Under insolvency legislation, there is a presumption that the interests of a bankrupt’s creditors (including the interests of the bankrupt's spouse/civil partner and family) take precedence over all other factors unless the circumstances are exceptional. But unhelpfully, within the Insolvency Act 1986 (“the Act”) - specifically section 335A(3) - there is no definition of what constitutes ‘exceptional circumstances’ so courts have to rely on case law to guide them.

There are prescribed sets of factors which a court can take into account when faced with an application for possession and sale issued by a Trustee in Bankruptcy (“the Trustee”). No particular weight is given to any one factor. The court is required to make an order as it thinks is just and reasonable, having regard to all of the facts.

If the application to court is made by the Trustee after 12 months from their date of appointment, there will be a presumption (which is rebuttable) that the interests of the bankrupt's creditors outweigh all other considerations, unless the circumstances are exceptional.

'Exceptional circumstances' cannot postpone a sale indefinitely

In Grant and another v Baker and another [2016] the Chancery Division allowed an appeal by the trustees in bankruptcy against an order postponing the sale of the bankrupt’s home for as long as his adult daughter, who had global developmental delay, dyspraxia and obsessive compulsive disorder (OCD), lived there.

It agreed with the District Judge that there were exceptional circumstances, within the meaning of section 335A of the Act, which included circumstances where a child of a bankrupt, who suffered from a medical or mental condition, would be adversely impacted if required to move due to the sale of the home. However, it held that the judge had erred significantly in exercising her discretion by ordering an indefinite postponement of the sale of the property. It ordered a further postponement in the sale for approximately 12 months.

This case highlights that while the presence of exceptional circumstances is a necessary precondition to displace the presumption that the interests of the creditors outweigh all other considerations, the simple fact of exceptional circumstances does not prevent the court from making an order for sale.

Background to the case

Mr. Baker had been made bankrupt on an HMRC petition. Mr. Baker was married with three children. Two were independent adults. The eldest, Samantha, was born with global development delay, having at the age of 30 the mental age of an eight- or nine-year-old child. She also had dyspraxia and OCD. She had difficulty with moving, was incapable of independent living and there was no prospect of her condition improving. Mr. Baker’s trustee in bankruptcy applied to sell the family home (in which Mr. and Mrs. Baker each had a 50% share).

The issues before the judge were firstly whether these circumstances were exceptional with the effect of ousting the presumption, set out in section 335A(3), that where such an application is made after the period of one year of the first vesting of the property in the trustee, the court shall assume that the interests of the bankrupt’s creditors outweigh all other considerations. The second question, which only arose if such circumstances were exceptional, was what order the judge ought to make. The judge considered the circumstances to be exceptional and, in the exercise of her discretion, ordered that the property be sold subject to the caveat that such sale was not to take place until Samantha no longer lived there, or no longer needed it as her home.

Appeal

On appeal, the Trustee contended, firstly, that the circumstances were not exceptional and, secondly, that even if the circumstances were exceptional, the decision of the judge not to put a long-stop date on the postponement was an incorrect exercise of her discretion.

Mr. Justice Henderson said that the judge was plainly entitled to find that the circumstances of the case were exceptional and that the presumption in favour of the creditors was displaced. However, he concluded that the exercise of discretion in refusing to place a long-stop date on the sale was erroneous. He started from the premise that section 283A provides a three-year period within which the trustee can apply to sell the bankrupt’s property, failing which the property re-vests in the bankrupt. If the trustee does take that step, the court should exercise its powers under section 335A with the object of enabling the sale to take place and funds available for distribution. He re-emphasised that the sale should take place even if the funds generated are swallowed up in meeting the trustee’s costs. He went on to say that an indefinite suspension, for a period which might be measured in decades, is incompatible with the statutory scheme. The period should be measured in months rather than years.

The original judge had considered it was unreasonable to order a sale while Samantha continued to live in the property because the only realistic alternative was in the private sector which would not guarantee Samantha a settled home for the rest of her life. Mr. Justice Henderson said that this was open to criticism on a number of grounds:

  1. The judge was unduly influenced by the perceived lack of security for Samantha.
  2. The judge was wrong to dismiss as ‘quite short-term thinking’ the suggestion that Mrs. Baker’s share of the equity could be used to make up a shortfall in paying for rent—Mrs. Baker would receive around £30,000 which would fund the difference between the present mortgage and likely rental outlay for at least a decade.
  3. Samantha’s ultimately positive move from London eight years previously showed that a further move, sensitively handled, was not unreasonable.
  4. It was wrong to consider that there was no alternative to an indefinite suspension.

In light of the above he concluded that there was a significant error in the judge’s exercise of her discretion which fell well outside the ‘middle ground’ within which views might legitimately differ. It then fell to him to exercise the discretion afresh. The longest postponement he thought appropriate was one of 12 months to the end of July 2017.

About the author

Caroline Benfield Senior Associate

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.