Beneficial Joint Tenants, Survivorship and Creditors of a Deceased's Insolvent Estate - Section 421A of the Insolvency Act 1986

Where Person A and Person B are beneficial joint tenants[1] of land/property[2] (leasehold/freehold), and Person A dies, the effect of the rule of survivorship is that, from the moment of death forward, Person B will be left as the sole beneficial interest holder. It does not matter[3] whether Person A dies testate or intestate, nor what Person A’s Will might say. Person B will be left as the sole beneficial interest holder. To put this into a typical, real world scenario: this will often be the case where two spouses/partners own land/property and one of them dies. 

The result of the survivorship rule is that an asset (the share of the land/property) which was inside Person A’s estate, and so potentially available to pay Person A’s debts/liabilities, ceases[4] to be within Person A’s estate. Where, following death, Person A's estate is balance sheet insolvent[5], Person A's creditors will get less than 100p in the £1 on their debt. Such creditors might naturally view the effect of the survivorship rule, depleting as it does, the assets in Person A's estate, as unfairly prejudicing their right to be paid what they are owed[6a]. The depletion only occurring because Person A dies. An event that hardly explains/justifies such creditors receiving less than they might otherwise obtain had Person A continued living[6b]

To address this unfairness, Parliament intervened on 2 January 2001 with the coming into force of section 421A of the Insolvency Act 1986. 

Section 421A Power to Order Survivor (Person B) to pay into Deceased’s Estate

Section 421A[7] is entitled ‘Insolvent Estates: Joint Tenancies’ and empowers to the Insolvency Court to make orders where 3 pre-conditions are satisfied:

‘(1) This section applies where

(a) an insolvency administration order has been made in respect of the insolvent estate of a deceased person,

(b) the petition for the order was presented after the commencement of this section and within the period of five years beginning with the day on which he died, and

(c) immediately before his death he was beneficially entitled to an interest in any property as joint tenant.

Taking these in turn, 

(a) Person A’s estate must be subject to an ‘insolvency administration order’. Subsection (9) defines an 'insolvency administration order’ (‘IAO’) as having:

the same meaning as in any order under section 421 having effect for the time being’[8] .

The Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) (the ‘1986 Order’) is the relevant Order and, that 1986 Order provides, at art 2, that IAO means:

‘an order for the administration in bankruptcy of the insolvent estate of a deceased debtor (being an individual at the date of his death)’

(b) proceedings for a section 421A order must be commenced (that is, petition presented), within 5 years of Person A’s death. In essence, a limitation period, whereafter Person B will have the certainty of knowing he/she will not longer be susceptible to being made subject to a section 421A Order. Providing a long stop measure of certainty to those in the position of Person B. As will be seen, the 5 year limitation was an issue in Wicks v Russell and Parkes [2009] B.P.I.R. 194 (‘Wicks’), discussed below;

(c) Self-evidently, Person A must have held a beneficial joint tenancy with another, Person B, in property, prior to Person A's death. Without this, there would be no application of the survivorship rule and no potential for unfairness requiring intervention by the Insolvency Court.

Should this criteria be satisfied, then subsection 2 provides:

‘For the purpose of securing that debts and other liabilities to which the estate is subject are met, the court may, on an application by the trustee appointed pursuant to the insolvency administration order, make an order under this section requiring the survivor to pay to the trustee an amount not exceeding the value lost to the estate.’

The ‘survivor’ is defined for section 421A, in subsections (7) and (8) - subsection (8) is for multiple survivors[9]. For single survivors, subsection (7) provides:

‘... “survivor” means the person who, immediately before the death, was beneficially entitled as joint tenant with the deceased or, if the person who was so entitled dies after the making of the insolvency administration order, his personal representatives.’

So, upon the application by the Trustee in Bankruptcy of Person A’s estate (under the IAO), the Insolvency Court has a discretion (because of the word ‘may’) to make an order against the survivor (Person B) requiring Person B to pay money to the Trustee in Bankruptcy. Any such order is required to be for the statutory purpose stipulated in subsection 2 - namely for '...securing that debts and other liabilities to which the estate is subject are met.' The order can have no wider purpose. 

