Insolvency — Bankruptcy — Realisation of interest — Deferral of consideration — Bankrupt and wife registered joint tenants of matrimonial home — Trustees in bankruptcy selling bankrupt’s interest to creditor for consideration of £1 plus percentage of net proceeds in event of future sale — Section 283A(2) and (3)(a) of Insolvency Act 1986 — Whether bankrupt’s interest automatically reverting to him three years after date of bankruptcy — Whether reversion prevented by realisation of interest in meantime
The claimants were a married couple who were registered joint tenants of the matrimonial home. A bankruptcy order was made against the first claimant, whereupon his interest in the property vested in his joint trustees in bankruptcy. The defendant was a judgment creditor of the first claimant and the largest creditor in his bankruptcy. Although it at first appeared that, upon severance of the beneficial joint tenancy by the bankruptcy, the estate was entitled to a beneficial half-share of the property, the second claimant claimed an equity of exoneration (as explained in Re Pittortou (a bankrupt) [1985] 1 WLR 58), which she claimed had exhausted the first claimant’s share of the equity. The joint trustees investigated the claim but were unwilling to institute proceedings in respect of the property without funding from creditors. Accordingly, they entered into a deed by which they assigned the estate’s interest in the property to the defendant in consideration of a payment of £1 plus 25% of the net proceeds in the event that the defendant effected a sale of the property.
After the first claimant was discharged from bankruptcy, the claimants applied to the court for a declaration that his interest in the property had automatically reverted to him by virtue of section 283A(2) of the Insolvency Act 1986, since it was the first claimant’s sole or main residence and the trustees had not, within three years of the bankruptcy, “realised” the interest within the meaning of section 283A(3)(a) or taken any of the other steps referred to in section 283A(3). They submitted that realisation required not just a sale but a sale for an immediate monetary consideration, payable and actually paid within the three-year period, not merely a contingent, deferred entitlement to payment such as the trustees held under the arrangement with the defendant.
Held: The application was dismissed. A sale by a trustee for a deferred contingent consideration is a realisation within the meaning of section 283A(3)(a) of the 1986 Act provided that the trustee has assigned the estate’s interest absolutely. Section 283A(3)(a) requires only the estate’s interest in the property to be realised, not, where there are co-owners, the underlying property itself. The joint trustees had assigned all the estate’s interest in return for the assignee’s obligation to pay consideration to them at some future time and on a contingent event. The trustees had thereby realised the interest by a sale, notwithstanding that the consideration was deferred and the tenure of the bankrupt and his family in the property remained precarious. The policy behind section 283A was to protect the bankrupt and his family. However, the precariousness of their position was not inherent in the deferred nature of the consideration but was merely a by-product of the fact that the interest, rather than the property, had been realised; unless the interest was disposed of to the bankrupt or a member of his family, the threat would remain regardless of whether the sale was for immediate cash consideration.
The following cases are referred to in this report.
Board of Trade v Block (1888) LR 13 App Cas 570, HL
Byford (deceased), Re; sub nom Byford v Butler [2003] EWHC 1267 (Ch); [2004] 1 P&CR 12; [2004] 1 FLR 56
Debtor (No 29 of 1986), Re [1997] BPIR 183, Ch
Guy v Churchill (1889) LR 40 Ch D 481, Ch
Oxford Benefit Building & Investment Society, Re (1887) LR 35 Ch D 502, Ch
Phillips v Symes [2005] EWHC 2867 (Ch); [2006] BPIR 1430
Pittortou (a bankrupt), Re; sub nom Pittoriou (a bankrupt), Re [1985] 1 WLR 58; [1985] 1 All ER 285, Ch
Ramsey v Hartley [1977] 1 WLR 686; [1977] 2 All ER 673, CA
This was the hearing of an application by the claimants, Paul Lewis and Gonda Lewis, against the defendant, Metropolitan Property Realizations Ltd, seeking a determination that the first claimant’s interest in the matrimonial home had reverted to him three years after bankruptcy, pursuant to section 283A of the Insolvency Act 1986.
Stephen Schaw Miller (instructed by Edwin Coe LLP) appeared for the claimants; John Briggs (instructed by Mishcon de Reya) represented the defendant.
