Freehold and/or leasehold property, sale or notice to elect
A bankrupt may be in the process of selling his/her interest in a property at the date of the bankruptcy order or shortly after. The official receiver will need to ensure that the interest of creditors is protected until a trustee is appointed. In this section when the term property is used it includes both freehold and leasehold premises.
The official receiver can intervene to stop the sale of the premises in order to protect any property which may be claimed for the estate by the trustee [Note 1]. However, before doing so, the official receiver should ensure that his/her refusal to allow the sale to proceed does not result in a loss to the estate. A loss to the estate may be incurred where the costs of re-selling the property together with a possible increase in mortgage arrears due to the delay in the sale result in reduced or negative equity. To ensure the official receiver is not subject to a negligence claim from the trustee, advice should be sought from his/her agents as to whether the agreed sale price is fair and, if the sale did not proceed, whether a new purchaser could be easily found.
Where the official receiver has established that the agreed sale price is substantially below the market price and there is no apparent reason for this, for example the poor condition of the property, the official receiver should intervene to prevent the sale [Note 2]. The failure of the official receiver to prevent the sale of the bankrupt’s interest in these circumstances could result in an action for negligence being brought by the trustee.
If the issues surrounding the sale of his/her interest in a property by the bankrupt are complicated or time consuming the official receiver should consider applying to the Secretary of State for the appointment of an insolvency practitioner as trustee [Note 3]. A Secretary of State appointment would only be possible after the official receiver had become trustee after issuing a notice of no first meeting of creditors. Further information is provided in Chapter 17 part 5.
The official receiver, as receiver and manager, should not be a party to the sale of the bankrupt’s interest in any property. The bankrupt’s interest in solely owned property only vests in the official receiver upon him/her becoming trustee. The legal title in a jointly owned property vests in the owners as joint tenants and is not severable. It is therefore, only the bankrupt’s beneficial interest and not the legal title which will vest in the trustee. See Chapter 31.3, Part 4 for a detailed explanation, in particular paragraphs 31.3.13 to 31.3.14.
It is possible that a third party, usually the bankrupt’s spouse, civil partner or partner may have a beneficial interest in a solely owned property. Where the official receiver is satisfied as to the existence of the third party beneficial interest he/she deal with the property as if it were jointly owned (see paragraphs 24.85 to 24.89). Chapter 31.3, Part 4 provides detailed guidance on calculating a third party’s beneficial interest in a solely owned property.
Where the official receiver is satisfied that a solely owned property is being sold with no third party beneficial interest and the sale price is fair, the bankrupt’s solicitors should be asked to hold the net sale proceeds to his/her order pending the appointment of a trustee. The official receiver should inform the bankrupt and his/her solicitors that an application to court must be made to gain its consent to the sale of the property [Note 4]. The official receiver should support or not oppose the bankrupt’s application.
Where the official receiver is satisfied that a jointly owned property is being sold and the sale price is fair, the joint owners’ solicitors should be informed to hold the bankrupt’s share of the net sale proceeds to his/her order pending the appointment of a trustee. The bankrupt does not need to obtain the consent of the court for the sale of the property to proceed [Note 5].
It is probable that the sale of the bankrupt’s interest in a solely owned or jointly owned property will be part of a chain of transactions. Invariably the sale proceeds will be used to finance, or partially finance, the purchase of anther property. The response of the official receiver will depend on whether contracts have been exchanged.
Where the exchange of contracts have occurred there will be a legal obligation to complete the transaction(s). The official receiver should not attempt to prevent the completion of the sale in these circumstances unless he/she is advised that the agreed sale price is substantially below the market price for no apparent reason. The official receiver should only stop the sale if he/she is absolutely certain that the costs arising from the breach of contract(s) are substantially less than the potential sale at an undervalue [Note 6]. If the sale has not been completed by the time the official receiver is appointed trustee he/she should consider disclaiming his/her interest in the contract [Note 7]. If a trustee other than the official receiver is appointed his/her attention should be drawn to the transactions.
Whilst the exchange of contracts may have occurred the official receiver may intervene to prevent the completion of the purchase if he/she believes that the purchase will result in a depletion of the estate. This is because solicitor’s fees, Land Registry fees and stamp duty would be payable in connection with the purchase. The official receiver would need to balance the potential depletion of the estate against the probable costs of preventing the completion of the purchase. The vendor may sue for specific performance or bring an action for damages against the official receiver. The vendor will also be entitled to retain any deposit paid. A failure by the official receiver to prevent the purchase may result in a negligence action being brought against him/her by the trustee therefore each case should be considered on its merits.
Where the official receiver decides that the purchase can proceed he/she should inform the proposed mortgagee of the bankruptcy proceedings. If the mortgagee subsequently provides the funds necessary for the purchase the official receiver should not consider this an offence of obtaining credit [Note 8]. Any property purchased after the date of the bankruptcy order will not qualify as a family home and the bankrupt’s interest will form part of his/her estate [Note 9].
Where the official receiver believes that a jointly owned property may be at risk he/she should write to the mortgagee and/or other charge holders, if known, informing them of the bankruptcy and asking them to hold the bankrupt’s interest in any sale proceeds to the his/her order. The official receiver should also issue a notice of no meeting and as trustee register Form J and Form A restrictions with the Land Registry. Further details issuing Form J and Form A restrictions can be found in Chapter 50, part 7. For more details on the appointment of liquidators and trustees see Chapter 17.
The official receiver, as receiver and manager, is unable to accept a landlord’s attempt to serve a notice to elect in respect of rented residential property. The notice to elect must be served upon the trustee [Note 10]. The official receiver should inform the landlord and/or his/her solicitors that service of the notice to elect can only be accepted by the trustee. The official receiver should undertake to supply the landlord with the name and address of the trustee on his/her appointment to enable the matter of the disclaimer to be considered. A notice to elect served upon a receiver and manager does not become effective on the appointment of a trustee.