PART 5
April 2013
REALISATION OF THE INSOLVENT’S INTEREST IN A PROPERTY
31.3.153 Realisation of property - general
This Part provides advice to assist official receivers when dealing with the realisation of the insolvent’s interest in a property.
It is rare for a company to own (rather than lease) property, but the general principles in this Part may also be followed where the official receiver is dealing with company property. Paragraph 31.3.193 gives guidance on issues of particular relevance to company property. Guidance on the realisation of leases is in Part 13.
Most properties owned by the bankrupt will be the family home, for which there are special provisions (see paragraph 31.3.155). There are also special provisions in relation to ‘low value homes’ (essentially those where the bankrupt’s interest is below £1,000). Guidance on low value homes is in Part 6.
This Part contains the following guidance:
The official receiver should also consider the advice in Part 7 where he/she is dealing with a freehold property which has leaseholders.
Part 4 gives guidance on the valuation of the bankrupt’s interest in a property, to which valuation the advice in this Part can be applied.
31.3.155 Realisation of the bankrupt’s property – the family home
It is likely that the vast majority of properties in which the bankrupt has an interest will be a family home (see Part 3) and official receivers should note that unless the interest is dealt with (see paragraph 31.3.83) (which includes realising the interest - see paragraph 31.3.156) within three years (see paragraph 31.3.80) that interest will be lost to the estate (see paragraph 31.3.72).
31.3.156 ‘Realisation’ in the context of the family home
It has been held that the realisation of the bankrupt’s interest in the family home can only mean to turn the interest into money at the time, and not later [note 1]. This would mean that a sale (assignment) of the bankrupt’s interest for future consideration would not stop the property re-vesting in the bankrupt (see paragraph 31.3.72) at the end of the relevant term (see paragraph 31.3.80) [note 2].
It is not necessary for the official receiver, as trustee, to realise the property him/herself. It will be sufficient where the property is realised by, for example, the mortgagee in possession [note 3].
31.3.157 Official receiver unable to obtain release until property dealt with
The official receiver will be unable to obtain his/her release as trustee (see Chapter 37) until an interest in the family home has been dealt with [note 4] (see paragraph 31.3.83).
31.3.158 Basic process for realising the bankrupt’s interest in a property
The basic process for the realisation of the bankrupt’s interest in a property is that (subject to a minimum property value – see paragraph 31.3.159) a letter [note 5] is sent to the bankrupt and/or any joint owner to establish if any party wants to make an offer for the bankrupt’s interest (guidance on this process, and the subsequent sale, is in paragraphs 31.3.159 to 31.3.173).
If no such offer is received, the property interest will be passed to the LTAU to review (see paragraph 31.3.172), unless the bankrupt’s interest is significant – in which case the appointment of an insolvency practitioner should be sought (see paragraph 31.3.173). It is not anticipated that the official receiver will seek an order for the possession of a bankrupt’s property, though he/she has the power to do so (see paragraph 31.3.184).
31.3.159 Inviting offers to purchase the insolvent’s interest in the property
Assuming the bankrupt’s interest in the property is over £1,000 (see paragraph 31.3.161), consideration should be given by the official receiver, as trustee, to sending a letter [note 6] to the bankrupt and any joint owner inviting an offer to purchase the bankrupt’s interest in the property.
There is no standard procedure or letter such as this for companies, but the official receiver may offer to dispose of a property interest to a party connected to the company if he/she believes that this will be in the interests of creditors.
31.3.160 Content of standard offer letter to bankrupts
The standard letter to bankrupts (see paragraph 31.3.159) makes it clear to the bankrupt and/or joint owner that if a sale of the interest is not conducted, and if no other arrangements are made to transfer the interest then the official receiver, as trustee, may take action to deal with the interest at any point during the period that it vests in him/her, as trustee (see paragraph 31.3.80). The letter sets out the process for the transfer.
The letter asks the bankrupt/joint owner to acknowledge receipt, which acknowledgment should be recorded in the case notes on ISCIS. A failure to return the form should not delay discharge.
31.3.161 Minimum value required to offer sale at initial stage
If the case is in the initial stages, any letter inviting an offer to purchase the official receiver’s interest (see paragraph 31.3.159) should only be sent where the insolvent’s interest in the property exceeds £1,000 (see also Part 6).
