Trustees should be careful when disclaiming assets after bankruptcy, after a High Court ruling blocked an application on a property that turned a significant profit when sold.

The case in question is Sleight v The Crown Estate Commissioners [2018] EWHC 3489 (ch).

The facts 

The Applicant in Sleight was the trustee in bankruptcy (the Applicant). The Respondents were The Crown Estate Commissioners (the Respondents).

The Applicant was appointed trustee in bankruptcy of the insolvent estate of the late Jillian Mascall.

The estate owned 27 freehold properties, and 24 of these properties appeared to be in negative equity, with the value of their charges being more than their respective values. A number of these properties were tenanted with ongoing Landlord obligations.

The Applicant disclaimed 20 of the properties on the grounds that they were onerous. The disclaimed properties automatically went to the Crown, subject to any existing rights and charges.

Mortgagees In Possession (the Mortgagees) for two of the disclaimed properties sold them two years after the Applicant had disclaimed them. After deducting the value of their charge and the costs of sale, the Mortgagees made nearly £19,000 on the two properties.

The Mortgagees paid the surplus funds into court.

The Applicant sought a court order that the two properties – and the £19,000 surpluses – should be vested in him, stating section 320 of the Insolvency Act 1986 (Court Order Vesting Disclaimed Property).

Judgment 

The Judge dismissed the application and declined any potential appeal.

After reviewing section 320 of the Insolvency Act 1986, the Judge determined that its wording is intended to grant a vesting order to an applicant with an existing interest in the asset, rather than someone who is simply interested – the latter not forming a proprietary interest.

Dealing with the vesting of the actual properties, there was a practical issue that the two properties now belong to third parties following the Mortgagee’s sales. The Judge decided it would not be possible, or appropriate, to vest the freeholds in the Applicant.

If the properties hadn’t been sold, the Judge outlined three possible outcomes for charged property following its disclaimer:

  1. The Crown could create new freeholds (which automatically dissolved on the vesting in the Crown assuming no other proprietary interests exist)
  2. The mortgagee may apply for a vesting order
  3. The mortgagee may enforce its existing proprietary interest.

Turning to the Applicant’s claim for the £19,000 sale surplus, the Judge confirmed that this would usually automatically vest in the Crown unless someone applied for a vesting order. In this case, the only person who had made an application was the Trustee who had no right to do so, as after disclaiming the property, he had no interest in it.

Interestingly, the Judge did allude to the potential for another outcome. In Lee v Lee [1999] BPIR 926, the mortgagee obtained a vesting order. The property was jointly owned by the bankrupt individual and his wife, so the wife was entitled to 50% of the net proceeds in any event. The mortgagee agreed to a consent order where 50% of the net proceeds were paid to the wife and the other 50% to the Trustee in bankruptcy. In Sleight, there was no joint owner and the Mortgagee had not made an application. If a similar application had been made in this case, the surplus could have been ordered and paid to the applicant for the benefit of the creditors.

The Judge concluded as the Trustee had no right to make an application for a vesting order, the properties and the resulting surplus of £19,000 belonged to the Crown. The surplus funds would remain in the court funds office until any other party, including the Crown, applied to have them paid out.

Comment

The decision in this case warns Trustees to take care when disclaiming property.

It would be prudent to seek several reliable valuations before deciding upon what assets are truly onerous and when may they move to positive equity, or check to see whether any agreements could be made in relation to the expenses associated with the asset that make it onerous.