptcy or by appointment by the court, related back to the act of
bankruptcy on which the bankruptcy proceedings were founded. There is a direct
authority for the proposition that the relation back severed a joint tenancy of
property of which the debtor was joint tenant with another notwithstanding the
death of one of the joint tenants before the assignment to or appointment of
the trustee; that is the decision of the Court of King’s Bench in Smith
v Stokes (1801) 1 East 363. The brief judgment of Lord Kenyon CJ can be
understood only in the context of the facts and argument stated earlier in the
report. They are as follows. Richardson and Strickland carried on a trading
partnership. Richardson committed an act of bankruptcy on January 29 1800. On
January 31 goods belonging to the partnership were sent to A and B and received
by the defendant, Stokes. A commission in bankruptcy was appointed on February
8. Shortly thereafter Strickland died and his will was proved by Stokes and
another, the executors thereby appointed. On March 7 the commissioners executed
an assignment of the bankrupt’s estate to the plaintiffs. The action was
brought in trover and it was admitted that an action at law could not succeed
if Stokes as the representative of Strickland was a tenant in common of the
goods. It was contended at p365 that:
The property
was originally vested in the two partners as joint tenants, and nothing
happened during the life of Strickland to convert their title into a tenancy in
common; for he died before the Commissioners assignment was made, and
consequently before the bankrupt laws had attached upon the legal title of the
bankrupt so as to destroy the joint tenancy. The act of bankruptcy, which
happened before Strickland’s death, could not of itself operate to dissolve the
joint-tenancy or sever the title of the parties, and convert it into a tenancy
in common.
Then, having
pointed out that the appointment of commissioners did not affect the bankrupt’s
title but conferred on the commissioners a bare power to transfer and that the
title to the bankrupt’s property was not divested until the assignment, counsel
for the assignee in bankruptcy continued at p366:
The relation
back of the assignment to the act of bankruptcy, in order to avoid mesne acts
of the bankrupt, is by force of the bankrupt laws, and is quite distinct in its
operation from the change of title effected in the property by such assignment,
from a joint tenancy to a tenancy in common, which results from the rules of
the common law in consequence of the conveyance, and which has no relation
back.
That argument
was rejected by Lord Kenyon CJ in the following passage:
In this case
it was not the act of bankruptcy alone that dissolved the joint tenancy, but
the act of bankruptcy followed up by the commission and the assignment. Nothing
passes to the assignees till the assignment; but when that is executed, they
are in by legal relation to the time of the act of bankruptcy, according to Cooper
v Chitty and many other cases. This is the essential object of the
bankrupt laws, and the uniform operation of them . . .
Then, having
referred to the exception of the Crown prerogative in regard to extents against
the bankrupt’s property, he added:
In all other
instances the relation takes place. The effect of it then in this case is, that
the assignees became tenants in common by relation from the time of the act of
bankruptcy with the other partner in his lifetime, and since his decease with
his representative, one of whom is the present defendant: and then the rule of
law attaches, that one tenant in common cannot maintain trover against another.
That is a
clear decision that the relation back of the title of the assignee (now the
trustee in bankruptcy) operated retrospectively to sever a joint tenancy. It is
the more remarkable because at that time there was no limit to the period over
which the relation back to the act of bankruptcy could operate.
There are many
cases in which Smith v Stokes has been cited but not, I think,
(with the possible exception of Thomason v Frere [1808] 10 East
418), for the proposition that the act of bankruptcy followed by an assignment
to a trustee in bankruptcy severs a joint tenancy. I should, however, mention Morgan
v Marquis (1853) 9 Exch 145 because it is relied on in Megarry &
Wade on the Law of Real Property 5th ed at p430 as authority for the
proposition that:
involuntary
alienation would also effect severance, as where a joint tenant went bankrupt
and under the bankruptcy law his property became vested in his trustee in
bankruptcy
One Perrin was
a merchant and the defendants were commission agents. In March 1852 the
defendants by the direction of Perrin purchased 2,020 barrels of flour and sent
him an advice note stating that they had bought the flour for him alone.
