An order for sale in bankruptcy can be delayed in exceptional circumstances.
Summary
The High Court held that ‘exceptional circumstances’ per sections 335A and 336 of the Insolvency Act 1986 (IA 1986) applied, meaning the interests of creditors did not outweigh ‘all other factors’ when deciding whether to order the sale of the bankrupts' family home.
The sale of the family home was delayed by over eight years.
Background
The bankruptcy trustee applied to court to confirm the bankrupt’s beneficial interest in the family home and to order the immediate possession and sale of the family home under section 335A IA 1986.
The default position, per s.335A(3), is that after one year following the bankruptcy order, the interest of the bankrupt’s creditors outweigh ‘all other considerations’ unless there are exceptional circumstances.
The facts were based on divorce proceedings and bankruptcy proceedings running concurrently.
Mei-Lin, the former spouse of the bankrupt, requested a declaration that the bankrupt's beneficial interest in the family home did not vest in the trustees. This was based on written correspondence between the divorcing parties before the bankruptcy order was made. The former spouse believed she held 100% interest in the family home under section 53(1) of the Law of Property Act 1925 in return for taking responsibility for looking after their children.
The court had ordered the interest in the property to be transferred to the former spouse in a hearing in February 2019.
Not just and reasonable
The former spouse also argued that it would not be ‘just and reasonable’ under s.335A IA 1986 to grant an immediate possession and order for sale sought by the trustee.
She argued that the bankrupt had frustrated the family proceedings by asking the judge in the family court to delay handing down the resulting property adjustment order. He was declared bankrupt seven days before that order transferred the family home to Ms Lin.
She also felt that it was not just and reasonable because of her and her family’s medical conditions.
The court’s decision
The court accepted that, in December 2018, the bankrupt proposed, via WhatsApp, to transfer his share of the family home to Ms Lin. However, the divorce proceedings concluded in March 2020, after the bankruptcy order in February 2020. The bankrupt’s interest in the family home was transferred to the trustees at the point of bankruptcy.
The Court of Appeal decision of Xydhias v Xydhias [1999] All ER 386 was authority that agreements reached between parties in divorcing proceedings are not legally binding until approved by the court.
The Trustees had a right to pursue possession and sale of the family home.
Suspending sale of the home
The court accepted it was not just and reasonable to order a sale.
The court accepted the former spouse’s arguments and held that there were ‘exceptional circumstances’, and that it was not ‘just and reasonable’ to make an immediate possession order. The judge found that the bankrupt had materially delayed the family proceedings. His misconduct resulted in his former spouse losing the chance to benefit from the property adjustment order.
The judge held that ordering the sale of the family home would have resulted in Mei-Lin and her children moving to a smaller property away from the area, causing disruption to their education and risking further deterioration in both Mei-Lin’s and her son’s mental health.
The sale of the family home was delayed until 31 July 2032. This was the earliest date by which both children would have completed school examinations.
Comments
Mei-Lin would have been entitled to 100% of the family home had it not been for the bankrupt's misconduct. This case demonstrates that multiple factors can result in the interest of the bankrupt’s family outweighing that of the creditors.
This is an unusual example of a court finding ‘exceptional circumstances’ and exercising its discretion to significantly delay the sale of a property following bankruptcy.