Where a person is made bankrupt, and the assets vesting in the Trustee in Bankruptcy (‘TIB’)[1]as the bankrupt estate include a property interest[2], the TIB is likely to seek to sell the property interest in order to distribute the net proceeds of sale (after transaction costs and any relevant secured creditors have been satisfied) received by the TIB from the sale, to the bankrupt’s unsecured creditors. 

Assuming everyone with an interest (whether beneficial interest or other relevant interest/right) does not consent, a TIB with a property interest vested[3]in the bankrupt estate may issue within the bankruptcy proceedings an application[4a]to the Court for orders[4b] against the bankrupt (and any other defendants[5a]), that: (a) the property be sold[5b]; (b) vacant possession of the property be delivered up to the TIB for the purpose of facilitating that sale; and (c) the net proceeds of sale be paid to TIB. In the High Court in London, this application is to the Business and Property Courts of the High Court of Justice, Insolvency and Companies List, for listing usually before a Insolvency and Companies Court Judge.

This article will consider how the High Court, Business and Property Court, Insolvency and Companies List (‘Insolvency Court’) is required to balance the interests of the creditors entitled to a distribution from the bankrupt estate (realised through the statutory obligation on the TIB to liquidate the bankrupt estate for the benefit of the creditors), against the interests of the occupant family members living with the bankrupt to live in the subject property. It will also consider when the mandatory assumption that the creditors interests prevail/take priority applies, as well as when 'exceptional' circumstances exist to displace it, and when the Court might postpone[6] the date possession must be given up to the TIB on.  

Terminology -  ‘Trustee' of Land and ‘Trustee in Bankruptcy’

Prior to considering the applicable law, it is necessary to briefly make clear the distinction between ‘Trustee in Bankruptcy’ and ‘Trustee’ of land. A ‘Trustee’ is a property law term, referring to a person who holds the legal title to a property interest, who owes fiduciary obligations to at least one other who holds the beneficial interest[7]in the property. This is a equitable trust (the much more usual type). Conversely, a ‘Trustee in Bankruptcy’ is an insolvency term, referring to an office-holder administering a bankrupt estate. The TIB might be, but is not necessarily, an equitable trustee - i.e. in the strict property law sense. As an aside, and hoping not to complicate the matter unduly, note, during the administration of the bankrupt estate, the TIB holds the property in the bankrupt estate on a statutory trust [7.1]. 

Applicable Rules

The exact rules which apply to an application by the TIB for an order for possession and sale will depend on what property interest vests in the TIB under s.306(1) of the Insolvency Act 1986 ('IA 1986'). Given that the vesting of the bankrupt's property interest in the TIB under s.306(1) simply transfers rather than alters the property interest, it is necessary to consider the position of the bankrupt, in relation to the property, immediately before the bankruptcy order was made. 

Bankrupt held Property Absolutely

Where the bankrupt held the property absolutely, and neither s.336 nor s.337 of IA 1986 apply, then s.363(2) of the IA 1986 will apply. By absolutely, what is meant is that the bankrupt was the sole legal title and sole beneficial interest holder (though technically the beneficial interest does not split from the legal title where both are held solely by the same person[7.2]). In such a situation, s.335A(1) is not engaged as the applicant TIB is neither a ‘trustee’ nor person holding a property interest ‘subject to a trust of land ‘. 

Section 363 reads:

‘(1) Without prejudice to any other provision in this Group of Parts, an undischarged bankrupt or a discharged bankrupt whose estate is still being administered under Chapter IV of this Part shall do all such things as he may be directed to do by the court for the purposes of his bankruptcy or, as the case may be, the administration of that estate.’

(2) Without prejudice to any other provision in this Group of Parts, an undischarged bankrupt or a discharged bankrupt whose estate is still being administered under Chapter IV of this Part shall do all such things as he may be directed to do by the court for the purposes of his bankruptcy or, as the case may be, the administration of that estate.

(3) The official receiver or the trustee of a bankrupt's estate may at any time apply to the court for a direction under subsection (2).

(4) If any person without reasonable excuse fails to comply with any obligation imposed on him by subsection (2), he is guilty of a contempt of court and liable to be punished accordingly (in addition to any other punishment to which he may be subject).’

In Holtham v Kelmanson [2006] BPIR 1422 (‘Holtham’) the bankrupt had held a leasehold interest absolutely.  Evans Lombe J said, after quoting s.363(2), at a paragraph 16:

‘Pursuant to that sub-section [the bankrupt] can be ordered to deliver up possession of the property to the Trustee for the purposes of a sale of the property for the benefit of the creditors notwithstanding that the (sic) has been discharged from his bankruptcy. It follows from this conclusion that…Section 335A of the Insolvency Act 1986 is not engaged because it was unnecessary for the Trustee to apply for relief under Section 14 of the 1996 Act.’ [7.3]('bankrupt' is probably the missing word from the first sentence)

See also Carter v Hewitt [2019] EWHC 3729 (Ch)[7.4]

Re Gonsalves (A Bankrupt) [2011] BPIR 419 (‘Re Gonsalves’) also involved a bankrupt who had held the property absolutely. Section 363 applied because the daughter (who had mental health issues) who was living with the bankrupt was over 18 years of old. 

In Re Gonsalves, Deputy Registrar Schaffer held that the Insolvency Court has the power to suspend any possession order it makes under s.363; such discretion is not constrained and the Insolvency Court is entitled to exercise its discretion in an appropriate and just manner. 

Where others also have an Interest in Property

Section 363 will not apply where the property was not held absolutely, that is, it was held on trust, and/or where s.336 or s.337 of the Insolvency Act 1986 apply. Section 336 applies where the bankrupt has a spouse or civil partner holding home rights under Family Law Act 1996[8], and s.337 applies where the bankrupt was entitled to occupy the property, which is a dwelling house[9], by virtue of a ‘beneficial estate or interest’, and the bankrupt had occupied it with a person/persons under the age of 18, who had the property as their home both when ‘…the bankruptcy petition was presented and at the commencement of the bankruptcy’[10]. Given the obvious complexity of each section, the reader is recommended to consult s.336 and s.337 for their exact wording.

For the TIB to hold any interest in the property, prior to the bankrupt order the bankrupt must have held some beneficial interest in the property[11]. Where the bankrupt did hold some of the beneficial interest, this will have vested in the bankrupt estate. A typical scenario will be where the bankrupt was sole legal title holder, with the bankrupt holding some of the beneficial interest, and the remaining beneficial interest being held by his/her partner (e.g. spouse/cohabitee).  In such a scenario, the TIB will apply under s.14 Trusts of Land and Appointment of Trustees Act 1996 (‘TOLATA’) for the order for possession and sale. The TIB will be a ‘person who is a trustee of land or has an interest in a property subject to a trust of land’ within s.14(1) of TOLATA[12]. By s.15(4)[13], s.335A of the Insolvency Act 1986 will govern the Insolvency Court’s approach to the TIB’s application. 

Though identifying the relevant section is important, to a certain extent, the approach the Insolvency Court must take to an application for an order for possession and sale, is very similar[14]whether s.335A, s.336 or s.337 applies – each requires the Insolvency Court to undertake a balancing exercise between various competing interests, considering ‘all the circumstances of the case other than the needs of the bankrupt’ (see s.335A(2)(c), 336(4)(e) and s.337(5) respectively) but with the balancing exercise being constrained by the imposition of a mandatory assumption in favour of the creditor’s interests, ‘unless the circumstances of the case are exceptional.’ (see s.335A(3), 336(5) and s.337(6) respectively). Each of s.335A, s.336 and s.337 application routes requires the Insolvency Court to make such order as it thinks  ‘just and reasonable’, having regard to those circumstances[15].

For convenience, this article will focus on a s.14 of TOLATA and s.335A of the Insolvency Act 1986 based TIB application. 

£1,000 Net Threshold for TIB Applications

Where a TIB application is made under s.14(1) of TOLATA and s.355A, the first issue to consider is whether the property interest the TIB wishes to realize, has a value above the minimum threshold. Where the net value of the property interest[16] in the bankrupt estate held by the TIB is below a prescribed threshold, currently, £1,000[17], the Court is required to dismiss the application[18]. In reality, with a threshold so low, this is unlikely to have any relevance to most cases.

