Part 2

May 2008

ESTABLISHING THE BANKRUPT’S INTEREST IN THE PROPERTY

33.39 Introduction

In cases where the bankruptcy order was made on a petition presented before 1 April 2004 and section 283A applies reference should be made to Annex 3. (Details of the transitional provisions of section 283A are given in paragraph 3 of Annex 3.)

The official receiver should have also have regard to the guidance in this part and in Parts 3 to 8 of this chapter in all cases. Guidance on dealing with an interest in a qualifying property in the form of a charge is covered in Annex 2, paragraph 21 (f).

The contents of this part of the chapter should be used as a guide in the calculation of the bankrupt’s interest in a property and whether there is likely to be any equity in it for the benefit of the estate [note 1]. If an insolvency practitioner is likely to be appointed as trustee, the official receiver should make only such enquiries and basic calculations as are necessary to enable him/her to establish that the bankrupt has a beneficial interest and then it will normally be a matter for the insolvency practitioner acting as trustee to determine the exact nature of the interest. If the official receiver is likely to become trustee, a more detailed calculation might be necessary, particularly if the bankrupt’s interest is likely to be transferred to his/her spouse, civil partner or cohabitant.

33.40 Complex cases

If a detailed calculation cannot be made because the circumstances of the case are particularly complex, legal advice might be required. If legal advice is considered necessary but there are insufficient funds in the estate to discharge the costs of the advice, the consent of Technical Section should be sought prior to incurring a debit balance on the estate. See Chapter 32.2 for guidance on the employment of solicitors.

33.41 Interpretation of chapter

References in this chapter to property and dwelling-house should be taken to include both freehold and leasehold titles, such titles being held solely by the bankrupt or jointly with another unless otherwise stated. In all cases the premises referred to are residential premises. Where the term dwelling-house is used it should be interpreted as: including any building or part of a building which is occupied as a dwelling and any yard, garden, garage or outhouse belonging to the dwelling house and occupied with it [note 2].

33.42 Registered land

Both registered and unregistered land are dealt with in this chapter (see also Chapter 50).

The aim of registering land is to provide a safe and simple system of transferring and mortgaging land. With registered land there is a public record of ownership, rights, covenants and mortgages held at HM Land Registry. Upon registration for the first time on the Land Register, a parcel of land will be allocated a title number. The ownership (and any changes) or charges relating to the land will also be recorded in the Register (see Chapter 50 - Dealings with Land Registry and the HM Land Registry website http://www.landreg.gov.uk/ for details of this process).

If the official receiver is aware of the title number it should be quoted in all correspondence with HM Land Registry (see also paragraphs 33.137 to 33.139)

33.43 Unregistered land

Owners of unregistered land will normally hold a bundle of deeds, which form a record of previous sales, mortgages and other dealings with the land. However if the land is mortgaged, the lender normally holds the deeds as security for their loan. There is usually no public record of the information contained in the deeds. The Land Charges Department maintains a record of restrictive covenants, rights and mortgages relating to unregistered land. These are registered against the name of the landowner at the time the entry was made, rather than against the land or property (see paragraph 33.140).

33.44 Beneficial interest and legal estate

The terms ‘beneficial interest’ and ‘legal estate’ are used widely in this chapter and should be interpreted as follows:

(a) A beneficial interest is an interest in the proceeds of sale of a property and in the rents and profits which could be earned from the property until the sale and amounts to an equitable, as opposed to a legal, interest in the property. Beneficial interests often arise as a result of contributions to the purchase of, or improvements to, the property and can arise whether or not the person is the legal owner of the property (see paragraphs 33.51 and 33.66); and

(b) The legal estate is the title to the property itself which vests in its owner (see paragraphs 33.51 and 33.66).

33.45 Initial Enquiries

Details of any property in which the bankrupt is, or may have been, living or which he/she owns or owned should be obtained at an early stage in the bankruptcy to establish if the bankrupt has a beneficial interest. The following details should be established as soon as possible:

(a) The amounts due under any mortgages or other charges against such properties;

(b) Details of any third parties who have, or may have, an interest in the property. Particular attention should be paid to the possibility that the property or part of it might have been transferred to a spouse, civil partner or other associate (see pargraphs 33.119 to 33.125);

(c) Details of any property adjustment order in force (see paragraphs 33.107 to 33.114);

(d) The official receiver should identify property which is the sole or principal residence of the bankrupt, the bankrupt's spouse, or civil partner, former spouse or former civil partner and notify them that section 283A applies by sending form BHNOT [note 3]. (See Annex 3 in cases where the petition was presented before 1 April 2004 and Part 1 where the petition was presented on or after 1 April 2004).

