The law has for years tried to grapple with the Gordian Knot between protecting a debtor’s assets for realisation and distribution to his creditors and protecting third parties who enter into transactions with the debtor after the bankruptcy process has been initiated, completely unaware of that process.
In the case of land, where a third party purchaser takes the land without notice of the pending bankruptcy action, the purchaser takes the land free from any interest of any subsequently appointed trustee in bankruptcy. By contrast, where a third party purchaser takes the land, with notice of the pending bankruptcy action, the purchaser takes the property subject to the rights of any subsequently appointed trustee in bankruptcy.
Poulton v Ministry of Justice and Rule 6.13
It is with this backdrop in mind that the importance of Rule 6.13 of the Insolvency Rules 1986 (Rule 6.13) and the case of The Trustee in Bankruptcy of Louise St John Poulton v Ministry of Justice (2010) should be considered. In this case, a bankruptcy petition was presented against Louise Poulton (P) in the Guildford County Court.
Pursuant to Rule 6.13, the court is required to ‘as soon as reasonably practicable send to the Chief Land Register notice of the petition with a request that it may be registered in the register of pending actions.’ Following receipt of the notification, the Land Registry registers a bankruptcy petition against the name of the debtor in the register of pending actions. To the extent that the debtor is the registered proprietor of any registered estate in land, the Land Registry is required to register a notice in respect of the pending action against the relevant property’s title as soon as practicable after the registration of the petition as a pending action. In this way, any subsequent purchaser who decides to purchase property owned by the debtor takes his interest in the property subject to the power of any subsequently appointed trustee in bankruptcy to overturn the transaction. In practice, therefore, a purchaser will not purchase a property from a debtor whose Land Registry title is subject to notice of a pending bankruptcy action for fear of the sale being subsequently overturned.
In this case, however, the court failed to notify the Land Registry of the issue of a bankruptcy petition in breach of Rule 6.13. P therefore sold a property owned by her to a third party who did not have notice of the pending bankruptcy action. The net equity in the property, totalling approximately £45,000, was therefore not available for the benefit of the creditors as P’s trustee in bankruptcy could not have the sale set aside.
P’s trustee in bankruptcy sought damages from the Court Service to compensate P’s bankrupt estate for the loss resulting from the sale of the property following the Court’s failure to comply with Rule 6.13. The High Court held that Rule 6.13 gave the trustee in bankruptcy a right of action for breach of statutory duty against the Court Service but the Court of Appeal disagreed, overturning the lower court’s decision.
The Court of Appeal held that there was no private law right of action against a court for failing to comply with Rule 6.13. This means that where the court fails to comply with its obligations under Rule 6.13, the trustee in bankruptcy has no remedy even where the court’s failure has caused a loss to the bankrupt’s estate.
In conclusion, this is unwelcome news for creditors. In light of this decision, creditors would be well advised to check with the Land Registry themselves whether the court has complied with its obligations under Rule 6.13 and if it has not, to register the bankruptcy petition themselves. Indeed, this route was sanctioned by the Court of Appeal and appears to be the best way to avoid being left in the unenviable position of having no remedy.