Shortly afterwards they learned that one Shute was interested in the purchase
of the flour and had advanced money to Perrin. On August 11 the defendants sold
1,000 barrels of the flour by the direction of Perrin and Shute. On August 12
Perrin committed an act of bankruptcy. On August 18 the defendants sold the
remaining 1,020 barrels by the direction of Shute. On October 15 a petition in
bankruptcy was presented in which Perrin was adjudicated bankrupt. The trial
judge left it to the jury to say whether the flour was sold by the defendants
on account of Perrin and Shute or on account of Perrin only and the jury found
that the sale was on account of Perrin and Shute.
It is clear
from the judgment of Chief Baron Pollock that the finding of the jury was a
finding that Perrin and Shute were joint tenants. He refers to the finding of
the jury that:
. . . one
Shute was jointly interested with the bankrupt in the goods.
He continues:
The
defendants sold the goods in question after the bankruptcy, by the direction of
Shute; and I am of opinion that they were justified in so doing, since they had
the authority of the solvent partner, who had a right to deal with the property
as his own.
The reference
to ‘the bankruptcy’ is clearly a reference to the commission by Perrin of an
act of bankruptcy; the adjudication followed some weeks after the sale of the
1,020 barrels.
The point is
dealt with more fully by Baron Parke and I should, I think, read his judgment
in full:
I am also of
opinion that the learned Judge at the trial was right. Shute, the solvent
partner, directed the defendants to sell the flour. Now it is clear that one
tenant in common may dispose of the common property; and therefore, when the
flour was sold by the defendants, it was properly sold so far as Shute was
concerned. Then the effect of the bankruptcy was to render the assignees
tenants in common of the goods with Shute. But it is well established that one
tenant in common cannot maintain an action against his companion, unless there
has been a destruction of the particular chattel or something equivalent to it.
That being so, the defendants are not wrong doers, for they have acted under
lawful authority.
In this
passage again the phrase ‘the bankruptcy’ clearly refers to the act of
bankruptcy. He referred to a number of cases including Smith v Stokes
as authority for the proposition that:
. . . after
an act of bankruptcy committed by one of two partners, the solvent partner is
capable of disposing of the partnership property. Therefore, in this case, the
goods having been sold by the order of Shute, the assignees of Perrin have no
right to recover the proceeds from the defendants, but the matter must be
settled by an account between the parties in the Court of Bankruptcy or in a
court of Equity.
Baron Alderton
concurred and Baron Platt added:
The goods
never were the property of the assignees alone, nor did the money, the proceeds
of sale, ever belong to them alone.
There is no
decision on this point after Morgan v Marquis until the recent
decision of Sir Donald Nicholls V-C in Re Dennis [1992] 3 WLR 204. I
shall come back to that case later. I should first observe that it is clear
that the Bankruptcy Act 1914 did not alter the basic principles governing the
relation back of the title of the trustee in bankruptcy. Section 37 provided
that the bankruptcy should be ‘. . . deemed to have relation back to, and to
commence at, the time of the act of bankruptcy being committed on which a
receiving order is made against him’ or if there is more than one then the
first act of bankruptcy being within the three months preceding the
presentation of the petition. Under section 38 the property of the bankrupt
divisible against his creditors comprised:
All such
property as may belong to or be vested in the bankrupt at the commencement of
the bankruptcy.
Sections 42
and 43 provided for the avoidance of settlements and preferences before the
commencement of the bankruptcy and section 45 excepted from those provisions
and from the effect of bankruptcy on execution or attachment a payment or
delivery to the bankrupt or his creditors, a conveyance or assignment by the
bankrupt for valuable consideration and any contract dealing or transaction by
or with the bankrupt for valuable consideration if made before the date of the
receiving order and without notice of any available act of bankruptcy.
