England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand. London. WC2A 2LL
		12 November 2008

MR. RICHARD SNOWDEN QC:

Introduction

1. This claim raises a point of law concerning bankruptcy and the administration of estates. The issue is whether, if a sole residuary legatee under a will becomes bankrupt but is automatically discharged from bankruptcy before the completion of the administration of the estate of the testator, the money and assets which are thereafter ascertained to form the net residuary estate are payable to him or to his trustee in bankruptcy.

The facts

2. The relevant facts are not in dispute and can be shortly stated. I must, however, also set out a little of the background in order to explain the positions taken by the parties at the hearing before me.
3. Mrs. Bertha Hemming died on 18 July 2003. Under her will, after a few minor specific bequests, she left the entire residue of her estate to her son, Mr. Bernard Hemming, who was also named as one of her executors. At the time of her death, Mrs. Hemming and her son owned a farmhouse and a cottage at Guestling, East Sussex as tenants in common in equal shares.
4. Mr. Hemming was adjudicated bankrupt in the Hastings County Court on 24 September 2003. The Second Defendant ("the Trustee") was appointed trustee in bankruptcy with effect from 14 October 2003.
5. Mr. Hemming took a grant of probate as the sole executor of his mother's will on 17 February 2005. Following the amendment of section 279 of the Insolvency Act 1986 by section 256 and Schedule 19 of the Enterprise Act 2002, Mr. Hemming was automatically discharged from bankruptcy on 1 April 2005.
6. The cottage at Guestling was sold for £125,000 in May 2005. Half of the net proceeds (representing Mr. Hemming's personal interest in the cottage) were paid to the Trustee. The balance (representing Mrs. Hemming's interest) was retained by the Claimants ("Raymond Saul & Co.") who at the time were acting as solicitors for Mr. Hemming in his capacity as his mother's executor.
7. On 5 July 2005 the Trustee wrote to Raymond Saul & Co. requesting that they release the further sum of £28,969.69 from the monies which they held in order to satisfy the balance then due in Mr. Hemming's bankruptcy. On 26 July 2005 Raymond Saul & Co. replied, refusing that request.
8. The basis for that refusal was explored in subsequent correspondence. Raymond Saul & Co. argued that although Mr. Hemming had been the residuary legatee of his mother's estate at the date of his bankruptcy, that status gave him no legal or equitable interest in any of the assets in her estate and would not do so until the administration of the estate had been completed. They contended that the only right which a residuary legatee has is a right to have the deceased's estate properly administered. So, they said, the only thing that the Trustee could request was that Mrs. Hemming's estate should be administered.
9. Raymond Saul & Co. also made the further point that even when Mrs. Hemming's estate was fully administered, the Trustee would not be able to claim the assets then forming the residue. They said that this was because Mr. Hemming had been discharged from his bankruptcy, and an after-acquired property notice cannot be served in respect of any property which the bankrupt only acquires after his discharge: see section 307(2)(c) of the Insolvency Act 1986. In short, Raymond Saul & Co. contended that the proceeds of sale and the residue of Mrs. Hemming's estate would be payable to Mr. Hemming.
10. The Trustee did not accept this analysis. In correspondence, her solicitors contended that Mr. Hemming had an interest in his mother's residuary estate which had vested in the Trustee, and that the proceeds of sale of Mrs. Hemming's half-share in the cottage belonged to the Trustee.
11. By a letter dated 6 September 2005 Raymond Saul & Co. indicated that if the dispute between the Trustee and Mr. Hemming could not be resolved, then as solicitors to Mrs. Hemming's estate, they would have to commence proceedings so that the Court could determine which of the competing claims was correct. Raymond Saul & Co. suggested that in order to avoid the expense that such proceedings would involve, the Trustee should contact Mr. Hemming to resolve matters directly.
12. The solicitors acting for the Trustee responded on 14 September 2005, warning that if the Trustee became embroiled in proceedings over the distribution of Mrs. Hemming's estate, she might simply choose to seek an order for possession and sale of the farmhouse at Guestling, which was Mr. Hemming's matrimonial home. That farmhouse was said to be worth in the region of £450,000 and to be unencumbered. In these circumstances, the Trustee's solicitors' letter suggested that rather than there be a forced sale of the farmhouse, it would be "infinitely preferable" for Mr. Hemming simply to authorise Raymond Saul & Co. to pay the Trustee the amount needed to satisfy the bankruptcy debts and costs out of the money that they were holding. The Trustee subsequently wrote to Mr. Hemming to that effect.
13. Such overtures did not, however, result in resolution of the dispute. Instead, on 30 November 2005 Raymond Saul & Co. wrote again on behalf of Mrs. Hemming's estate to the solicitors for the Trustee. They stated that they had been advised by counsel that the correct course was for them to make payment of the residue of the estate to Mr. Hemming. The letter indicated that if the Trustee did not accept that payment could be made to Mr. Hemming, then "the estate" would have no choice but to issue proceedings pursuant to CPR Part 64 for determination of the issue. The letter added that "the executor" (i.e. Mr. Hemming) would be seeking an order that the costs of such proceedings should be paid by the Trustee personally.
14. On 21 April 2006, Raymond Saul & Co. issued the Claim Form in this case. It seeks a determination pursuant to CPR Part 64 of the question whether they should make payment of the residue of Mrs. Hemming's estate to Mr. Hemming as residuary beneficiary, or to the Trustee. The Defendants to the claim were Mr. Hemming and the Trustee.
15. Shortly thereafter, on 24 April 2006, the Trustee issued a claim in the Hastings County Court for possession and sale of Mr. Hemming's farmhouse. In June 2006 the possession action was transferred to this Court to be heard in conjunction with the claim under CPR Part 64.
16. Subsequent attempts to resolve the dispute came to nothing and were overtaken by events when, on 12 April 2007, Mr. Hemming died. The First Defendant ("the Executor") is the sole executor by appointment of Mr. Hemming's will. In that capacity he was substituted for Mr. Hemming as a party to these proceedings. The Executor also became the executor of Mrs. Hemming's estate by succession.
17. After taking up his dual role, the Executor wrote to Raymond Saul & Co. and to the Trustee in October 2007, complaining that in his view the CPR Part 64 proceedings were "completely unnecessary and pointless". In essence, the Executor contended that someone should have advised Mr. Hemming to avoid litigation and to agree that the balance of the proceeds following the sale of the cottage should be used to discharge his bankruptcy debts and costs.
18. By this stage, however, the difficulty was that the fees and costs claimed by the Trustee on the one hand and by Raymond Saul & Co. on the other, meant that it might not be possible for all the liabilities in Mr. Hemming's bankruptcy to be discharged from the monies in the hands of Raymond Saul & Co. In rough terms, the monies said by the Trustee to be required to discharge the bankruptcy debts and costs had risen to over £60,000, but the balance of the proceeds of sale of the cottage amounted only to about £50,000, of which Raymond Saul & Co. were claiming about £18,000 on account of their own fees, counsel's fees and disbursements. This situation caused the Executor to seek to question both the Trustee and Raymond Saul & Co. as to the level and justification for their fees and costs.
19. At the hearing before me, the Trustee maintained her argument that she would be entitled to be paid the residue of Mrs. Hemming's estate as and when ascertained. The Executor chose not to advance any positive case on behalf of Mr. Hemming's estate, but instead filed a skeleton argument reiterating the view that the proceedings had been a waste of time and costs. It was Raymond Saul & Co. who advanced the argument that the residue of Mrs. Hamming's estate should, when ascertained, be paid to the Executor on behalf of Mr. Hemming's estate.

