The reduction in the purchase price under the new Government 'Mortgage to Rent' scheme has led to queries regarding the effect this has on the property if there is a bankruptcy of an applicant.
The Insolvency Service has confirmed that where a bankrupt enters into the Mortgage to Rent scheme prior to petitioning for bankruptcy, the main concern for the official receiver would be to establish whether there has been a transaction at an undervalue, or a transaction defrauding creditors.
For a successful recovery by the trustee in bankruptcy, the property must have been transferred for no consideration, or for consideration that is significantly less than the value of the property transferred. On the face of it, a Mortgage Rescue Scheme transaction at 90% of market value could constitute a transaction at an under value or a transaction defrauding creditors as being one that is significantly less than the value of the property. However, it is the view of the Insolvency Service that it would not be appropriate for official receivers to seek to challenge the transaction for two reasons, one practical and one of policy:
- it could be argued that the subsequent agreement to rent the property at less than normal rentable value (which is a feature of Mortgage to Rent) represented some value – possibly even balancing out the 10% ‘loss’ on sale; and
- to attack the transaction, the trustee would seek an order restoring the position to what it would have been had the transaction not taken place. This would result in either the property being returned to the estate and on the brink of repossession (or a necessary forced sale by the trustee) resulting in no benefit to creditors, or it would result in the trustee seeking to have the Registered Provider ‘make good’ the loss to the estate. This second option would result in a return to creditors but it would not be appropriate on policy grounds given the policy intentions of the Mortgage Rescue Scheme.
A copy of the valuation obtained prior to the transfer may be requested from the Registered Provider by an official receiver dealing with a later bankruptcy to ensure that the discount on sale was not more than 10% and, therefore, the Registered Provider should be reasonably satisfied that the valuation is accurate.
Following the making of the bankruptcy order, the bankrupt may be required to account to the official receiver for any surplus arising from the operation of the Mortgage Rescue Scheme in respect of his or her property. Under the scheme, there is an expectation that any surplus would be used to clear other unsecured debts. The debtor should take care as to how these payments are distributed as any payments to creditors (particularly, associates of the debtor) in preference to the general body of creditors are at risk of being recovered from the payee under provisions relating to preferences in section 340 of the Insolvency Act 1986.
Where a bankrupt is considering entering into the Mortgage Rescue Scheme post-bankruptcy, the official receiver will consider whether some other transfer of the property (for example, to a relative of the bankrupt) may represent better value for creditors. Each case would be considered on its own merits.