Use it or lose it—getting insolvency applications in on time (Sands v Singh)

Use it or lose it—getting insolvency applications in on time (Sands v Singh)

What was the significance of the court’s decision in Sands v Singh? Joseph Curl, barrister at 9 Stone Buildings considers the extent to which the judgment clarifies the law regarding the filing and service of applications under the Insolvency Act 1986 (IA 1986) and evaluates what practical lessons can be taken away.

Original news

Sands and another v Singh and others [2015] EWHC 2219 (Ch), [2015] All ER (D) 304 (Jun)

The Chancery Division ruled that the claimant trustees in the bankruptcy of the first defendant had ‘applied’ for orders of possession and sale, within the meaning of IA 1986, s 283A(3), within the three-year time period after which, failing such application being made, the property would have re-vested in the bankrupt. The trustees’ attempt to issue the proceedings by delivering the application notice and tendering the relevant fee to the county court had been sufficient to engage IA 1986, s 283A(3), notwithstanding that the court had not issued the proceedings until a later date. IA 1986, s 283A(3) was not dependent upon the court doing anything, but merely required that ‘the trustee applies’.

What were the facts of the case?

A bankrupt’s trustees in bankruptcy made an application for possession and sale of a property formerly belonging to the bankrupt. This gave rise to a statutory complication to do with IA 1986, s 283A. When a bankruptcy estate contains a property that was, at the date of the bankruptcy, the home of the bankrupt, or the bankrupt’s spouse or civil partner, or the bankrupt’s former spouse or civil partner, then the special provisions of IA 1986, s 283A come into play.

IA 1986, s 283A is colloquially known as the ‘use it or lose it’ provision. IA 1986, s 283A(2) provides that at the end of the period of three years beginning with the date of the bankruptcy, such a home will cease to be comprised in the bankruptcy estate and will automatically re-vest in the bankrupt. A trustee in bankruptcy can prevent the automatic re-vesting by taking certain steps, which are set out in IA 1986, s 283A(3). One of these steps is taken if, during the three year period, ‘the trustee applies for an order for sale in respect of’ the property. This case turned on what was meant by ‘the trustee applies for’ for the purposes of IA 1986, s 283A(3).

The facts were that a bankruptcy order had been made in the Coventry county court, as it then was, on 28 September 2011. The last day for making an order within ‘the period of three years beginning with the date of the bankruptcy’ was 26 September 2014. During the currency of the bankruptcy, there had been a contested application (see Thandi v Sands and another (Trustees in Bankruptcy of Tarlochan Singh) [2014] EWHC 2378 (Ch), [2014] All ER (D) 315 (Jul)). A case management order had been made that had transferred the proceedings up to the Birmingham District Registry of the High Court. Both Coventry and Birmingham had treated that order as if it had transferred the entire bankruptcy proceedings to the District Registry. Accordingly, the physical bankruptcy file was sent to Birmingham and the electronic record was changed to show the Birmingham District Registry as the appropriate court.

On 26 September 2014, the trustees went to the county court at Coventry with their application. It appears that the court staff at Coventry accepted the application over the counter but declined to issue it, because the system said that the bankruptcy was in the District Registry in Birmingham. There were various administrative delays and eventually the application was issued in Birmingham on 1 November 2014.

What were the main legal arguments arising?

At the first hearing in the Birmingham District Registry, the bankrupt spotted the date stamp showing an issue date of 1 November 2014 and raised the issue of IA 1986, s 283A. That preliminary issue was heard by HHJ Purle QC, sitting as a deputy high court judge. The question was—had the trustees applied for an order within three years for the purposes of IA 1986, s 283A(3)?

The trustees contended that IA 1986, s 283A(3) concerned limitation and could thus fall within the saving provision for limitation purposes in Practice Direction 7A, para 5 of the Civil Procedure Rules 1998 (CPR), SI 1998/3132 which provides that:

‘Proceedings are started when the court issues a claim form…but where the claim form as issued was received in the court office on a date earlier than the date on which it was issued by the court, the claim is ‘brought’ for the purposes of the Limitation Act 1980 (LA 1980) and any other relevant statute on that earlier date’.

Alternatively, the trustees argued that CPR 23.5 could save the day. CPR 23.5 provides that:

‘Where an application must be made within a specified time, it is so made if the application notice is received by the court within that time’.

Both Practice Direction 7A and CPR 23.5 essentially provide that where a party has done everything in their power to commence a claim or make an application, they would not be penalised for subsequent events over which they had no control.

Limitation argument

The bankrupt’s primary argument was that the trustees were wrong to treat the question as one of limitation, because IA 1986, s 283A had a quite different effect. Limitation usually operates simply as a defence to a claim and does not affect the existence of the claimant’s underlying right. Even in those cases where a right is extinguished by limitation, the Limitation Act 1980 does not reallocate vested rights—all that happens on expiry of limitation is that a claimant loses an undetermined right. By contrast, at the end of the three year period in IA 1986, s 283A, a binary and conclusive once-and-for-all shift in proprietary rights from one ascertained party to another occurs.

The bankrupt argued that property rights had to be the same for all purposes at any given time and ascertainable both by the owner and third parties who might be affected. Such affected parties include those who might want to purchase or take security over the property. In any event, the limitation exception in Practice Direction 7A, para 5 concerned solely when proceedings were ‘brought’ for limitation purposes. Other authority was presented to show that proceedings were ‘started’ or ‘commenced’ or ‘begun’ only when they were issued. Thus, said the bankrupt, the limitation exception (‘claim is brought’) was narrow and did not assist the trustees in respect of the wording of IA 1986, s 283A(3) (‘trustee applies for’).