The relevant statutory provisions

20. Section 306(1) of the Insolvency Act 1986 ("section 306" and "the 1986 Act") provides that a bankrupt's estate vests in the trustee in bankruptcy immediately upon his appointment. Section 283(1) of the 1986 Act provides that (subject to certain provisions that are not relevant here) a bankrupt's estate comprises,

"all property belonging to or vested in the bankrupt at the commencement of the bankruptcy".

21. By virtue of section 436 of the 1986 Act ("section 436"), "property" for this purpose,

"includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of or incidental to, property."

Ownership of the proceeds of sale of the cottage

22. Before dealing with the point raised by the Claim Form, I must first explain what was common ground. Both parties agreed that until the estate of a testator is fully administered, a residuary legatee or anyone claiming through him does not own or have any interest in any specific asset in the hands of the executor. Hence the parties were agreed that Mr. Hemming did not, at the commencement of his bankruptcy, own or have any proprietary interest in any of the specific assets in his mother's unadministered estate.
23. That proposition is established by a quartet of cases of the highest authority. In Lord Sudeley v. Attorney-General [1897] AC 11 ("Lord Sudeley's Case"), a testator's estate at the time of his death included certain mortgages on real estate in New Zealand. He left his widow a one-quarter share of his residuary estate. His estate was still in the course of administration when his widow died. The Crown contended that the widow had a personal remedy against her husband's executors in England, and that probate duty was accordingly payable by the widow on a one-quarter share in the value of the entire residuary estate of her late husband. The widow's executors contended that she did not have merely a personal claim against her husband's executors, but a one-quarter share in the New Zealand mortgages as specific property; and that since they were foreign property, their value should not have been included in any assessment for probate duty purposes.
24. The House of Lords unanimously held that the New Zealand mortgages were required to be included in the assessment for probate duty purposes. They held that until the assets forming the residue had been ascertained, the widow, as residuary legatee, had no right in specie to any particular assets forming part of the unadministered estate.
25. The point was reiterated in Dr. Barnardo's Homes National Incorporated Association v. Commissioners for Special Purposes of the Income Tax Acts [1921] 2 AC 1 ("Dr. Barnado's"). A testator had left his residuary estate to a charity. His estate included some investments. During the course of the administration of the estate, the executors received income from the investments on which tax had been deducted at source. The income received was eventually handed over to the charity as part of the residue, and the charity argued that it should be entitled to a repayment of the tax deducted at source.
26. The House of Lords held that the charity was not entitled to repayment of the tax. Viscount Finlay stated, ([1921] 2 AC 1 at page 8),

