Sale of Bankrupt's Interest in solely owned property

Sale of Bankrupt's Interest in solely owned property (ISCIS)

(January 2011)

1) Introduction

Where the bankrupt's interest in a solely owned property (not tenanted, see TM chapter 31.11)  is of sufficient value to be in the interest of creditors to effect a transfer, form MP1 (available on the ORBS intranet site) should be sent to the bankrupt inviting them to make an offer to purchase that interest.  It is not anticipated that it would be in the interest of creditors to pursue a property interest below £1,000.  If a willing purchaser comes forward, the case should be transferred to the RTLU for realisation of the property.

Where there is equity and realisation of the bankrupt’s interest in a property is likely to be protracted, usually where there is no willing purchaser, the official receiver should seek the appointment of an IP. The appointment of a trustee may also be appropriate if there are other assets of a complex nature in the case, or where there has been a request from creditors for the appointment of a trustee other than the official receiver.

However, in those cases where the property is charged for more than the current realisable value (negative equity) or where the value of the property exceeds any debts charged over it by only a minimal amount, the case should be transferred to the RTLU. 

2) Protecting the official receiver’s interest

In every case where a bankruptcy order is made, the official receiver notifies the Land Charges Department of the order on statutory Form 6.26, the registration being against the name of the bankrupt. ISCIS ‘Docs’ tab form LRRABO is used for this purpose. It is the court’s responsibility to notify HM Land Registry of the presentation of the petition.  This registration serves to protect unregistered property as a search will be made against the name of the owner  when any purchase is proposed.  A WO(B) number will be issued and should be recorded on the ‘Data Store’ tab.  If there is insufficient space (i.e. there is more than one WO(B) number issued on a particular case) the additional number/s should be recorded on ISCIS ‘Notes’ tab as a note.  If the WO(B) number is registered against one of the bankrupt’s aliases then a note should be made highlighting which number relates to which known name.

In turn, the Land Charges Department provides the District Land Registry with the information and, once the bankruptcy order is made and it is aware that a bankrupt is the sole owner of a registered property, a bankruptcy restriction will be entered in the proprietorship register, a bankruptcy notice having already been lodged on the presentation of the petition. (For further information, please see the Case Help Manual part: Freehold Property: Solely Owned – Registration of a Bankruptcy Restriction.)

The official receiver, as receiver and manager, should give early notice to the mortgagee / charge-holder(s) of the making of the bankruptcy order using form MP2 (ISCIS ‘Docs’ tab).  Formal notice of the property interest vesting in the official receiver should also be sent to the same secured creditors once the official receiver becomes trustee, this should be done using form MP3 (ISCIS ‘Docs’ tab).  The official receiver will then be informed of the amount due under each mortgage/charge and will be made aware of any steps that the mortgagee / charge-holder(s) have taken to realise their interest in the property, e.g. possession proceedings. Details of insurances linked to the property such as endowment as well as property and contents should also be obtained.  Full details of the property should be recorded on ISCIS under the ‘Assets’ tab. including details of the mortgages and charges against the property.   

3) Conditions of the sale of the official receiver's interest in a bankrupt's solely owned property

In a case where the bankrupt is the sole owner of a property, the official receiver may sell the legal title, either back to the (former) bankrupt or to a third party introduced to the official receiver by the bankrupt.  This is particularly appropriate where the property is still occupied by the bankrupt and his family. For information on how to deal with a property that is the sole or principal residence of the bankrupt, the bankrupt's spouse or former spouse, civil partner or former civil partner at the date of the bankruptcy order please refer to the Case Help Manual part - The Family Home.  It is important that the property type is identified and recorded correctly on ISCIS (‘Assets’ tab) e.g. family home, house, garage etc.  This is done using the property type drop-down box within the asset entry (‘Assets’ tab)

NB In cases where the bankrupt owns a property or properties that are tenanted and he or she is entitled to receive rent, do not send form MP1 ‘Offer to purchase’ letter without specific instructions to do so from the examiner. See also TM Chapter 31.11

