Possession proceedings against a bankrupt tenant

Bankruptcy is a formal insolvency process for individuals who are unable to pay their debts when they become due.

A person can become bankrupt if either:

• they apply to an adjudicator to make themselves bankrupt

• a creditor has issued a bankruptcy petition against them in the courts and the court makes a bankruptcy order

A creditor can only make a debtor bankrupt if they owe more than £5,000.

For the debtor’s application to be approved, the applicant must be insolvent. A person is insolvent if they cannot pay their debts from their income or assets.

Bankruptcy normally lasts for 12 months, unless the Official Receiver applies to court to extend it. Discharge from bankruptcy ends the liability for all debts that were included in it, apart from those obtained by fraud.

There is no limit on the number or sum of the debts that can be included in bankruptcy. Some debts, such as court fines and child maintenance payments, are not included in bankruptcy.[1]

More information about bankruptcy is available from the Insolvency Service Guide to Bankruptcy.

Rent arrears are a bankruptcy debt. A landlord is not permitted to take steps to recover arrears incurred before the bankruptcy.

The landlord can prove the rent arrears debt in bankruptcy. That means they are entitled to a proportion of the bankrupt's estate (income and assets) if they have any. They share the proceeds of the estate with other creditors, once the bankruptcy costs have been paid.

Arrears incurred before bankruptcy

If the arrears are provable in the bankruptcy because they accrued before the bankruptcy order was made, the court can make an order for possession. The court cannot suspend a possession order on terms of payment of the arrears.

If possession is suspended on terms, the terms are limited to rent only, plus costs. The landlord is unable to obtain a money judgment for the arrears.

Arrears incurred after bankruptcy

If the rent arrears are not provable in the bankruptcy because they accrued after the bankruptcy order was made, the court can suspend or postpone an order for possession on payment of current rent and rent arrears.

The landlord can obtain a money judgment for rent arrears and costs that were incurred after the bankruptcy order was made. This is the case whether the bankrupt has been discharged or not.

Action against a joint tenant

When the bankrupt tenant is a joint tenant, the landlord can recover all the rent arrears from the non-bankrupt joint tenant(s).

While a tenant is bankrupt there are restrictions on proceedings and remedies that can be taken against their property.

No creditor of a debt provable in the bankruptcy shall, without the leave of the court:[2]

• have any remedy against the property or person of the bankrupt in respect of that debt, or

• start any action or other legal proceedings against them

Rent arrears are a provable debt.

Property of the bankrupt

Property includes money, goods, land in the UK or elsewhere, and rights and liabilities over property.[3]

A residential tenancy is the property of the bankrupt.[4]

The above restrictions do not affect the right of mortgage lenders or other secured creditors to enforce their security.[5]

Sharples v Places for People Homes

The Court of Appeal examined the interaction between insolvency law and the landlord’s right to possession in Sharples v Places for People Homes Ltd.[6]

It held that:

• a bankruptcy or a debt relief order did not prevent a landlord from gaining possession of the property

• the landlord is not entitled to recover arrears included in the bankruptcy

• a mandatory rent arrears ground can be made out even if the arrears were included in the bankruptcy

The case involved a tenant with rent arrears facing a possession claim brought on ground 8, schedule 2 Housing Act 1988. Ground 8 is made out where the amount of rent arrears exceeds a defined threshold both at the date of service of the notice, and on the day of the hearing. Where rent is payable monthly the threshold is two months’ worth of rent.

The tenant had applied for bankruptcy which had not yet been discharged.

The Court of Appeal held that the County Court had been correct to make a possession order against the tenant.

Stay on proceedings in the Insolvency Act

There is an automatic stay on most legal proceedings in the Insolvency Act. This does not apply to possession proceedings but if there is a money claim element, that element is automatically stayed.