These
provisions were all considered by the Court of Appeal in the well-known case of
Re Gunsbourg [1920] 2 KB 426. The debtor transferred his assets
including certain furniture to a company formed by him on September 20 1917 and
on September 27 committed an act of bankruptcy. The petition was presented on
October 8 and a receiving order, made on October 24, was followed by an
adjudication on December 12. After the date of the receiving order, but a day
before the adjudication, part of the furniture was sold by the company to a
bona fide purchaser for value without notice; it was later resold to another in
the same position. The transfer to the company was later held to be fraudulent
and void and an act of bankruptcy and the company was ordered to deliver to the
trustee the property comprised in the sale. A further order was later made
against the company for payment of the amount of the value to the trustee. No
payment having been made the trustee claimed to recover the furniture or its
value from the ultimate purchaser. The question was thus, whether the relation
back of the title of the trustee had the consequence that the title of the
purchaser from the company and of the ultimate purchaser was rendered wholly
void as from the act of bankruptcy.
Lord Sterndale
MR cited the following passage from the judgment of Lord Esher MR in Re
Pollitt, ex parte Minor [1893] 1 QB 455 at p457 that:
The result of
the relation back is that all subsequent dealings with the debtor’s property
must be treated as if the bankruptcy had taken place at the moment when the act
of bankruptcy was committed.
He continued
in a passage, which I should cite in full:
If this be correct
the position is exactly the same as if the bankrupt had been in possession of
goods belonging to another person, to which he had no title and had sold them
to the original transferee who had then resold them. In such a case neither the
original nor any of the subsequent transferees would take any title at all, and
the true owner could recover the goods from any one in whose possession he
found them. I know of no doctrine of law or equity which would relieve any of
the transferees in these circumstances.
It was
however argued that this statement of Lord Esher cannot be taken to its full
extent and that it must be confined to avoiding dealings with his property by
the bankrupt himself after the date of relation back. This was founded on the
argument that the original transfer was not void but only voidable, and that
therefore any bona fide purchase from the original transferee was protected. I
am not sure that void and voidable are quite apt expressions, but clearly the
transfer was not void at the moment it was made, for it might be that no
circumstances would ever arise in which a trustee’s title would accrue or the
bankruptcy law apply. I will assume that voidable is a correct expression to
describe the nature of the transaction, and then it becomes necessary to
ascertain the effect of the avoidance caused by the making of the receiving
order. This seems to me to be quite different from the effect of avoidance in
the ordinary case of a voidable transfer where no principles of bankruptcy law
apply. In the latter case the title of the person avoiding the transaction
arises only from the time when he elects to avoid, and therefore intervening
bona fide transactions are protected because the transferor up to the date of
avoidance had and could confer a good title. In the case under consideration so
soon as the receiving order is made the trustee at once gets a title which
relates back to the earliest act of bankruptcy within three months of the
receiving order, whether it be the one upon which the receiving order is made
or not, and therefore his position and rights are entirely different from those
of an ordinary person who elects to avoid a voidable transaction.
I must now
turn to the decision of Sir Donald Nicholls V-C in Re Dennis [1992] 3
WLR 204. A husband and wife owned two properties as beneficial joint tenants.
The husband committed an act of bankruptcy on September 21 1982 and on December
20 a bankruptcy petition was presented. The wife died on February 24 1983. On
May 23 a receiving order was made and on November 11 the husband was
adjudicated bankrupt. As in the case of Smith v Stokes it was the
trustee in bankruptcy who claimed that the relation back of his title to the
act of bankruptcy did not sever the joint tenancy and that on the death of the
wife the entire beneficial interest accrued to the husband and through him to
the trustee. That contention was accepted by the Vice-Chancellor. Having set
out in the material terms of section 37 and section 38 he said at p206:
The
consequence of this may be, and in some cases will be, to divest the third
party of title to property which since the commencement of bankruptcy he has
acquired from the bankrupt. That divesting occurs when the adjudication order
is made, not before. Hence in the present case Mr Dennis had not been divested
of his interest of the joint tenancy when his wife died, When she died the
joint tenancy still subsisted.