31.3.162 Early redemption fees and right to buy charges not to be included in calculation of bankrupt’s interest
The official receiver should not include mortgage early redemption fees or council right to buy charges in the calculation of a bankrupt’s interest in a property for the purpose of inviting offers, as these fees would not be encountered in the alternative means of realisation – i.e., a charging order.
31.3.163 Future increases in property
Any future general property value fluctuations should not be taken into consideration in respect of the calculation of the insolvent’s interest in a property
31.3.164 Considering an offer to purchase the insolvent’s interest
In order to assess whether any offer to purchase the insolvent’s interest in the property is fair and in the interests of creditors to accept (see paragraph 31.3.165), the official receiver will need to establish the level of the insolvent’s interest in the property. The official receiver will need to take into account:
31.3.165 Sale to be in the interests of creditors
Before accepting any offer, the official receiver should be satisfied that the offer represents a good deal for the creditors, based on the current value of the property interest to the estate,
It has been held that a bankrupt's creditors had an interest in an order for sale being made (see paragraph 31.3.184) regarding a property notwithstanding that the entirety of the bankrupt's share in the net proceeds of sale might be swallowed up in defraying the expenses of the bankruptcy and it was in the interests of the creditors that the expenses of the bankruptcy be discharged as far as possible out of the bankrupt's assets [note 7] [note 8].
The official receiver should also ensure that the offer is above the minimum level of £1000 (see paragraph 31.3.161).
31.3.166 Competing offers for the interest
Where there are competing offers for the insolvent’s interest in the property, the official receiver should go with the offer that will provide the best return for creditors (which may be an offer for a lower amount, but payable immediately). Where the competing offers are equal, the official receiver, as liquidator or trustee, should, as a matter of policy, favour any offer that originates from, or is on behalf of, an occupier of the property.
31.3.167 Acceptance of the offer
Assuming that it is in order to accept the offer to purchase the insolvent’s interest (see paragraph 31.3.165), the official receiver should ensure that the proposed purchaser undertakes to provide a sum equivalent to the necessary costs (see paragraphs 31.3.179 to 31.3.180) before instructing solicitors (see paragraphs 31.3.174 to 31.3.178). The sum to be paid in consideration should also be agreed (‘subject to contract’ – see paragraph 31.3.176) at this stage, before instructing solicitors.
The official receiver should make it clear to the proposed purchaser that, if the transaction is aborted due to his/her failure to complete the purchase, he/she will remain liable for the official receiver’s legal costs (that is, the legal costs and those of any valuation which was carried out).
31.3.168 Acceptance of offer to be marked ‘subject to contract’
Where the official receiver, as liquidator or trustee, accepts an offer to purchase the insolvent’s interest in the property, any written acceptance (including e-mails) should be clearly marked ‘subject to contract’.
Similarly, any written communication discussing the possibility of sale should also be marked ‘subject to contract’.
31.3.169 Acceptance of offer – solely owned property
In addition to the conditions set out in paragraphs 31.3.167, the official receiver should additionally be satisfied that arrangements have been made by the bankrupt or other proposed transferee to deal with the outstanding charges on the property – for which they will become liable as the legal owner.
31.3.170 Limited period of acceptance of offer
When accepting a offer to purchase the insolvent’s interest in a property, the official receiver should make it clear that the agreement is for a limited period (normally, a period of three months from acceptance is appropriate). The official receiver is at liberty to review the position in the event of any delay exceeding this period which will allow him/her to restart the negotiation (seeking a new valuation as appropriate) in the event of local volatility in the property market, or similar.
31.3.171 Insolvent’s interest worth over £1000 with a willing purchaser – transfer of case to LTAU for realisation
Where the insolvent’s interest in a property is over £1,000 and there is a willing purchaser who has made an offer that is in the interest of the creditors to accept (at least £1,000) and, therefore, the realisation of the property is not likely to be protracted, the property should be transferred to LTAU for realisation of the interest (see paragraph 31.3.11).
The fact that the case is on the investigation register need not prevent the property being transferred to the LTAU as there is the facility on ISCIS for the administrative and investigatory aspects of the case to be separated.
31.3.172 Insolvent’s interest has no value and/or interest below £10,000 and no willing purchaser – transfer of case to LTAU for monitoring
Where the insolvent’s interest in a property is below £1,000, or where it is between £1,000 and £10,000 and there is no willing purchaser who has made an offer that is in the interest of the creditors to accept (at least £1,000), the property should be transferred to LTAU for review at the two year, three month stage (see Part 8).
