Section 283A of the Insolvency Act 1986 was enacted to prevent trustees in bankruptcy from keeping a bankrupt’s home indefinitely. Under the legislation, trustees in bankruptcy have three years from the date of a bankruptcy order to “realise” such assets, failing which title will revert to the bankrupt. Consequently, trustees must use such assets or lose them.
In Lewis v Metropolitan Property Realizations Ltd [2009] EWCA Civ 448; [2009] PLSCS 184, the Court of Appeal had to decide whether or not a trustee in bankruptcy had realised an asset. The case turned on whether an assignment for deferred contingent consideration satisfied the requirements of section 283A. The bankrupt argued that the legislation required the trustee to convert his property into cash, and that nothing less would suffice. The Court of Appeal upheld his claim.
The court examined the statutory scheme and held that parliament had intended the legislation to achieve a reasonable degree of certainty. It ruled that provisions empowering trustees in bankruptcy to apply for an order for sale, or charging order, or to sell the property to the bankrupt were designed to ensure that the trustees could not hold on to property indefinitely to see whether property values might increase. By the end of the third year (or the end of litigation commenced within three years), all parties should know whether a property is to be sold.
The court also considered whether the sale of the bankrupt’s beneficial interest to his wife on the day before the third anniversary of his bankruptcy, in exchange for a future sum should the property be sold, was consistent with the statutory scheme. It ruled that it was not. A sale for deferred contingent monetary consideration created the very uncertainty that the statute sought to remove, and was also inconsistent with the ordinary meaning of the word “realise”.
It is important to note that the contingent nature of the debt was irrelevant to the outcome in this case. The decision turned on the fact that some (or, in this case, the vast majority) of the cash to be obtained from the transaction would not be paid within three years. The deal done by the trustee was, at most, a step on the road towards realisation, because that occurs only when all the cash has been received.
What are the consequences of the decision? The requirement to realise a bankrupt’s home within three years will deprive a co-owner of the opportunity to buy out a trustee in bankruptcy by instalments, unless the instalments are paid within three years or, alternatively, the bankrupt consents to the transaction and agrees to waive the re-vesting to enable the sale to the co-owner to proceed.
The decision also highlights the danger of confusing or eliding the concepts of “realisation” and “sale”. Practitioners should beware the difference when drafting or reviewing documents for clients where obligations or liabilities are expressed to be dependent on one or other of these terms.
Allyson Colby is a property law consultant