Mandatory Assumption and Exceptional Circumstances

The second issue to consider is whether the mandatory assumption applies. The mandatory assumption applies ‘where such an application is made after the end of the period of one year beginning with the first vesting…of the bankrupt’s estate in the [TIB]’. Necessarily, this requires a comparison between: (a) the date of appointment of the TIB (when the vesting occurs); and (b) the date the application was issued, to determine whether the TIB waited at least one year before issuing.  

Almost all TIB’s wait one year before issuing their applications, in order to gain the benefit of the mandatory assumption. The TIB is though at liberty to issue the application at any point after this appointment[19].By incentivizing TIBs to wait one year, Parliament has, in effect, granted to the bankrupt and those living with him, a one year ‘breathing space’[20]to accept the bankruptcy and make suitable alternative accommodation arrangements.  

Where the TIB delays at Least 1 Year before Issuing 

Where the TIB delays issuing until 1 year has passed since the date of his appointment, the mandatory assumption will, subject to one important exception, apply to the application, and the task of balancing the various interests (all the circumstances apart from the needs of the bankrupt) is removed from the Insolvency Court. Instead, Parliament instructs the Insolvency Court to assume (‘…the court shall assume…’) that the balancing exercise produces the prescribed result, namely that the interests of the creditors outweigh all other considerations. On such an assumption the creditors interest prevail; logically this translates into the Insolvency Court making orders for possession and sale, though the other interests are not ignored. George Bompas QC, sitting as a Deputy High Court Judge, said obiter in Re Haghighat (also known as Brittain v Haghighat [2009] 1 FLR 1271), after quoting s.336(4) of the Insolvency Act 1986 (including para (a) the interests of the creditors), at paragraph 16:

'By IA 336(5), the application being made more than a year after the appointment of the trustee, the court is directed to ‘assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations’. I do not regard that provision as requiring the court to ignore all the other considerations referred to above apart from that in para (a), assuming that the circumstances of the case are not exceptional; rather, in that situation the para (a) consideration is to be preponderant.'

The important exception is that the mandatory assumption will not apply where the facts of the case are ‘exceptional’. This raises the third issue for consideration, whether or not the ‘…circumstances of the case are exceptional…’

Determining whether the Circumstances are Exceptional 

The classic formulation of what is exceptional and what is unexceptional/ordinary (i.e. not exceptional), at least on the bankrupt/bankrupt’s family side of the balancing exercise, can be found in Re Citro [1991] Ch 142 (‘Re Citro’), a case still highly relevant although it was decided under a previous statutory regime[21]:

‘What then are exceptional circumstances? As the cases show, it is not uncommon for a wife with young children to be faced with eviction in circumstances where the realisation of her beneficial interest will not produce enough to buy a comparable home in the same neighbourhood, or indeed elsewhere. And, if she has to move elsewhere, there may be problems over schooling and so forth. Such circumstances, while engendering a natural sympathy in all who hear of them, cannot be described as exceptional. They are the melancholy consequences of debt and improvidence with which every civilised society has been familiar.’[22]

In other words, while the typical consequences of a bankrupt’s family having to vacate their home may be distressing, these are merely the ordinary consequences of debt and improvidence. Having to move out of the neighbourhood, or having to move into rented accommodation, having problems with the children having to move schools and alike, are all classed as being the usual consequences of a family member’s bankruptcy. They are not exceptional consequences per se in terms of nature or extent. For a particular case to stand out from all other cases, that is, for a case to be outside the normal run of cases ('out of the ordinary course, or unusual, or special, or uncommon' Hosking v Michaelides [2006] BPIR 1192 ('Hosking'), paragraph 73), and so be an ‘exceptional’ case, the likely consequences of vacating the property must be discernibly worse for the occupants of the property – whether in nature or extent[23], than would ordinarily be experienced by those forced to vacate a property. Some disruption unhappiness, inconvenience and discomfort are almost inevitable aspects to involuntarily moving. Elevated adverse impact might be felt, for instance, physically, emotionally, socially, educationally or alike (see Everitt v Budhram [2010] Ch 170 ('Everitt'), paragraph 36), and it might be from ‘pulling up roots’ and/or ‘putting down roots’ elsewhere. The elevated impact might arise from the process of moving itself, or for instance because a congenial and suitable present set up is likely to be difficult, if not impossible to reproduce at the likely alternative address. By way of example, those less able-bodied, or suffering from a debilitating illness, are likely to experience the impact of having to vacate a property much more acutely than the average person would.  

Determining whether the likely consequences to the occupants of vacating a property will be ordinary, or exceptional, requires the Court to reach a value judgment. In Claughton v Charalambous [1998] BPIR 558, Jonathan Parker J said at 562H:

‘What is required of the court in applying s335A(3) is, in effect, a value judgment. The court must look at all the circumstances and conclude whether or not they are exceptional.’

The principles which the Insolvency Court should follow when considering whether the circumstances of the case are exceptional, were conveniently summarised in Dean v Stout [2005] BPIR 1113, by Lawrence Collins J, at paragraphs 6 to 11:

‘The principles which can be derived from the authorities may be summarised as follows. First, the presence of exceptional circumstances is a necessary condition to displace the presumption that the interests of the creditors outweigh all other considerations, but the presence of exceptional circumstances does not debar the court from making an order for sale.

Secondly, typically the exceptional circumstances in the modern cases relate to the personal circumstances of one of the joint owners, such as a medical or mental condition.

Thirdly, the categories of exceptional circumstances are not to be categorised or defined and the court makes a value judgment after looking at all the circumstances.

Fourthly, the circumstances must be exceptional and this expression was intended to apply the same test as the pre-Insolvency Act 1986 decisions on bankruptcy … that is to say exceptional or special circumstances which are outside the usual "melancholy consequences of debt and improvidence"…or…"compelling reasons not found in the ordinary run of cases".

Fifthly, it is not uncommon for a wife with children to be faced with eviction in circumstances where the realisation of her beneficial interest will not produce enough to buy a comparable home in the same neighbourhood or, indeed, elsewhere. Such circumstances, while engendering a natural sympathy, cannot be described as exceptional, and it was in that context that Nourse LJ referred to the "melancholy consequences of debt and improvidence" with which every civilised society has been familiar…

Sixthly, for the purposes of weighing the interests of the creditors, the creditors have an interest in the order for sale being made, even if the whole of the net proceeds will go towards the expenses of the bankruptcy, and the fact that they will be swallowed up in paying those expenses is not an exceptional circumstance justifying the displacement of the presumption that the interests of the creditors outweigh all other considerations.’

This summary was recently approved by Henderson J in Grant v Baker [2016] EWHC 1782 (Ch) (‘Grant’), paragraph 26. These principles will be returned to below, when considering how the reported decisions in this area illustrate how the Insolvency Court evaluates and applies these competing considerations. 

Exceptional Circumstances on Creditors’ Side of Balancing Exercise

It is not just on the bankrupt’s side of the balancing exercise, that exceptional circumstances can be found; the creditors’ circumstances can make the circumstances exceptional. In Re Citro, Nourse LJ, at 157, construed the reasoning in Re Holliday [1981] Ch. 405 (‘Re Holliday’), and found the decisive factor in Re Holliday for why the wife’ voice prevailed, was because of one ‘special feature’ on the creditors’ side, namely that it was ‘…it was highly unlikely that postponement of payment of the debts would cause any great hardship to any of the creditors…’ Nourse LJ said [24]it was ‘…exceptional for creditors in a bankruptcy to receive 100p. in the £ plus statutory interest in full…’ The debt and interest would be ‘well covered’ (including 6 years worth of interest, the debt would be ‘less than £9,000, well covered by the £13,250’ equity in the bankrupt estate).

Nourse LJ in Re Citro said, at 157, that:

‘Admittedly, it was detrimental to the creditors to be kept out of a commercial rate of interest and the use of the money during a further period of five years. But if the principal was safe, one can understand that that detriment was not treated as being decisive, even in inflationary times.’