"It appears to me that the present case is really decided by the decision of this House in Lord Sudeley's Case. It was pointed out in that case that the legatee of a share in a residue has no interest in any of the property of the testator until the residue has been ascertained. His right is to have the estate properly administered and applied for his benefit when the administration is complete. The income from which this income tax was deducted was not the income of the charity. It was the income of the executors."

Viscount Cave stated, ([1921] 2 AC 1 at page 10),

"When the personal estate of a testator has been fully administered by his executors and the net residue ascertained, the residuary legatee is entitled to have the residue as so ascertained, with any accrued income, transferred and paid to him: but until that time he had no property in any specific investment forming part of the estate or in the income from any such investment, and both corpus and income are the property of the executors and are applicable by them as a mixed fund for the purposes of administration."

27. The same point was considered at some length by the Privy Council in Commissioner of Stamp Duties (Queensland) v. Livingston [1965] AC 694 ("Livingston"). A testator and his wife were domiciled in New South Wales. By his will, the testator left one-third of his residuary estate to his wife. At the time of his death he owned properties in New South Wales and Queensland. Whilst his estate was still in the course of administration, his widow, who had remarried, also died. The authorities in Queensland sought to levy succession duty on the executors of the widow in respect of her share of the assets of the testator in Queensland.
28. As a matter of construction of the Queensland statute, the Privy Council concluded that succession duty could only be levied by the authorities in Queensland if, at the date of her death, the widow had been the beneficial owner of property in Queensland: see [1965] AC 694 at page 706G. The Privy Council held that the issue was governed by the decision in Lord Sudeley's Case and that at the date of her death, the widow had not been the beneficial owner of any specific assets forming part of her husband's unadministered estate. Hence she had not owned any specific property in Queensland, and her estate was not liable for succession duty.
29. The most recent case in the quartet is Marshall v. Kerr [1995] 1 AC 148. The case concerned the application of part of the capital gains tax legislation to a settlement upon trust which had been made by the widow of a testator whose estate was, at the time, still in the course of administration. Lord Browne-Wilkinson summarised the law, ([1995] 1 AC 148 at page 165E-F),

"In English law the rights of a testamentary legatee in the unadministered estate of a testator are well settled: see Lord Sudeley v. Attorney-General [1897] AC 11 and Commissioner of Stamp Duties (Queensland) v. Livingston [1965] AC 694....A legatee's right is to have the estate duly administered by the personal representatives in accordance with law. But during the period of administration the legatee has no legal or equitable interest in the assets comprised in the estate."

30. It follows from these authorities that the Trustee has never had any proprietary interest in Mrs. Hemming's half-share of the cottage, or in the proceeds of sale of that specific property. Accordingly, if and to the extent that the Trustee asserted any present entitlement to the proceeds of sale in the hands of Raymond Saul & Co., that claim was unjustified.
31. Although the Trustee could not establish that she owned the proceeds of sale of the cottage, it does not necessarily follow that her request to Raymond Saul & Co. on 5 July 2005 for payment of £28,969.69 from the proceeds of sale of Mrs. Hemming's share of the cottage was misconceived. Apart from the balance of the proceeds of sale of the cottage, Mrs. Hemming's estate also included the half-share in the farmhouse worth several hundred thousand pounds. Where an unadministered estate is obviously more than sufficient to meet liabilities, it is common practice for an executor to make a partial distribution on account of the residue from time to time as the administration proceeds: see Williams on Wills (8^th ed., 2002) para 38.16. So, if the Trustee will be entitled to the residuary estate as and when that is ascertained, it was also open to her to request a payment of sufficient monies to discharge the bankruptcy debts from the monies that were then in hand.
32. As I have indicated, however, the problem appears to have been that Mr. Hemming did not agree that the Trustee had a valid claim to the residue of his mother's estate, and he appears also not to have been willing to agree that his bankruptcy debts should be discharged from what, on the alternative view of the law, were monies that could have been paid to him on account of his entitlement to the residuary legacy.
33. So I turn to the issue directly raised by the claim under CPR Part 64: which of the Executor or the Trustee has the right to payment of the monies or assets that will comprise the residue of Mrs. Hemming's estate as and when the administration of her estate is completed?