In appropriate circumstances the official receiver may proceed to sell, provided that:

a. All costs associated with the sale, are met by the (former) bankrupt or other third party (proposed transferee). The preferable method would be to secure a cash deposit before the transfer commences. (This cash deposit does not have to cover the transferee’s own legal costs for which he/she will also be liable).

b. the proposed transferee provides an up to date valuation prepared at their own expense by an independent agent or valuer.

c. the proposed transferee supplies the official receiver with evidence of the current amount(s) owed to each mortgagee and/or charge-holder.

d. appropriate arrangements have been made by the (former) bankrupt or other proposed transferee to deal with the outstanding charges on the property.

e. that an offer is received representing the full net value of the interest to be transferred, and that amount is in the creditors’ interest to accept.

f. that the official receiver and the proposed transferee can agree the value of the interest to be transferred.

4) Costs of the sale

The costs associated with a sale will consist of the legal costs incurred by the official receiver to convey the property and the proposed transferee’s own legal costs together with any fee for valuing the property.

The official receiver will have to instruct solicitors to act on his/her behalf in the sale but, unlike in the sale of jointly owned properties, there is no property conveyancing scheme in operation with a fixed fee. TLT Solicitors, who act on the official receiver’s behalf in the sale of jointly owned properties, have indicated that they will be prepared to act on the official receiver’s behalf in the sale of solely owned properties and the fee they charge for this work is likely to be fairly constant. As a result, the official receiver may opt to use TLT Solicitors for this work or a local firm.

5) Must the official receiver obtain a valuation?

Before embarking on a sale, the official receiver must be satisfied as to the value of the property to be sold. It may be that there is a current or recent valuation available already, which the official receiver is at liberty to rely on if he/she is satisfied as to the accuracy of the document, especially where the value of the bankrupt’s interest is minimal.

Otherwise, the proposed transferee should be asked to obtain an up-to-date valuation for which he must bear the cost. The main criterion is that the valuation must reflect the current market price of the property, it is therefore important that when a valuation is received the matter is dealt with in a timely manner. It is possible that a valuation provided free of charge by a local estate agent in the belief that instructions to sell the property will be received, may be acceptable at the official receiver’s discretion.

In the event that the official receiver is unhappy with any valuation provided to him/her, he/she is at liberty to seek another valuation, at the cost of the proposed transferee, before agreeing to go ahead with the transaction.

6) Using ‘subject to contract’ on all relevant correspondence

It is important when dealing with the potential sale of a bankrupt’s property that all relevant correspondence is headed ‘subject to contract’. This means that the parties are not contractually bound until another document is signed which will normally occur on the formal exchange of contracts. In effect, the matter is left open until it is concluded formally and if the matter is delayed, the official receiver is not bound to complete at a previously agreed price. In a small number of cases, the completion of the transfer has been delayed sometimes for several years and when the matter is revived the property interest has inevitably increased in value. On occasion, the proposed transferee has sought to complete the transaction based on an open letter from the official receiver accepting a lower offer for the property interest rather than the current higher value. The official receiver should resist such approaches but difficulties could be avoided if all correspondence on the potential sale of the property were marked ‘subject to contract’.

7) Consideration payable

(Amended May 2011)

Generally the consideration (or price for the transfer) should be equal to the full value of the bankrupt’s interest in the property at the date that the sale is agreed. This means, for example, that where a property has been valued at £170,000 and the outstanding mortgage debt is £167,000, the official receiver should expect the proposed transferee to provide £3,000 in consideration of the proposed transfer.

A transfer should only be pursued where it is clearly in the interest of creditors to do so ( i.e. where it is anticipated that bankrupt’s interest is in excess of £1000, or where the amount of the bankrupt’s interest is less than this an offer in the region of £1000 has been received).

