One of the criticisms of the old insolvency regime was that a Trustee in Bankruptcy (“the trustee”), who had failed to immediately realise their interest in a bankrupt’s family home, was able to recover this interest several years after the date of discharge of the bankruptcy order.
In most cases, this interest would have increased substantially in value due to recent spiralling property prices. Amendments introduced by the Enterprise Act 2002 seemed to address the balance more in favour of the bankrupt. Section 261 of the Enterprise Act 2002 amended the Insolvency Act 1986 (“the Act”) by adding a new section 283A, which came into force on 1 April 2004. Under this new provision where a bankrupt, who at the time of his bankruptcy, had an interest in a dwelling house that is a sole or principal residence of the bankrupt, or the bankrupt’s spouse or former spouse, then his or her trustee must have taken specified steps to realise the bankrupt’s former interest in this property within three years of the date of the bankruptcy order. If the bankrupt fails to disclose to his trustee or the official receiver his interest in the property within three months commencing from the date of the Bankruptcy Order, then the three year time period shall not run until the trustee or official receiver is notified of the bankrupt’s interest.
The specified steps that the trustee must take are as follows:-
- realise the bankrupt’s former interest in the family home; or
- apply for an order for possession and/or sale of the family home; or
- apply for an order under section 313 of the Act for a charge on the family home for the benefit of the bankrupt’s estate; or
- reach an agreement with the bankrupt that the bankrupt shall incur a specified liability to his estate in consideration that the family home shall cease to form part of the estate.
If the trustee fails to take any of the above steps within the stipulated time period, then the bankrupt’s former interest will automatically re-vest in the bankrupt on the expiry of that time limit. Section 283A(6) of the Act does allow a trustee to apply to court to extend the three year period in such circumstances as the court thinks appropriate. Consequently, it is essential that the trustee does not delay in obtaining the necessary information to ascertain whether he or she has an interest in the bankrupt’s family home.
Establishing if the trustee has a beneficial interest in the bankrupt's family home
Property held in the sole name of the bankrupt
If the legal title to the family home is held in the sole name of the bankrupt, then there is the presumption that the entire beneficial interest in the property was owned solely by the bankrupt. Upon the trustee’s appointment, the bankrupt’s legal and beneficial interest in the property vests in the trustee. However, the above presumption is rebuttable and not withstanding the fact that the property was purchased in the full name of the bankrupt, it may in reality be held on trust for other beneficial owners. Often in the case of the family home, the bankrupt’s spouse or partner (“non-bankrupt party”) will have beneficial interest in the family home on the basis of his or her contributions to the purchase of the home. The nature and extent of the bankrupt’s beneficial interest in the property will depend upon whether the bankrupt and non-bankrupt party had a common intention before or at the time the property was purchased to share the beneficial interest in the home. This common intention or agreement may be expressed in writing, such as a declaration of trust, orally or in some circumstances will exist by implication. Provided that the non-bankrupt party claiming an interest in the property is able to show that he or she acted to their detriment in reliance on this agreement, then a beneficial interest under a constructive trust arises. However, even if a common intention is not established, provided that the non-bankrupt party claiming an interest in the family home is able to prove a contribution to the purchase price, a resulting trust may be imposed (see Lloyds Bank Plc v Rosset ).
Express constructive trust
When faced with a non-bankrupt party seeking to assert his or her interest against the family home, the trustee firstly needs to establish whether there is an expressed declaration of trust confirming that the beneficial ownership of the property is to be shared. The declaration of trust may be set out in the transfer, such as the Land Registry transfer form “TR1”, which is filed at the Land Registry or a formal declaration of trust may have been drawn up at the time the family home was purchased. A written declaration of trust is generally considered to provide conclusive evidence of the parties intention. More often than not, the co-owning parties claim that the common intention to share the beneficial interest was expressed orally but they must show that the non-bankrupt party acted to his/her detriment relying upon this oral agreement.
Implied constructive trust
If there was no express agreement, the courts may infer that the non-bankrupt party was intended to have a beneficial interest deriving from the conduct of the non-bankrupt party, such as a direct or indirect contribution to the purchase price of the property or payments towards the mortgage, provided always that this express or implied intention was coupled with the non-bankrupt party acting to his/her detriment in reliance on the common intention. Examples of both direct and indirect contributions and detrimental reliance which have been held by the court gives rise to a beneficial interest include:
- payments towards the deposit on a property;
- mortgage repayments;
- expenditure incurred in improving the property which is not limited to mere maintenance;
- substantial contributions to the parties household expenses, allowing the legal owner of the property to make the mortgage payments (see Grant v Edwards );
- payments made into a joint account used to fund the mortgage and household expenses;
Even undertaking physical labour on substantial renovation works may be treated as giving rise to an interest (see Eves v Eves ).
