English bankruptcy law seeks to protect creditors against the risk that debtors may dispose of assets during the process that leads to their bankruptcy. Consequently, dispositions of property by a bankrupt during a period before it becomes bankrupt are rendered void in certain circumstances, unless made with the consent of the court or later ratified by the court.
This exposes third parties to the risk that they may deal with debtors in ignorance of the bankruptcy process. The Insolvency Rules 1986 therefore require the court to notify the Land Registry of the receipt of bankruptcy petitions. The Registry must then register the pending action against the name of the debtor in the land charges register and enter a notice on the registers of title to any registered land that appears to be affected. This serves to alert potential purchasers to the existence of the bankruptcy petition and to the risk of a potential claim by the trustee in bankruptcy if and when one is appointed.
What is the position if the court fails to notify the Registry of the receipt of a bankruptcy petition and the debtor sells land and dissipates the proceeds? It appears that this may have occurred in several cases, whose fate hung on the outcome of Trustees in Bankruptcy of Poulton v Ministry of Justice [2010] EWCA Civ 392; [2010] PLSCS 114.
The legislation provides that a failure to register bankruptcy proceedings will deprive a trustee in bankruptcy of any claim as against a purchaser that acquires land for valuable consideration, in good faith, without notice of the bankruptcy petition. In Poutlon, the trustee in bankruptcy issued proceedings for breach of statutory duty against the government department that was responsible for the court service.
The High Court upheld the claim and awarded the trustee in bankruptcy damages equivalent to the sum lost as a result of the court’s failure to notify the Registry of the bankruptcy petition against the debtor.
The Court of Appeal overturned the decision. It accepted that the requirement to notify the Registry was enacted not just for the benefit of potential purchasers but also for the benefit of creditors. None the less, the court decided that Parliament had not intended to confer private rights of action against the courts for failure to comply with the obligations laid down in the bankruptcy rules. Consequently, the Ministry of Justice was not liable for the administrative error by court staff that enabled the debtor to dispose of his land after a bankruptcy petition was issued against him.
What steps should creditors take to protect themselves against the consequences of similar errors? The Court of Appeal indicated that the system is not entirely dependent on the actions or omissions of the courts. Petitioning creditors can also request the Registry to effect the appropriate registrations on payment of a modest fee. It seems that this might, in future, be the prudent thing to do.
Allyson Colby is a property law consultant