Giving judgment, Proudman J said:
[1] In this application, Mr Paul Lewis and Mrs Gonda Lewis assert that the interest of Mr Lewis, a former bankrupt, in their dwelling-house, 35 Little Common Stanmore (the property), has reverted to him by virtue of the provisions of section 283A(2) of the Insolvency Act 1986 (the 1986 Act). The respondent, Metropolitan Property Realizations Ltd (MPRL), maintains that Mr Lewis’s joint trustees in bankruptcy successfully realised his interest for the purposes of section 283A (3)(a) by assigning it to MPRL. Proceedings before the Land Registry adjudicator have been stayed pending the outcome of this application. The joint trustees are aware of this action but have not been joined as parties and have declined to intervene.
[2] The point that I have to decide is an important one of statutory construction concerning the meaning of the word “realises” in section 283A (3)(a) of the 1986 Act.
History
[3] A bankruptcy order was made against Mr Lewis on 12 July 2004 on his own petition. He is now discharged. MPRL was a judgment creditor of Mr Lewis and the largest creditor in his bankruptcy after a company associated with him.
[4] Mr and Mrs Lewis were at all material times registered as joint tenants of the property, which was their matrimonial home. On his |page:10| bankruptcy, Mr Lewis’s interest vested in his joint trustees, and it is common ground that the interest is one to which section 283A of the 1986 Act applies. At first, it seemed that, on severance of the beneficial joint tenancy by the bankruptcy, the estate was entitled to a beneficial half-share of the property. However, Mrs Lewis claimed an equity of exoneration (as explained in Re Pittortou (a bankrupt) [1985] 1 WLR 58), which she said exhausted her husband’s share of the equity. The joint trustees investigated her claim, but because they had incurred significant costs without payment, they were unwilling to institute proceedings in respect of the property without funding from creditors.
[5] MPRL has adduced evidence that it regarded the stance that the joint trustees had taken over the exoneration claim as insufficiently firm. At all events, no funding commitment was forthcoming and the joint trustees were faced with the choice of abandoning the estate’s interest in the property or trying to obtain some benefit from it without bringing proceedings.
[6] On 11 July 2007, the joint trustees and MPRL entered into a deed whereby the joint trustees assigned the estate’s interest in the property to MPRL in consideration of the sum of £1 and the following:
In the event that the Assignee effects a sale of the Property then following completion of the sale and upon receipt of the proceeds of sale and the deduction of all costs and expenses including but without limitation to professional and legal fees, marketing costs and further taxes, twenty five per cent (25%) of the net proceeds of sale of the Property will be paid by the Assignee to the Assignor.
[7] I note that the obligation is to pay 25% of the net proceeds, not a sum equivalent to 25% of the net proceeds. The possibility is not catered for that Mr Lewis’s interest might be less than 25% of the whole. It is said on behalf of Mr and Mrs Lewis that the interest has not been realised because the trustee has retained a contingent interest in the proceeds of sale. Realisation was deferred (I quote from Mr Stephen Schaw Miller’s skeleton argument) because:
the conversion of the value into money, in which the trustee is to share, will only occur on the subsequent sale. In other words, as a matter of substance, the trustee will only have his interest realised on the subsequent sale.
Two possible arguments are combined here. First, that the right to share in the proceeds themselves is different in kind from the right to receive a sum equivalent to a proportion of the proceeds. Second, that realisation does not occur until consideration in the form of money is received in the hands of the trustee. As I understand it, Mr and Mrs Lewis rely (principally, at any rate) upon the second contention because they assert that even if the assignment had conferred a right to receive an equivalent sum, it would not have constituted a realisation of the interest.
[8] The deed is also notable in that the obligation to pay is expressed to arise only in circumstances in which it is MPRL (as opposed to Mr and Mrs Lewis) that effects a sale. Moreover, the deed does not say anything about whether the benefit and burden of the deed is assignable.
[9] Mr John Briggs, on behalf of MPRL, explained that, in practice, none of these matters was likely to arise because the parties contemplated a sale by MPRL from which the estate’s share of the proceeds would greatly exceed 25%.
[10] It is nevertheless plain, as Mr Schaw Miller stressed on behalf of Mr and Mrs Lewis, that the joint trustees’ entitlement to receive any part of the proceeds of sale is both contingent and deferred and may never in fact release any money for the creditors.