So where the bankrupt estate is predicted to have sufficient funds to meet the creditors’ proofs of debt in full, including statutory interest thereon, and estate expenses at the proposed sale date, it is likely (though not inevitable) that the circumstances will be found to be exceptional. Demonstrating that his is not inevitable, is Donohoe v Ingram [2006] BPIR 417 (‘Donohoe’). In Donohoe, Stuart Isaacs QC, sitting as a Deputy High Court Judge, did not interfere with a first instance judge’s decision that the circumstances were not exceptional. At paragraph 18, the Deputy High Court Judge said:

‘In my judgment, it cannot properly be said that the district judge was wrong to have concluded that the circumstances were not exceptional. On the facts of the present case, he took into account the consideration that that the creditors were likely to be paid in full but nevertheless decided that, taken together with all the other circumstances, they were not exceptional. Re Holliday, which I accept needs to be approached with a degree of caution, did not require him to reach the contrary conclusion. I do not accept that, on the arithmetic in this case, it would have been impossible, without the trustee's half-interest in the property being exceeded, for the district judge to have concluded that the creditors were going to be repaid in full with statutory interest, having regard to a delay in the sale of the property until 2017, statutory interest at 8% pa and continuing costs in the meantime, and taking into account the fees payable to the DTI. However, I do regard the position in the present case as less clear-cut than in Re Holliday, in particular given the considerable length of the delay. It is, however, unnecessary to express a concluded view on that aspect.’

Further, unusual circumstances, unlikely to be held to be exceptional in themselves, include[25]: (i) the bankrupt estate being currently solvent; (ii) there being only two unsecured creditors; and (iii) a family member property interest holder being represented by the Official Solicitor due to illness. 

Where the Circumstances are Exceptional 

Where the Insolvency Court finds that the circumstances are ‘exceptional’, the mandatory assumption does not apply. The Insolvency Court’s evaluation of the prescribed s.335A(2) list of matters to be weighed up in the balancing exercise is unconstrained by the mandatory assumption. As Evans Lombe J said in Martin-Sklan, paragraph 9, the Insolvency Court has ‘…a complete discretion…’ provided those prescribed matters are had regard to. Those matters are: 

(a) the interests of the bankrupt's creditors,

(b) where the application is made in respect of land which includes a dwelling house which is or has been the home of the bankrupt or the bankrupt's spouse or civil partner or former spouse or former civil partner

(i) the conduct of the spouse, civil partner, former spouse or former civil partner, so far as contributing to the bankruptcy,

(ii) the needs and financial resources of the spouse, civil partner, former spouse or former civil partner, and

(iii) the needs of any children; and

(c) all the circumstances of the case other than the needs of the bankrupt.’

Although certain matters are specifically listed here, the Insolvency Court is required to have regard to ‘all the circumstances of the case other than the needs of the bankrupt’ – a sweeping up provision[26]. Consequentially, the Insolvency Court must consider all relevant matters, whether or not they are specifically identified in (a) or (b). Of all the circumstances, the only aspect not to be taken into account by the Insolvency Court is the ‘needs of the bankrupt’.

The relative degree of weight to be placed on each of the matters will of course depend on the facts of each case. Necessarily, as a precursor to this balancing exercise, will be a fact finding stage, where the Insolvency Court will determine what the salient facts are in the case, from an evaluation of the evidence put forward by the parties. 

It should be noted that, while on this scenario the Insolvency Court has found that the circumstances are exceptional, this will in no way impede the Insolvency Court from going on to find, following its evaluation of the various matters in the balancing exercise, that the creditors’ interests outweigh all others and that an order for possession and sale within a short period[27]is the ‘just and reasonable’ order. 

Balancing the Competing Interests

In Re Holliday (A Bankrupt) [1981] Ch. 405, the husband went bankrupt and the wife held a beneficial interest. Goff LJ at 420, described in plain language, the typical question faced by the Insolvency Court:

‘So we have to decide having regard to all the circumstances, including the fact that there are young children . . . whose voice, that of the trustee seeking to realise the debtor's share for the benefit of his creditors or that of the wife seeking to preserve a home for herself and the children, ought in equity to prevail.’[28]

The problem for the Insolvency Court, is that when attempting to balance these competing interests, the court has to weigh up considerations with quite different characteristics and qualities. As the Deputy High Court Judge stated in Nicholls v Lan [2007] 1 FLR 744 (‘Nicholls’), at paragraph 46:

‘The difficulty in a case like the present is that one has to balance the interests of the creditors and the needs of the bankrupt's spouse but, in truth, the considerations are of a different character or quality. This has long been recognised…’[29]

The outcome of the balancing exercise is a value judgment because contrasting the components that make up the interests of the occupant family members, against the interests of the creditors, is a comparison between sets of factors that are in no way commensurable. On the one hand, there are the financial interests of the creditors, and on the other, there are the personal and human interests of the bankrupt’s family. As Goulding J said in the Divisional Court case of Re Lowrie (A Bankrupt) [1981] 3 All ER 353 (decided under the previous s.30 of the Law of Property Act 1925 regime), at 358:

‘In all cases where a home is the subject of co-ownership between a trustee in bankruptcy for the benefit of the bankrupt's creditors on the one hand and the wife of the bankrupt on the other, the court, in exercising its discretionary jurisdiction to order or not to order a sale…has to effect a comparison of merits and hardship which in its nature is very difficult, because the position of creditors on the one hand and a family on the other are in themselves hard to compare.’

Balancing Exercise Undertaken For All Future Points in Time

Before turning to the various likely matters to be weighed in the balance, it is important to appreciate that the Insolvency Court does not, at the hearing, just weigh up the various interests as at the date of the hearing. In the event that an immediate, or outright order for possession and sale (say, possession to be given up within 28 days of the date of hearing) would not be ‘just and reasonable’, the Insolvency Court will not simply dismiss the TIB’s application. The Insolvency Court will go on to consider how the balance of the various interests will change over the foreseeable future, in order to see whether, at a discernable point in the future, the balance will tip - at which point, it would be ‘just and reasonable’ for a possession and sale order to bite. Where the Insolvency Court discerns such a point, the Insolvency Court may make an order for possession and sale, suspended / postponed / deferred until that future point in time arrives[30].

While undertaking this prospective evaluation, the Insolvency Court may consider it appropriate to include reasonable expectations as to how the occupants ought to act during the interim period. For instance, the Insolvency Court may build into its evaluation, the expectation that the occupant family members will, or ought to, spend the interim period making reasonable preparations to reduce as far as possible, the adverse affect the move will have on them. The Insolvency Court may also consider whether the passage of time will materially reduce the adverse impact of a move on the occupant family member. If extended periods of time will not reduce the expected adverse consequences of moving, then is it actually in the interests of the occupants to be granted such extended time. 

The Competing Interests

In this balancing exercise, the components to the occupant family members interests can be very varied. However certain life circumstances have been argued in court and guidance exists on them. While there is no rigid categorisation is appropriate[31], certain life circumstances have received judicial scrutiny in the reported cases. While considering these reported cases, it is important to remember that each case is just an illustrative example of how the Insolvency Court might weigh up the various interests. Every case will be decided on its own facts. 

The Creditors’ Interests 

Returning to the interests of the creditors, these must of course be weighed into the balance. As to the appropriate weight to attribute to them, that is a matter of discretion/evaluation, depending on the financial position of the bankrupt estate. As Henderson J in Grant said, at paragraph 25:

‘In making that assessment, the interests of the bankrupt's creditors must still be taken into account, by virtue of paragraph (a), but the appropriate weight to attach to them will be in the discretion of the court.’

In Nicholls, Paul Morgan QC (later Morgan J), sitting as Deputy High Court Judge said, at paragraph 45:

‘The statute requires that the interests of the creditors are taken into account, but in an exceptional case like the present, the statute does not prescribe the weight which is to be given to those interests. What ultimately matters is what appears to the judge to be fair and reasonable.’

In Re Holliday, Buckley LJ said at 424:

‘Of course, the creditors are entitled to payment as soon as the debtor is in a position to pay them. They are entitled to payment forthwith; they have an unassailable right to be paid out of the assets of the debtor.’

As to the particular weight to be attributed to them, in Nicholls, the Deputy High Court Judge said, at paragraph 47:

‘In most of the cases, there does not appear to be any detailed consideration of the particular circumstances of the creditors. It is taken to be almost axiomatic that what the creditors want is to be paid their money and, in particular, they want to be paid sooner rather than later.’

To be paid sooner rather than later, the interest of the creditors lie in an immediate and outright possession order, or failing that, the shortest suspension / postponement to the possession order as it appropriate[32]. 

Henderson J expressed this sentiment in Grant, where he said, at paragraph 25:

‘To state the obvious, the interests of the bankrupt's creditors will normally require that the property be sold so that the bankrupt's share in it can be realised for their benefit.’

It might be said therefore that the creditors’ interests are given, at least as a starting point, a ‘conventional weight’[33]. Any specific evidence may then move the weight of the creditor’s interest way from this starting point. 