Generally, the transaction should take place without any speculation as to any possible change in value in the future. However, if the local property market is unstable or if the property has particular features that may affect the short term value, the official receiver may enforce a reasonable time scale such as 3 months for completion of the transaction. This may be appropriate where the official receiver is of the opinion that the proposed transferee is delaying the transaction in an attempt to benefit from variations in the property market. If the transaction is not completed within this period, the official receiver can refuse to be bound by the existing valuation and ask that the proposed transferee obtain a current valuation at his own expense.     

8) What about outstanding charges over the property?

Before the transaction to transfer a solely owned property has been completed, any charges outstanding over the property, such as the mortgage, must be dealt with. Generally, in the case of solely owned property, the mortgagees or charge-holders expect to be paid in full from the sale proceeds of the property. In the circumstances outlined in this part, where only a minimal sum will be paid over to the official receiver in consideration of the “sale” the mortgagees will not be paid anything at that time.

However, before proceeding with the sale, the official receiver must be satisfied that the proposed transferee has come to an arrangement with the existing mortgagees, who will usually consent to the transaction if an agreement has been made for dealing with their mortgage debt.

In the past, the mortgage debt has continued unofficially by agreement between the mortgagee and the proposed transferee, but this practice is unsatisfactory.

The official receiver should not become involved in any negotiations between the (former) bankrupt and the mortgagee(s), except to inform the (former) bankrupt by letter to take independent advice before entering into any arrangement with the mortgagee(s). A copy of the letter from the official receiver should also be sent to the (former) bankrupt’s legal representative instructed to act in the transaction. 

9) Dealing with the mortgagees

There are two ways for a bankrupt to resolve the problem of satisfying the mortgagees of the property, either by way of a re-mortgage with the current or another mortgagee or by acknowledging the debt as a post bankruptcy order obligation, probably by deed.

  1. A re-mortgage operates so as to cancel out the mortgage which existed at the date of the bankruptcy order and replace it with another, so that if the property was later sold at a shortfall, the mortgagee would have no provable claim in the bankruptcy.
  2. The acknowledgement of debt by deed allows for the continuation of the existing mortgage and would not have the same effect. In such circumstances, were the property to be sold at a shortfall, the mortgagee might have both a provable claim in the bankruptcy and a claim against the bankrupt under the deed of acknowledgement for any outstanding sum.

10) Assumption of responsibility for debts

Where an undischarged bankrupt comes to an arrangement with the existing mortgagees of a property to allow for a transfer of legal title to take place, he/she is likely to have to obtain credit and/or become liable for a debt which would generally have been released at discharge. The financial effect for the bankrupt of such an agreement should not concern the official receiver so as to prevent him/her from going ahead with the sale – it is a matter for the bankrupt and his advisors to consider.

In the same way, where a discharged bankrupt takes on the responsibility for a debt from which he was formerly released on discharge, the official receiver should not refuse to go ahead with the transaction.

11) What about other assets associated with the mortgage debt?

Official receivers should ensure that all parties to such a transaction are aware of the position being taken regarding all other assets related to the mortgage debt and the mortgaged property.

For example, in the case of an endowment policy charged or assigned to the mortgagee, the official receiver may wish to include the value of the policy as part of the negotiations to fix the value of the property to be bought by the proposed transferee, which may increase the consideration payable considerably. He/she may also wish to exclude the value of any such asset if, at the time of the transaction, it is not validly charged to the mortgagee and its value merely reduces an amount of negative equity and/or is not fully represented by the sale.

The official receiver should be aware that, even where there is no formal charge or assignment of the policy to the mortgagee, the likelihood is that an equitable charge exists over the policy, if it is clear from documentation that it was intended for the life policy to be used for repayment of the advance, and it will not be available for realisation as a “free” asset.

12) Will the transferred property be an after-acquired asset?

The view is that, for an official receiver to become involved in a “sale” of property to a bankrupt, only to claim it later as an after-acquired asset would be inequitable. Once the house has been transferred to the bankrupt, there is an unwritten understanding that, subject to any mortgage commitment, the bankrupt is entitled to enjoy unhindered ownership of the property without the official receiver as trustee making a claim over it. In the event of a subsequent failure, however, a claim would be made.

