Postponing the sale of a bankrupt’s (family) home

When a bankrupt shares a home with his spouse and/or family, there is an inevitable conflict between the family’s interests and those of the bankrupt’s creditors.

In (1) Grant (2) Cork (as joint trustees in bankruptcy of Ronald Charles Henry Baker) v Ronald Charles Henry Baker [2016] EWHC 1782 (Ch), the Court’s approach is neatly illustrated.

Mr Baker was a self-employed taxi-driver, married for some 30 years to Mrs Baker, who was – until shortly before the hearing – working as a carer for elderly people (on an income of c. £15K, gross). Mr Baker employed an accountant to deal with his tax affairs. Unfortunately, the accountant failed to take into account the private use by Mr Baker of his taxi and fuel. HMRC then reopened his accounts going back some five years, and issued a bill for £25,000. Unsurprisingly, Mr Baker did not have this money to hand, particularly given the downturn in business brought about by Uber.

In due course, Mr Baker was made bankrupt. A year later, the Trustees noted a shortfall in the sum which was by then owed to HMRC (c. £51K); the Official Receiver recorded an estimated deficiency of c. £26K; the Trustees (unsurprisingly) sought to recover the shortfall by applying for sale of Mr & Mrs Baker’s home. By this time Mr Baker had been discharged from bankruptcy; he had co-operated fully throughout. Sale of the home was expected to yield around £30K for Mrs Baker, the remainder being used to discharge Mr Baker’s debt to HMRC.

Mr & Mrs Baker had an adult daughter who lived with them; she suffered from global developmental delay and dyxpraxia, together with OCD. Her needs were (I paraphrase) best met by the family home. The application for an order for sale was opposed.

However, the Court noted the impact of s 335(A) Insolvency Act 1986:

“(3)Where [an application for an order for sale] is made after the end of the period of one year beginning with the first vesting . . . of the bankrupt’s estate in a trustee, the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations.”

The question of whether the circumstances are “exceptional” are, in case you are interested, set out in Dean v Stout [2005] EWHC 3315 (Ch). Of particular significance are the principles set out by Lawrence Collins J at [9] – “exceptional or special circumstances [must be] outside the usual ‘melancholy consequences of debt and improvidence’ . . .” and at [11] ” . . . the creditors have an interest in the order for sale being made, even if the whole or the net proceeds will go towards the expenses of the bankruptcy, and the fact that they will be swallowed up in paying those expenses is not an exceptional circumstances justifying the displacement of the presumption that the interests of the creditors outweigh all other considerations.”

The first instance decision in Grant was to postpone the order for sale indefinitely, until the daughter was “no longer residing in [the] property or no longer requires that property as a home”. But that, said the High Court, was an impermissible exercise of the judge’s discretion: the District Judge had been “unduly influenced” by the perceived lack of security for the daughter if she had to move into private rented accommodation; was wrong to dismiss as “quite short term thinking” the suggestion that MRs Baker’s share of equity could be used to make up a shortfall in paying rent for suitable replacement accommodation; was wrong to dismiss as unreasonable the prospect of inflicting a further move on the daughter; and was wrong not to consider any alternative to indefinite postponement. The High Court, exercising its discretion afresh, thought that the appropriate further period of postponement would be one of approximately 12 months, allowing time for a replacement property to be found and for the move to be prepared, and to contemplate bringing a claim against the accountant (who, you will recall, was clearly in the picture in relation to the Bakers’ unfortunate predicament).

It is important to note that the overall postponement ran from the date of the first instance hearing – 8 October 2015 – until the end of July 2017 (see para [52] of the High Court decision). That is almost two years. But the relevant period, properly understood, is still only 12 months: until the High Court decision, Mr & Mrs Baker would not have been preparing for sale. The 12 month period is the period of grace afforded to the Bakers to prepare for sale, and to find alternative accommodation. So in a case where the relevant interests include those of a bankrupt’s family who need to care for an adult (largely, it would seem, dependant) daughter, we are still only looking at a postponement of sale of 12 months.

Further, the reminder that the creditors’ interest in an order for sale will dominate even when the proceeds go towards the expenses of the bankruptcy is salutory, and should be borne in mind. The statutory scheme is, in this respect, very clear.