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England and Wales High Court (Chancery Division) Decisions
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Lewis & Anor v Metropolitan Property Realizations Ltd [2008] EWHC 2760 (Ch) (21 November 2008)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/2760.html
Cite as:
[2008] NPC 128,
[2009] 1 FLR 631,
[2009] BPIR 79,
[2009] 9 EG 198,
[2008] 47 EG 113,
[2009] Fam Law 102,
[2009] 1 EGLR 9,
[2008] EWHC 2760 (Ch)
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Neutral Citation Number: [2008] EWHC 2760 (Ch) |
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Case No: 6451 OF 2004 |
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
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Royal Courts of Justice Strand. London, WC2A 2LL |
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21 November 2008 |
B e f o r e :
MRS JUSTICE PROUDMAN
____________________
Between:
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PAUL WARREN LEWIS GONDA TARYN LEWIS
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Applicants
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-and-
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METROPOLITAN PROPERTY REALIZATIONS LIMITED
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Respondent
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____________________
Stephen Schaw Miller (instructed by Edwin Coe LLP) for the Applicants
John Briggs (instructed by Mishcon de Reya) for the Respondent
Hearing date: 30 October 2008
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
Proudman J:
- In this application Mr and Mrs Lewis assert that the interest of Mr Lewis, a former bankrupt, in their dwelling house 35 Little Common Stanmore ("the property") has reverted to him by virtue of the provisions of S.283A (2) of the Insolvency Act 1986. The Respondent, Metropolitan Property Realizations Limited ("MPRL"), maintains that Mr Lewis's Joint Trustees in bankruptcy successfully realised his interest for the purposes of S.283A (3) (a) by assigning it to MPRL. Proceedings before the Land Registry Adjudicator have been stayed pending the outcome of this application. The Joint Trustees are aware of this action but have not been joined as parties and have declined to intervene.
- The point I have to decide is an important one of statutory construction about the meaning of the word "realises" in S.283A (3) (a) of the 1986 Act.
History
- A bankruptcy order was made against Mr Lewis on 12 July 2004 on his own petition. He is now discharged. MPRL was a judgment creditor of Mr Lewis and the largest creditor in his bankruptcy after a company associated with him.
- Mr and Mrs Lewis were at all material times registered as joint tenants of the property which was their matrimonial home. On his bankruptcy Mr Lewis's interest vested in his Joint Trustees and it is common ground that the interest is one to which s. 283A of the 1986 Act applies. At first it seemed that on severance of the beneficial joint tenancy by the bankruptcy the estate was entitled to a beneficial half share of the property. However Mrs Lewis claimed an equity of exoneration (as explained in Re Pittortou [1985] 1 WLR 58 ) which she said exhausted her husband's share of the equity. The Joint Trustees investigated her claim but, as they had incurred significant costs without payment, they were unwilling to institute proceedings in relation to the property without funding from creditors.
- MPRL has adduced evidence that it regarded the stance that the Joint Trustees had taken over the exoneration claim as insufficiently firm. At all events, no funding commitment was forthcoming and the Joint Trustees were faced with the choice of abandoning the estate's interest in the property or trying to obtain some benefit from it without bringing proceedings.
- On 11th July 2007 the Joint Trustees and MPRL entered into a deed whereby the Joint Trustees assigned the estate's interest in the property to MPRL in consideration of the sum of £1 and the following:
"In the event that the Assignee effects a sale of the Property then following completion of the sale and upon receipt of the proceeds of sale and the deduction of all costs and expenses including but without limitation to professional and legal fees, marketing costs and further taxes, twenty five per cent (25%) of the net proceeds of sale of the Property will be paid by the Assignee to the Assignor"
- I note that the obligation is to pay 25% of the net proceeds, not a sum equivalent to 25% of the net proceeds. The possibility is not catered for that Mr Lewis's interest might be less than 25% of the whole. It is said on behalf of Mr and Mrs Lewis that the interest has not been realised because the trustee has retained a contingent interest in the proceeds of sale. Realisation was deferred (I quote from Mr Schaw Miller's skeleton argument) because
"the conversion of the value into money, in which the trustee is to share, will only occur on the subsequent sale. In other words, as a matter of substance, the trustee will only have his interest realised on the subsequent sale."
