Postponing the sale of a bankrupt’s home

Postponing the sale of a bankrupt’s home

Edward Rowntree, barrister of Hardwicke, considers the discretion afforded to judges to postpone the sale of a bankrupt’s home in light of the decision in Grant v Baker where the High Court overturned the indefinite postponement of sale ordered by a judge seeking to protect a vulnerable individual residing at the property.

Original news

Grant and another v Baker and another [2016] EWHC 1782 (Ch), [2016] All ER (D) 108 (Jul)

The Chancery Division allowed an appeal by the trustees in bankruptcy against an order postponing the sale of the bankrupt’s home for as long as his adult daughter, who had global developmental delay, dyspraxia and obsessive compulsive disorder (OCD), resided there. It held that the district judge had correctly held that there were exceptional circumstances, within the meaning of section 335A of the Insolvency Act 1986 (IA 1986), which included circumstances where a child of a bankrupt suffered from a medical or mental condition and would be impacted by being required to move due to the sale of the home. However, it held that the judge had erred significantly in exercising her discretion by ordering an indefinite postponement of the sale of the property. It ordered a further postponement in the sale for approximately 12 months.

What practical lessons can those advising take away from this case?

The importance of understanding that while the presence of exceptional circumstances is a necessary precondition to displace the presumption that the interests of the creditors outweigh all other considerations, the simple fact of exceptional circumstances does not prevent the court from making an order for sale.

What was the background to the appeal?

Mr Baker had been made bankrupt on an HMRC petition that arose from failures on the part of his accountant in relation to his tax returns. Mr Baker was married and had three children. Two were independent adults. The oldest, Samantha, was born with global development delay, having at the age of 30 the mental age of an eight- or nine-year-old child. She also has dyspraxia and OCD. She has difficulty with moving, is incapable of living on her own and there is no prospect of her condition improving. Mr Baker’s trustee in bankruptcy applied to sell the family home (in which Mr and Mrs Baker each had a 50% share).

What were the issues before the judge?

The first question for the judge at first instance was whether these circumstances were exceptional with the effect of ousting the presumption, set out in IA 1986, s 335A(3), that where such an application is made after the period of one year of the first vesting of the property in the trustee the court shall assume that the interests of the bankrupt’s creditors outweigh all other considerations. The second question, which only arose if such circumstances were exceptional, was what order the judge ought to make.

The judge considered the circumstances to be exceptional and, in the exercise of her discretion, ordered that the property be sold subject to the caveat that such sale was not to take place until Samantha no longer resided at the property or no longer needed it as her home.

What were the main legal arguments put forward?

On the appeal, the trustee contended, firstly, that the circumstances were not exceptional and, secondly, that even if the circumstances were exceptional, the decision of the judge not to put a long-stop date on the postponement was an incorrect exercise of her discretion.

What did the judge decide, and why?

Mr Justice Henderson said that the judge was plainly entitled to find that the circumstances of the case were exceptional and that the presumption in favour of the creditors was displaced. He referred to the decision of Mr Justice Jonathan Parker in Claughton v Charalambous [1999] 1 FLR 740 which stated that this question involved the court making a value judgment which leaves very little scope for interference by an appellate court.

However, he concluded that the exercise of discretion in refusing to place a long-stop date on the sale was erroneous. He started from the premise that IA 1986, s 283A provides a three-year period within which the trustee can apply to sell the bankrupt’s property, failing which the property re-vests in the bankrupt. If the trustee does take that step, the court should exercise its powers under IA 1986, s 335A with the object of enabling the sale to take place and funds available for distribution. He re-emphasised that the sale should take place even if the funds generated are swallowed up in meeting the trustee’s costs. The approach adopted by the judge ‘may have blunted the force of [the statutory] principle’. He went on to say that an indefinite suspension, for a period which might be measured in decades, is incompatible with the statutory scheme. The period should be measured in months rather than years.

The judge at first instance had considered that it was unreasonable to order a sale while Samantha continued to live in the property because the only realistic alternative was in the private sector and would not guarantee Samantha a settled home for the rest of her life. Mr Justice Henderson said that this was open to criticism on a number of grounds:

  • the judge was unduly influenced by the perceived lack of security for Samantha
  • the judge was wrong to dismiss as ‘quite short term thinking’ the suggestion that Mrs Baker’s share of the equity could be used to make up a shortfall in paying for rent—Mrs. Baker would receive in the order of £30,000 which would fund the difference between the present mortgage and likely rental outlay for at least a decade
  • Samantha’s ultimately positive move from London eight years previously showed that a further move, sensitively handled, was not something which would be unreasonable to inflict on her
  • it was wrong to consider that there was no alternative to an indefinite suspension

Taking all these points together, he concluded that there was a significant error in the exercise of the judge’s exercise of her discretion which fell well outside the ‘middle ground’ within which views might legitimately differ. It then fell to him to exercise the discretion afresh. The longest postponement he thought appropriate was one of 12 months to the end of July 2017.

To what extent is the judgment helpful in clarifying the law in this area?

The judge made clear the distinction between the conclusion that the circumstances are exceptional on the one hand, and the exercise of the court’s discretion in determining what order to make once the decision that the circumstances are exceptional has been made. He went on to highlight clearly the need for practical effect to be given to the statutory bankruptcy scheme.

Interviewed by Diana Bentley.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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