Furthermore, the interests of the creditors are not necessarily static (as will be seen, this is also the case for the interests of the occupant family members). It is conceivable that the creditors’ interests could change over time, but more typically it will be the weight to be attributed to the creditors’ interest that will change over time. Creditors ought to be financially compensated for being kept out of their money because a dividend cannot be made until the property interest is liquidated. Where the bankrupt estate cannot, or will not be able to make a dividend distribution for statutory interest, the creditors will suffer additional losses due to postponement. The Court will be astute to weigh the consequence of postponement into the balance. 

This concern can be seen in Bank of Ireland Home Mortgages Ltd v Bell [2001] 2 FLR 809, where Peter Gibson LJ at paragraph 31: 

‘…a powerful consideration is and ought to be whether the creditor is receiving proper recompense for being kept out of his money, repayment of which is overdue …In the present case it is plain that by refusing sale the judge has condemned the bank to go on waiting for its money with no prospect of recovery from Mr and Mrs Bell and with the debt increasing all the time, that debt already exceeding what could be realised on a sale. That seems to me to be very unfair to the bank.’

Conversely, where it is plain that there will be a net surplus of assets in the bankrupt estate, sufficient to cover: (a) all the debts due to the unsecured creditors, and, importantly (b) all or most of the interest which will accumulate on those debts during any proposed postponement in those debts being paid due to a postponement in the order for possession and sale (payable pursuant to s.328(4) of the Insolvency Act 1986[34]), then the Court will be astute to weigh this fact into the balance.[35]. It is noted here that section 328 (5) prescribes the rate of interest for s.328 (4) as the ‘…greater of the following – (a) the rate specified in section 17 of the Judgments Act 1838 at the commencement of the bankruptcy, and (b) the rate applicable to that debt apart from the bankruptcy.’

Evaluating the bankrupt estate’s ability to pay interest to the creditors under s.328(4) (as compensation to the creditors for being kept out of their money), for the purpose of evaluating the probable impact of various possible possession order postponement lengths, requires a number of variables to be considered: 

(a) the value of the property interest, and whether it is likely to increase or decrease in value over time (whether through house price inflation or deflation, or disrepair/lack of maintenance to the property itself);

In Martin-Sklan, Evans Lombe J criticising the TIB’s figures as to the impact of postponing the date for possession to be given up - approximately 7 years hence, to 2013. Evans Lombe J said, at paragraph 28:

‘No allowance in assessing what the estate of the bankrupt will look like in April 2013 was made for the fact of likely house price inflation or even a genuine relative increase in house values which may take place over the years from now until 2013.’

Evans Lombe J in Martin-Sklan also considered how the condition of the property was likely to fare over the proposed postponement period. Fundamental repairs would be undertaken he held, notwithstanding that internal decorations had been neglected up to that point.[36].  

(b) size of the TIB’s recoverable remuneration and expenses bill, and how this might change over time.

(c) any lending secured against the property interest and how this will change over time; consequentially the existence and size of any net equity in the property over time (and whether that will be a sufficient surplus, or net equity, to fund distributions to unsecured creditors);

By way of example, in Martin-Sklan the bankrupt estate contained a property interest valued at £120,000, subject to a £41,000 mortgage. TIB remuneration and solicitors costs amounted to slightly more than £30,000 (the recoverability of all of this was queried). The unsecured debts (including interest at 8%) amounted to £17,126, leaving a surplus of at least £31,874 to pay s.328(4) interest to compensate unsecured creditors for being kept out of their money, during the c.7 year order for possession postponement (2.6.06 to 30.4.13).

In Martin-Sklan, the first instance judge had said (Evans Lombe J quoting DJ Jackson, at paragraph 17):

‘I find that it is highly unlikely that an appropriate delay in the sale of the property would cause hardship to the creditors in this case. There is a sufficient surplus in the value of the property to protect the creditors’ interests. While this would of course reduce the sum available to the bankrupt, as the sums due to creditors increase this would be an inevitable consequence of delay in selling the property and the bankrupt could at any earlier time agree to vacate in favour of a trustee.’

Evans Lombe J said, in Martin-Sklan, at paragraph 24:

‘…we have here … a circumstance where the evidence before the district judge was that there was a sufficient equity in the property which was sought to be realised to ensure that the interests of the creditors were protected in the sense that they would receive in due course the totality of their debts together with statutory interest.’[37]

As will be apparent from the above, the fact that postponement will increase the unsecured creditors s.328(4) interest claim, and so consequentially reduce the size of any surplus to be received by the bankrupt under s.330(5) of the Insolvency Act 1986[38], does not weigh in favour of only a short postponement in the date for giving up possession. It is the unavoidable price the bankrupt is required to pay to protect the creditors’ financial position during a postponement period designed to benefit those around him. Subject to other occupants intervening, if he later does not want to pay this price, he may elect to give up possession earlier than required by the possession order, thereby effectively bringing to an end, the creditors' wait for a dividend.

It is worth stating that the Court is likely to view the rate of interest the creditors will get pursuant to s.328(4) and (5), as full compensation for being kept out of their money – at least at prevailing interest rates. Evans Lombe J in Martin-Sklan noted (in 2006), at paragraph 29, that:

‘…the rate of interest which results in the creditors’ indebtedness increasing to £25,000 is with the benefit of a rate of interest of 8%. I think that anybody today obtaining 8% on an indebtedness would be pleased to be receiving it. The amount obtainable today on money deposited at a bank does not often exceed 4%. An 8% return would be regarded today as being an exceptional return.’

(d) the identity, size and, where known, general financial position/cash flows of the bankrupt’s unsecured creditors; 

This can be a relevant factor. In Martin-Sklan, Evans Lombe J said, at paragraph 30:

‘Finally, the identity of the creditors. The Inland Revenue is hardly short of money, neither is a bank. I cannot believe that the Mid Kent Water Authority will regard itself as being seriously undermined by a debt of £295 remaining unpaid at interest of 8% until 30 April 2013.’

In summary, undertaking the above evaluation will enable the Insolvency Court to form a view as to what prejudice and hardship will be caused to the creditors’ interests, by varying possible lengths of possession and sale postponement.

Creditors' Interest in TIB’s Expenses Being Met 

Where the net proceeds of sale of the property interest will be absorbed higher up the bankrupt estate statutory distribution hierarchy/order of priority, leaving none for a distribution to unsecured creditors, the creditors do still hold an interest in sale. This was articulated in Dean v Stout [2005] BPIR 1113’s sixth principle. In Harrington v Bennett [2000] BPIR 63, Lawrence Collins QC, sitting as a Deputy Judge of the High Court, summarised at paragraph 12(e), the proposition in Trustee of the Estate of Bowe v Bowe [1997] BPIR 747:

‘For the purposes of weighing the interests of the creditors, the creditors have an interest in the order for sale being made even if the whole of the net proceeds will go towards the expenses of the bankruptcy; and the fact that they will be swallowed up in paying those expenses is not an exceptional circumstance justifying the displacement of the assumption that the interests of the creditors outweigh all other considerations’[39]

Creditors' Interests - Purpose of the Bankruptcy Legislation 

In Grant v Baker [2016] EWHC 1782 (‘Grant’), Henderson J emphasised that ‘all the circumstances of the case…’ is wider than simply the creditors’ interest and encompasses consideration of the purpose of the statutory scheme in the bankruptcy legislation – namely to make a distribution within, save for truly exceptional circumstances, time frames normally measured in months rather than years. He said, at paragraphs 44 and 45:

‘The judge directed herself…that she needed to weigh up the interests of the only creditors, HMRC, against the interests of [the occupant family members]. This was true as far as it went, but in my view paid insufficient attention to the requirement in section 335A(2)(c) to have regard to "all the circumstances of the case other than the needs of the bankrupt". The circumstances of the case include the statutory scheme of the bankruptcy legislation, at the heart of which is the vesting of the bankrupt's property in his trustee, with the object that the trustee should then realise the property and distribute the net proceeds among the unsecured creditors on a pari passu basis. Moreover, the clear effect of section 283A of the 1986 Act is that there is a limited period of three years within which the trustee must either take steps towards realisation of the bankrupt's interest in his home, or forfeit that interest as part of the bankrupt's estate. If, as in the present case, the trustee does take action within the requisite period, it seems to me that the court should then exercise its powers under section 335A with the object of enabling the bankrupt's interest in the property to be realised and made available for distribution among his creditors. Only in that way can the underlying purpose of the bankruptcy legislation be achieved.

