The procedure for applying for possession and sale of a bankrupt’s home.
Summary
The trustees in bankruptcy had correctly initiated a claim for possession and sale of the bankrupt’s home by way of an Insolvency Act Application notice, pursuant to rule 1.35 of the Insolvency (England and Wales) Rules 2016.
Background
Hussain (H) was declared bankrupt on 21 November 2017 on a petition by HRMC, based on H's failure to pay VAT. The only substantial asset in H's estate was their share in the family home, which they and their spouse had bought in 2011. They owned the home jointly.
In March 2018 the net equity was calculated at approximately £250,000, so H's half interest, which now belonged to the trustees, was £125,000.
The trustee’s suggested three alternative options:
H’s spouse (or a third party) could buy out the trustees' interest for £125,000
H and their spouse could market the property themselves for sale
The couple could do nothing, but this could result in the trustees applying for an order for possession and sale
The trustees then served formal notice of their interest in the property under s.283A(1) of the Insolvency Act 1986 (IA 1986). H and their spouse repeatedly failed to make a proposal. In September 2019, the trustees' solicitors wrote to H to offer a final opportunity. There was still no response from H. The trustees held off, and in March 2020, they decided to postpone issuing proceedings in the light of the Covid-19 outbreak.
By August 2020, the trustee’s solicitors wrote that they were now instructed to issue proceedings. They gave one final opportunity for the bankrupt to buy out their interest in the property. There was still no response, and in October 2020 the trustees issued an application notice under Rule 1.35 of the Insolvency Rules 2016 (“the IR 2016”).
In January 2021 a District Judge dismissed the trustee's application for an order for the sale of H’s home. The application was made under s.335A IA 1986, which authorises the court to make such an order on an application by a trustee in bankruptcy. However, the judge dismissed it on the ground that the application had been made on the Insolvency Act Application notice (Form IAA) issued under the IR 2016, when (the judge held) it should have been made on Part 8 Claim Form issued under the Civil Procedure Rules (CPR).
One important aspect of the case was that a bankrupt's dwelling house ceases to be part of the trustee's estate after three years from the date of bankruptcy and revests in the bankrupt, unless, amongst other things, either:
an order for sale or possession has been applied for in the meantime
the court disapplies this rule and applies a longer period (see s.283A(6) IA 1986)
For this reason, the question of whether proceedings for possession and sale had begun properly and in the right form was a matter of real importance because, by January 2021, more than three years had already elapsed since H's bankruptcy order.
The trustees were granted permission to appeal in April 2021.
The court’s decision
At appeal, the court overturned the District Judge dismissal of the application and made an order for possession and sale of the property.
The court held that the trustees in bankruptcy had correctly made the application under IR 2016, Rule 1.35 on Form IAA. The judge reasoned that s.412 IA 1986 provides for rules to be made to give effect to the Insolvency Act 1986 Pts VIIA to XI. It held that s.335A is in Pt IX, and accordingly the rules made (including rules relating to applications) are clearly intended to apply to that section. The judge noted that this conclusion aligned with the wording of s.335A IA 1986 and with the purpose of Rule 1.35.
Furthermore, the court held that even if the application should have been issued under the CPR, it was wrong for the District Judge to hold that they lacked jurisdiction to deal with the matter. CPR 3.10 provides that the court can correct an error of procedure, and there is authority in this context for such an error being corrected.
Comments
The decision confirms that an application under s.335A IA 1986 for possession and sale (along with an application under ss.336 and 337) should be made by way of Form IAA pursuant to Rule 1.35 IR 2016, as opposed to under the CPR. Even if the application had been made in the wrong form, that did not mean that the court lacked jurisdiction to deal with the application, as the District Judge could have waived the defect under CPR Part 3.10.
The judge on appeal also dealt with the indication of the District Judge that an order for vacant possession should not be granted until contracts for sale of the property had been exchanged. It was held that that was not an appropriate order to make because the judge had overlooked the fact that the interests of creditors outweigh all other considerations under s.335A IA 1986, and that any delay to granting possession could be seriously prejudicial to them.
Finally, this decision provides authority for the proposition that a court, if raising an issue for the first time, should consider granting an adjournment to allow the issue to be addressed, rather than making a decision without full argument.