Even if there were no express or implied agreements as to the sharing of the beneficial ownership of the property, the non-bankrupt party may be able to establish that he/she has a beneficial interest in the family home held under a resulting trust in the absence of any evidence to the contrary. For a resulting trust to be imposed, there must have been a direct contribution to the purchase price of the property by the non-bankrupt party, such as a payment towards the deposit, or the legal or conveyancing expenses incurred in purchasing the property or a contribution towards the mortgage repayments. In some cases, it may be possible to argue that a resulting trust does not arise, if there is evidence indicating that the direct contribution to the purchase price was in reality a gift or a loan. This is referred to as a “Presumption of Advancement” (see Gissing v Gissing ) but this presumption does not apply as between unmarried parties or to transfers by a wife to her husband.
Property in sole name of non-bankrupt party
The above principles apply even if the family home is registered in the sole name of the non-bankrupt party. The trustee may be able to establish that the bankrupt had a beneficial interest in the family home based on direct or indirect contribution to the purchase price of the property by the bankrupt. The trustee will also need to consider whether the bankrupt has transferred any interest that he may have had in the property to the non-bankrupt party or a third party at an undervalue, contravening section 339 and/or 423 of the Insolvency Act 1986. Often it is the case that the trustee has an uphill struggle in establishing a resulting or constructive trust in such cases since the parties are unlikely to assist him or her in establishing a common intention to share the beneficial ownership.
Property held in joint names
Nowadays it is more common for properties to be jointly owned by spouses or co-habiting parties. Where the legal title to a property is held in joint names, then in the absence of evidence to the contrary, there is a presumption that the beneficial interest in the property is shared equally between the parties.
Once the trustee has ascertained the extent of the bankrupt’s former interest in the family home, he may then need to take an equitable account between the beneficial owners. Equitable accounting principles allow the court to take an account of expenditure incurred on the property to establish whether one co-owner has contributed more than his/her fair share towards the value of the property. This account does not alter the extent of the beneficial shares but determines the amount for which a co-owner should give credit to another co-owner in respect of expenditure incurred on the property. As confirmed in the case of Re Pavlou , the guiding principle is that a co-owner cannot take the benefit of an increase in the value of a property without making an allowance for what has been spent on the property by the other co-owner to obtain this increase.
Mortgage capital repayments
In the case of Re Pavlou, the family home was in the joint names of the husband and wife. The marriage broke down and the husband left the home. The wife met all the mortgage payments thereafter and the husband was subsequently adjudicated bankrupt. The wife sought credit for the mortgage capital and interest repayments. The court held that the wife was entitled to credit for one half of the capital repayments made by the wife since she became solely responsible for the mortgage payments and not merely from the date of the bankruptcy order.
Mortgage interest repayments
With regard to mortgage interest payments, in the cases of Re Gorman  and Re Pavlou, the court directed that a separate account should (if required) be taken of mortgage interest payments by the non-bankrupt party and the occupation rent owed by the non-bankrupt party to the trustee in consideration of the non-bankrupt party’s sole occupation of the property or use of the bankrupt’s/trustee’s share of the home. In both cases it was conceded that the mortgage interest payments could be set off against an occupation rent for the period following the bankruptcy order. In both cases, the husband had left the home. The decisions were upheld in the case of Byford v Butler ) where the court confirmed that where a non-bankrupt co-owner seeks to recover mortgage interest repayments, even where the bankrupt has not been excluded and is still living at the property, the trustee is entitled to set off for occupational rent against those mortgage interest payments.
In the case of Re Pavlou, it was held that the non-bankrupt spouse was entitled to receive credit in respect of the costs of the improvements to the property that actually enhanced the value of the property. She was either entitled to be credited for one half of the costs of the improvement works paid by her before and after the bankruptcy order, that increased the value of the property or for half the increase in the value of the property which arose as a direct result of such works, which ever was the lesser.
Operation of equitable accounting
In the case of Clarke v Harlowe  it held that equitable accounting commences at the date of separation of the co-owners. By way of background, Ms Clarke and Mr Harlowe purchased a property that was declared on the transfer to be held on trust as joint tenants. Mr Harlowe being the higher wage earner paid all the mortgage instalments and refurbishment costs to the property. Following the breakdown of the relationship the property was sold and Mr Harlowe relying on principles of equitable accounting sought a greater than 50% share of the net proceeds of sale in respect of the improvement costs paid by him.
In this particular case the arrangement between the parties was that the mortgage payments and the improvement costs were to be met by Mr Harlowe and there was no suggestion that Ms Clarke was under any obligation to reimburse Mr Harlowe for any part of these payments. The payments were in accordance with the arrangements between the parties and common purpose of the implied trust. Consequently, there was no breach or failure to comply with those arrangements on Ms Clarke’s part and equitable accounting did not operate such as to require Ms Clarke to contribute to the improvement costs from her share of the sale proceeds.
It appears from the case of Clarke v Harlowe that where a bankrupt and non-bankrupt party separate, resulting in one of the parties failing to discharge his or her agreed share of the property related liabilities, as a general rule equitable accounting would operate from the date of separation. However, this is not a hard and fast rule and each case would depend on the facts.
