There is always the risk with any property transaction that the seller could be selling at an undervalue because they are in financial difficulties and need a quick sale. If a pending winding up or bankruptcy petition is presented against the seller before the sale has completed, and which later results in a winding up or bankruptcy order, then the sale will be void – a fact the buyers are unlikely to know.
Providing buyers have proceeded in good faith and have produced credible valuations and enquiries / declarations of the seller’s solvency, both they and their lender should be protected against any loss caused by the voiding of the transaction.
Check for pending petitions before purchase
Under sections 127 (compulsory liquidation) and 284 (bankruptcy) of the Insolvency Act 1986 the insolvent seller’s creditors are protected from being adversely affected by a sale of the seller’s property (or any other disposition of their assets) in the run up to an insolvency event. Therefore it is always advisable for the buyer’s solicitors to carry out relevant searches before exchange of contracts in order to reveal any pending petitions. If a petition is revealed then there is always the opportunity to withdraw from the purchase or apply to the court where the petition has been presented to validate the transaction.
From property owner to unsecured creditor
If a buyer proceeds with the transaction knowing there was a pending petition, then the liquidator or trustee in bankruptcy, appointed to deal with the seller’s assets, would seek to overturn the transaction as void once the seller is wound up or made bankrupt. In that event, the purchaser would potentially go from being a property owner to an unsecured creditor in the insolvency. The purchaser’s only recourse in these circumstances would be to persuade the Court to validate or ratify the transaction retrospectively. It would be the purchaser’s responsibility to make such an application to the court and they would need to show clear evidence that market value has been paid for the property and the transaction took place in good faith.
Recent case law
A case before the High Court (375 Live Limited (in liquidation)  EWHC 870 (Ch)) demonstrates this point. The director of 375 Live Limited sold a Grade II listed property for £850,000 to the director of the purchaser (SMC) at a time when there was an HMRC winding up petition pending against it for some £280,000 for overdue VAT assessments. The petition was not paid off so a winding up order was made. There was very little documentary evidence regarding the validity of the transaction but the Court accepted that SMC was a bona fide, unconnected purchaser with no notice of the winding up petition and that there was no conspiracy between the parties. The Court considered the facts in that there had been previous offers for the property in line with what SMC had paid and that the property had been on the market for a very long time. This was despite the fact that SMC knew the seller was facing repossession proceedings and needed a quick sale and there had been higher offers for the property which hadn’t proceeded. Nonetheless it was considered that SMC had paid market value.
Proceed cautiously when buying property from a potential bankrupt
Any purchaser would be well advised to look for any warning signs of financial difficulties, not least because of the cost of going to court and the uncertainty of recovering those costs through the seller or within the liquidation or bankruptcy. Going to court could be avoided if the petition is discovered before committing to the purchase.
A purchaser/investor should take additional precautions in the event of a possible undervalue purchase to ensure they can prove in advance that they have paid market value, and that they are not buying the property when a winding up or bankruptcy petition has been issued against the seller. Furthermore, a purchaser must have strong valuation evidence that they are purchasing the property for value and in good faith. Considerations should also be given early on as to whether the transaction needs validating by the court in light of any pending petitions.