Two possible arguments are combined here. First, that the right to share in the proceeds themselves is different in kind from the right to receive a sum equivalent to a proportion of the proceeds. Secondly, that realisation does not occur until consideration in the form of money is received in the hands of the trustee. As I understand it, Mr and Mrs Lewis rely (principally at any rate) on the second contention because they assert that even if the assignment had conferred a right to receive an equivalent sum it would not have constituted a realisation of the interest.
- The Deed is also notable in that the obligation to pay is only expressed to arise in circumstances where it is MPRL (as opposed to Mr and Mrs Lewis) which effects a sale. Moreover the Deed does not say anything about whether or not the benefit and burden of the Deed is assignable.
- Mr Briggs on behalf of MPRL explained that in practice none of these matters was likely to arise as the parties contemplated a sale by MPRL from which the estate's share of the proceeds would greatly exceed 25%.
- It is nevertheless plain, as Mr Schaw Miller stressed on behalf of Mr and Mrs Lewis, that the Joint Trustees' entitlement to receive any part of the proceeds of sale is both contingent and deferred and may never in fact release any money for the creditors.
Section 283A of the Insolvency Act 1986
- S. 283A of the 1986 Act was inserted by the Enterprise Act 2002 s. 261(l) and came into force on 1st April 2004. It provides that where property comprised in the bankrupt's estate consists of an interest in a dwelling house, which at the date of the bankruptcy was the sole or principal residence of the bankrupt, his spouse or civil partner or former spouse or civil partner (ss. (1)), the interest should at the end of three years from the date of the bankruptcy cease to be comprised in the estate and automatically vest in the bankrupt (ss. (2)). However that provision is disapplied if within the three-year period the trustee has taken any of the steps specified in ss. (3). In addition, the court retains a discretion to substitute a longer period in such circumstances as it thinks just and reasonable or appropriate: see ss. (6) and the Insolvency Rules 1986 r. 6.237C.
- Ss.(3) provides as follows:
"Subsection (2) shall not apply if during the period mentioned in that subsection-
(a) the trustee realises the interest mentioned in subsection (1),
(b) the trustee applies for an order for sale in respect of the dwelling-house,
(c) the trustee applies for an order for possession of the dwelling-house,
(d) the trustee applies for an order under s. 313 [for a charge on the bankrupt's home] in respect of that interest,
(e) the trustee and the bankrupt agree that the bankrupt shall incur a specified liability to his estate...in consideration of which the interest mentioned in subsection (1) shall cease to form part of the estate."
Subsection (4) goes on to provide that if an application of the kind described at (b) to (d) of ss. (3) is made and dismissed, unless the court orders otherwise the interest vests automatically in the bankrupt on the dismissal of the application.
- Prior to the insertion of S.283A, a trustee had been able to retain the estate's interest indefinitely in order to take advantage of rising property prices. He could register a caution against the title to the property and take no action to realise the interest for many years. This could operate unfairly, particularly in the case of jointly owned property, for example where the owners had separated and the non-bankrupt owner was continuing to pay the outgoings. The legislative purpose of the section is plainly to reduce the uncertainty facing a bankrupt and his family. As Collins J said in Re Byford deceased, Byford v. Butler [2003] EWHC 1267 (Ch), [2004] 1 P&CR 12 at paragraph 15,
"Parliament has now made it clear in the new s. [2]83A of the Insolvency Act 1986...that it is undesirable for trustees to wait many years before resolving their rights in respect of the home of the bankrupt or his spouse. This introduces a general rule that the trustee must take steps to realise his interest in the home of the bankrupt or his spouse within three years of the bankruptcy...If he fails to do so the property vests in the bankrupt and the creditors lose all right to it. All parties concerned would know where they stand within a reasonable time... [The section] can be taken as a strong indication of public policy..."
The applicants' case
- Mr Schaw Miller submitted that, as a matter of construction of s. 283A and having regard to the 1986 Act as a whole, the word "realises" in ss. (3)(a) means not just a sale but a sale for an immediate monetary consideration. The consideration for such a disposal has to be both payable and actually paid within the three-year period. A sale in consideration of payments by instalments over more than the three years, or payments by instalments payable even within the three years on which the transferee defaults, would not, he said, constitute a realisation for the purposes of the section. The issue is whether realisation takes place when the interest is finally and effectively disposed of, or when the proceeds of the disposal are actually received in the form of money (rather than merely a promise to pay) in the hands of the trustee.