…I think she … failed to give appropriate weight to the fundamental point that an indefinite suspension of the order for sale, for a period that could be measured in decades, is incompatible with the underlying purpose of the bankruptcy code. In all save the most truly exceptional circumstances, that purpose must require realisation within a much shorter time frame, normally to be measured in months rather than years.’

Ill Health of an Occupant Family Member

Turning to the occupant family members' interests, the serious ill health of an occupant family member can lead to findings of exceptional circumstances, and result in postponed possession orders. 

Physical disability, physical ill health and mental health problems, can elevate/magnify the likely adverse impact of vacating a property and relocating elsewhere. Reported cases involving physical ill-health include Judd v Brown [1997] BPIR 470 (cancer), Claughton v Charalamabous [1998] BPIR 558 (chronic renal failure and osteoarthritis) and Pickard v Constable [2018] BPIR 140 (myasthenia gravis – autoimmune conditions affecting muscles), while mental ill health examples include Raval (paranoid schizophrenia), Nicholls (schizophrenia) and Hosking (psychiatric condition).

Serious disability/illness, whether acute or chronic, can inhibit a person’s ability to deal with the problems of finding and moving to alternative accommodation, with all the consequential changes necessary to a person’s affairs. With this in mind, the Court is likely to want evidence as to the diagnosis, typical symptoms, loss of amenity, prognosis and affect of any treatment. Further, any unique or hard to reproduce aspect to the property or its locality will be relevant. For example, community support networks existing in the neighbourhood, or installed home adaptions (for example stair lifts). 

In Judd v Brown [1998] 2 FLR 360 (‘Judd’), critical to the decision to refuse the application was the damage that the stress and loss of security from an eviction would have on the spouse’s chances of recovery from cancer. Similarly, in Raval and Nicholls, the court had to weigh up the risk that eviction would lead to relapses.

Acute afflictions might warrant a postponement more than a long-term illness of indeterminate duration (though this might not always be so). In Judd, Harman J said, at 364E-G (note: Josephine is the bankrupt’s wife):

'Josephine's illness for which everyone must feel deep sympathy, plainly creates difficulties of a very different character from such difficulties as obtaining substitute accommodation or arranging for children's schooling which are foreseeable and long-term conditions. This event must have been sudden, unforeseeable, of very recent occurrence, of gravity and is directly affected by the orders now sought. Although cancer in various forms attacks many people yet I think that as a matter of normal language people would say that a sudden and serious attack was an exceptional circumstance in any individual's life. When recovery from the attack is directly related to the order sought it is, in my judgment, what is properly to be described as an exceptional reason for refusing the orders. If the occurrence of life-threatening illness is not an exceptional event I find it difficult to know what such an event can be. In this case the oncologist's view of the importance of security to his patient's possible recovery seems to me to reinforce the relevance of Josephine's illness. Further, the fact that a comparatively short time will enable matters to be resolved, it is to be hoped by a happy outcome, differentiates this particular case on its facts from the case of some person who suffers a long-term illness of indeterminate duration.'

Conversely, in Raval, Blackburne J said, at 725:

‘I can well envisage circumstances, for example, a person who suffers from terminal cancer but whose life expectancy simply cannot be judged, and whose illness therefore could properly be described as long term and of indeterminate duration, which it would be proper to describe as exceptional and where no order for possession should be made.’

In Raval, the bankrupt’s wife Mrs Raval suffered from paranoid schizophrenia. Adverse life events, such as a move to a small property away from her supportive friends and family, could, said her doctor, cause a relapse in her condition, Blackburne J said, at 725:

‘In this case the uncontroverted evidence is that a move to accommodation which is too small to serve the family's needs having regard to the ages of the children for whom the Ravals continue to have day-to-day responsibility, or which, because of its location, deprives Mrs Raval of her current support network both from family and from neighbours, could trigger a relapse. That to my mind is plainly an exceptional circumstance within the meaning of the legislation. However, it does not follow that, as [counsel] submits, either I should make no order for possession or if an order ought to be made I should accede to the suggestion that it be suspended until Sanjay, the youngest of the Raval's three children, has reached 21 when Mr and Mrs Raval will have discharged what Dr Ikkos describes as 'the major part of their responsibilities towards their children'.

Blackburne J ordered possession to be delivered up after 12 months. 

The facts of Claughton v Charalambous [1998] BPIR 558 (‘Charalambous’) show that, in an appropriate case, the exceptional circumstances may be such as to justify a postponement of any order for sale until the bankrupt's spouse either dies or vacates the property. In that case, Mrs Charalambous (the bankrupt's wife) was in very poor health, suffering from chronic renal failure and chronic osteoarthritis. She could walk only with great difficulty and with the aid of a Zimmer frame, and she needed a wheelchair. She was about 60 years old, and evidently had a reduced life expectancy, although how reduced does not appear from the judgment[40].

In Pickard v v Constable [2018] BPIR 140 (‘Pickard’), the bankrupt’s husband suffered from myasthenia gravis, an autoimmune condition which affected his muscles. He used a ventilator during the night and for three to four hours during the day to assist with breathing. He used a wheelchair and had a carer. A possession and sale order was made, postponed for 12 months, providing liberty to make a further application for a further postponement upon further evidence being tendered. The Court took into account the fact that the local authority would, upon hearing of the impending eviction of a seriously disabled person, take steps to ensure that he was not simply thrown onto the street, but found suitable accommodation as a priority need. 

The Court will also take into account the Part VII of the Housing Act 1996 statutory obligations, imposed on local authorities, to rehouse families made unintentionally homeless by involuntary eviction (See Re Haghighat, paragraph 63 onwards) 

See also Everitt, where the husband's needs were exceptional and taken into account in his wife's bankruptcy (the relevant bankruptcy; notwithstanding that he was also bankrupt with the same TIB). Possession order was suspended 1 year (or until 3 months after the obtaining of a possession order against him (in his bankruptcy)). 

Bankrupt’s Needs

The bankrupt’s needs are not directly relevant to the balancing exercise, as they are expressly excluded from the list of circumstances to be considered, s.335A(c). If confirmation is needed, then this can be found at paragraph 25 of Grant, where Henderson J said ‘…by virtue of section 335A(2)(c), the needs of the bankrupt himself are to be disregarded.’ However, the bankrupt’s ill-health may generate in an occupant family member, an enhanced need to remain in the property. In Re Bremner [1999] 1 FLR 912 ('Bremner'), the court recognised the bankrupt’s wife/carer had an independent need to remain in the property to care for her 79 year old terminally ill house-bound bankrupt husband. In this indirect, reflective sense, the bankrupt’s needs were taken account of. The circumstances were ‘exceptional’.

In Everitt, Henderson J held that the 'needs' of the bankrupt was to be broadly construed (like 'needs' of any children and 'needs'...of the spouse) so as to include financial, medical, emotional, psychological and mental needs. Henderson J in Everitt said, at paragraph 37:

'...the court must disregard not only the financial needs of the bankrupt but also... the medical and psychological needs of the bankrupt.'

As to the length of the postponement, in Bremner, given the bankrupt's death was impending, an indefinite suspension was imposed on the possession and sale order, to lift 3 months after the bankrupt’s death. A likely postponement measured in months rather than years (with inoperable cancer, he had probably no more than 6 months to live). The creditors’ interests were mostly met - the evidence was that on an immediate sale of the property there should be enough money to pay all the creditors in full, with some (but not all) of the statutory interest to which they were entitled. However, Mr Jonathan Sumption QC (subsequently a Supreme Court Justice), sitting as a deputy judge of the High Court, added, at 188E:

‘I should make it clear that I would not necessarily have reached the same decision if Mr Bremner had been younger or less ill, or if his life expectancy had been longer than, in fact, it appears to be.’

Children’s Well-Being and Welfare

Where it is likely that the occupant child(ren) will experienced an elevated adverse impact from moving, a Court may find exceptional circumstances, and postpone when possession and sale orders will bite. The ‘needs of any children’ are specifically prescribed as a consideration in the balancing exercise. 