However, if the official receiver becomes aware that the transaction is being financed by a bankrupt from monies or assets which may have been withheld from the official receiver, or from surplus income that could have been subject to an income payments order, it can be claimed, even though this may defeat the property transaction, either as an after-acquired asset or via an IPO or IPA (undischarged bankrupts only).

13) Income Payments Agreement (IPA) and Income Payments Order (IPO)

The transfer of legal title in a solely owned property should not operate so as to affect the pursuit of IPA/IPOs in appropriate cases. If, in the opinion of the official receiver, the mortgage commitment taken on by an undischarged bankrupt is disproportionate to the type of property that he will continue to reside in (where it could be rented for less than the mortgage payment, for example), the official receiver should inform the bankrupt of this at the time that transfer of the property is first mooted. The official receiver should then seek an IPA/IPO  without completing the property transfer.

Where a choice has to be made by an official receiver, it is preferable to obtain an IPA/ IPO rather than to allow a property transaction which will mean that the bankrupt cannot meet the commitments to a mortgage.

For more information on the terms and conditions for an IPA please refer to the Case Help Manual part Income Payment Agreements. For information regarding the criteria to be considered when considering IPO, see the Case Help Manual part Income Payments Orders.

14) Cancelling Insurance

(Inserted February 2014)

The official receiver’s insurance, if any, must be cancelled when the property is sold or the legal title transferred. For further information see Case Help Manual part: official receiver’s insurance. 

Notes

a. It is not possible for a solicitor or licensed conveyancer to act for more than one party in any conveyancing transaction, and the official receiver should thus not suggest to proposed transferees that his/her solicitors can also act for them. The proposed transferee must find a different legal representative.

b. Official receivers should not agree to transfer the beneficial interest only in a solely owned property. Any property transaction which would leave the legal interest vested in the official receiver has no benefit to him/her. A request for the official receiver to do so must be rejected.

c. In the event that a bankrupt is the sole owner of a property occupied by tenants, the official receiver should seek legal advice at an early stage. Such properties are likely to require special consideration (See TM Chapter 31.11).

 

Where can I find out more?

Technical Manual:

Chapter 31.3 Dealing with freehold and leasehold properties

Chapter 31.3 Part 3

Chapter 50 Dealing with the Land Registry

Case Help Manual:

The Family Home

Freehold Property: Solely Owned – Registration of a Bankruptcy Restriction

Sale of Bankrupt’s Interest in Jointly Owned Property

Income Payments Orders

Income Payment Agreements

Technical Notices:

T57-10 - Revision to the way in which the family home is to be dealt with

Management Notice: M72-02 – Drive-by Valuations 

OROS Articles 

Assets:    Drive by valuations

Forms to be used:

LRRABO      Land Registry, register BO or amend registration

LRCBI         Land Registry, confirm bankruptcy restriction

MP1           Letter to bankrupt re purchase of OR's interest in property

MP2            Mortgaged Property (2)

MP3            Mortgaged Property (3)

 

Sale of Bankrupt's Interest in Solely Owned Property Flowchart 

 

Procedure

For those properties that have been recognised as the principal residence of the bankrupt,  the bankrupt's spouse or former spouse please refer, in the first instance, to the Procedural part of the Case Help Manual: The Family Home

1. Receive instruction from examiner to deal with solely owned property.

2. Send notice of bankruptcy order to all mortgagees and charge-holders, where not previously done, using form MP2 (ISCIS ‘Docs’ tab).  The mortgagees and charge-holders should be added to ISCIS using the ‘Assets’ tab).    

3. Check that the bankrupt is the sole owner of the property and, if it is a registered property, that a bankruptcy restriction has been registered by ordering an office copy of the register of title from the Land Registry.  (See CHM Part Freehold property: Solely owned property: registering a bankruptcy restriction)

4. If the bankrupt is not shown as the sole owner of the property and all address details, etc. are correct, record the findings on ISCIS (‘Assets’ tab) as a note against the relevant property and refer the file to the examiner/B1.