Entitlement to the residuary estate

34. Mr. John, who appeared for Raymond Saul & Co., accepted that, at the date of his bankruptcy, Mr. Hemming, as residuary legatee had a right to have his mother's estate properly administered in accordance with law. He also accepted that such right was a "thing in action" and hence "property" within the meaning of section 436, and that it had vested in the Trustee pursuant to section 306.
35. Mr. John's concession was plainly correct in the light of the authorities referred to above. In Livingston, Viscount Radcliffe stated, ([1965] AC 694 at page 717C-E),

"...their Lordships regard it as clearly established that Mrs. Coulson was not entitled to any beneficial interest in any property in Queensland at the date of her death. What she was entitled to in respect of her rights under her deceased husband's will was a chose in action, capable of being invoked for any purpose connected with the proper administration of his estate..."

36. However, Mr. John also submitted that the right to due administration was a right that was entirely separate from any right to payment of the residue. He submitted that the residue (if any) will only come into existence at the completion of the administration of the estate, and that it is only at that moment that the right to receive the residue will actually vest in Mr. Hemming (or his estate). Hence, he said, the right to receive the residue of Mrs. Hemming's estate never vested in the Trustee.
37. In support of those submissions, Mr. John referred to Dr. Barnado's in which Lord Atkinson said, ([1921] 2 AC 1 at page 11),

"The case of Lord Sudeley v. Attorney-General ... conclusively established that until the claims against the testator's estate for debts, legacies, testamentary expenses, etc., have been satisfied, the residue does not come into actual existence. It is a non-existent thing until that event has occurred. The probability that there will be a residue is not enough. It must be actually ascertained."

38. Mr. John also referred to Marshall v. Kerr in which Lord Browne-Wilkinson commented, ([1995] 1 AC 148 at page 166F-G),

"...it is crucial to appreciate that the property settled by [the legatee] comprised, not the assets in the deceased's estate...but a separate chose in action, the right to due administration of his estate."

39. Miss Mahoney, who appeared for the Trustee, disputed Mr. John's analysis. She referred to the decision of Buckley J. in Re Leigh's Will Trusts, Handyside v. Durbridge [1970] 1 Ch 277 ("Re Leigh") and submitted that a residuary legatee's right to have a testator's estate properly administered necessarily carries with it the right to receive the residue of the estate, once ascertained. Such residue, she said, would be the "fruits" of the chose in action, and the two could not be separated. She also submitted that a residuary legatee had an "interest" in respect of the assets in the unadministered estate that was sufficient to fall within section 436.
40. As I have indicated, Lord Sudeley's Case, Dr. Barnado's and Livingston all raised the question, in the context of taxing statutes, whether a residuary legatee had a proprietary interest in particular assets in the unadministered estate of the testator. The decision in each case was that the residuary legatee had no such interest in any particular assets until completion of the administration of the estate. Having determined that issue negatively, it was unnecessary for the speeches and judgments to define the precise nature and extent of the residuary legatee's rights.
41. There are, however, indications that at least some of the members of the House of Lords in Lord Sudeley's Case thought that the right that vested in the residuary legatee on her husband's death went beyond a limited right to compel administration of her husband's estate. For example, Lord Davey observed ([1897] AC 11 at page 21),

"What then, are the rights of the appellants? Their right, and the only right which they could enforce adversely, is to have the administration completed and the residuary estate ascertained and realised, either wholly or so far as may be necessary for the purpose, and to have one-fourth of the proceeds paid to them."

(emphasis added)

42. Likewise, in the passage I have cited from Dr. Barnardo's, Viscount Finlay observed that a residuary legatee had,

"the right to have the estate properly administered and applied for his benefit when the administration is complete".

(emphasis added)

43. That a residuary legatee's rights extend beyond a mere right to have the estate properly administered also appears from the decision of Buckley J. in Re Leigh. In that case, the testatrix's husband and only child had drowned in an accident. She was his administratrix and sole beneficiary under his intestacy. At his death, the husband had been the owner of 51% of the issued shares in a company called Sheet Metal Prefabricators (Battersea) Limited, and had been owed money by the company. The testatrix died not long after her husband, at a time when his estate had not been fully administered and when the shares in the company were still registered in her husband's name. By clause 3 of her will, the testatrix bequeathed to the defendant "all shares which I hold and any other interest or assets which I may have in Sheet Metal Prefabricators (Battersea) Limited". The executors of her will issued a summons to determine whether that specific bequest was valid or not.
44. It was common ground between the various interested parties who appeared that the testatrix intended that the defendant should have the shares and the debt owed by the company to her husband. The question raised by the residuary legatees was whether the testatrix was capable, when she died, of bequeathing anything answering the description in clause 3 of her will. The residuary legatees submitted (i) that the testatrix could only dispose by will of property which, at her death, she held to her own use, and, (ii) relying upon Livingston, that at her death, the testatrix did not have any legal or equitable interest in any specific assets forming part of her husband's estate.
45. In dealing with the second point, Buckley J. stated that Livingston established the following propositions, ([1970] 1 Ch 277 at page 281G-282A),

