England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st January 2011

MRS JUSTICE PROUDMAN:

1. I am asked to decide a point of statutory construction. It is comprised in a preliminary issue ordered by Master Bowles on 13^th April 2010 as follows:

"Whether, apart from and without prejudice to paragraph 14 of the defence, the cancellation of the restriction in favour of the claimant on 13^th August 2008 and the restriction [sic]" (by which it is agreed was meant "registration") "on that date of Ms Awokiyesi in place of the bankrupt was a mistake for the purpose of Schedule 8 to the Land Registration Act 2002."

Schedule 8 entitles the claimant to an indemnity against the Land Registry in specified in circumstances. I am not concerned with paragraph 14 of the defence, which is an allegation that any loss suffered by the claimant was caused through his own fault.

2. In brief, the point is whether the rights of a trustee in bankruptcy are avoided pursuant to section 86(5) of the Land Registration Act 2002 on a sale of land by a bankrupt to a bona fide purchaser at a time when no bankruptcy restriction appears on the register, notwithstanding that the purchaser sought to register her title after the restriction had been entered.

Facts

3. The following facts are agreed:

i) Stella Edughele was formerly the sole registered proprietor of a property at Sydenham Hill in London.

ii) She was adjudged bankrupt on 29^th March 2007, the Official Receiver being the trustee. The date of the petition is not in evidence.

iii) Despite the bankruptcy, the bankrupt completed a transfer of the property to Tinuke Awokiyesi on 14^th November 2007. Ms Awokiyesi allowed her priority period in which to affect registration to lapse.

iv) On 14^th December 2007 the Land Registry entered a restriction on the title to the property.

v) On 17^th December 2007 the claimant was appointed trustee in bankruptcy in place of the Official Receiver. (See Chapter III of the Insolvency Act 1986.)

vi) On 17^th January 2008 the defendant entered a bankruptcy restriction against the title.

vii) On 13^th August 2008 the defendant (i) registered Ms Awokiyesi as the registered proprietor of the property in place of the bankrupt and (ii) cancelled the restriction.

4. The proper procedure is common ground: namely, the bankruptcy petition should have been notified to the defendant by the court under the Insolvency Rules 1986, rule 6.13. On receipt of notification the registrar was required to enter the petition as a pending land action under the Land Charges Act 1972 and then, as soon as reasonably practicable thereafter, to enter a notice against the registered title under section 86(1) of the 2002 Act so as to make anyone dealing with the bankrupt aware of the bankruptcy. Although there is no requirement to make a search under the Land Charges Act 1972 (see section 86(7) of the Land Registration Act 2002), anyone who did so would have relevant actual notice of the petition. It is not alleged for present purposes that the absence of such a notice or restriction involved any error or omission by the defendant.
5. Further, in order for Ms Awokiyesi to take free of the trustee's rights, she must (a) have given valuable consideration for the transfer; (b) have acted in good faith; and (c) have had no notice of the bankruptcy petition. It is not alleged for present purposes that Ms Awokiyesi fell foul of any of these requirements.
6. Accordingly, the preliminary issue is one of statutory construction only.

Section 86 Land Registration Act 2002

7. Section 306 of the Insolvency Act 1986 vests the estate of the bankrupt in the trustee, and that section has effect without the necessity to register the trustee's interest (see section 27(5)(a)). Section 284 of that Act deals with the position between the date of presentation of the petition and the adjudication. It must however be remembered that the Land Registration Act 2002 derogates from the general rule that a person may not dispose of property which he has ceased to own, in that section 58 of that Act works what has been described as "the statutory magic" by vesting land in a person merely by virtue of the fact that he is the registered proprietor.
8. In general, the Land Registration Act does not recognise the doctrine of notice in determining priorities. However, the effect of a disposition of property after the owner has become bankrupt depends on principles of notice and good faith, and these have been reflected in the Land Registration Act 2002 in bankruptcy cases, in effect protecting a bona fide purchaser for value and without notice, notwithstanding that the purchase was made from a bankrupt who had ceased to own the property.
9. To cope with the different principles applicable to insolvency and to land registration, the Land Registration Act 2002 has imposed a special regime for bankruptcy. Thus neither a bankruptcy petition nor a bankruptcy order is, for the purposes of the Act, an interest affecting an estate or charge (section 86(1)) and by section 86(5) the Act makes express provision for the protection of disponees from the bankrupt in relation to such petitions and orders.
10. Section 86(5), (6) and (7) provide as follows:

"(5) Where the proprietor of a registered estate or charge is adjudged bankrupt, the title of his trustee in bankruptcy is void as against a person to whom a registrable disposition of the estate or charge is made if—

(a) the disposition is made for valuable consideration,

(b) the person to whom the disposition is made acts in good faith, and

(c) at the time of the disposition—

(i) no notice or restriction is entered under this section in relation to the registered estate or charge, and

(ii) the person to whom the disposition is made has no notice of the bankruptcy petition or the adjudication.