Section 283A of the 1986 Act
[11] Section 283A of the 1986 Act was inserted by section 261(1) of the Enterprise Act 2002 and came into force on 1 April 2004. It provides that where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house that, at the date of the bankruptcy, was the sole or principal residence of the bankrupt, his spouse or civil partner or former spouse or civil partner (see subsection (1)), the interest should, at the end of three years from the date of the bankruptcy, cease to be comprised in the estate and automatically vest in the bankrupt: see subsection (2). However, that provision is disapplied if, within the three-year period, the trustee has taken any of the steps specified in subsection (3). In addition, the court retains a discretion to substitute a longer period in such circumstances as it thinks just and reasonable or appropriate: see subsection (6) and r 6.237C of the Insolvency Rules 1986.
[12] Subsection (3) provides as follows:
Subsection (2) shall not apply if during the period mentioned in that subsection
(a) the trustee realises the interest mentioned in subsection (1),
(b) the trustee applies for an order for sale in respect of the dwelling-house,
(c) the trustee applies for an order for possession of the dwelling-house,
(d) the trustee applies for an order under section 313 in Chapter IV in respect of that interest, or
(e) the trustee and the bankrupt agree that the bankrupt shall incur a specified liability to his estate… in consideration of which the interest mentioned in subsection (1) shall cease to form part of the estate.
Subsection (4) goes on to provide that if an application of the kind described at (b) to (d) of subsection (3) is made and dismissed, unless the court orders otherwise the interest vests automatically in the bankrupt on the dismissal of the application.
[13] Prior to the insertion of section 283A, a trustee had been able to retain the estate’s interest indefinitely in order to take advantage of rising property prices. He could register a caution against the title to the property and take no action to realise the interest for many years. This could operate unfairly, particularly in the case of jointly owned property, for example where the owners had separated and the non-bankrupt owner was continuing to pay the outgoings. The legislative purpose of the section is plainly to reduce the uncertainty facing a bankrupt and his family. As Collins J said in Re Byford (deceased) [2003] EWHC 1267 (Ch); [2004] 1 P&CR 12, in [15]:
Parliament has now made it clear in the new s[2]83A of the Insolvency Act 1986… that it is undesirable for trustees to wait many years before resolving their rights in respect of the home of the bankrupt or his spouse. This introduces a general rule that the trustee must take steps to realise his interest in the home of the bankrupt or his spouse within three years of the bankruptcy… If he fails to do so the property vests in the bankrupt and the creditors lose all right to it. All parties concerned would know where they stand within a reasonable time. [The section] can be taken as a strong indication of public policy…
Applicants’ case
[14] Mr Schaw Miller submitted that, as a matter of construction of section 283A and having regard to the 1986 Act as a whole, the word “realises” in subsection (3)(a) means not just a sale but a sale for an immediate monetary consideration. The consideration for such a disposal has to be both payable and actually paid within the three-year period. A sale in consideration of payments by instalments over more than the three years, or payments by instalments payable even within the three years from which the transferee defaults, would not, he said, constitute a realisation for the purposes of the section. The issue is whether realisation takes place when the interest is finally and effectively disposed of or when the proceeds of the disposal are actually received in the form of money (rather than merely a promise to pay) in the hands of the trustee.
[15] Mr Schaw Miller relied upon three matters in support of his argument. First, what he said was the natural meaning of the word “realises” and how it is used throughout the 1986 Act and the predecessor provisions of the Bankruptcy Act 1914; second, the scheme of the section; and, third, policy considerations. This is my grouping rather than his and these matters overlap. I propose to deal with them in turn.
Natural meaning of “realises”
[16] The word used in subsection (3)(a) is “realises”, not “disposes of” or “sells”. Mr Schaw Miller submitted that this usage focuses upon what is coming in for the creditors as well as what is being transferred away, and that the point of realisation is the time at which cash consideration for the disposal arrives in the hands of the trustee. He referred me to the New Shorter Oxford English Dictionary (OED) |page:11| (1993) and, in particular, to the definition at 3a of “realize” as “convert into cash or money”. The dictionary definition is a starting point, but since meaning depends upon context I do not find it particularly helpful in this case, particularly as the OED also gives some more general definitions to the word, such as “sell out” and “fetch as a price”.