"(1) the entire ownership of the property comprised in the estate of a deceased person which remains unadministered is in the deceased's legal personal representative for the purposes of administration without any differentiation between legal and equitable interests;

(2) no residuary legatee or person entitled upon the intestacy of the deceased has any proprietary interest in any particular asset comprised in the unadministered estate of the deceased;

(3) each such legatee or person so entitled is entitled to a chose in action, viz. a right to require the deceased's estate to be duly administered, whereby he can protect those rights to which he hopes to become entitled in possession in the due course of the administration of the deceased's estate;

(4) each such legatee or person so entitled has a transmissible interest in the estate, notwithstanding that it remains unadministered."

46. Buckley J. then continued, ([1970] 1 Ch 277 at page 282B-C),

"This transmissible or disposable interest can. I think, only consist of the chose in action in question with such rights and interests as it carries in gremio, that is to say, the right to which Lord Radcliffe refers in Commissioner of Stamp Duties (Queensland) v. Livingston, in his comment, at pp. 712, 713, on McCaughey v. Commissioner of Stamp Duties (1945) 46 S.R., N.S.W. 192. If a person entitled to such a chose in action can transmit or assign it. such transmission or assignment must carry with it the right to receive the fruits of the chose in action when they mature. The chose in action itself may be incapable of severance, but I can see no reason why a person entitled to such a chose in action should not so dispose of it through the medium of a trustee in such a way that the right to participate in its fruits is given to several beneficiaries either in fractional shares or by any other method of division that a trustee or the court can carry out."

(emphasis added)

47. Although Mr. John pointed out that Re Leigh was a case on construction of a specific bequest in a will, in which a court will strive to uphold the validity of the bequest, I do not think that this affects the validity of Buckley J.'s analysis of the general principles of law. In that regard, I note that Buckley J.'s four-point summary of Livingston was quoted, with approval, by Lord Templeman in Marshall v. Kerr [1995] 1 AC 148 at pages 157F-158A.
48. Buckley J.'s third proposition, namely that a residuary legatee's right to require due administration of the deceased's estate was designed to protect the rights to which the legatee hopes to become entitled in possession, is entirely consistent with the observations of Viscount Radcliffe in Livingston as to the origins and purpose of the right to compel an executor properly to administer the estate. Viscount Radcliffe stated, ([1965] AC 694 at page 707),

"When Mrs. Coulson died she had the interest of a residuary legatee in the testator's unadministered estate. The nature of that interest has been conclusively defined by decisions of long-established authority .. .[W]hatever property came to the executor virtute officii came to him in full ownership, without distinction between legal and equitable interests. The whole property was his. He held it for the purpose of carrying out the functions and duties of administration, not for his own benefit; and these duties would be enforced upon him by the Court of Chancery, if application had to be made for that purpose by a creditor or beneficiary interested in the estate. Certainly, therefore, he was in a fiduciary position with regard to the assets that came to him in the right of his office, and for certain purposes and in some aspects he was treated by the court as a trustee....

It may not be possible to state exhaustively what those trusts are at any one moment. Essentially, they are trusts to preserve the assets, to deal properly with them, and to apply them in a due course of administration for the benefit of those interested according to that course, creditors, the death duty authorities, legatees of various sorts, and the residuary beneficiaries."

49. The authorities to which I have referred establish that upon death of a testator, a residuary legatee has an immediate entitlement, arising from the terms of the will, to have transferred to him, at the completion of the administration of the estate, such assets (if any) as then form the residue of the estate. This entitlement does not give the residuary legatee any present property interest in any of the individual assets forming the estate whilst it is being administered. Nor can it give the legatee any immediate interest of a proprietary nature in what is called "the residue of the estate", because that is simply a concept which has no existence independent of the assets which are eventually found to comprise it, as and when the estate has been fully administered.
50. The residuary legatee's immediate entitlement to future payment (if there are any assets left to form the residue) is, however, recognised and protected whilst the estate is in the course of administration by a right of action to compel the due administration of the estate. As Viscount Radcliffe explained in Livingston, the due administration of the estate, by its very nature, involves the application of the assets for the benefit of the creditors, the taxation authorities, legatees of various sorts, and (finally) the residuary beneficiaries. Because the entitlement to receive such assets as may comprise the residue in the future is the very foundation for the legatee's right to compel due administration of the estate, it seems to me that there is no sensible basis upon which the two can be separated. The right of action would not be given to a stranger to the estate who had no possibility of receiving such assets in the future.
51. It is therefore correct to describe the right of the residuary legatee as a composite right to have the estate properly administered and to have the residue (if any) paid to him as and when the administration is complete. That composite right is a chose in action, which is transmissible, and accordingly falls within the first limb of the definition of "property" in section 436.
52. On that basis, it must follow that when a residuary legatee becomes bankrupt, the chose in action which vests in his trustee in bankruptcy is the composite right that includes the right to have the assets comprised in the residuary estate paid over to him at the end of the administration of the estate. Once that right vests in the trustee, the right will not revest in the bankrupt unless and until his bankruptcy debts and costs have been paid; and the right will be capable of being asserted by the trustee in bankruptcy against the executors, so as to preclude them from giving priority to any rival claims to the assets comprising the residue at the end of the administration.
53. That conclusion would be sufficient to decide this claim. But in any event I also think that Miss Mahoney is right to submit that even if a residuary legatee's right is limited to a right to compel due administration of the estate, the legatee would nevertheless still have an immediate "interest" which would fall within the second limb of the extended definition of "property" in section 436, namely,