5. If no bankruptcy restriction has been entered in the register, check that form LRRABO (ISCIS ‘Docs’ tab) has previously been sent to the Land Registry. If not, send one immediately.

6. If it appears that the Land Registry has received all necessary documents and has acknowledged with the WO(B) number (ISCIS ‘Data Store’ tab), but no restriction is in place, send 2 copies of form LRCBI (ISCIS ‘Docs’ tab) - to the District Land Registry, quoting the address and title number.

7. For further detailed information on the registration of a bankruptcy restriction please refer to the Case Help Manual part Freehold Property: Solely owned - Registration of a Bankruptcy Restriction.

8. Where it appears that there is sufficient equity in the property and the circumstances outlined in introduction paragraph 1 are appropriate, a meeting of creditors must be called or an application for a Secretary of State appointment sought. Please follow the procedure set out in the Case Help Manual parts: Meeting: Calling a Meeting and Insolvency Practitioners - Appointment by the Secretary of State.

9. Where the official receiver remains trustee, forward form MP3 (ISCIS ‘Docs’ tab) to all known mortgagees and charge-holders. Check the details in the bankruptcy preliminary information questionnaire(PIQ), to ensure that none has been omitted.

10. If the property is the subject of repossession proceedings, the official receiver need take no further action once satisfied that the bankruptcy restriction has been registered and that the mortgagees are aware of the official receiver's interest.  Full details of any action taken with regard to the property should be recorded as a note on ISCIS (‘Assets’ tab) against the relevant asset entry.

11 Generally, where the official receiver is to remain trustee, and the bankrupt’s interest in the property is sufficient enough to be in the interest of creditors to realise then the letter ’offer to purchase’ form MP1(available on the ORBS intranet site) should be sent to the bankrupt. This letter informs the bankrupt that he or she may make an offer to purchase the official receiver’s interest in the property and have it transferred either back to the bankrupt or to a third party nominated by the bankrupt. NB In cases where the bankrupt owns a property or properties that are tenanted do not send form MP1 without specific instructions to do so from the examiner.

12 In dealing with any rental income from property where the insolvent, as owner of the property, is entitled to receive rent, see TM Chapter 31.11. The examiner should be asked to give consideration and provide instruction in this respect.

13 If necessary, on instruction from the examiner, write to the bankrupt informing him or her that the transfer is not available. If appropriate, refer to the procedure outlined in the Case Help Manual parts Income Payment Agreements and Income Payment Orders. See also Technical Manual – Chapter 31.3 Dealing with freehold & leasehold properties

14. The (former) bankrupt may approach the official receiver with a request to purchase the interest in a property. If it has been agreed that the property transfer is a possibility and would be in the interest of creditors, write to the (former) bankrupt informing him/her of the conditions that will have to be met before any property can be transferred MP7 (ISCIS ‘Docs’ tab). 

15. The (former) bankrupt must be informed in clear terms that he/she will be responsible for:

  1. All costs incurred in the transaction including the cost of valuing the property and both his/her own and the official receiver's legal costs. A cash deposit will be required before the official receiver takes any action to transfer the property although this deposit does not have to cover the transferee's own legal costs, for which he/she will be liable.
  2. Payment of the full "price" for the property as agreed with the official receiver.
  3. Arranging with the mortgagees to deal with the outstanding charges over the property to the satisfaction of the official receiver.

16. Before agreeing to a property transfer, the official receiver must ask the bankrupt to submit a current valuation of the property for the matter to be considered properly. It must be stressed to the (former) bankrupt that the official receiver will not bear the cost of the valuation. The main criterion is that the valuation must reflect the current market price of the property. It is possible that a valuation provided free of charge by a local estate agent in the belief that instructions to sell the property will be received, may be acceptable at the OR’s discretion. The examiner/B1 will be responsible for deciding what method of valuation is acceptable.

17. Ask the (former) bankrupt to provide the name and address of their solicitors or other legal representative who will be acting in the transaction.