In determining whether the bankrupt has an interest in a property which is registered in the name of his/her spouse or civil partner, former spouse or former civil partner, the official receiver should consider the nature of any payments made by the bankrupt to the spouse or civil partner, former spouse or former civil partner in respect of mortgage costs or maintenance. Such payments could arise under a court order or an agreement. If the official receiver suspects that a separation may have been engineered and maintenance payments made as a means of defeating creditors, he/she should make further enquiries. (See also paragraph 33.47 and 33.48)

33.46 Verifying interest HM Land Registry

Where the official receiver becomes aware of a possible interest in property a search should be made [note 4] of the relevant District Land Registry to verify ownership. A record of restrictive covenants, rights and mortgages relating to unregistered land is maintained by the Land Charges Department. A search, [note 5] can be made to verify ownership of unregistered land (see Chapter 50 - Dealings with the Land Registry). A search should not be undertaken as a matter of routine but only in specific circumstances, see paragraph 50.17.

33.47 Calculation of bankrupt’s interest

33.48 Property in the sole name of spouse, civil partner or cohabitant

Where the property is in the sole name of a spouse, civil partner or cohabitant of the bankrupt, the official receiver should consider the possibility that the property has been transferred into the spouse’s, civil partner’s or cohabitant’s sole name or was purchased with funds provided by the bankrupt with a view to defeating his/her creditors. Such transactions may be set aside (see paragraphs 33.119 to 33.125). Where the official receiver is satisfied that the bankrupt did not provide purchase monies, he/she should make enquiries to ascertain whether the bankrupt has acquired a beneficial interest in the property, for example, by making mortgage repayments, contributing to household expenses etc. The guidance in paragraph 33.52 should be considered in this respect.

33.49 Bankrupt’s interest in property - disputed

Where the bankrupt occupies a property with a partner (whether or not they are married or civil partners), the official receiver may have to consider a claim from the ‘solvent’ partner that they are entitled to a (greater) share of the property. For example, disputes can arise in respect of jointly owned properties where the partner believes that they are entitled to more than 50% of the beneficial interest or, in a solely owned property, where the partner believes that they have a financial interest in the property.

Where the official receiver as trustee is dealing with a jointly owned property, he/she should also consider whether the bankrupt is entitled to more than 50% of the net equity.

The conveyance of a property into joint names may be considered conclusive evidence of an intention to hold the property in equal shares. The exceptions to this are where one of the parties can demonstrate to the court proof of fraud or mistake in the conveyance or where there exists a declaration of trust of the beneficial interests. A declaration of trust should usually be made at the time of the conveyance, but may occur on the happening of a specific event which would disturb the shares in which the property was held. There is no requirement to lodge a declaration of trust between the legal owners of the property in respect of their beneficial interests with HM Land Registry as the Register is only concerned with the legal title and not the division of the beneficial interest by the legal owner(s). The official receiver should request documentary evidence in support of any disputed claim concerning the beneficial interest in the property whether it relates to the bankrupt, or solvent partner’s share.

33.50 Bankrupt’s interest disputed – case law

In the case of Re Lorraine Share [2002] BPIR 194 the bankrupt (now Mrs Fisher) was the sole owner of a property. The mortgage application form contained clear statements by Mrs Fisher that she was to pay the deposit personally and meet the instalments out of her own income. In 1996 she was adjudged bankrupt but gave no indication that she was not the legal and beneficial owner of the property. A trustee was appointed following which Mr and Mrs Fisher (who were unmarried but cohabiting at the time the flat was purchased) contended that Mrs Fisher had never been anything more than a nominee for Mr Fisher, who had in fact paid the deposit and maintained all the mortgage instalments. Witness statements and documentary evidence produced at trial supported this view. The court held Mr Fisher to be the sole beneficial owner of the flat but did so with specific mention that it was on the basis of evidence presented, but untested by cross-examination.

Where there is an express declaration of trust that declaration is conclusive evidence of the shares in which the joint owners hold the property, unless that declaration is set aside [note 6].

When considering the respective beneficial interest of the parties the official receiver should also have regard to representations made by the parties of any intention to hold the shares in the property to reflect their contributions to the initial purchase of the property. In the absence of any specific declaration of trust the official receiver can consider that the shares are held equally but representations that this was a mistake may be successful if one party can demonstrate a significantly higher contribution to the purchase price.

In the case of Springette v Defoe [1992] 2 FCR 561 the Court of Appeal held that, in the absence of evidence to the contrary (in particular a communicated intention to hold the property in equal shares), the property was held on a resulting trust for the persons who provided the purchase money in the proportions in which they provided it.