"every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property".

54. A review of the speeches and judgments in the cases to which I have referred shows a variety of views being expressed on the question of whether a residuary legatee has an "interest" of some kind in the assets which might eventually form the residuary estate. For example, in Lord Sudeley's Case, though denying that a legatee has a proprietary interest in any specific assets, Lord Herschell commented, ([1897] AC 11 at page 19),

"In truth, the right she had was to require the executors of her husband to administer his estate completely, and she had an interest to the extent of one-fourth in what should prove to be the residuary estate of the testator.."

(emphasis added)

Likewise, in Livingston, Viscount Radcliffe both denied that there was any separation of the legal and beneficial interest in any of the assets in the unadministered estate ([1965] AC 694 at page 712B-D), but also acknowledged the "undoubted rule" that "the interest of a residuary legatee in an unadministered estate has always been transmissible" ([1965] AC 694 at page 710D). Such views were reflected in the statement of Lord Browne-Wilkinson in Marshall v. Kerr to which I have already referred, that, "during the period of the administration the legatee has no legal or equitable interest in the assets comprised in the estate" and in Buckley J.'s four point summary of Livingston in Re Leigh.

55. These observations can be reconciled and understood when one appreciates that the word "interest", like the word "property" is a word of many potential meanings. The word must take its meaning from the specific context in which it is used. Viscount Radcliffe made this very point in Livingston, when commenting upon criticisms that had been made of the decision in Lord Sudeley's Case to the effect that Lord Herschell could not really have intended to deny a residuary legatee all beneficial interest in the assets of an unadministered estate. Viscount Radcliffe said, ([1965] AC 694 at pages 712B-713C),

"Criticisms of this kind arise from the fact that the terminology of our legal system has not produced a sufficient variety of words to represent the various meanings which can be conveyed by the words "interest" and "property." Thus propositions are advanced or rebutted by the employment of terms that have not in themselves a common basis of definition. For instance, there are two passages quoted by the Chief Justice in his dissenting judgment in this case which illustrate the confusion. There is the remark of Jordan C.J. in McCaughey's case, "The idea that beneficiaries in an unadministered or partially administered estate have no beneficial interest in the items which go to make up the estate is repugnant to elementary and fundamental principles of equity." If by "beneficial interest in the items" it is intended to suggest that such beneficiaries have any property right at all in any of those items, the proposition cannot be accepted as either elementary or fundamental. It is, as has been shown, contrary to the principles of equity. But, on the other hand, if the meaning is only that such beneficiaries are not without legal remedy during the course of administration to secure that the assets are properly dealt with and the rights that they hope will accrue to them in the future are safeguarded, the proposition is no doubt correct. They can be said, therefore, to have an interest in respect of the assets, or even a beneficial interest in the assets, so long as it is understood in what sense the word "interest" is used in such a context."

55. Viscount Radcliffe returned to this theme later in the judgment, ([1965] AC 694 at pages 716E-7127E),

"Where, as here, the question is whether a succession arose on a death in respect of a "devolution by law of any beneficial interest in property," and the necessary limitations of the Queensland Succession Duty Act reduce that question to one whether there was a beneficial interest in Queensland property belonging to her at her death, it is necessary, to use Lord Greene's words, to "discover the locality to be attributed to a right," and this requirement involves a precise analysis of the nature of the right. It is not enough for this purpose to speak of an "interest" in a general or popular sense. It is apt to recall what Lord Halsbury L.C. said on this point in his speech in the Sudelev case:

"With reference to a great many things, it would be quite true to say that she had an interest in these New Zealand mortgages - that she had a claim on them: in a loose and general way of speaking, nobody would deny that that was a fair statement. But the moment you come to give a definite effect to the particular thing to which she becomes entitled under his will, you must use strict language, and see what it is that the person is entitled to; because upon that in this case depends the solution of the question. It is idle to use such phrases as ... that she had an 'interest' in this estate."