In Martin Sklan, a postponement on the possession order of about 7 years was imposed, until the youngest child was 17 years old. The situation was exceptional and the two occupant children’s safety and welfare warranted such a postponement (when balanced against the creditors’ interests). In that case, the bankrupt and his chronically alcoholic partner had two girls, aged 10 and 14. From time to time, their mother would leave the home without notice for several days to indulge in a period of alcoholism, leaving the children anxious as to her whereabouts and safety. On returning, perhaps the worse for drink, domestic incidents might occur leading to the children seeking refuge with neighbours or other family members. The girls’ well-being and welfare was protected by a delicate combination of their father, their home and a long-established support network of close neighbours, relatives and their schools. Living close to neighbours who understood the family’s problems without need of explanation and who could provide refuge to two young girls on their own quickly, what time of day or night, was ‘priceless’ and ‘almost impossible to replicate’. Substitute accommodation compared very poorly. Eviction was likely to have a seriously negative impact on the children’s well-being, educational attainment and self-esteem. Such circumstances were exceptional, and when the needs of the children were weighed against the interests of three large institutional creditors, who were very likely to be fully compensating in interest for being kept out of their money during the postponement period, postponement until the youngest child was 17 years old, was appropriate. 

Returning to the case of Grant, Henderson J considered the weight to be given to the needs of an adult[41]child of the bankrupt and his wife (the bankrupt and wife each owning 50% of the beneficial interest in the dwelling house). Samantha, the adult child, was 30 years old and had been born with a condition known as global developmental delay, suffered from dyspraxia and obsessive compulsive disorder (‘OCD’). She had a mental age of a 8/9 year old, and was incapable of living on her own. She had difficulties with mobility, finding it hard to get up and down stairs, and felt unsteady on uneven ground. There was no prospect of her condition ever improving, and she was never going to be able to live alone. She needed lots of supervision. The bankrupt and his wife had always cared for Samantha at home. Originally they have lived in a 3 bedroom flat in Hackney, before moving 8 years before, from the flat to a bungalow with 4 bedrooms, because its layout, and the absence of stairs, were well suited to Samantha’s needs. A further advantage of the move was that it provided her with a bigger bedroom. Samantha’s live expectancy was no lower than normal. 

A letter from Samantha’s GP said ‘She lives in a bungalow with her parents which enables her easier access to the toilet and bedroom, as well as the rest of the house. She lives in a commutable distance from her college, which she very much enjoys, and benefits from. The fear of moving home has been detrimental on her mental well-being and has caused her a lot of distress. Her life requires routine, and her home has been adapted to meet her requirements, therefore moving from her home of 8 years would have a real negative impact on her well-being.’ It was common ground between the parties that the bungalow was well-suited to Samantha rather than actually adapted for her. 

There was no medical evidence about Samantha’s OCD, though the bankrupt referred to it in his statement as follows: ‘Sam also suffers with OCD and finds great comfort in routine. Her bedroom is her sanctuary and it would stress her greatly knowing she would have to leave her home. We would find it very difficult to rent as we feel Sam needs the security of a permanent home and not a place that we could be forced out of with just two months notice.’

The bankrupt and wife had two other adult children, who lived with them in the bungalow, but ‘they clearly are independent’ and were able to live without parental support. 

Henderson J held, at paragraph 41, that the first instance judge had ample grounds for concluding that the circumstances were ‘exceptional’ circumstances. However he reduced the indefinite postponement to the possession and sale order (i.e. ‘until such time as Samantha … no longer resides at the Property’ (paragraph 2)), down to a 12 month postponement measured from the date of his judgment (the bankruptcy was 20.11.13; TIB’s application was about 8.10.14, and possession would have to be given up by 0.7.17). He said, at paragraph 52:

‘This would allow ample time for a suitable replacement property to be found on the rental market, and for the move to be prepared with Samantha’s welfare and best interests at heart.’

The length of the postponement was reduced because[42]: (1) rental accommodation would not be as transitory as initially perceived; (2) a suitable 2 bed-roomed bungalow (which would suffice given the independence of the two other adult children) was affordable with the wife contributing her lump sum or working; (3) Samantha’s previous move indicated that, if sensitively handled, a further move would not be an unreasonable thing to inflict upon her; and (4) there was no evidence Samantha’s condition was likely to improve with time; the need to move was a nettle that needed to be grasped, to fit within the statutory bankruptcy scheme, and so postponement need only be sufficient to enable suitable alternative rented accommodation to be found, and the move planned in order to cause her the least amount of distress.  

In Barca v Mears [2005] BPIR 15, the bankrupt argued that he was able to help his child with his concentration and physical coordination problems during his staying contact with him. He argued that if he, the bankrupt, was forced to move, he would have a reduced ability to help his child with his homework. This argument was unsuccessful; this was not ‘exceptional’; the judge found that the child’s special educational needs were not extreme, the sale of the property would not require the child to change school (as the child would continue to live with his mother separately) and it was unclear whether the bankrupt’s ability to assist the child would in fact be impaired, or to what extent if it was impaired. Counterbalancing this was substantial prejudice to the creditors’ interests if made to wait the 3 years proposed as the postponement. The appeal judge unhesitatingly dismissed these grounds of the appeal.

In Re Karia [2006] BPIR 1226, no ‘exceptional’ circumstances were found and, seemingly, no postponement was made to the possession and sale order. The bankrupt had a 5 year old daughter who lived with her mother separately, but had perhaps staying access with the bankrupt 3 nights each week, sometimes more. The bankrupt claimed if the flat was sold, he would be ‘…rendered destitute; he will have no home and, because he will have no permanent address, he will lose his present employment. All this, he says, will have the most serious effect on his daughter's mental health and on their continuing relationship.’. The Judge found this was an over-exaggeration and that he would, on his income, obtain an alternative one-bedroomed flat, which while it might not be as commodious and might be less conveniently located, perhaps less suitable for his daughter to stay in, this was not an unjustifiable interference with his rights.  

In Re Haghighat, the bankrupt and his wife lived with their 3 adult children. The eldest child (c.24 years old) was a seriously disabled vulnerable adult ('Mani'). Mani had congenital quadriplegic cerebral palsy with learning disability and epilepsy, was doubly incontinent, with no speech and little comprehension, used a wheelchair, and had to be carried between his bed, his chair, and the shower. He required continuous care. Mani's needs reflected into Mani's mother's needs, in that her needs included an ability to care for Mani. The trial judge George Bompas QC, sitting as a Deputy High Court Judge, made a possession and sale order, but deferred his order for 3 years, or until, if sooner, 3 months after Mani had ceased permanently to reside at the property [52]. The Court of Appeal in Brittain v Haghighat [2011] BPIR 328 dismissed an appeal against that decision.  

In Hosking, the bankrupt's spouse had mental health issues (with some physical issues), including a propensity for and history of self-harm and elevated inability to cope with stress and trauma, led to a finding of 'exceptional' circumstances and a 6 month postponed possession and sale order [53].

The facts in Re Citro involved disruption to children’s education. 

Delayed Applications 

Very significant delays between the commencement of the bankruptcy and an application for an order for possession and sale are no longer possible. Prior to the introduction on 1.4.04[43]of s.283A of the Insolvency Act 1986, there was a long stop on such delays, but only if the delay: (1) was inordinate; and (2) materially and disproportionately affected some interest to which the court is directed to have regard. In Foyle v Turner [2007] BPIR 43 ('Foyle'), the TIB had waited until rising house prices had eliminated initial negative equity - over a 13-year period. The Insolvency Court in Foyle found this justified – neither aspect was made out. See also Turner v Avis [2009] 1 FLR 74.

This legal landscape has now changed. Now by reason of s.283A, the TIB must fulfill at least one of the 4 provisions in s.283A(3) within 3 years of the commencement of the bankruptcy. As explained in Holtham, at paragraph 14:

‘The effect of that Section was to require a trustee in bankruptcy to make up his mind in a period of three years from the commencement of the bankruptcy whether to realise for the benefit of creditors any interest of the bankrupt in a dwelling house which was his sole or principle (sic) residence. In the event that the trustee fails during that period of three years to realise that interest or to apply to the court for orders which will lead to such realisation, the dwelling house in question re-vests automatically in the bankrupt who will, in the vast majority of cases, have obtained his discharge.’

See Carter v Hewitt [2019] EWHC 3729 (Ch) for a more detail explanation[44.1]

Henderson J in Grant explained the rationale behind the introduction of this provision, at paragraph 22:

‘In general terms, the mischief which this section was designed to remedy was "the practice adopted by certain trustees of not realising family homes immediately but allowing the matter to lie dormant, only acting many years after discharge where the value of the property had increased due to inflation" (Sealy & Milman, Annotated Guide to the Insolvency Legislation, 18th edition, vol. 1, p 357).’

Unless s.283A(5) to (9) apply[44.2], the automatically re-vesting in the bankrupt, of the property interest means that the TIB can no longer delay taking some action. 