CPR 23.5 argument

In respect of the argument on CPR 23.5, the bankrupt contended that the rule did not engage at all. This was because an application of the kind commenced by the trustees was equivalent to the commencement of a new claim—CPR 23 applied only to applications made in respect of a claim—rather than originating process of the kind represented by the trustees’ application. In any event, the words ‘must be made within a specified time’ within CPR 23.5 showed that, even if Part 23 could apply generally to the trustees’ application, CPR 23.5 could not apply to IA 1986, s 283A. This was, the bankrupt said, because the question whether or not an application for possession and sale was made at all was a matter for a trustee in bankruptcy’s judgment. Often a trustee in bankruptcy could properly form the view that no application in respect of a family home should be made at all, for example, the proceedings might be susceptible to unpredictable third party claims, or of insufficient value to be worthwhile when compared to the extent of creditor claims. It could not be characterised as a species of application that ‘must be made’, which was a precondition for CPR 23.5 to engage.

Emphasis was placed by the bankrupt upon the Court of Appeal’s judgment in Lewis and another v Metropolitan Property Realisation Ltd [2009] EWCA Civ 448, [2009] All ER (D) 127 (Jun) in which their Lordships held that IA 1986, s 283A was intended to tilt the balance back towards domestic interests at the expense of doing the trustee the best deal for creditors (see para 167H per Laws LJ). Given the binary proprietary consequences of IA 1986, s 283A—combined with the special elevation of domestic interests that were fundamental to its operation—limitation principles were inapt and an independent interpretation of IA 1986, s 283A was required. An analogy was drawn by the bankrupt between IA 1986, s 283A and the conclusion of the Court of Appeal in Salford City Council v Garner [2004] EWCA Civ 364, [2004] All ER (D) 465 (Feb) which concerned rights under the Housing Act 1996, in the context of when proceedings were ‘begun’. The Court of Appeal in that case had concluded that the relevant housing proceedings were ‘begun’ when they were issued. A similar approach, said the bankrupt, should be taken to IA 1986, s 283A, because it likewise concerned positive domestic interests in a person’s home, rather than merely a limitation defence to an undetermined right.

Alternatively, the bankrupt argued that even if the trustees were correct that either Practice Direction 7A or CPR 23.5 applied, the trustees had not done everything in their power to start the proceedings, because they had not taken it to the court that had carriage of the proceedings. While the bankrupt accepted that rule 7.12 of the Insolvency Rules 1986, SI 1986/1925, provides that insolvency proceedings are not invalidated if they are commenced in the wrong court, the trustees’ proceedings had not been commenced at all—they had taken the application to the wrong court—which had quite properly declined to issue it. By the time it reached the appropriate court, it was too late and the property had re-vested.

What was the decision of Judge Purle QC?

HHJ Purle QC found for the trustees. His lordship disposed of the ‘wrong court’ argument first. While it was true that any bankruptcy will be proceeding in one court, that was not determinative of where a particular claim arising that bankruptcy will be heard. On a careful construal of the transfer order, HHJ Purle QC concluded that the order provided only that one discrete dispute in the bankruptcy would be transferred to the Birmingham District Registry, while the county court at Coventry had maintained overall carriage of the bankruptcy as a whole. The fact that both courts had, from an administrative perspective, treated the entire bankruptcy as transferred did not come into it.

HHJ Purle QC noted Salford v Garner, but because the statutory wording in that case was different, ie when proceedings are ‘begun’ as distinct from ‘the trustee applies’, it was not conclusive. His lordship concluded that the trustees ‘applied’ when they delivered the application notice and tendered the appropriate fee to the county court at Coventry. The trustees could not have done anything over and above what they actually did and it would be wrong to construe IA 1986, s 283A(3) as requiring something further to be done by the court. Practice Direction 7A was apt to apply to IA 1986, s 283A, because it was directed not only at LA 1980, but also ‘any other relevant statute’, which could include IA 1986, otherwise CPR 23.5 was readily applicable to IA 1986, s 283A.

To what extent is the judgment helpful in clarifying the law surrounding IA 1986, s 283A?

It is probably fair to say that, if presented with the facts of this case in advance, most insolvency lawyers would accurately have predicted the outcome, despite the lack of direct authority on the point. While attempts were made by the bankrupt to distinguish IA 1986, s 283A from the ambit of Practice Direction 7A and CPR 23.5, the appropriate analogy for IA 1986, s 283A was always likely to be those provisions.

The case does, however, bring certainty to the position, which is always useful. A more difficult case would arise if some innocent third party took an interest for value from a bankrupt at a time after three years had elapsed, but while the trustee’s application was sitting in a ‘pending’ tray at court—although such a case is likely to be rare for obvious reasons.

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

Insolvency law is packed with time limits, many of which carry serious consequences if they are missed. If things are left until the last available day then unfortunate situations like this one have a habit of arising. It is a good idea to make sure adequate time is allowed to provide for the unexpected and avoid mishaps.

Interviewed by Ioan Jones.

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

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

What is the 'three-year rule' and what does the trustee in bankruptcy need to do to avoid it?

Applications for the possession and sale of the family home—when can the application be made and what is the process?

Checklist and time-line for applications to court for possession and sale

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.