57. In the present context, Miss Mahoney submitted, and I agree, that the general approach of the courts has been to give the words used in section 436 a wide meaning. Miss Mahoney cited the remark of Ferris J. in In re Landau [1998] Ch 223 at page 232A, that the words of section 436 were "about as wide as they could be". The same point was made more fully by Morritt LJ. in Re Celtic Extraction Limited [2001] Ch 475 at page 486,

"The word "property" is not a term of art but takes its meaning from its context: see Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014, 1051; Kirby v Thorn EMI plc [1988] 1 WLR 445, 452. In the context of insolvency there is, as Lord Atkinson observed in Hollinshead v Hazleton [1916] 1 AC 428, 436, a well established

"principle of public policy, which has found expression in the provisions of the Bankruptcy Codes of ... England ... as estimable and as conducive to the welfare of the community as any. It is this, that in bankruptcy the entire property of the bankrupt, of whatever kind or nature it may be, whether alienable or inalienable, subject to be taken in execution, legal or equitable, or not so subject, shall, with the exception of some compassionate allowances for his maintenance, be appropriated and made available for the payment of his creditors."

Thus in successive statutes dealing with bankruptcy and insolvency the definition of "property" has been progressively extended {Morris v Morgan (unreported) 31 March 1998; Court of Appeal (Civil Division)

Transcript No 524 of 1998); though however wide the definition it is subject to the implied exclusion of rights of the bankrupt with respect to his body, mind or character {Heath v Tang [1993] 1 WLR 1421, 1423). It is apparent from the terms of section 436 of the Insolvency Act 1986 that the definition is to some extent circular but is not exhaustive. Further as Sir Nicolas Browne-Wilkinson V-C observed in Bristol Airport plc v Powdrill [1990] Ch 744, 759 it is hard to think of a wider definition of "property.""

56. Mr. John sought to counter the breadth of meaning which has been accorded to section 436 by suggesting that the intention of Parliament, when introducing the new provisions for an automatic discharge from bankruptcy after one year in the Enterprise Act 2002, had been not only to reduce the stigma and restrictions of being an undischarged bankrupt, but also to limit the extent of a bankrupt's estate that vests in his trustee in bankruptcy.
57. The introduction of an automatic discharge from bankruptcy after 12 months, together with other measures, was plainly designed to reduce the stigma, restrictions and disqualifications placed upon bankrupts: see e.g. the DTI's White Paper, "Insolvency - A Second Chance" (Cm 5234) which set out the basis for the reforms contained in the Enterprise Act 2002. It is also obviously the case, as was acknowledged by the White Paper, that by reducing the period of bankruptcy before an automatic discharge, the after-acquired property provisions in section 307 of the 1986 Act would apply for a substantially shorter period, thus potentially reducing the assets available to creditors. The White Paper expressed the view that in practice trustees did not often use their powers under section 307.
58. To that extent I accept Mr. John's submissions. But in contrast to the acknowledged effect upon the operation of the after-acquired property provisions, I can find nothing in the structure of the changes brought about by the Enterprise Act 2002, or the legislative history, to suggest that Parliament also intended to make a change to the scope of the estate owned by the bankrupt which would vest in the trustee at the commencement of the bankruptcy by reason of the combined effect of sections 283, 306 and 436 of the 1986 Act. That is of course the critical issue in this case. Mr. John did not refer me to any specific materials to support his contention in this respect, and I reject it.
59. In summary, as I have indicated, the law has long recognised that a residuary legatee has an immediate "interest" of some kind in the assets that will in the future form the residuary estate of a testator. The precise nature of the interest is unclear, but at very least it must give the holder of the interest the right to receive the residue (if any) as and when ascertained.
60. Whatever the precise nature of the interest, in my view it would be entirely consistent with the statutory purpose of the bankruptcy legislation to conclude that it vests in the trustee in bankruptcy by virtue of section 306. That conclusion is also in accord with the wording of the statute. Section 436 refers to "every description of interest": those words could not be wider. I also think that the interest can properly be described as "incidental to" the property which the residuary legatee undoubtedly owns, namely the chose in action to compel due administration of the estate: see e.g. Viscount Radcliffe's analysis in Livingston to which I have referred in paragraph 55 above. The transmission of this interest to the trustee must therefore operate to give the trustee an entitlement to receive whatever is ascertained to be the residuary estate, in priority to the bankrupt.

Australian Authority

61. The result which I have reached and the reasoning which leads to it, is, I believe, supported by the decision of the High Court of Australia in Official Receiver in Bankruptcy v. Schultz (1990) 170 CLR 306 ("Schultz"). Schultz concerned the Australian Bankruptcy Act 1966. That Act provided all property that belonged to, or was vested in, a bankrupt at the commencement of his bankruptcy, or which had been acquired by him or which devolved on him after the commencement of the bankruptcy and before his discharge, vested in the Official Receiver. "Property" for this purpose was defined, in terms similar to section 436, as meaning,

"real or personal property of every description ...and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property."