See also Part 3, paragraphs 33.117 and 33.118 on equitable accounting.

33.51 Protection of beneficial interest in solely owned property

Where a property is owned solely by the bankrupt, the official receiver should proceed as follows depending upon the position with regard to the beneficial interest:

(a) The bankrupt is entitled to the whole of the beneficial interest - the official receiver should assume that the legal estate vests in the trustee [note 7] and protect his/her interest by lodging a bankruptcy restriction (see paragraph 33.137).

(b) The beneficial interest is held by the bankrupt and/or another or others - the official receiver should register a Form J restriction as if it were jointly owned (see paragraph 33.139) HM Land Registry will not register a bankruptcy inhibition where the beneficial interest differs from the legal ownership. There are conflicting views as to whether the legal estate vests in the trustee in these circumstances. The property could vest in the trustee due to the property being solely owned by the bankrupt but subject to a third party claim, or the property could not vest in the trustee as the property is held by the bankrupt, wholly or partly on trust for another or others [note 8].

(c) The entitlement to the beneficial interest is in doubt - the official receiver should register a bankruptcy restriction or if unable to do so, a Form J [note 9] restriction should be registered. Each party’s entitlement to a share, if any, of the beneficial interest should be established and where a bankruptcy restriction has been registered this should be removed and replaced by a Form J restriction if the official receiver becomes satisfied that the beneficial interest is held as in (b) above.

33.52 Calculating an interest in solely owned property - with agreement

Reference should be made to any agreement made at the time of the acquisition of the property to establish that a third party has a beneficial interest in the property. This agreement is binding upon the trustee (Gissing v Gissing [1971] AC 886). Any agreement to share the interest in the property without stating the specific proportions in which that interest is to be divided, will give rise to interests in equal shares in the proceeds of sale. These interests may be adjusted by later agreement of the parties, which may or may not be in writing.

33.53 Dispute over ownership – solely owned property

In the event of any dispute, the onus of proof of the existence of an agreement falls upon the person claiming that there is an agreement. Where no agreement is found to exist, reference should be made to the guidance in paragraph 33.56 to establish the beneficial interests. See also paragraph 33.49.

33.54 Verbal agreement – solely owned property

In Re Densham, ex parte trustee of the bankrupt v Densham ([1975] 3 All ER 726), the property was purchased with a one-ninth contribution from the spouse towards the deposit. The contract was in the bankrupt’s sole name due to a misunderstanding as it had been verbally agreed that the spouse would have a half share of the property. It was held that the verbal agreement was valid. Without that agreement, the spouse would only have been entitled to a one-ninth share in the property.

33.55 Inferred agreement – solely owned property

In Midland Bank plc v Cooke and another (1995 4 All ER 562) there was no agreement between the spouses as to the exact proportions of their beneficial interest. It was held that the wife had made indirect contributions to the value of the matrimonial home by bringing up the children and maintaining and improving the property. From this it could be inferred that the couple’s presumed intention was to hold the beneficial interest in the property in equal shares.

33.56 Calculating interest - without agreement – solely owned property

Where no agreement is present (express or implied - see paragraphs 33.53 to 33.55) the beneficial interest in a property should be calculated after taking paragraphs 33.57 to 33.61 into consideration. 

33.57 Contribution to the purchase price, where property is purchased outright - solely owned property

The amount of the contribution to the purchase of the property, if it was purchased outright, must be considered to establish the parties’ interests in the property. The expected proceeds of sale should be divided in the same proportions as the sums paid for the purchase to arrive at the bankrupt’s interest. Other forms of contribution, as described in paragraphs 33.58 to 33.62, may affect the bankrupt’s interest. The intentions of the parties should also be considered so that if it can be shown that the intention was, for example, that the contribution from the other party was to be a gift or a loan to the bankrupt, no interest in the property will normally accrue to that party - but see also paragraph 33.58. The conduct of the parties may also indicate intentions or presumed intentions regarding whether the interests of the parties in the property should be in different proportions to the funds provided [note 10].

33.58 Types of contributions – solely owned property

Any contributions to the deposit and/or the mortgage should be considered in the calculation. Where the property was purchased with the assistance of a mortgage, the common intention of the interests of the parties in the property may be inferred by the source of the deposit and the arrangements for repaying the mortgage as explained below in (a) to (e):

(a) Contribution to deposit - If the bankrupt received assistance from another (“A”) in payment of the deposit, it may be inferred that it was the intention of the parties that “A” would share in the beneficial interest. It is likely that “A” will gain some interest in the property, unless the assistance was given in the form of a gift or a loan.