The Insolvency Act gives the court the power to stay cases but this is unlikely to be useful to tenants in possession proceedings.[7] In Sharples the Court of Appeal commented that that this power should not normally be exercised in proceedings for possession of property.[8]

No permission required to bring proceedings

The landlord of a bankrupt tenant does not require the permission of the court to start or continue possession proceedings, on the ground of rent arrears or any other ground, to obtain possession of the property.

A local authority or housing association may have a policy of writing off arrears that have been included in bankruptcy. This means not asking for payment or issuing a claim based on those arrears.

Social landlords can be asked for a copy of their policy on insolvency and rent arrears.

Tenants can face problems when landlords require payment of arrears included in bankruptcy. A poor payment record or high arrears could mean the court is more likely to make an outright possession order if a suspended order cannot contain terms for payment of the debt.

Paying the arrears to avoid possession action

Normally, no payments can be made towards debts included in bankruptcy. For tenants who must repay their arrears to avoid possession action, the Insolvency Service has given some flexibility to repay arrears on an informal basis, to avoid the issue of a claim or enforcement of an existing possession order. Tenants can offer to pay a reasonable amount when bankrupt at the discretion of the Official Receiver.

Tenants can explain to the Official Receiver that they will be less likely to be able to pay towards the bankruptcy debts and costs if they lose their home. This approach is confirmed in chapter 35 of the Insolvency Service internal guidance manual. Debt advisers report bankrupt tenants paying up to £100 per month towards arrears with the agreement of the Official Receiver.

Timing of the bankruptcy application

The tenant must consider the timing of their bankruptcy application. The best option is for the tenant to try to make an arrangement to repay arrears at the allowable level (or below) before applying for bankruptcy. That means it is:

• more likely that the payments can continue if the tenant is bankrupt

• less likely that the landlord will issue a claim for possession

It may be worth reminding a landlord who insists on bringing proceedings that in evicting an insolvent tenant, they will not be able to recover the rent arrears debt. Once evicted, a tenant is less likely to be in a position to repay the rent arrears.

Suspended possession orders for rent arrears

Tenants with a suspended possession order on rent payment terms must apply to vary it if the Official Receiver will not allow them to keep to the terms. This is very rare, as suspended possession order repayment terms do not usually exceed what the Official Receiver will allow.

The court cannot make an order for repayment of arrears that were included in the bankruptcy. Possession can only be suspended on current rent and any arrears that were incurred after the bankruptcy.

Read more about how a defendant can apply to vary a possession order on Shelter Legal.

The bankrupt's estate vests automatically in the trustee in bankruptcy on the making of the bankruptcy order and comprises all property belonging to, or vested in, the bankrupt at that moment.[9]

The trustee in bankruptcy (either the Official Receiver or an insolvency practitioner) is appointed to realise the interests of the creditors and manage the bankrupt estate.

Residential tenancies

Most types of tenancies created by statute do not vest automatically in the trustee, so the tenant retains their security of tenure. These include:[10]

• secure tenancies

• assured tenancies, including assured shorthold tenancies

• agricultural occupancies with statutory protection

• Rent Act protected tenancies

These tenancies do not usually hold any financial value for the trustee or the creditors. A trustee can claim these tenancies by serving a notice on the tenant.[11] In theory, this is a risk if the tenancy can be assigned to raise money for the creditors. A tenancy could raise money if:

• the landlord is willing to pay the trustee for vacant possession

• the rent is very high and ending it would free up money for creditors

It is the contractual element of the tenancy that can vest in the trustee, so a tenancy in the statutory periodic phase cannot be claimed. That means that in practice, this happens very rarely if at all.

Introductory and demoted tenancies

Introductory tenancies, demoted tenancies, and family intervention tenancies do form part of the bankrupt's estate and therefore vest automatically in the trustee. These tenancies have no financial value for the trustee and the creditors.

They do place obligations on the trustee, including paying the rent. The trustee is likely to agree to disclaim these tenancies, so they return to the property of the bankrupt.