- Mr Schaw Miller relied on three matters in support of his argument. First, what he said was the natural meaning of the word "realises" and how it is used throughout the 1986 Act and the predecessor provisions of the Bankruptcy Act 1914, secondly, the scheme of the section and thirdly, policy considerations. This is my grouping rather than his and these matters overlap. I propose to deal with them in turn.
Natural meaning of "realises"
- The word used in ss. (3) (a) is "realises", not 'disposes of or 'sells'. Mr Schaw Miller submitted that this usage focuses on what is coming in for the creditors as well as what is being transferred away, and that the point of realisation is the time when cash consideration for the disposal arrives in the hands of the trustee. He referred me to the New Shorter Oxford English Dictionary (1993), and in particular to the definition at 3a of "realize" as "convert into cash or money". The dictionary definition is a starting point, but since meaning depends on context I do not find it particularly helpful in this case, particularly as the OED also gives some more general definitions to the word, such as "sell out" and "fetch as a price".
- Mr Schaw Miller then turned to the use of "realises" and kindred expressions in other sections of the 1986 Act on the basis that as matter of statutory construction one starts with the presumption that a word used in one part of a statute is intended to bear the same meaning throughout. First he pointed to s. 305, which describes the function of the trustee as:
"to get in, realise and distribute the bankrupt's estate in accordance with the following provisions of this Chapter",
submitting that "realise" in that context presupposes money coming to the trustee in a form fit for distribution under s. 324. While I see the logic of that argument, it does not sit well with the power of the trustee conferred by s. 314 (in the same Chapter of the Act) and Schedule 5 paragraph 3:
"to accept as the consideration for the sale of any property comprised in the bankrupt's estate a sum of money payable at a future time".
Again, the wide powers of compromise and arrangement contained in Schedule 5 paragraph 8 of the 1986 Act enable the trustee to exchange property in the process of realisation. There would seem to be no reason why the trustee could not exchange the estate's interest in the bankrupt's principal residence for his wife's interest in a second home or some other non-monetary asset. The powers conferred by Schedule 5 paragraphs 3 and 8 are available to the trustee in fulfilling the functions described in s. 305.
- Secondly, Mr Schaw Miller pointed to s. 313, which empowers the trustee to apply to the court for a charging order over an interest in a dwelling house where
"the trustee is, for any reason, unable for the time being to realise that property."
However, subject to the issue of policy and the scheme of the Act, it seems to me that the submission begs the question of whether a sale for a deferred consideration is a realisation within the section. Thirdly, Mr Schaw Miller relied on s. 330 (1), which provides as follows:
"When the trustee has realised all the bankrupt's estate or so much of it as can, in the trustee's opinion, be realised without needlessly protracting the trusteeship, he shall give notice...either...of his intention to declare a final dividend, or...that no dividend, or further dividend, will be declared."
I agree that in this section the word "realise" imports reducing the asset into a form in which it can be distributed by way of dividend. However it is implicit in s. 330(1), as indeed in s. 305(2), not only that realisation has taken place but that the consideration for it has been paid, yielding an amount for the creditors. In other words, the section is about distribution rather than realisation. Bearing in mind the provisions of Schedule 5 paragraph 3, the usage in s. 330(1) does not in my judgment restrict the meaning of the word in s. 283A. Indeed, if s. 283A were intended to bear the construction put forward by Mr Schaw Miller, I would, in the light of s. 314(1), have expected it to contain an express prohibition on consideration deferred beyond the three-year period.
- I was also referred to Re a Debtor (No 29 of 1986) [1997] BPIR 183. That was a case under the provisions of s. 82 of the Bankruptcy Act 1914 which entitled a trustee to a "commission or percentage.. .payable on the amount realised by the trustee". The issue was whether the trustee was only entitled to payment in respect of sums coming into his hands through his own efforts or whether he was also entitled to a commission on proceeds of sale paid to him by a mortgagee. The county court judge had held that no remuneration was payable unless the trustee had himself taken some step in the course of realising the asset. Vinelott J's finding that
"the word 'realised' in the context of s. 82(1) simply means 'got in or reduced into cash' and the words 'by the trustee' mean simply in his capacity as trustee"
must be read in the context of what was in issue. As the case was about the amounts received from a realisation it does not control the meaning of 'realises' for the purposes of s. 283A of the 1986 Act.