(6) Subsection (5) only applies if the relevant registration requirements are met in relation to the disposition, but, when they are met, has effect as from the date of the disposition.

(7) Nothing in this section requires a person to whom a registrable disposition is made to make any search under the Land Charges Act 1972."

11. A registrable disposition is defined by section 132 of the Act as, in effect, a disposition required by section 27 to be registered. An interest can be registrable notwithstanding that it has been sold to the person seeking registration after the date of presentation of a bankruptcy petition or the making of a bankruptcy order. That is plain from section 86(1) consistently with section 58. It is common ground in this case that the disposition referred to in section 86 was the transfer to Ms Awokiyesi (see the judgment of Lewison J in Thompson v. Foy [2010] 1 P&CR 16 at [121]-[124]) and that it was effected on 14^th November 2007. It is also common ground that it was a registrable transfer; that is to say, a transfer which had to be registered in order to be effective by virtue of section 27.
12. The issue I have to decide is whether section 86(5) applies so as to invalidate the claimant's title as trustee in bankruptcy as against Ms Awokiyesi. Mr Dawson on the claimant's behalf says that it does not, because the bankruptcy restriction was entered on the title before Ms Awokiyesi sought to register her title. He submits that the effect of section 86(6), which requires registration of the registrable interest, is that registration must have been effected before entry of the bankruptcy restriction. While it is true that section 86(5) postulates the date of the disposition as the date at which the restriction must have been entered for the purpose of fixing the disponees with notice, he submits that the requirements of section 86(6) are additional and mean that registration also has to be effected before the restriction is entered.
13. He relies on Schedule 2 to the 2002 Act, which provides that:

"In the case of a transfer … the transferee … must be entered in the register as the proprietor."

14. In support, he also relies on the wording of the restriction itself, which is prescribed in obligatory form by the Land Registration Rules 2003, rule 166:

"'BANKRUPTCY RESTRICTION entered under section 86(4) of the Land Registration Act 2002, as the title of [the proprietor of the registered estate] or [the proprietor of the charge dated ... ... ... ... referred to above] appears to be affected by a bankruptcy order made by the [name] Court (Court Reference Number ... ... ... ...) against [name of debtor] (Land Charges Reference Number WO ... ... ... ...).

[No disposition of the registered estate] or [No disposition of the charge] is to be registered until the trustee in bankruptcy of the property of the bankrupt is registered as proprietor of the [registered estate] or [charge].'"

I note that rule 166(3) goes on to define "bankruptcy restriction" as the restriction which the registrar must enter in the register under section 86(4) of the Act.

15. Mr Dawson's argument is simple. It is that in order to fall within section 86(5) a disponee must not only satisfy the provisions of section 86(5) but must also go on to satisfy section 86(6). Ms Awokiyesi could only do so by applying to register her interest. The Land Registrar was then faced with an application for registration by the disponee. It is at that time that he had to determine whether the requirements of section 86(5) were met so as to avoid the trustee's title. At the time he considered the matter there was ex hypothesi no registration, so that the requirements were not met and section 86(5) could not apply. He was therefore bound by the wording of the obligatory restriction. He could not register without cancelling the restriction and he could not cancel the restriction unless there had been registration. Therefore it must follow, runs the argument, that registration had to have been effected prior to entry of the restriction. The registrar could not look forward to future registration to justify cancellation of the restriction.
16. Mr Dawson went on to demonstrate that this result is not unfair to the disponee since, if the restriction is registered after the transfer, the disponee still has the priority period in which to register and obtain good title. The fact that she failed to do so in this case was her fault or that of her advisers.
17. The difficulty with the appellant's argument is that the whole focus of section 86(5) is on the time of the disposition rather than the time of registration. The mind of the reader is directed to the avoidance of the trustee's title if no restriction is registered at that date rather than any later date. I can see no point in specifying that date so precisely for the purposes of notice if the restriction could be registered at any time before registration in order for the trustee's title to be saved.
18. By contrast, the date when the "relevant registration requirements" for the purposes of section 86(6) have to be met is not specified in that subsection, as one would expect if a different date from the precisely formulated date in section 86(5) were to be applicable.
19. It therefore seems to me that the defendant is right in saying that the reason why the protection afforded by section 86(5) only takes effect in favour of a proprietor who becomes registered is to ensure that it only extends to persons who are entitled to be registered. If for some unrelated reason the disponee does not become registered, the protection does not come into operation. However, that registration can be effected at any time.
20. This interpretation is accentuated by consideration of the subsection which sections 86(5) and 86(6) replace; namely, section 61(6) of the Land Registration Act 1972. Section 61(6) provided:

"Where under a disposition to a purchaser in good faith for money or money's worth such purchaser is registered as proprietor of an estate or a charge, then, notwithstanding that the person making the disposition is adjudged bankrupt, the title of his trustee in bankruptcy acquired after the commencement of this Act shall, as from the date of such disposition, be void as against such purchaser unless at the date of such disposition, either a creditors' notice or a bankruptcy inhibition has been registered, but a purchaser who, at the date of the execution of the registered disposition, has notice of the bankruptcy petition or the adjudication, shall not be deemed to take in good faith."

21. In this connection I bear in mind the observations of Lloyd LJ in St. John Poulton's Trustee in Bankruptcy v. The Ministry of Justice [2010] 3 WLR 1237 ([2010] EWCA Civ 392). He said at [68], having cited Hoffmann J's approach to construction expressed in In re a Debtor (No. 784 of 1991) [1992] Ch 554 at 558-9, (himself citing the decision of the House of Lords in In re Smith (a Bankrupt) ex parte Braintree District Council [1990] 2 AC 215),

"It is therefore a question of considering both how similar the current text is to that of the previous legislation and whether there are policy reasons, having regard to the terms of the present legislation, which should lead to any earlier construction being ignored and to taking a fresh view of the content of the relevant provision."

22. For present purposes there is, as far as I know, no judicial authority on the meaning of section 61(6). However, section 61(6) was described by the Law Commission (in Land Registration for the Twenty-first Century, Land Registration Bill and Commentary, Law Commission No. 271) as the model for the new provisions. It seems to me unlikely in the extreme that sections 86(5) and 86(6) were intended to have a different effect from section 61(6) of the earlier Act, as opposed merely to clarifying its provisions. Certainly there is nothing in the Law Commission Report, or indeed the Explanatory Notes to the Act, to suggest that it did.
23. Even more pertinently, I can find nothing in the terms of the 2002 Act to suggest a shift in policy. As with the putative mothers of the baby in the judgment of Solomon, the statute cannot protect both parties; namely, an innocent disponee from the bankrupt on the one hand, and the innocent unsecured creditors on the other. To the extent that the 1972 Act favoured one or the other it seems to me that the same applies to the 2002 Act.
24. I therefore asked Mr Dawson whether he contended that section 61(6) of the 1972 Act had the same effect that he contends for in construing section 86(5) and 86(6) of the 2002 Act. At first he would not be drawn on the issue, but eventually he submitted that the position is the same under the two statutes. In other words, that for the trustee's title to be avoided under section 61(6) of the 1972 Act, registration had to have taken place before the registration of the bankruptcy inhibition. Again, the submission is founded on the inability for the disponee to be registered as proprietor while the restriction is in place.
25. I simply cannot read section 61(6) in this way. Since the requirement for registration is imposed in the same subsection the focus on the date of disposition is even more pronounced than under the 2002 Act.
26. Mr Morshead relied on views expressed in Ruoff & Roper on the Law and Practice of Registered Conveyancing (2006) at 34.009 and 34.001. Mr Dawson valiantly tried to persuade me that these passages are at best equivocal, (applying only to notice) and at worst confusing. I accept that they are not binding on me but I derive some comfort from the fact that my view of the construction of section 86(5) is apparently shared by the editors. I also derive comfort from the views expressed by Lloyd LJ in the St. John Poulton case at [22], [35] and [50], although I accept that they were stated in a different context and were not addressed to the registration requirements of section 86(6).
27. The one matter that gives me pause is the wording of the restriction itself, which, as I have said, is obligatory under the Regulations. However, I accept Mr Morshead's explanation (a) that the present situation, where the requirements of section 86(4) were apparently not met, is unusual, (b) that section 41(2) of the 2002 Act specifically empowers the registrar by order to disapply a restriction where circumstances warrant and (c) that it was appropriate and correct for him to do so on an application by Ms Awokiyesi to register on the basis that section 86(5) applied.
28. I therefore determine the preliminary issue in favour of the Chief Land Registrar.