Subsection 3 sets down how the Insolvency Court is to determine whether, and on what terms, any such order ought to be made. Section 421A(3) reads:

‘In determining whether to make an order under this section, and the terms of such an order, the court must have regard to all the circumstances of the case, including the interests of the deceased’s creditors and of the survivor; but, unless the circumstances are exceptional, the court must assume that the interests of the deceased’s creditors outweigh all other considerations.’

As the authors of Sealy & Milman: Annotated Guide to the Insolvency Legislation 23rd Ed.; 2020 ('Sealy & Milman'), state in their commentary to this section:

‘The court enjoys discretion to deal with the matter, but as in insolvency generally the interests of creditors prevail unless the case is exceptional. The jurisprudence under s.336 of IA 1986 is likely to be influential here.’

Accordingly, while the Insolvency Court does have the discretion, and the Insolvency Court must have regard to 'all the circumstances of the case' when determining how to exercise that discretion, Parliament has imposed a mandatory assumption upon the Insolvency Courts in relation to a central issue. Unless the case is 'exceptional', Parliament has dictated that the Insolvency Court must find that the interests of the deceased (Person A)’s creditors outweigh all other considerations, which must include outweighing the survivor/Person B’s interests. Where, therefore the circumstances (as determined by the Insolvency Court) are not 'exceptional', the mandatory assumption will be engaged, and will inevitably be a decisive factor in how the Insolvency Court exercises its discretion. Where the case is 'exceptional', the mandatory assumption will not be engaged, and the Court will, in the normal way, have to evaluate and balance the competing considerations.  

The Mandatory Assumption under Section 336 of the Insolvency Act 1986

Sealy and Milman postulate that the jurisprudence under section 336 of Insolvency Act 1986 is likely to be influential on, in essence, the construction of section 421A(3). Section 336 of the Insolvency Act 1986 is one of a number of sections (sections 335A, 336 or 337 of the Insolvency Act 1986) in relation to the possession and sale, by a Trustee in Bankruptcy, of a home held by a bankrupt. Section 336 (along with the other sections) require 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’, but that balancing exercise is constrained by the imposition of a mandatory assumption stipulating that the creditor’s interests outweigh all others, ‘unless the circumstances of the case are exceptional.’ 

Section 336 and section 421A are very similarly structured - with discretion to be exercised based on a balancing exercise to be undertaken on all the circumstances (save section 336 excludes the bankrupt's interests) - but with a mandatory assumption fixing the outcome of the balancing exercise, unless the circumstances are 'exceptional'. An analysis of case law and jurisprudence surrounding section 336, including on what is 'exceptional', can be found in an article entitled ‘Possession and Sale of Bankrupt's Home’, by this author, available as an Insight on 33 Bedford Row’s Insights page. It suffices here to say that exceptional circumstances under section 336 can be found within the facts surrounding either (or both): (1) the creditors; or (2) bankrupt's family. Typically, exceptional circumstances are found within the personal circumstances of family members living with the bankrupt (usually linked to ill-health). 

Quantum of Order against the Survivor/Person B

As to the quantum of any order against the Survivor/Person B, the following points can be observed.

The order may be for any ‘amount’, provided it: 
(i) fits with the statutory purpose; and 
(ii) does not exceed the ‘value lost to the estate’. 

Subsection (9) defines “value lost to the estate” as meaning:

‘the amount which, if paid to the trustee, would in the court’s opinion restore the position to what it would have been if the deceased had been made bankrupt immediately before his death’.