The fact that the case is on the investigation register need not prevent the property being transferred to the LTAU as there is the facility on ISCIS for the administrative and investigatory aspects of the case to be separated.
31.3.173 Insolvent’s interest over £10,000 and no willing purchaser – appointment of IP
In cases where the insolvent’s interest is greater than £10,000 and there is no willing purchaser for the interest, the official receiver should seek the appointment of an insolvency practitioner as liquidator or trustee, following the guidance in Chapters 16 or 17, as appropriate.
The figure of £10,000 is given as a guide, and may vary depending on local conditions and the stance of local insolvency practitioners. In some cases a lower figure may be sufficient to attract an insolvency practitioner or, conversely, a higher amount may be required.
It might also be appropriate to seek the appointment of a liquidator or trustee where there is a willing purchaser but there are other complex assets in the case, or if the level of the insolvent’s interest in the property in dispute and there are insufficient funds to seek legal advice (see Part 4).
31.3.174 Appointment of solicitors to deal with transfer of interest – jointly owned bankruptcy property
Where, in respect of a jointly owned property, an offer has been received that is in the interest of creditors to accept, and the conditions outlined in paragraphs 31.3.165 and 31.3.167 have been satisfied, the solicitors (see Annex C) appointed under the terms of the property conveyancing scheme must be instructed (see paragraph 31.3.175) to deal with the transfer provided:
31.3.175 Appointment of solicitors under the property conveyancing contract – other factors – jointly owned
Assuming the conditions outlined in paragraph 31.3.174 apply, the solicitors currently engaged under the property conveyancing scheme should be employed even if some, or all, of the following conditions apply:
31.3.176 Appointment of solicitors under property conveyancing scheme – practicalities
Where the official receiver is instructing solicitors under the property conveyancing scheme (see paragraph 31.3.174), the standard form of instruction [note 9] should be used. Generally, the solicitors work to the expectation that the transaction will be completed within five months of the instruction. If there is a need for the transaction to be completed sooner than that, this should be pointed out in the form of instruction, along with the reasons. The solicitor will then inform the official receiver if completion within the shorter period is realistic.
31.3.177 Appointment of solicitors to deal with transfer of interest – solely owned or company property
Where the property is solely-owned or owned by a company in liquidation, the official receiver is not obliged to instruct the solicitors under the property conveyancing scheme. The solicitors appointed under this scheme have indicated that they will be prepared to act on the official receiver’s behalf in the sale of an interest in a solely owned property and the fee they charge for this work is likely to be constant. The solicitors may also be prepared to act in the sale of a company property.
31.3.178 Appointment of solicitors where the property conveyancing scheme does not apply
The official receiver may instruct any solicitor to deal with a conveyance (rather than appointing under the property conveyancing scheme – see paragraph 31.3.174) in the following circumstances:
Chapter 32.2, Part 1 provides guidance on the appointment of solicitors.
31.3.179 Costs of appointed solicitors – property conveyancing scheme
The amount required by the solicitors engaged under the property conveyancing scheme (see paragraph 31.3.174) is £211 for each instruction given; this includes the fixed fee of £203 (inclusive of VAT) and an allowance of £8 for disbursements. The contract with the solicitors is in place until 2015, and there is not expected to be a fee increase before that date.
If these solicitors are appointed outside of the property conveyancing scheme (see paragraph 31.3.180), then the costs are likely to be higher – probably in the region of £400 plus VAT.
31.3.180 Costs of appointed solicitors – outside property conveyancing scheme
If the solicitor is not being appointed under the property conveyancing scheme (see paragraph 31.3.174), it will be necessary to agree the costs prior to instruction.
The official receiver should seek to have the costs paid directly to the solicitors appointed by the proposed purchaser or their solicitors, so that the monies do not have to be handled by the official receiver.
The costs should be provided for by the purchaser (see paragraph 31.3.167, or come from the sale proceeds, i.e., there should be a net benefit from the sale to the insolvent estate.
31.3.181 After-acquired property following transfer – bankruptcy only
It is technically possible for the official receiver, as trustee, to claim a property interest that has been transferred (back) to a bankrupt by the official receiver, as trustee, if the transfer takes place before discharge [note 10].