[17] Mr Schaw Miller then turned to the use of “realises” and kindred expressions in other sections of the 1986 Act on the basis that, as matter of statutory construction, one starts with the presumption that a word used in one part of a statute is intended to bear the same meaning throughout. First, he pointed to section 305, which describes the function of the trustee as:
to get in, realise and distribute the bankrupt’s estate in accordance with the following provisions of this Chapter,
submitting that “realise” in that context presupposes money coming to the trustee in a form fit for distribution under section 324. Although I see the logic of that argument, it does not sit well with the power of the trustee conferred by section 314 (in the same Chapter of the Act) and para 3 of Schedule 5:
to accept as the consideration for the sale of any property comprised in the bankrupt’s estate a sum of money payable at a future time… .
Again, the wide powers of compromise and arrangement contained in para 8 of Schedule 5 to the 1986 Act enable the trustee to exchange property in the process of realisation. There would seem to be no reason why the trustee could not exchange the estate’s interest in the bankrupt’s principal residence for his wife’s interest in a second home or some other non-monetary asset. The powers conferred by paras 3 and 8 of Schedule 5 are available to the trustee in fulfilling the functions described in section 305.
[18] Second, Mr Schaw Miller pointed to section 313, which empowers the trustee to apply to the court for a charging order over an interest in a dwelling-house where:
the trustee is, for any reason, unable for the time being to realise that property… .
However, subject to the issue of policy and the scheme of the 1986 Act, it seems to me that the submission begs the question of whether a sale for a deferred consideration is a realisation within the section. Third, Mr Schaw Miller relied upon section 330(1), which provides as follows:
When the trustee has realised all the bankrupt’s estate or so much of it as can, in the trustee’s opinion, be realised without needlessly protracting the trusteeship, he shall give notice… either
(a) of his intention to declare a final dividend, or
(b) that no dividend, or further dividend, will be declared.
I agree that, in this section, the word “realise” imports reducing the asset to a form in which it can be distributed by way of dividend. However, it is implicit in section 330(1), as indeed in section 305(2), not only that realisation has taken place but that the consideration for it has been paid, yielding an amount for the creditors. In other words, the section concerns distribution rather than realisation. Bearing in mind the provisions of para 3 of Schedule 5, the usage in section 330(1) does not, in my judgment, restrict the meaning of the word in section 283A. Indeed, if section 283A were intended to bear the construction put forward by Mr Schaw Miller, I would, in the light of section 314(1), have expected it to contain an express prohibition on consideration deferred beyond the three-year period.
[19] I was also referred to Re Debtor (No 29 of 1986) [1997] BPIR 183. That was a case under the provisions of section 82 of the Bankruptcy Act 1914, which entitled a trustee to a “commission or percentage… payable on the amount realised by the trustee”. The issue was whether the trustee was entitled to payment only in respect of sums coming into his hands through his own efforts or whether he was also entitled to a commission on proceeds of sale paid to him by a mortgagee. The county court judge had held that no remuneration was payable unless the trustee had himself taken some step in the course of realising the asset. Vinelott J’s finding, at pp185H-186A, that:
the word “realised” in the context of s82(1) simply means “got in or reduced into cash”, and the words “by the trustee” mean simply in his capacity as trustee
must be read in the context of what was in issue. Since the case concerned the amounts received from a realisation, it does not control the meaning of “realises” for the purposes of section 283A of the 1986 Act.
[20] In two older cases, the word “realise” has been said to mean conversion into cash. In Re Oxford Benefit Building & Investment Society (1887) LR 35 Ch D 502, Kay J, in considering the meaning of a provision that “no dividends shall be paid except out of the realized profits arising from the business of the company” said, at p510:
“realized” must there have its ordinary commercial meaning, which, if not equivalent to “reduced to actual cash in hand,” must at least be “rendered tangible for the purposes of division.”