None of the
authorities to which I have referred was cited to the Vice-Chancellor. Only two
cases were cited. The first is Rhodes v Dawson (1886) 16 QBD 548,
which is authority for the proposition that a receiving order does not operate
to divest a debtor of his property; strictly, as the Vice-Chancellor observed,
that question was irrelevant because both the receiving order and the
adjudication occurred after the wife’s death. Counsel for the wife’s executors
relied upon observations of Fletcher-Moulton LJ in Ponsford Baker & Co
v Union of London & Smith’s Bank Ltd [1906] 2 Ch 444.
Fletcher-Moulton LJ said at p452:
Until commission
of the act of bankruptcy he was, of course, the beneficial
to be regarded as such beneficial owner is no longer absolute, but is
contingent on no bankruptcy petition being presented within three months of the
date of the act of bankruptcy which leads to a receiving order being made. If
such receiving order be made the whole of the assets vested in his trustee as
from the date of the act of bankruptcy.
The question
before the Court of Appeal in Ponsford Baker was whether a debtor who
had committed an act of bankruptcy had the right to require a secured creditor
who had notice of it to hand over his securities on payment of the amount due
thereon and in the case of a refusal to hand over whether the debtor could
enforce his rights by action. It contains a very learned discussion by
Fletcher-Moulton LJ, who was of course a master of the bankruptcy law, as to
the principles on which the courts of common law acted when they permitted a
debtor who had committed an act of bankruptcy to recover judgment against a
person indebted to him who had notice of the act of bankruptcy and, in
particular, the circumstances in which a defendant might be ordered to deliver
up securities in an action for redemption by a person in that position. None of
this was relevant to the question before the Vice-Chancellor and not
unnaturally he declined to treat the statement by Fletcher-Moulton LJ which I
have cited as a sufficient authority for the proposition that the relation back
of the trustee’s title operated to sever a joint tenancy of the debtor with
another.
In Re
Dennis (as in Smith v Stokes) the question was whether the
relation back of the trustee’s title operated retrospectively to divest the
bankrupt of an interest as joint tenant in property of which he had been joint
tenant at the time of the act of bankruptcy and which apart from the act of
bankruptcy would have accrued to him on the death of the other joint tenant.
There is clearly much force in the view that although the effect of the
bankruptcy legislation is to give the trustee the right to assert that all the
property of the debtor at the date of the act of bankruptcy must be treated as
vested in him as from the act of bankruptcy and that the operation of the
retrospective vesting is to sever a joint tenancy of which the debtor was a
joint tenant, the personal representatives of a joint tenant cannot similarly
rely on the relation back of the trustee’s title to deprive the trustee of a
claim of property that would otherwise have accrued to the debtor. There is
support for that approach in an observation of Lord Lindley in Re Hirth, ex
parte The Trustee [1899] 1 QB 612 at p623, which is also cited by Lord
Sterndale in Re Gunsbourg where Lord Lindley refers to the position of a
trustee at p622:
. . . who
finds that there has been a fraudulent conveyance, which is an act of
bankruptcy, and who elects to impeach the transaction and demands back the
property from the person in whose possession it is.
It may be that
the decision of the Vice-Chancellor in Re Dennis can be supported on
this narrow ground. However, it is unnecessary for me to consider whether in
these precise circumstances Smith v Stokes would now be followed.
The question which I have to consider is whether the relation back of the title
of the trustee can be relied upon by the trustee as severing a joint tenancy of
property of which the debtor was the joint tenant and which apart from the act
of bankruptcy would have accrued on the death of the debtor to the other joint
tenant. In my judgment, the principles explained in Re Gunsbourg support
the conclusion that under the law before the 1986 Act the trustee could claim
that, in the words of Fletcher-Moulton LJ, the title which the other joint
tenant took on the death of the debtor was contingent on no petition being
presented.
