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Distributing a surplus where bankrupt customer’s trustee has disclaimed freehold security

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

21-08-2019

Sleight (as trustee of the estate of Jillian Paula Mascall deceased) v Crown Estate Commissioners [2018] EWHC 3489 (Ch)

 

Summary:       

A lender should be aware that the effect of a disclaimer of a freehold security by a trustee in bankruptcy (‘Trustee’) of their customer is to extinguish the freehold interest. In those circumstances, a lender should not therefore pay any surplus sale proceeds following repossession to the Trustee or the customer because prima facie, the Crown will be entitled to the surplus by virtue of escheat. To do otherwise would expose the lender to potential liability to the Crown.

If the Crown is reluctant (as was the case in this decision) to get involved when freehold property has been disclaimed (primarily to avoid taking on liabilities in relation to the disclaimed property), the most prudent course of action for a lender who holds a surplus, is to pay it into Court.

This decision held that a Trustee (and by analogy the customer) will have no standing to make an application for a vesting order to recover any surplus for the benefit of the creditors of the customer and highlights a very unsatisfactory outcome as the money will remain in Court unclaimed.

Background:

The estate of Ms Mascall (the ‘Estate’) was being administered as an insolvent estate in bankruptcy under the Administration of Insolvent Estate of Deceased Persons Order 1986. Upon the making of an insolvency administration order, Mr Sleight (the ‘Applicant’), an employee of PKF Geoffrey Martin and Co Limited, was appointed as Trustee of the Estate.

Ms Mascall had owed a portfolio of properties, the majority of which appeared to be in negative equity and/or were subject to tenancies with ongoing obligations on the landlord.

Two freehold properties (the ‘Properties’) within the portfolio were disclaimed by the Applicant as onerous property. The Properties were subject to charges in favour of Bank of Scotland PLC (the ‘Lender’). The Lender sold the Properties and having discharged the debts under the mortgages there remained circa £19,000 surplus which they proposed to pay into Court.

The Applicant sought an order that the Properties (and corresponding surpluses) vest in him pursuant to section 320(2)(a) of the Insolvency Act 1986 (the ‘Act’), as “a person who claims an interest in the disclaimed property”. The application was issued against the Government Legal Department (‘GLD’) on the basis that the Properties had vested in the Crown Bona Vacanti.

The Crown Estate Commissioners argued that the correct Respondent in those circumstances would be the Treasury Solicitor and not GLD.  They also  argued that  freehold property disclaimed by a Trustee did not vest in the Crown Bona Vacanti, but instead it was subject to escheat to the Crown. Their position, following longstanding legal advice, was that if they undertook ‘no act of possession, entry or management’ no liability or responsibility in respect of the Properties would arise in circumstances of escheat.  They made it clear they did not oppose (nor support) the application, nor would they appear or be represented at the application hearing nor should they be taken as expressing any view on the validity of the application, the proposed order sought or (even) whether there had been any prior application for a vesting order. Neither the Crown nor the Lender asserted a claim to the surplus.

Decision:

The Applicant would only have standing to apply for a vesting order if he had an existing interest in the Properties rather than being someone seeking an interest.

The Court found it is ‘circular to confer a right to apply a vesting order on any person who applies for one.’ The Applicant did not have a proprietary interest, rather an interest in a ’much  looser legal sense’, and therefore did not, have standing to apply for a vesting order in respect of the Properties. In any event, the Court considered it would ‘not be possible or appropriate in any event’ to vest the Properties in the Applicant given that they had been sold to a third party.

In respect of the surplus, on the assumption that the Lender relied on its existing proprietary interest in the Properties, (section 315 (3) of the Act preserving its rights and interest), the Court found, prima facie, the Crown was entitled to the surplus as the Properties seemingly became subject to escheat. Accordingly, the Applicant had no standing to apply for a vesting order in relation to the surplus.

The position was distinguished from the decision in Lee v Lee[1] where the lender applied for a vesting order and the Court Of Appeal upheld a consent order that as part of the vesting order, 50% of the surplus should be paid to the trustee of the bankrupt’s estate for the benefit of the creditors on the basis that the Court had a wide discretion as to the terms upon which a vesting order might be made.  In this case, if the Lender had applied for a vesting order, rather than selling the Properties by enforcing its security, the Court would have had a discretion to order that any surplus be paid to the Trustee for the benefit of the creditors of the Estate but that was not the position.

Comment:

This decision highlights the generally passive and cautious attitude of the Crown Estate Commissioners in dealing with applications for vesting orders, presumably to avoid responsibility or liability for a property that might be onerous.  It also highlights that a lender in this situation, should simply pay the surplus money into Court and not, as might be assumed, to the Trustee or the customer.

From the Trustee’s perspective, this decision does lead to an unsatisfactory outcome as unless the Crown Estate Commissioners agree to claim and distribute any proceeds in respect of disclaimed property, a disclaiming Trustee will be without remedy in relation to any surplus. Trustees should therefore be cautious to disclaim property where there could be some surplus for creditors. If they have already disclaimed and later discover a surplus is likely, their only option would be to seek to persuade the lender to apply for a vesting order, before they exercise their powers of repossession and sale.  However this is unlikely to be attractive to a lender even if a Trustee was to meet the additional costs and provide an appropriate indemnity as it would inevitably lead to a delay in realising the security.



[1]                [1999] BPIR 926

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