It is considered to be inequitable for the official receiver to make such a claim. Once the property interest has been transferred, there is an understanding that the bankrupt is entitled to enjoy unhindered ownership of the property without the official receiver, as trustee, making a subsequent claim over it.
The exception to this is where it comes to the official receiver’s attention that the transfer was funded by undeclared assets or undeclared income, or where the valuation was shown to be inaccurate. The property may then be claimed as after-acquired property (see Chapter 31.8).
31.3.182 Property repossessed by mortgagee
(Amended February 2014)
Where the property has been repossessed by the mortgagee (see paragraph 31.3.33) company but has not yet been sold, the mortgagee should be put on notice of the official receiver’s interest in any surplus sale proceeds, using the standard letter [note 11].
When the mortgagee obtains possession the official receiver should cancel any insurance he/she has obtained on the property in accordance with paragraph 49.27B. The official receiver should inform the charge-holder that his/her insurance has been cancelled.
Where the property has been taken into possession and sold, the official receiver should obtain a copy of the completion statement from the mortgagees and should claim the insolvent’s share of any surplus following sale.
(Amended February 2014)
The mortgagee in possession has a duty to take reasonable care to ensure that the price at which the property is sold is the best price which could be achieved [note 12][note 13]. It is possible for the official receiver, as liquidator or trustee to apply to court to stop the sale of a property by a mortgagee, but this should not be considered unless there is compelling evidence that the sale is being conducted significantly under market value. Sanction (see Chapter 29) would be required for such an application.
If the official receiver, as liquidator or trustee, is requested by a secured creditor (or a receiver appointed by a secured creditor) to transfer or convey a property, he/she should charge the appropriate remuneration on a time and rate basis (see paragraph 36.43) and instruct solicitors to act in the sale. The official receiver should ensure that the chargeholder gives a written indemnity (and, if possible, a cash deposit) to cover all the expenses in connection with the sale.
31.3.184 Sale of property - general
The official receiver, as trustee, has the power to apply to court for the sale of the insolvent’s property [note 14] [note 15] [note 16] [note 17]. It is not anticipated that the official receiver will make such applications and, before following the advice in the following paragraphs, he/she should seek permission of Technical Section, who will grant sanction/permission (see Chapter 29) as appropriate.
31.3.185 Considerations for the court when an application for sale of the family home is made
The court, when considering an application for the sale of the bankrupt’s family home, will have regard to [note 18]:
After one year has passed the court assumes that, unless there are exceptional circumstances (see paragraph 31.3.186), the interests of the bankrupt’s creditors outweigh all other considerations, and the order will be given. The rights of the creditors are also considered paramount to any matrimonial or civil partnership proceedings home rights [note 19] [note 20] (see paragraph 31.3.188), and to the rights of occupation of the bankrupt [note 21].
31.3.186 Exceptional circumstances which might prevail over the interests of the creditors
The courts have largely taken a narrow view over what might constitute an exceptional circumstance leading to it taking the view that the rights of the bankrupt and his/her dependents outweigh the rights of the creditors beyond one year (see paragraph 31.3.185).
Family hardship caused by the bankruptcy is not considered an exceptional circumstance. The hardship suffered by a wife and children of a bankrupt when the family home is taken is deemed distressing on the parties concerned, but not exceptional [note 22]. Exceptional circumstances have been found to be present where there is illness [note 23], including mental illness [note 24]. The need for the bankrupt’s wife to care for her terminally ill husband has also been held by the court to be an exceptional circumstance [note 25]. Exceptional circumstances were also found where a bankrupt’s spouse is disabled and in poor health. The court may make an order postponing the sale of the property until an ill/disabled person has died or chosen to leave the property [note 26]. In a case concerning a property in which a disabled child was resident, the court delayed the sale for a period of three years [note 27].
31.3.187 Considerations under the Human Rights Act where official receiver is seeking an order for sale
The court has held that the protections afforded under the Act (see paragraph 31.3.185) mean that the power of the trustee to seek an order for sale of a property are not at odds with the protection of family rights available under the Human Rights Act [note 28] [note 29], unless there is a (very) late application for an order for sale, in which case the court will consider the merits of the application for possession/sale [note 30]
31.3.188 Matrimonial or civil partnership ‘home rights’
The term ‘home rights’ relates to legislative provisions [note 31] providing that, where one spouse or civil partner has no ‘legal’ right (as owner, for example) to occupy the property, but is nevertheless in occupation, he/she has the right not to be evicted from the property except by order of court.