On this, the stages the Insolvency Court will need to follow would appear to be as follows:

(a) the Insolvency Court will need to determine what the ‘value lost to the estate’ is. Upon determining what that amount is, the ‘value lost to the estate’ sum will act as upper limit on what sum the Insolvency Court may order the survivor (Person B) to pay to the Trustee in Bankruptcy; and then,

(b) the Insolvency Court will need to determine what, in it is discretion, the survivor (Person B) ought to pay to the Trustee in Bankruptcy (ensuring it does not order more than the upper limit). Such sum could be the ‘value lost to the estate’ sum, but the Insolvency Court may order a lesser sum. 

Wicks v Russell and Parkes

The focus so far as been on the language of the section itself. This is to a large extent inevitable and unavoidable, because there is such a paucity of reported case law on the section. Indeed, there is only one reported authority on section 421A and that case only touches on section 421A as an element in the background to an application to annul an IAO under section 282(1)(a) of the Insolvency Act 1986. The case is Wicks, a decision of His Honour Judge Purle QC (sitting as an Additional Judge of the High Court). Regrettably however, it offers almost no insight into the application of section 421A. The following paragraphs set out Wicks' facts and the decision only therefore for the purposes of completeness. Section 421A awaits substantial judicial consideration. 

In Wicks, the Appellant (the survivor/Person B) was the former partner of the deceased (‘Mr Smith’; Person A). Some time before, the Appellant had received as an inheritance, a house, which she had then, while they were both alive, put in her and her partner’s Mr Smith’s name as beneficial joint tenants. Mr Smith died, and by the rule of survivorship, the Appellant was left as the sole beneficial interest holder (and presumably the sole legal title holder as well[10])). Later, Mr Smith’s son in law petitioned for an IAO against Mr Smith’s estate, on the basis that he could petition as a (eligible) creditor (for money paid for services after Mr Smith’s death). This petition was successful, and an IAO was made over Mr Smith’s estate. Pursuant to the IAO, a Trustee in Bankruptcy was appointed over Mr Smith’s deceased estate, and the Trustee in Bankruptcy made an application under section 421A for an order against the Appellant, that she do pay to the Trustee in Bankruptcy, the value of Mr Smith's half share in the property, there being (it was said) no other assets in Mr Smith's estate from which Mr Smith's liabilities might be met. 

The Appellant applied for an order annulling the IAO on the basis the putative creditor was not, in fact, a creditor of Mr Smith at the date of death[11]. At first instance, the DJ dismissed the annulment application. The Appellant appealed. 

The Appellant's appeal came before the Additional Judge of the High Court. He held that Mr Smith’s son in law had not been a creditor eligible to petition for an IAO (by definition, funeral expenses are incurred after not before death). However, section 282 provided that the Court had a discretion, even after holding that an IAO ought not to have been made, to refuse to annul it. The Additional Judge said, at paragraph 26:

‘I undoubtedly do have a discretion under section 282, as the word "may" confirms. The circumstance that the original order was made on the application of someone having no standing to petition is no doubt something which I should have serious regard to. Nevertheless, bankruptcy is a class remedy and it behoves me to have regard also to the interests of the creditors as a body.

In Guinan III v Caldwell Associates Ltd [2004] BPIR 531, Neuberger J (as he then was) had this to say on the question of the exercise of the discretion under section 282:

"As I have mentioned, there is a discretion even if there is an arguable case, but it seems to me that unless there are special circumstances such as other creditors who have undoubted debts, or clear other evidence of insolvency, or facts such as were before the Court of Appeal in Askew v Peter Dominic Ltd [1997] BPIR 163, namely that the debt in question was not challenged, then it seems to me, save in exceptional circumstances, that it must be right not to uphold a bankruptcy order."'

Reasoning on the facts in Wicks, the Additional Judge stated, at paragraphs 28 and 29:

'Here there are in my judgment special circumstances, namely the undoubted insolvency of [Mr Smith], and the loss of a potential remedy if the IAO is now annulled….'

Pausing there, the loss of potential remedy is the loss of a section 421A application. 5 years having passed since Mr Smith’s death, no new section 421A application could be made on any subsequent IAO obtained by any other creditor of Mr Smith’s undoubtedly insolvent estate.  