18. Work out the sum that the (former) bankrupt will be required to pay in consideration for the transfer. This can generally be done in a straightforward manner by subtracting the value of the outstanding mortgages and charges from the valuation figure provided by the (former) bankrupt.

For instance, on a property valued at £165,000 with an outstanding mortgage of £155,000 and a second charge of £6,250, the sum required in consideration will be £165,000 less £161,250, which is £3,750.

However, bear in mind any other assets associated with the mortgage such as an insurance policy, the value of which may be taken into account and increase the consideration payable. Where appropriate, include this in the calculation. In the event of uncertainty refer to the examiner for approval.

19. Send a letter to the (former) bankrupt informing him/her of the sum he/she will have to provide the official receiver for the transaction to proceed. Mark the letter "Subject to contract".

20. The sum requested should be clearly broken down into the amount required in payment for the property.

21. Where there is any uncertainty as to how much will be needed to pay for the legal costs, ask the official receiver's solicitors to give an approximate figure. It is better to ask the (former) bankrupt for a sum which may subsequently require that a refund is made than to receive too small an amount and be forced to ask the (former) bankrupt for more money later.

22. The OR will need to see that there has been either a re-mortgage of the property or that there has been an acknowledgement of debt in the form of a deed by the (former) bankrupt.

23. Write to ask the (former) bankrupt for evidence that the debt to the existing mortgagees has been dealt with by him/her. Point out that the official receiver will not take part in any negotiations with the mortgagee(s) nor offer any advice as to the best course of action to be taken by the (former) bankrupt.

24. Inform the bankrupt, in writing, that he/she should take independent advice before entering into either a re-mortgage or acknowledgement of debt. Forward a copy of this letter to the bankrupt's legal representative dealing with the transfer.

25. Once the valuation has been received, pass it to the examiner/B1 for consideration as to its validity. If unsatisfied with the valuation provided, the official receiver can request that the (former) bankrupt provide another. The OR may consider using the services of King Sturge to provide a ‘drive by valuation’ the cost of which must be borne by the (former) bankrupt.

26. At the same time, pass the evidence supplied by the (former) bankrupt regarding settlement of the existing mortgage debt to the examiner/B1 for confirmation that it is acceptable.

27. Once confirmation has been received that the transaction can go ahead, ask the (former) bankrupt to let the official receiver have a cash deposit for the total costs and point out that, until that sum is received by the official receiver, no action will be taken to initiate the transfer.  If these funds are not received promptly it may be necessary for the transferee to have to produce up to date valuations.  If new valuations are required then the bankrupts interest in the property will need to be recalculated (See procedure 18).

28. When payment is received, ensure that the cashier posts the deposit to a suspense account and the property interest consideration to the main estate.

29. Instruct solicitors to act on the official receiver's behalf in the transaction. Provide the solicitor with full details of the case. This will include:

  1. official receiver's full name and address details, including the case officer's name;
  2. bankrupt's full name and address;
  3. details of bankrupt's solicitors;
  4. full mortgage details, including copies of the correspondence securing the existing mortgage debt;
  5. copies of any Land Registry searches undertaken by the official receiver.

Documents enclosed must include a certified copy of the bankruptcy order and proof that the official receiver is trustee together with any other relevant correspondence. Confirm that the official receiver is in receipt of funds to cover the legal costs and the agreed consideration.

30. Ask the solicitors to inform the official receiver once the transfer has been completed.

31. Once confirmation has been received, ensure that the legal costs are paid and that the consideration for the equity is posted to the appropriate estate ledger.

32. Cancel the official receiver’s insurance (including public liability), if any (inserted February 2014).

33. Return any overpayment of costs by the (former) bankrupt to him/her. Ensure that the suspense account has a nil balance and has been closed.

34. Note ISCIS ‘Assets’ tab with any information relating to the property, add appropriate text to any notes created on the ‘Notes’ tab within ISCIS regarding the property and file papers accordingly.