The
present position
The present
position under the new legislation is, I think, a fortiori. Under the
new legislation the trustee’s title relates back to the date of the bankruptcy
order and the appointment of a trustee follows automatically after a bankruptcy
order has been made and, during the interval between the making of a bankruptcy
order and the vesting of the debtor’s property in the trustee, the official receiver
is constituted the receiver and manager of the bankrupt’s estate with power to
take any necessary steps to preserve the property. The effect of the new
legislation, in my judgment, is to impose on the debtor’s property at the time
when the bankruptcy order is made a trust for the benefit of his creditors and
to sever any joint tenancy although, no doubt, the severance would operate
contingently upon the bankruptcy order not being rescinded or set aside before
the appointment of the trustee. As Mr Briggs pointed out, severance of a joint
tenancy upon and not before the appointment of a trustee in bankruptcy could
have very arbitrary results. If a debtor dies after a petition has been
presented proceedings continue as if he were alive subject to immaterial
modifications: see article 5 of the 1986 order. If severance of a joint tenancy
occurs only on the appointment of a trustee in bankruptcy the devolution of the
property would depend upon whether the bankrupt survived the period of 12 weeks
after the date of the order (at the end of which either a trustee would have
been appointed by the creditors or the official receiver would have become the
trustee) or, if the debtor died within the 12-week period, upon whether, at his
death the official receiver had decided not to summon a meeting of creditors
and had given notice of his decision to the court in accordance with section
293(2) (in which event he would be the trustee from the giving of the notice to
the court). I do not think that the legislature can have intended that
severence of the joint tenancy should depend upon the precise order of these
events after a bankruptcy order has been made.
Miss
Hilliard’s argument to the contrary was founded upon section 284. She pointed
out that section 284 operates to invalidate dispositions made by the bankrupt
during the whole of the period from the presentation of the petition until the
vesting of the debtor’s estate in the trustee and that the death of a joint
tenant enlarges the estate of the survivor and cannot be considered a
disposition by him. She submitted that section 284 must be read as an
exhaustive code governing the devolution of the bankrupt’s estate from the
petition to the vesting of the estate in the trustee. That submission, if well
founded, would have some very surprising effects. As I see it, it would make
the relation back of the trustee’s title to the commencement of the bankruptcy
otiose. I think the answer to Miss Hilliard’s submission is that section 284
has a dual effect. First, it supplements the relation back of the trustee’s
title by avoiding dispositions after the date of presentation of the petition.
Second, it protects dispositions after the presentation of the petition and
before the appointment of the trustee which fall within subsections (4) and
(5); to that extent it reflects (though it is not coterminous with) section 45
of the 1914 Act.
Miss Hilliard
also pointed out that, if a petition is presented and the debtor dies before a
bankruptcy order is made, then property of which he is a joint tenant accrues
to the survivor, it is not caught by the provisions of section 284. I do not
find that a surprising conclusion. The policy of the Act is to restrict the
relation back of the trustee’s title to the making of the bankruptcy order or,
where the debtor dies before a petition is presented, the date of his death.
Section 284 adds to the relation back the avoidance of dispositions after
presentation of the petition so far as not protected by subsections (4) and
(5). If this result (that property of which the debtor was joint tenant accrues
to the survivor on his death after the presentation of the petition and before
the date of the bankruptcy order) is thought to be an undesirable restricton on
the extent to which a debtor’s property is subjected to a trust for his
creditors then that is a matter for the legislature to correct and not for the
court.
I will
accordingly make the declaration sought that the debtor’s estate includes an
undivided moiety of the proceeds of sale and of the net rents and profits until
sale of the property, 147 Wigton Lane, Alwoodly.