(b) Contribution to deposit and mortgage payments - If “A” made direct contributions to the mortgage repayments from his/her own funds and had provided some or all of the deposit for the purchase, it may be inferred that his/her interest in the property will be increased.

(c) Contribution to deposit and household expenses - If “A” provided some or all of the deposit for the purchase, did not make direct contributions to the mortgage instalments but paid other joint household expenses from his/her own monies, it could be inferred that these payments were intended by both parties to be a contribution to the price of the property. Accordingly “A’s” interest in the property will be enhanced by that contribution.

(d) Contribution to mortgage only - If there was no contribution by “A” to the deposit, but the bankrupt received assistance from “A” in payment of the mortgage repayments, “A” will accrue an interest in the property provided that the contributions were direct, regular and substantial.

(e) Contribution to household expenses only - Similarly, where the payment of the household expenses by “A” was substantial, an interest may accrue to “A”. The extent of the interest will depend upon the amount of the contributions and what can be inferred from the conduct of the bankrupt and “A” on how the beneficial interest would be shared.

33.59 Equal shares – solely owned property

In the situations (a) to (e) in paragraph 33.58 above it should not be assumed that the interests in the property will automatically be equal. If no inferences can be drawn, the rule of law that ‘equality is equity’ will be applied with the result that the parties will hold the beneficial interest in equal shares (Gissing v Gissing - see paragraph 33.52). The purchase of items for the property by “A” will not imply an intention that he/she would acquire an interest in the property. Similarly, the fact that the parties live together and “A” shares ordinary domestic duties, e.g. looking after children or undertaking repairs to the property, will not give rise to an interest or an enlarged interest in the property [note 11].

33.60 Improvements to a property – solely owned property

The Matrimonial Proceedings and Property Act 1970, section 37 provides that where a spouse contributes in money or money’s worth to the cost of any improvements to a property (in which either or both of them has or have a beneficial interest), this would give the spouse a share or enlarged share in the beneficial interest. This provision is subject to any contrary agreement (express or implied) between the spouses. It only applies if the contribution, monetary or otherwise, was of a substantial nature and can be identified with the relevant improvement so that contributions should be for a separate physical feature; for example, a garage or a central heating system: general contributions are not sufficient [note 12]. The amount of the spouse’s interest should be based upon the financial value of the improvement [note 13]. There is a similar provision in the Civil Partnership Act 2004 applying to civil partners [note 14].

33.61 Cohabitant’s interest – solely owned property

Although the Matrimonial Proceedings and Property Act 1970, section 37 applies only to married couples, (and civil partners are covered by virtue of the Civil Partnership Act 2004) a cohabitant may accrue an interest, or a greater interest, in the property, provided that:

(a) The contribution to the improvement (of money or in terms of labour) was substantial;

(b) There were joint efforts to acquire the property (i.e. contributions to either the deposit or the mortgage or both); and

(c) The property was used for the joint benefit of the bankrupt and the cohabitant [note 15].

The principles which relate to a cohabitant may also be applied to any other party who pays for such improvements; for example, in Hussey v Palmer ([1972] 1 WLR 1286) they were applied to a mother-in-law who paid for an extension to be built to a house.

33.62 Tenant’s right to buy – solely owned property

A tenant’s right to buy a local authority property at a discount could have a value referable to the discount and that could be treated as a contribution towards the purchase of the discounted property [note 16].

33.63 Irrevocable licence – solely owned property

Licences are a grant of permission by an owner of rights to land, intellectual property rights or some other type of property, but pass no interest in that property. They may be given verbally, or contained within a written licence/tenancy. Consideration should be given as to whether an irrevocable licence has been given by the bankrupt, prior to the bankruptcy proceedings, to another party who provided funds for the purchase of the property. An irrevocable licence is a licence that passes no interest and cannot be altered.

Where the bankrupt and another person proceed on the common assumption that the other is to enjoy a right to occupy the property and in reliance on that assumption the other party expended money, or otherwise acted to his/her detriment, the court could imply an irrevocable licence giving effect to the arrangement. This would not merely be a contractual licence, but a licence under a constructive trust conferring an interest binding upon a trustee in bankruptcy [note 17].

An irrevocable licence is likely to result in someone having the right to remain in the property, which may affect the value of that property. Therefore if one is encountered Technical Section should be contacted, and legal advice may be required.