Again, in Board of Trade v Block (1888) LR 13 App Cas 570, in considering whether a provision that a bankrupt should “aid, to the utmost of his power, in the realisation of his property” required him to submit to a medical examination, Lord Fitzgerald (who dissented from the actual decision of the House) said, at p579:
What does “realisation” here mean? I should say it has the same meaning as it would have in any of the everyday transactions of life. If you speak of realising stocks or securities, or give your broker instructions to do so, what is meant by realising? Nothing more than their sale and conversion into money at the highest price that can reasonably be obtained.
However, there was no issue in either case as to the point of time at which the realisation occurred. I would therefore distinguish both authorities.
Scheme of the section
[21] The scheme of section 283A provides an exhaustive list of the steps available to the trustee during the three-year period in respect of the bankrupt’s interest in the dwelling-house. If the trustee fails to take such steps or obtain an extension of the three-year period from the court under section 283A(6), the interest will revert to the bankrupt. The trustee must “use it or lose it”. Apart from realising the interest, the other four steps that the trustee can take are as follows:
● Subparagraph (b): Applying for an order for sale of the dwelling-house. This course will be appropriate where the bankrupt is only one of the beneficial owners. The trustee would be applying under section 14 of the Trusts of Land and Appointment of Trustees Act 1996, (the 1996 Act) with the special preference for creditors afforded by section 335A(3) of the 1986 Act.
● Subparagraph (c): Applying for an order for possession of the dwelling-house, for example where the bankrupt is the sole beneficial owner.
● Subparagraph (d): Applying for a charging order under section 313, such an order being available only where the trustee is for the time being unable to realise the interest in the property.
● Subparagraph (e): Agreeing with the bankrupt that he should incur a specified liability in return for the interest ceasing to be part of the estate.
All these steps have to be taken within the three-year period, but although applications to the court do not have to be resolved within the period, Mr Schaw Miller submitted that the scheme of the section is such as to produce certainty within a short time frame. The applications will be granted, settled or dismissed. Where an order for a charge is made, the outstanding obligations will be defined and clear. This, he said, reinforces the meaning of “realises” for which he contended, namely a definition that does not leave the process of realisation incomplete, thwarting the resolution and certainty that the other prescribed options open to the trustee are designed to achieve.
[22] He relied upon the decision in Phillips v Symes [2005] EWHC 2867 (Ch); [2006] BPIR 1430, in [4], in support of a submission that |page:12| the trustee should not be able to use lack of funds as an excuse for failure to take the alternative steps prescribed by the section. However, the observations in that paragraph were addressed to the particular facts with which Peter Smith J was faced. I do not think that he intended to assert any general proposition (with which I would disagree) that a trustee who is not in funds is bound to expend his own money in litigation.
[23] It seems to me that if Mr Schaw Miller’s analysis of the options open to the trustee is correct, it could result in an anomaly. There is nothing in the section to prevent proceedings under section 283A(3)(b), (c) or (d) above from being compromised in Tomlin form outside the three-year period on terms of payment over a yet further period.
[24] In my judgment, a sale for a deferred consideration is a realisation provided that the trustee has assigned the estate’s interest absolutely. In Ramsey v Hartley [1977] 1 WLR 686, the trustee had assigned a cause of action for negligence back to the bankrupt. The Court of Appeal, following Guy v Churchill (1889) LR 40 Ch D 481, rejected the argument that the assignment was not absolute because the bankrupt had undertaken to pay to the trustee 35% of the net proceeds of the action: see Megaw LJ, at pp695E-696E, Lawton LJ, at p698D-H, and Geoffrey Lane LJ, at pp700B-701A. No argument was addressed to me that Ramsey could be distinguished simply on the basis that the joint trustees in the present case were dealing with an interest in land that (owing to the doctrine of conversion or sections 3 and 4 of the 1996 Act or some other provision) had not been effectively assigned.
[25] Section 283A(3)(a) requires only the estate’s interest in the property to be realised, not (where there are co-owners) the underlying property itself. The joint trustees have assigned all the estate’s interest in return for the assignee’s obligation to pay them consideration at some future time and on a contingent event. The joint trustees have therefore, in my judgment, realised the interest by a sale, notwithstanding that the consideration is deferred and notwithstanding that the tenure of the bankrupt and his family in the property remains precarious.