At paragraph 27, the Additional Judge continued:

[Counsel for the Appellant] says that the creditors have until recently been entirely supine and, even now, only one outside creditor with a genuine claim has bothered to prove. I do not think that is decisive. It may well be that other creditors, once it is known (if that becomes the case) that there are assets available for distribution, will show an interest. The fact that they have not bothered to throw good money after bad up till now is no reason for depriving them collectively of the class remedy of bankruptcy to which they are entitled.’

He said, at paragraph 30:

‘I do not overlook the potential hardship to the Appellant of facing a claim – under section 421A - that may turn out to be unjustified, or which may leave her homeless after the 5-year period of limitation has expired. I cannot form any view on the merits of that claim. As the District Judge observed, the merits will be considered at the hearing of the section 421A application. The fact that the 5-year period has now expired is not decisive. The claim was commenced in time, and, in the absence of any suggestion of abuse by the trustee or inordinate delay in prosecuting that claim, the fact that it would now be statute-barred is no reason for exercising the discretion adversely to the creditors as a class.’

SIMON HILL © 2020

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.

[1] It is important to distinguish between: (1) beneficial joint tenants; and (2) beneficial tenants in common. The rule of survivorship does not apply to beneficial tenants in common. It is also important to recognise that a beneficial joint tenancy can be severed into a beneficial tenancy in common. Note the law gets more complex where there is more than 2 people involved. As to the manner in which a beneficial joint tenancy can be severed, Balcombe LJ in Re Palmer (A Debtor) [1994] Ch 316, at 341A, listed them as follows:

‘(1) by an act of one of the joint tenants operating on his own interest so as to sever it—this might be voluntary or involuntary alienation; (2) by mutual agreement; (3) by a course of dealing sufficient to intimate that the interests were to be treated as tenants in common (see generally Williams v. Hensman (1861) 1 Johns. & H. 546, 557; Burgess v. Rawnsley [1975] Ch. 429); to which can be added; (4) the statutory method of notice in writing under section 36(2) of the Law of Property Act 1925.’

[2] This rule is not specifically confined to land/property. It can apply to money held on trust as beneficial joint tenants - an undivided moiety.

[3] In Re Palmer (A Debtor) [1994] Ch 316 (‘Palmer’), Balcombe LJ said, at 342B:

The estate of a deceased joint tenant does not include his unsevered interest under a beneficial joint tenancy: that accrues by right of survivorship to the surviving joint tenant(s), and does not pass to his personal representatives or form part of his estate.’

Evans LJ said in Palmer, at 350A, referring also to the insolvency administration order:

‘His interest in the joint tenancy of the property could only continue whilst he was alive. The order could only take effect when he died. It follows that the interest was not affected by the order. It never formed part of his estate.’

[4] The phraseology used is that, at the moment of death, Person A’s interest in the land/property ceases, and accrued by survivorship to Person B. For instance, see Balcombe LJ in Re Palmer (A Debtor) [1994] Ch 316, at 341E and 344B

[5] Person A’s estate may: (1) have been balance sheet insolvent prior to death (but be made even more balance sheet insolvent following the effect of the survivorship rule); (2) be rendered balance sheet insolvent by the effect of the survivorship rule; or (3) be rendered balance sheet insolvent by post death contingents occurring (but would have remained solvent but for the effect of the survivorship rule). 

[6a] The counterargument, clearly not favoured by Parliament, is that Person A/deceased's beneficial joint tenancy, as an asset in Person A's estate, was precarious. It being known that Person A might die and the surviving beneficial joint tenant takes all. Anyone who became a creditor of Person A during Person A's lifetime should have known this (everyone being taken to know the law) and can be taken to have weighed the risk of death/affect of the survivorship rule, into their calculation, as to whether or not to become a creditor of Person A at all (or on what terms, for instance higher interest rate to compensate for risk of loss; not applicable to involuntary creditors). That it is a risk of being a creditor that a debtor might die and the survivorship rule work against the creditor.