- In two older cases the word "realise" has been said to mean conversion into cash. In Re Oxford Benefit Building and Investment Company (1886) 35 Ch D 502 Kay J, in considering the meaning of a provision that "no dividends shall be paid except out of the realized profits arising from the business of the company" said,
"'realized' must there have its ordinary commercial meaning, which, if not equivalent to 'reduced to actual cash in hand', must at least be 'rendered tangible for the purposes of division"'.
Again, in Board of Trade v. Block (1888) 13 App Cas 570, in considering whether a provision that a bankrupt should "aid, to the utmost of his power, in the realisation of his property" required him to submit to a medical examination, Lord Fitzgerald (who dissented from the actual decision of the House) said,
"What does 'realisation' here mean? I should say it has the same meaning as it would have in any of the everyday transactions of life. If you speak of realising stocks or securities, or give your broker instructions to do so, what is meant by realising? Nothing more than their sale and conversion into money at the highest price that can reasonably be obtained."
However there was no issue in either case as to the point of time when the realisation occurred. I would therefore distinguish both those authorities.
The scheme of the section
- The scheme of S.283A provides an exhaustive list of the steps available to the trustee during the three-year period in relation to the bankrupt's interest in the dwelling house. If the trustee fails to take such steps, or obtain an extension of the three-year period from the court under s. 283A (6), the interest will revert to the bankrupt. The trustee must "use it or lose it". Apart from realising the interest, the other four steps that the trustee can take are as follows:
Subparagraph (b): Applying for an order for sale of the dwelling house. This course will be appropriate where the bankrupt is only one of the beneficial owners. The trustee would be applying under the Trusts of Land and Appointment of Trustees Act 1996 s. 14, with the special preference for creditors afforded by s. 335A(3) of the 1986 Act.
Subparagraph (c): Applying for an order for possession of the dwelling house, for example where the bankrupt is the sole beneficial owner.
Subparagraph (d): Applying for a charging order under s. 313, such an order only being available where the trustee is for the time being unable to realise the interest in the property.
Subparagraph (e): Agreeing with the bankrupt that he should incur a specified liability in return for the interest ceasing to be part of the estate.
All these steps have to be taken within the three-year period but, although applications to the court do not have to be resolved within the period, Mr Schaw Miller submitted that the scheme of the section is such as to produce certainty within a short time frame. The applications will be granted, settled or dismissed. Where an order for a charge is made, the outstanding obligations will be defined and clear. This, he said, reinforces the meaning of 'realises' for which he contends, namely a definition which does not leave the process of realisation incomplete, thwarting the resolution and certainty which the other prescribed options open to the trustee are designed to achieve.
- He relies on the decision in Phillips v. Symes [2006] BPIR 1430 at paragraph 4 in support of a submission that the trustee should not be able to use lack of funds as an excuse for failure to take the alternative steps prescribed by the section. However the observations in that paragraph were addressed to the particular facts with which Peter Smith J was faced. I do not think that he intended to assert any general proposition (with which I would disagree) that a trustee who is not in funds is bound to expend his own money in litigation.
- It seems to me that if Mr Schaw Miller's analysis of the options open to the trustee is correct it could result in anomaly. There is nothing in the section to prevent proceedings under s. 283A(3) (b), (c) or (d) above from being compromised in Tomlin form outside the three-year period on terms of payment over a yet further period.
- In my judgment a sale for a deferred consideration is a realisation provided the trustee has assigned the estate's interest absolutely. In Ramsay v. Hartley [1977] 1 WLR 686 the trustee had assigned a cause of action for negligence back to the bankrupt. The Court of Appeal, following Guy v. Churchill (1888) 40 Ch D 481, rejected the argument that the assignment was not absolute because the bankrupt had undertaken to pay to the trustee 35% of the net proceeds of the action: see Megaw LJ at 695E-696E, Lawton LJ at 698D-H and Geoffrey Lane LJ at 700B-701A. No argument was addressed to me that Ramsay v. Hartley could be distinguished simply on the basis that the Joint Trustees in the present case were dealing with an interest in land, which (owing to the doctrine of conversion or sections 3 and 4 of the 1996 Act or some other provision) had not been effectively assigned.
- S. 283A (3)(a) requires only the estate's interest in the property to be realised, not (where there are co-owners) the underlying property itself. The Joint Trustees have assigned all the estate's interest in return for the assignee's obligation to pay them consideration at some future time and on a contingent event. The Joint Trustees have therefore in my judgment realised the interest by a sale, notwithstanding that the consideration is deferred and notwithstanding that the tenure of the bankrupt and his family in the property remains precarious.