As an aside, the bankrupt's discharge from bankruptcy has no effect on the TIB's ability to pursue a claim for possession and sale. Such ability comes within what section 281(1) of the Insolvency Act 1986 states is unaffected by the discharge. See also Re Hussain (A Bankrupt) (also known as: Gostelow v Hussain) [2021] EWHC 3276 (Ch), paragraphs 47 to 49.

Purchasing the Property Interest on the Bankrupt Estate

An order for possession can be avoided where the property interest held in the Bankrupt Estate is purchased from the TIB by a person who does not require vacate possession. The only candidates likely to want to purchase a property interest without also obtaining vacant possession of the property, are the bankrupt’s close family members – in other words, the property interest is kept in the family because it is sold by the TIB to someone close to the bankrupt, who is content to let the current position on possession continue. 

Where for instance the bankrupt’s spouse proposes to purchase the property interest held in the bankrupt estate, but the would-be purchaser does not have the money yet, the Insolvency Court must consider whether it will postpone the date possession must be given up, to provide time for the would-be purchaser to raise the purchase funds. In Re Gorman [1990] 1 All ER 717, a postponement was granted for 6 months where the bankrupt’s wife had a strong prime facie and well-progressed claim against her former solicitors for negligence and where the damages would have equally the sum necessary to purchase the property interest in the bankrupt estate  (liberty to apply was incorporated in the postponement, so that the TIB could bring the case back to court if bankrupt wife did not pursued her claim with due dispatch or abandoned it) (see also Foenander v Allan [2006] BPIR 1392)(see Davis v Johnson [2017] 1 W.L.R. 4005, paragraph 20). Unissued claims for solicitors negligence, of dubious or uncertain merit, failed to secure postponements in similar circumstances in Trustee of the Estate of Eric Bowe (A Bankrupt) v Bowe [1998] 2 FLR 439 and Jackson v Bell [2000] All ER (D) 2280.

Evidence

Evidence is essential in these applications. A non-exhaustive list would include: (1) HM Land Registry Office Copy Entries; (2) property valuation(s); (2) mortgage redemption statement(s); (4) TIB’s fees and expenses (estimate); (5) Statement of Affairs; what creditors there are and what the overall bankrupt estate asset/liability picture is. Expert evidence will often be required to support any contention put forward that vacting the property will result in adverse medical, educational or welfare consequences. For instance, the following reports were relied upon: (i) medical reports in Judd, Claughton and Haghighat; (ii) psychiatric reports in Nicholls and Raval; (iii) an occupational therapist report in Haghighat; (iv) social worker report in Martin-Sklan; and (v) school reports in Barca.

Likelihood that Some Form of Possession and Sale Order 

A broad and tentative statement can be made that, where exceptional circumstances are found, an immediate outright possession and sale order is unlikely to be made, however, almost always the Insolvency Court will find it ‘just and reasonable’ to impose some form of postponed possession and sale order, in light of the bankruptcy legislation’s purpose, and since over time, generally speaking, the creditors’ interests are likely to grow weightier, while the adverse impact on the occupant family members' interests can, with time and planning, usually be mitigated. Typically, therefore, at some point in the discernable future, the balance will tip and it will be ‘just and reasonable’ at that point for a possession and sale order to bite[45]. The Court is seeking to strike the right balance; neither too generous nor too severe; sufficiently recognising the competing interests (preservation of family home vs rights of the creditors) and the importance of finality (see Everitt, paragraph 59). 

For instance, in Re Gonsalves, a s.363 case since the bankrupt had held the property absolutely prior to her bankruptcy, the order for possession was suspended for four months from the date of the handed-down judgment, in order to gave the bankrupt sufficient time to arrange suitable rehousing and to enable the TIB to take possession at a time of year when there was more prospect of a sale. In Everitt, the possession order was suspended until the earlier of: (a) 1 year; (b) 3 months after a possession order being obtained against the bankrupt's husband (in his bankruptcy). 

TIB issues Application before One Year Elapses

Where the TIB issues within one year of his appointment, the existence of mandatory assumption is not completely ignored by the Court. The existence of the mandatory assumption in the statute, though not directly engaged, still has an influence on how the Insolvency Court sees the various competing interests balance out. The mandatory assumption is a snap shot of how Parliament viewed the balance between the various competing interests at one moment in time – at the 1 year point[46]. This is instructive as to how the balance between the various considerations is likely to fall. For instance, in the event that the TIB’s application is issued just less than 12 month after the date of TIB appointment, then the Insolvency Court is likely to require something akin to exceptional circumstances, to warrant a finding that the interests of the creditors should not prevail (i.e. the interests of the creditors are outweighed by other interests). 

In Martin-Sklan, the TIB issued 5 days before the one year period had elapsed. Evans-Lombe J, at paragraph 8, referred to the statutorily prescribed considerations (discussed in detail below) and said, at paragraph 9, that ‘…the district judge therefore had a complete discretion provided that he took into account those specific matters if applicable and the facts of the case.’ and that ‘at least in theory’ the application was governed by s.337(5). However, he then said that the following approach of the first instance judge ‘cannot be faulted’, at paragraphs 10 to 13: 

‘Mr Hill, counsel for the trustee, argued that nevertheless the interests of the creditors should weigh more heavily than other considerations because the intention of Parliament was to provide a breathing space of 12 months to the bankrupt and/or his family to enable them to make alternative living arrangements. In my judgment, that argument has merit. The relevant provision is repeated in other sections of the Act, leaving no doubt as to Parliament’s intentions. The alternative would be a technical situation based upon the timing of the application notice, which could be overcome if necessary after these proceedings are concluded by a fresh application by the trustee. That could bring the law into disrepute and put the bankrupt and his family through a repeat of the anxiety which they have undoubtedly been facing during the time that this application has taken to be resolved.’

…

Accordingly, while I do not apply the provisions of s 337(6) strictly, I do approach this application on the basis that the interests of the creditors are a very important consideration in the balancing exercise which I must perform under s 337(5) and that those interests would need to be outweighed by a more important consideration or considerations in order to avoid an immediate order for sale of the property.’

…

The district judge was examining the facts of the case 22 months after the vesting order. I do not understand that the district judge’s approach to ss 337(5) and 337(6) is criticized as a matter of law. 

I think I should also refer to what the district judge said at para 13 of his judgment where he indicates that he is in effect applying the exceptional circumstances test contained in s 337(6), although only s 337(5) applies. In my judgment, the district judge’s approach on this aspect of the case cannot be faulted.’ 

Postponement Power despite Exceptional Circumstances not being found

Where the TIB waited over 1 year before issuing, and there are no exceptional circumstances, the Insolvency Court does still have a limited power to postpone the order for possession and sale. On ‘common humanity’ grounds, a 3 month postponement was granted to allow arrangements to be made in Donohoe v Ingram [2006] BPIR 417, paragraph 24. This would appear to fit with the effect of the mandatory assumption, which does not mandate an outright and immediate possession and sale order[47], ‘merely’ that the Insolvency Court must order what the Insolvency Court thinks ‘just and reasonable’ on a mandated finding that ‘…the interests of the bankrupt’s creditors outweigh all other considerations’. '[O]utweigh' here does not mean totally ignore all other interests, such that they are removed from all consideration (see Re Haghighat [2009] 1 FLR, paragraph 16); it can be 'just and reasonable' to postpone possession and sale though the creditors’ voice prevails. In Hosking, Paul Morgan QC (later Morgan J) said at paragraph 72, obiter, that if he did not find the circumstances exceptional, he would still have been inclined to postpone possession and sale for two to three months. 

Appeals - Generally

An appeal can be lodged against an adverse first instance decision. However an appellant court hearing an appeal[48]against finds on exceptionality and which set of interests prevail, will be reluctant to interfere. In A. E. I. Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507, Lord Woolf MR, at 1523, endorsed an earlier description of the conventional approach in the following terms:

‘Before the court can interfere it must be shown that the judge has either erred in principle in his approach, or has left out of account, or taken into account, some feature that he should, or should not, have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale.’

Appellant courts are acutely aware of the need not to rob the first instance judge of the width of his discretion. The observations of Lord Fraser in G v G (Minors: Custody Appeal) [1985] 1 WLR 647 at 652 are relevant here, where he emphasised the point:

‘that the appellate court should only interfere when they consider that the judge of first instance has not merely preferred an imperfect solution which is different from an alternative imperfect solution which the [appellate court] might or would have adopted, but has exceeded the generous ambit within which a reasonable disagreement is possible.’