The difficulty with this counterargument is it depends on the existence of the beneficial joint tenancy being obvious and visible to potential creditors of the debtor. But is that realistic. Can creditors be expected to discern whether a potential debtor holds a beneficial joint tenancy rather than a beneficial tenancy in common (upon which, of course, the survivorship principles does not apply). 

[6b] In Re Palmer (A Debtor) [1994] Ch 316, at 346G, Balcombe LJ recorded counsel as putting this as:

‘...the estate of a deceased debtor being treated more favourably, vis-a-vis his creditors, than the estate of a living bankrupt.’

Whether this is the right way to view it is left open to question. 

[7] The full text to section 421A of the Insolvency Act 1986, entitled ‘Insolvent estates: joint tenancies’, is:

(1) This section applies where

(a) an insolvency administration order has been made in respect of the insolvent estate of a deceased person,

(b) the petition for the order was presented after the commencement of this section and within the period of five years beginning with the day on which he died, and

(c) immediately before his death he was beneficially entitled to an interest in any property as joint tenant.

(2) For the purpose of securing that debts and other liabilities to which the estate is subject are met, the court may, on an application by the trustee appointed pursuant to the insolvency administration order, make an order under this section requiring the survivor to pay to the trustee an amount not exceeding the value lost to the estate.

(3) In determining whether to make an order under this section, and the terms of such an order, the court must have regard to all the circumstances of the case, including the interests of the deceased’s creditors and of the survivor; but, unless the circumstances are exceptional, the court must assume that the interests of the deceased’s creditors outweigh all other considerations.

(4) The order may be made on such terms and conditions as the court thinks fit.

(5) Any sums required to be paid to the trustee in accordance with an order under this section shall be comprised in the estate.

(6) The modifications of this Act which may be made by an order under section 421 include any modifications which are necessary or expedient in consequence of this section.

(7) In this section, “survivor” means the person who, immediately before the death, was beneficially entitled as joint tenant with the deceased or, if the person who was so entitled dies after the making of the insolvency administration order, his personal representatives.

(8) If there is more than one survivor

(a) an order under this section may be made against all or any of them, but

(b) no survivor shall be required to pay more than so much of the value lost to the estate as is properly attributable to him.

(9) In this section– “insolvency administration order” has the same meaning as in any order under section 421 having effect for the time being, “value lost to the estate” means the amount which, if paid to the trustee, would in the court’s opinion restore the position to what it would have been if the deceased had been made bankrupt immediately before his death.’

[8] Section 421 of the Insolvency Act 1986 authorises the Lord Chancellor, with agreement of Lord Chief Justice and the Secretary of State, to extend the provision of the Insolvency Act 1986 to the insolvent estates of deceased persons, subject to any modifications deemed necessary. Under this section, Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) was made (the ‘1986 Order’). Within the 1986 Order, art. 2 includes:

‘“insolvency administration order” means an order for the administration in bankruptcy of the insolvent estate of a deceased debtor (being an individual at the date of his death)’

[9] Subsection 8 of section 421A of the Insolvency Act 1986, on multiple survivors, reads:

‘If there is more than one survivor

(a) an order under this section may be made against all or any of them, but

(b) no survivor shall be required to pay more than so much of the value lost to the estate as is properly attributable to him.

[10] Technically, where the same person is the sole legal title holder and sole beneficial interest holder, the beneficial interest is not considered to exist separately from the legal title.

[11] See paragraph section 382(1) and its definition of ‘bankruptcy debt’, which (so far as presently material) says:

‘(a) any debt or liability to which he [meaning the bankrupt] is subject at the date of the death of the deceased debtor

(b) any debt or liability to which he may become subject after the date of death of the deceased debtor … by reason of any obligation incurred before the date of death of the deceased debtor.' 

See Wicks v Russell and Parkes [2009] B.P.I.R. 194, paragraph 14.