Such home rights may also apply to the children of the bankrupt, in certain circumstances.
Co-habitants who are not spouses or civil partners generally do not have these rights unless there is an occupation order in force.
31.3.189 Matrimonial or civil partnership ‘home rights’ and bankruptcy
Any home rights (see paragraph 31.3.188) are binding on the official receiver, as trustee, and such rights apply to all property which the bankrupt’s spouse/civil partner was entitled to occupy the day before the petition was presented. The home rights give the spouse/civil partner and/or children an effective charge over the bankrupt’s interest and an order of court will be required to evict them prior to any sale.
Home rights are only likely to cause difficulty to the official receiver where he/she is dealing with the forced sale of a bankrupt’s property. Such a sale is outside The Service policy (see paragraph 31.3.184). In the unlikely circumstances that such a sale is being considered, and home rights are likely to be a factor in that sale, the advice of Technical Section should be sought.
The official receiver may need to take into account the principles of equitable accounting when dealing with the sale of a property (see paragraphs 31.3.147 to 31.3.152).
31.3.191 Council tax liability where property taken into possession by official receiver
Where a property is unoccupied, it is generally the legal owner of the property that is liable for the council tax (see paragraph 40.5). A property is however exempt from the council tax provisions where the liable person is a trustee in bankruptcy in possession [note 32]. These exemptions apply even where the trustee is jointly liable with another, but do not apply to a liquidator in possession, with the liability remaining with the company.
31.3.192 Conveyance of property generally
The legislation [note 33] provides that a contract for the sale or other disposition of property must be in writing and signed by both parties.
31.3.193 Conveyance of a company property
The official receiver has the power, as liquidator, to convey its property [note 34]. Where the company has a company seal, it may be used when executing the conveyance, assuming it has been recovered [note 35] [note 36]. If it has not been possible to recover the seal, it is usually possible to obtain a replacement seal from a local rubber stamp manufacturer or from a company operating on the internet. The target cost for a simple hand seal should be in the region of £20.
Where the company does not have a seal, or it has not been possible to recover or obtain replacement of the seal, the official receiver is still able to execute a conveyance if, and only if, it is delivered as a deed [note 37]. Guidance on the completion of conveyance by deed is produced by the Land Registry (http://www.landregistry.gov.uk/professional/guides/practice-guide-8 - paragraph 8.5 provides guidance relating to liquidations).
31.3.194 Conveyance where bankrupt as joint owner absent
Occasionally, if the whereabouts of a bankrupt are unknown and the joint-owner wishes to sell the property, they may request that the official receiver, as trustee, ‘stand in the shoes’ of the absent bankrupt for the purposes of the conveyance. The legislation provides that the court can make an order to facilitate this [note 38] [note 39]. The joint beneficial owner, as trustee, has the power to appoint a replacement trustee in court, instead of applying for such an order.
The official receiver, as trustee, should not proceed with such a conveyance without legal advice, the costs of which should be provided by the joint-owner. The official receiver should also ensure that the bankrupt’s beneficial interest in the property is accounted for in the prospective sale.
31.3.194A Cancellation of insurance on completion of sale
(Amended February 2014)
On completion of the conveyance the official receiver should cancel any insurance he/she has obtained on the property within 5 working days of completion. Further details on cancelling insurance is contained in paragraph 49.27B.
31.3.195 Corporation tax and capital gains tax
Corporation tax is payable in relation to any profit derived from the sale of company property (http://www.hmrc.gov.uk/ct/index.htm). It is payable as a expense of the liquidation whether the property is sold by the liquidator, secured creditor or receiver [note 40].
Where a property that is not the family home (see Part 3) is sold, there may be a liability for capital gains tax. Generally, this will apply where the official receiver, as trustee, is selling a bankrupt’s commercial property, investment property or second/holiday home, but it is equally payable as an expense of the estate if the property is sold by the trustee, secured creditor or receiver [note 41] [note 42] (see also Chapter 36, Part 3).
A liability for capital gains tax is calculated as a percentage of the profit achieved on the sale (the current calculations are available on the HMRC website - http://www.hmrc.gov.uk/cgt/property/calc-cgt.htm).
[Back to Part 4 – Valuation of the property and establishing the insolvent’s interest in the property – including equitable accounting] [On to Part 6 – Low value homes – bankruptcy only]