Policy considerations
[26] It is true that a sale of the estate’s interest in the property means that the sword of Damocles continues to hang over the heads of the bankrupt and his family in the shape of the continued threat that the property may be sold. However, it seems to me that this is not something inherent in the deferred nature of the consideration. It is merely a by-product of the fact that it is the interest, and not the property itself, that has been realised. Unless the interest is disposed of to the bankrupt himself or a member of his family, the threat will remain, whether or not the sale is for immediate cash consideration.
[27] Mr Briggs gave what seems to me to be a telling example. He postulated a former spouse who had lived in the property during her marriage to the bankrupt and had taken a liking to it. Perhaps she also wanted to exert power over her ex-husband and his second wife. She pays the trustee an immediate monetary consideration for what the estate’s interest is worth, taking into account the current spouse’s claim to an equity of exoneration and the costs of, and uncertainties in, making the estate’s claim good in litigation. Such a sale would be a realisation within Mr Schaw Miller’s definition, but it would create the same uncertainty of tenure for the bankrupt and his family as the arrangement now under review. The former wife could wait as long as she wanted before seeking to realise the interest that she had purchased by applying for an order for sale of the property.
[28] Of course, in that example, there is immediate cash for the creditors. However, the legislative policy behind the insertion of the section was to protect the bankrupt and his family, not the creditors. It is hard to see why deferred consideration is any more contrary to the policy of the section than immediate consideration paid for the interest, since in either case the person acquiring the interest can go (or attempt to go) through the hurdles of realising the interest at any time in the future. It seems to me that it is wrong in principle to treat the trustee who disposes of the interest for deferred consideration as being in the same position as the trustee who, prior to the section, chose to defer a sale. There is nothing sham about the disposal. The trustee has assigned the interest and it ceases to be within his power to control the timing of a later sale of the property by the assignee.
[29] There is, in my judgment, a significant difference between the position of the trustee who deferred a sale under the pre-section 283A position and the trustee who disposes of the interest for deferred consideration. If a trustee applies to the court for an order for sale, section 335A(2) of the 1986 Act displaces the factors required to be considered by the court by section 15(1) to (3) of the 1996 Act in deciding whether to order a sale: see section 15(4) of the 1996 Act. Section 335A(3) provides that, in the absence of exceptional circumstances, the interests of the creditors will prevail over all other considerations. Accordingly, a trustee who applies to the court to sell the underlying property has a very strong case. An assignee, on the other hand, is subject to the factors specified in section 15 of the 1996 Act and is in no such preferred position. The court, in effecting the balancing exercise required by that section, might well dismiss the claim of a company that had acquired the bankrupt’s interest with a speculative and cynical eye to a share of future profit. A purchaser of the interest seeking a sale would have to satisfy the court that the balance of the factors in section 15 of the 1996 Act was struck in its favour.
[30] In short, there is nothing to suggest that the section was designed to prevent an application for sale by a purchaser being made after the three-year period rather than to prevent the trustee from retaining his preferred position for many years.
[31] That said, I am troubled by Mr Schaw Miller’s submission that to allow the trustee to realise the interest for a deferred consideration dependent upon and linked to a sale of the property will encourage a market in such interests. That ought not to be the effect, partly because the fact that the trustee is authorised to realise the interest in such a way does not make it proper for him to do so in every case, and partly because of the difficulty that the purchaser will have in obtaining an order for sale under section 14 of the 1996 Act. However, there is no risk to a purchaser in entering into such a transaction: he will pay only a nominal consideration immediately and need pay nothing further if he decides not to attempt a sale. An assignment on such terms is also an easy escape route for a trustee at the end of the three-year period in order potentially to salvage something for the creditors. I agree with Mr Schaw Miller that such a course, taken in order to defeat the expectation of the bankrupt under the section, seems contrary to the “use it or lose it” legislative purpose.
Conclusion
[32] Nevertheless, I accept Mr Briggs’s submission that there is nothing in section 283A requiring any realisation for the purposes of that section to be on terms more restrictive than are available to the trustee generally under the 1986 Act. In my judgment, a trustee who sells the estate’s interest for deferred contingent consideration “realises” the interest within the meaning of section 283A(3)(a) of the 1986 Act. Accordingly, I determine the issue before me in favour of MPRL.
Application dismissed.