Policy considerations
- It is true that a sale of the estate's interest in the property means that the sword of Damocles continues to hang over the heads of the bankrupt and his family in the shape of the continued threat that the property may be sold. However it seems to me that this is not something inherent in the deferred nature of the consideration. It is merely a by-product of the fact that it is the interest, and not the property itself, which has been realised. Unless the interest is disposed of to the bankrupt himself or a member of his family, the threat will remain, whether or not the sale is for immediate cash consideration.
- Mr Briggs gave what seems to me to be a telling example. He postulated a former spouse who had lived in the property during her marriage to the bankrupt and had taken a liking to it. Perhaps she also wanted to exert power over her ex-husband and his second wife. She pays the trustee an immediate monetary consideration for what the estate's interest is worth, taking into account the current spouse's claim to an equity of exoneration and the costs of, and uncertainties in, making the estate's claim good in litigation. Such a sale would be a realisation within Mr Schaw Miller's definition, but it would create the same uncertainty of tenure for the bankrupt and his family as the arrangement now under review. The former wife could wait as long as she wanted before seeking to realise the interest she had purchased by applying for an order for sale of the property.
- Of course in that example there is immediate cash for the creditors. However the legislative policy behind the insertion of the section was to protect the bankrupt and his family, not the creditors. It is hard to see why deferred consideration is any more contrary to the policy of the section than immediate consideration paid for the interest, since in either case the person acquiring the interest can go (or attempt to go) through the hurdles of realising the interest at any time in the future. It seems to me that it is wrong in principle to treat the trustee who disposes of the interest for deferred consideration as being in the same position as the trustee who, prior to the section, chose to defer a sale. There is nothing sham about the disposal. The trustee has assigned the interest and it ceases to be within his power to control the timing of a later sale of the property by the assignee.
- There is in my judgment a significant difference between the position of the trustee who deferred a sale under the pre- s. 283A position and the trustee who disposes of the interest for deferred consideration. If a trustee applies to the court for an order for sale, s. 335A (2) of the 1986 Act displaces the factors required to be considered by the court by s. 15(1) to (3) of the Trusts of Land and Appointment of Trustees Act 1996 in deciding whether to order a sale: see s. 15(4) of the 1996 Act. s. 335A(3) provides that in the absence of exceptional circumstances, the interests of the creditors shall prevail over all other considerations. Accordingly, a trustee who applies to the court to sell the underlying property has a very strong case. An assignee, on the other hand, is subject to the factors specified in s. 15 of the 1996 Act and is in no such preferred position. The court in effecting the balancing exercise required by that section might well dismiss the claim of a company which had acquired the bankrupt's interest with a speculative and cynical eye to a share of future profit. A purchaser of the interest seeking a sale would have to satisfy the court that the balance of the factors in s. 15 of the 1996 Act was struck in its favour.
- In short, there is nothing to suggest that the section was designed to prevent an application for sale by a purchaser being made after the three year period rather than to prevent the trustee from retaining his preferred position for many years.
- That said, I am troubled by Mr Schaw Miller's submission that to allow the trustee to realise the interest for a deferred consideration dependent on and linked to a sale of the property will encourage a market in such interests. That ought not to be the effect, partly because the fact that the trustee is authorised to realise the interest in such a way does not make it proper for him to do so in every case, and partly because of the difficulty that the purchaser will have in obtaining an order for sale under s. 14 of the 1996 Act. However, there is no risk to a purchaser in entering into such a transaction: he will pay only a nominal consideration immediately and need pay nothing further if he decides not to attempt a sale. An assignment on such terms is also an easy escape route for a trustee at the end of the three-year period in order potentially to salvage something for the creditors. I agree with Mr Schaw Miller that such a course, taken in order to defeat the expectation of the bankrupt under the section, seems contrary to the "use it or lose it" legislative purpose.
Conclusion
- Nevertheless, I accept Mr Briggs's submission that there is nothing in s. 283A requiring any realisation for the purposes of that section to be on terms more restrictive than are available to the trustee generally under the 1986 Act. In my judgment a trustee who sells the estate's interest for deferred contingent consideration "realises" the interest within the meaning of s. 283A(3) (a) of the Insolvency Act 1986. Accordingly I determine the issue before me in favour of MPRL.