Henderson J in Grant recently reaffirmed this appellant court approach, at paragraph 43. In Claughton v Charalambous [1998] BPIR 558, Jonathan Parker J described the decision on exceptionality as a value judgment, and said at 562H:

‘That process leaves, it seems to me, very little scope for the interference by an appellate court.

No doubt there may be cases where an appellate court can and should interfere. For example, where there is an error of law appearing on the face of the judgment, or where the conclusion which the court below has reached is so plainly wrong as to raise the inference that in reaching that conclusion the court somehow misdirected itself in law.’[49]

Appeals - to which Court

Though this article is written about such disputes in the High Court, Business and Property Court, it is useful to note the case of Mehmi v Maxine [2023] EWHC 1174 (Ch) ('Mehmi'), where a respondent/appellant appealed an adverse first instance decision in individual insolvency proceedings, but appealed to the wrong court. Describing the individual insolvency proceedings, Trowers J said, at paragraph 11:

'These proceedings were brought in exercise of the respondents’ powers under the Insolvency Act 1986 for relief pursuant to s.14 of TOLATA 1996. They were, therefore, governed by s.335A of the Insolvency Act 1986 which required them be brought in the court having jurisdiction in relation to the bankruptcy. They were also recognised as applications made under the Insolvency Act in existing insolvency proceedings, both by the forms of application notice issued by both parties, which made clear that they were made under rule 1.35 of the Insolvency (England Wales) Rules 2016, not CPR part 7, and by the ways in which the various orders made by the county court were entitled.'

The respondent had appealed the adverse district judge decision in the county court ('siting in bankruptcy in the county court...' (paragraph 1)), wrongly, to a circuit judge (in the county court), rather than to a High Court Judge. Trower J said in Mehmi, at paragraph 10:

'...it is trite law that appeals from district judges in individual insolvency proceedings must be made to a High Court judge, not to a circuit judge in the county court.'

Later, Trowers J in Mehmi said, at paragraph 12:

'...it was always clear that any appeal against the decision made by [the District Judge] ...was an appeal against a decision made in the exercise of jurisdiction for the purposes of the second group of parts in the Insolvency Act 1986 and was therefore required by s.375(2) of that Act to be made to a single High Court judge....It is set out in Table 2 in section III of PD 52A, which explains the court to which an appeal must be made in individual insolvency proceedings. It is also explained in Part 4 of the Practice Direction on Insolvency Proceedings at paras 17.2(2) and 17.2(4).'

Challenges 

Aside from appealing, disgruntled litigants can apply under s 375 of the 1986 Act for a review or variation of the order. For instance, where a sale is postponed, an application to vary it could be made, but there would have to be exceptional circumstances – such as new or newly revealed facts, to justify varying/setting aside the earlier order (see Papanicola v Humphreys [2005] 2 All ER 418).

Re-Vesting where TIB’s Application for Order for Sale is Dismissed

Where a TIB’s application for an order for sale or possession fails, unless the Court orders otherwise, the property will cease to form part of the bankrupt estate, and will re-vest in the bankrupt. This is the effect of s284A of the Insolvency Act 1986, which reads:

‘(4) Where an application of a kind described in subsection (3)(b) to (d) is made during the period mentioned in subsection (2) and is dismissed, unless the court orders otherwise the interest to which the application relates shall on the dismissal of the application—

(a) cease to be comprised in the bankrupt's estate, and

(b) vest in the bankrupt (without conveyance, assignment or transfer).’

Subsection (3)(b) to (d) read, as far as is directly relevant:

‘(3)  …

(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,

…’

This position was confirmed in Holtham v Kelmanson [2006] BPIR 1422, were Evans-Lombe J said at paragraph 14 ‘…if the Trustee's application for possession and sale ultimately fails it will re-vest in [the bankrupt]’.

Conclusion

The statutory framework creates a structure for balancing and resolving the conflict that arises following bankruptcy, between, on the one hand, the interests of the bankrupt’s creditors for a sale of all assets with the bankrupt estate, including in particular any dwelling house, to meet the debts of the bankrupt upon bankruptcy, and, on the hand, the interests of the occupant family members of the dwelling house, to continue living in the dwelling house undisturbed[50]. Third party purchasers are unlikely to be interested in purchasing the dwelling house interest held in the bankrupt estate, unless it is with vacant possession.  Without an order vacant possession and for sale, what is likely to be a main asset in the bankrupt estate cannot be sold and the unsecured value in it realized and distributed to the bankrupt's creditors in order of priority, class by class, pari passu[51]. But evicting the occupants of the dwelling house will cause upheaval, inconvenience and life disruption, since a home will represent stability and security to them. Accordingly, a balance must therefore be struck between these two completing sets of interests, in order to find where justice lies. 

Built into the law of credit and bankruptcy, is the sale of the bankrupt’s assets, and bankruptcy law does not exclude the bankrupt’s interest in a home from falling within the bankrupt estate and so to be liquidated. Some assets are excluded, but an interest in a home is not. This being the case, and the fact that third parties will not purchase it without vacant possession, means that involuntary vacating a home (with the normal life disruption that brings) is an almost unavoidable consequence of debt and insolvency law as a whole. Where the TIB waited more than 1 year before issuing, the question becomes, whether: (i) involuntary vacating, and the resultant life disruption in a particular case, is likely to be within, or outwith, what would normally be experienced, in nature or extent; or (ii) the interests of the creditors (particularly, the absence of likely adverse affects of delay in payment) are exceptional. Where this life disruption is likely to be no more than what might ordinarily be suffered (i.e. not exceptional), and nothing on the creditors side is exceptional, then the law is clear. Indeed Parliament has taken the decision out of the Insolvency Court’s hands, mandating an outcome that the interests of the creditors will prevail, and so logically, on that basis, compelling the Insolvency Court to make orders for possession and sale.

Where the circumstances are exceptional, then the Insolvency Court is free to balance the various interests, to determine where the balance lies between the competing interests. This determination is not just as to whether, presently, the interests of the creditors are outweighed by other interests. The Insolvency Court will go on to determine whether, at any future date, or upon any future occurrence, the balance will tip in favour of the creditors. The Inolvency Court may take the view that over a foreseeable period of time, the consequences for the occupants of involuntary vacating, will lessen, whether because circumstances will change (children will finish school, family members will die etc.) or time will enable preparations to be made, suitable alternative properties to be found, and alike. In contrast to this amelioration, the Insolvency Court may also take the view that the interests of the creditors will tend to become more pressing as time passes (inherently, and because TIB expenses will escalate, reducing likely dividends for creditors and/or creditors will suffer escalating costs of being kept out of their money (unlikely to be compensated for by recoverable interest)) 

The point in the future at which the balance of interests tips in favour of the creditors will be determined by the Insolvency Court. Up until that point, the order for sale should be suspended or execution postponed. Thereafter, given the interests of the creditors then prevail, there should be an immediately exercisable order for possession and sale. 

UPDATE

See:

(1) Howlader v Moore [2021] EWHC 3708 (Ch), a decision of HHJ Jackson sitting as a Judge of the High Court, on 30.11.21; and

(2) Reid-Roberts v Mei-Lin [2024] EWHC 759 (Ch), decision of Deputy ICC Judge Frith on 10.4.24, particularly paragraphs 73 to 147, where exceptional circumstances were found.

In Tyschenko v Hyde [2024] EWHC 838 (Ch), Bacon J, at paragraphs 89 and 90:

'...s. 335A(3) provides that where such an application is made more than a year after the vesting of the bankrupt’s estate in the trustee in bankruptcy, the court must assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations. Accordingly, since the Trustees’ application was made more than a year after the vesting of [the bankrupt's] estate in the Trustees, the starting point for the purposes of the possession application was that the interests of the creditors should prevail unless exceptional circumstances could be shown....

...the authorities establish that creditors are deemed to have an interest in the order for sale being made, and the exceptional circumstances which may displace that interest must go beyond the usual “melancholy consequences of debt and improvidence”. The fact that a family evicted from a property may not be able to buy a comparable property elsewhere, and may not be able to remain in the same area, is therefore not regarded as exceptional for these purposes: Dean v Stout [2004] EWHC 3315 (Ch), §§9–11.'

SIMON HILL © 2018-2023

BARRISTER 

33 BEDFORD ROW  

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole. This article was originally written in 2018. A couple of newer cases have been subsequently added, but no attempt has been made to keep the article completely up to date.