To avoid delay, if it is suggested that the non-bankrupt party has made contributions to the mortgage, mortgage statements should be obtained from the mortgage company setting out all the capital and interest repayments from the date of the bankruptcy order or since the non-bankrupt spouse became solely responsible for the mortgage. If the mortgage is in the name of the non-bankrupt party, a letter of authority should be requested from the non-bankrupt party allowing the trustee to be provided with the mortgage statements. The trustee should also watch out for other mortgages and further advances on the family home.
When instructing a valuer in relation to improvements, the trustee should also ask the valuer to provide an opinion as to whether the alleged renovation works improve the value of the property and, if so, by how much. The trustee will also need to seek documentary evidence of the payments made towards the mortgage and/or renovations. It would also be sensible to check the bankrupt’s bank account statements and PAYE slips/tax returns even if the non-bankrupt party was paying all or the bulk of the mortgage, it is possible that some or all the bankrupt’s funds were paid into the non-bankrupt party’s sole account or the bankrupt made payments to the household expenses enabling the non-bankrupt party to meet the mortgage repayments.
Equity of exoneration
In Re Pittortou (a bankrupt) , Mr Justice Scott discussed this principle by relying on the definition in Halsbury’s Laws of England, Volume 22 (4th Edition) paragraph 1071 that:-
“If the property of a married woman is mortgaged or charged in order to raise money for payment of her husband’s debts, or otherwise for his benefit, it is presumed, in the absence of evidence showing intention to the contrary, that she meant to charge her property merely by way of security, and in such case she is in the position of surety and is entitled to be indemnified by the husband, and to throw the debt primarily on his estate to the exoneration of her own.”
If the presumption is proved, then the charge will only be discharged from the bankrupt’s share of the equity in the property. The presumption is most likely to arise in cases where the bankrupt raises a first or second charge against the family home in order to settle his or her business debts. In Re Pittortou it was held that the equity of exoneration should apply to payments made purely for business purposes and for the bankrupt’s sole benefit. In that case, the bankrupt husband and non-bankrupt wife executed a legal charge over the property to secure the husband’s bank account which was used both in regard to his business and for payment of expenses relating to the matrimonial home. The judge held that the payments for the joint benefit of the household should be discharged out of the net proceeds of sale from the house before division, but the equity of exoneration should apply to payments made purely for business purposes and for the husband’s sole benefit.
However, the presumption is rebuttable, particularly if it can be shown that the bankrupt’s business borrowings were used to finance a business from which he derived an income for the benefit of his family as a whole and there is evidence that the parties did not intend that the security should fall wholly on one party’s beneficial interest to the exoneration of the other party. Nowadays it would be harder to establish the equity of exoneration where a further charge is taken out to support the bankrupt’s business as generally the business would be for the benefit of the bankrupt’s family and particularly where the non-bankrupt spouse has obtained independent legal advice before agreeing to this further charge.
It is often the case that third parties, ie the bankrupt’s adult son or daughter claim an interest in the property for contributions that they have made to the mortgage or improvements. It is arguable that they may have acquired an interest in the property on constructive/resulting trust principles. For example, the bankrupt may have agreed with his child that if the child pays the mortgage then he or she would acquire a beneficial interest in the property. As long as any child has made direct or indirect contribution to the purchase price of the property and acted to his or her detriment, then there appears to be no reason why that child could not argue that he or she has an interest in the property arising from a resulting trust. Conversely, the trustee may be able to argue that these payments were effectively contribution to the child’s living expenses, which would not give rise to a proprietary interest in the property.
Occasionally the bankrupt and non-bankrupt party are involved in matrimonial proceedings at the time the bankruptcy order is made. More often than not the bankrupt’s financial problems are the cause or catalyst for these matrimonial proceedings. In such a situation, it is important that the trustee obtains as much information as possible at the first available opportunity as to the state of play of the matrimonial proceedings and notify the matrimonial solicitors acting for the bankrupt and non-bankrupt party of his appointment immediately. The trustee will need to ascertain whether the matrimonial financial relief proceedings have been commenced, and if so, whether an order has been made for a property adjustment, lump sum, costs and/or maintenance.
If the trustee discovers that the financial relief proceedings are ongoing but a final order has not been made, the trustee could apply for a stay of these proceedings pursuant to section 285 of the Act. The Family Court may require the trustee to be made a party to the proceedings and will require any application in relation to the family home issued by the trustee be heard at the same time as the application for financial relief.
If the financial proceedings are ongoing, the trustee should ask for copies of the bankrupt’s and non-bankrupt’s form E, which set out in detail their financial position and for copies of any responses to questionnaires. Such documentation may prove very useful as they often reveal assets and/or income that the bankrupt has failed to previously disclose to the trustee, which may form part of the bankruptcy estate.
Once a final order has been made within the matrimonial proceedings prior to the onset of the bankruptcy proceedings then that order cannot be challenged by a trustee in bankruptcy even if the order states that the matrimonial home is to be transferred from the bankrupt to the non-bankrupt (see the case Hill v Haines ).
The trustee will need to apply for sanction from the Insolvency Service prior to commencing any legal proceedings. If no agreement is reached between the trustee and the bankrupt then the trustee will have no alternative but to apply for an order for possession and sale of the family home or for an order under section 313 of the Act, prior to the expiry of the three year time limit.