62. The testatrix (P) left her house to the defendant (S), who was an undischarged bankrupt. The testatrix's husband successfully sought and obtained a Court Order for provision to be made to him from the estate. At first instance, the order was that the husband be entitled to the house instead of S. S was then discharged from her bankruptcy. The order for provision to be made for the husband was then varied on appeal. The husband was given a life interest, with an interest in remainder to S.
63. The High Court of Australia held that the interest in remainder in the house vested in S's trustee in bankruptcy and not in S herself. The reasoning was that the interest in remainder was derived from the right to compel due administration of the estate, and that right was a property right which had vested in the trustee in bankruptcy from the start. The High Court of Australia said, ((1990) 170 CLR 306 at pages 313-314),

"The right which any beneficiary has in an unadministered estate springs from the duty of the executor to administer the estate, to preserve the assets and to deal with them in the proper manner. Each beneficiary has an interest in seeing that the whole of the assets are treated in accordance with the executor's duties. In that sense, the beneficiaries as a class may be said to have an interest in the entire estate. But it does not follow that each piece of property which goes to make up the estate is held on a particular trust for the beneficiary named as its intended recipient upon completion of administration... Whether or not the estate is held on a trust for the beneficiaries as a class in the usual sense in which the word "trust" is used, so as to confer a specific proprietary interest, as distinct from a general, non-specific interest, upon all beneficiaries, is not something which arises for consideration in this case.

Nevertheless, [S] acquired upon the death of [P] a right to have the deceased estate administered in accordance with the duties of the executors. Though not the legal or equitable owner of the assets which were the subject of the devise and bequest in her favour, she had, by virtue of the chose in action created by that devise and bequest, an expectation that the assets would pass to her upon completion of the administration, subject to their being realized to meet any outstanding liabilities and to defray the costs of administration, and an interest in respect of those assets. That interest was derived from and dependent upon the chose in action.

The interest is of such a kind that, when a beneficiary transmits a chose in action (or part thereof), or that chose in action passes by operation of law, such as under the Bankruptcy Act, that transmission naturally encompasses not only the chose in action but also the expected fruits of that chose in action: ... In re Leigh's Will Trusts [1970] Ch 277, at p 282."

Practical consequences

64. I am also supported in my conclusion by a consideration of the problems that would arise in practice if the entitlement of a bankrupt to payment of the residue of a testator's estate did not vest in the trustee in bankruptcy until the administration of the estate was complete.
65. It is obviously always a matter of chance whether a testator dies before a residuary legatee is made bankrupt. However, if the law was that the creditors of the bankrupt could only benefit from the residuary legacy if the administration of the testator's estate was completed in the one year before the bankrupt was automatically discharged, this would in my view lead to arbitrary and undesirable consequences. It would matter, for example, whether the death occurred at the beginning of the year or close to the end of the bankruptcy.
66. If the death occurred at or shortly after the bankruptcy, whilst it would at least be possible for the creditors to benefit, it would become almost essential for the trustee in bankruptcy to take proceedings to compel a speedy administration of the estate in an attempt to ensure that it was completed within the year. That would be so whether or not a speedy administration would realise the best value for the assets. Apart from the potential conflict that this would cause between the duties of the executors to maximise value and the interests of other legatees (including other persons who might be interested in the residuary estate), where, as here, the bankrupt was also the executor, he would have a perverse incentive to delay the administration of the estate. Where the death occurred towards the end of the bankruptcy, it would be virtually impossible, even with all due expedition, for the administration of the estate to be completed in time. The right to due administration vested in the trustee in bankruptcy would therefore be practically worthless.
67. Mr. John did not dispute these points, but suggested that they were the inevitable consequence of introducing so short a period for automatic discharge of a bankrupt. As I have said, I accept that Parliament foresaw and was prepared to accept that reducing the period of bankruptcy would lead to prejudice to creditors in the reduced operation of the after-acquired property provisions in section 307 of the 1986 Act. But I see no reason to assume that Parliament even foresaw, still less that it intended to create, these arbitrary results and the conflicts that would arise between trustees in bankruptcy and executors. Such consequences would, in my view, be entirely contrary to the statutory schemes for bankruptcy and the orderly administration of estates, and thoroughly undesirable.

The result

68. In the result, I hold that Mr. Hemming's entitlement to his mother's residuary estate, including the right to receive the assets comprising that residue as and when the administration of the estate is complete, vested in the Trustee by the operation of section 306 of the 1986 Act. The Trustee thereupon became entitled, and remains entitled, to receive the assets representing the residuary estate as and when the administration of the estate is complete, in priority to the Executor.
69. I propose to make a declaration to that effect and will hear counsel in due course as to the precise form of order and any consequential matters.