33.64 Summary of third party interests – solely owned property

In all the cases outlined in paragraphs 33.54 to 33.63 above it will be a matter for the party claiming an interest in the property to provide the evidence that the trustee is not entitled to the whole of the proceeds of sale of the property which is in the bankrupt’s sole name. The official receiver should always have regard to the possibility that other parties might hold an interest in the property and if he/she is aware of facts that give rise to an interest, he/she must consider them even if the party concerned has not contacted him/her. In cases where the official receiver is in doubt concerning the intentions of the parties on the sharing of the interest in the property and the bankrupt’s spouse/civil partner or other party claims a share which is not equal to the value of his/her contribution, legal advice may be necessary. (See Chapter 32.2 for guidance on the employment of solicitors.)

33.65 Legal title – jointly owned property

Where property is owned by the bankrupt jointly with others, the legal title to the property vests in all of those parties as joint tenants and is not severable. The legal title does not form part of the bankrupt’s estate and so does not vest in the trustee [note 18]. Even if all the joint owners are bankrupt, it will only be their beneficial interests and not the legal title which will vest in their trustee(s).

33.66 Beneficial interest – jointly owned property

The bankrupt’s beneficial interest in the proceeds of sale of the property, and rent and profits of the property pending sale is severable and does however vest in the trustee [note 19]. The interests of the parties are normally declared in the conveyance or in a trust deed executed at the time of the conveyance. Such declarations are conclusive of the interests of the parties unless there has been a mistake or fraud.

33.67 Calculating interests – jointly owned property

The usual declaration will be that the bankrupt and other owner are joint tenants in equal shares. However, on the making of the bankruptcy order the beneficial joint tenancy will be severed and any increase in value of the property as a result of expenditure by either party should be taken into account to calculate the respective beneficial interests of the parties [note 20]. If no declaration has been made, the principles outlined in paragraph 33.58 relating to solely owned property should be applied to determine the interests of the bankrupt and his/her co-owner(s). See paragraph 33.66 above.

33.68 Interest in property by deceased insolvent

Where a debtor dies before the presentation of a bankruptcy petition and a petition for an insolvency administration order is presented instead and the property had been jointly owned, the guidance in paragraphs 33.69 to 33.73 should be followed. Where property is solely owned by the deceased insolvent the guidance in paragraphs 33.52 to 33.64 should be followed to calculate the deceased insolvent’s interest in the property.

For further information on deceased insolvents see Chapter 54.

33.69 Petition for insolvency administration order presented before 2 April 2001 

Where:

(a) The petition for an insolvency administration order is presented before 2 April 2001 [note 21];

(b) The property is jointly owned; and

(c) The joint tenancy has not been severed prior to death,

(d) The beneficial interest will pass to the joint owner under the survivorship rules and not to the trustee.

33.70 Re Palmer, deceased (a debtor)

In Re Palmer, deceased (a debtor) [1994] 3 WLR 420, the Court of Appeal decided that an insolvency administration order can only affect the deceased insolvent’s estate. For these purposes, that means ‘estate’ as ordinarily understood, as opposed to his/her estate available for distribution in bankruptcy. The deceased insolvent’s estate as ordinarily understood would not include an interest which he/she held on a joint tenancy immediately prior to his/her death, since this would pass to his/her surviving joint owner(s).

33.71 Petition for insolvency administration order presented after 2 April 2001 

The Insolvency Act 2000 (section 12) inserted section 421A into the Insolvency Act 1986 to address the consequences of the Court of Appeal decision in Re Palmer deceased (see paragraph 33.70) in relation to jointly owned property. Where the petition for an insolvency administration order is presented after 2 April 2001, section 421A allows the trustee to seek to recover the value of any interest in jointly owned property lost to the estate by the operation of survivorship rules. Value lost to the estate is defined as the amount which would in the court’s opinion restore the position to what it would have been if the deceased had been adjudged bankrupt immediately before his/her death [note 22].

33.72 Monetary order

Under section 421A, the trustee will be able to apply to the court for a monetary order against the survivor, requiring the survivor to pay to the trustee an amount not exceeding the value lost to the estate, where:

(a) The petition on which the insolvency administration order is made is presented after 2 April 2001 The petition is presented within 5 years of the debtor’s death [note 23]; and

(b) Immediately before his/her death, the debtor had a beneficial interest in property held under a joint tenancy [note 24].

33.73 Purpose of a monetary order

The purpose of a monetary order is to provide for payment of debts and other liabilities of the insolvent estate. In making the order the court will have regard to all the circumstances of the case, including the interests of the deceased’s creditors and the survivor. However, unless the circumstances are exceptional, the court must assume that the interests of the deceased’s creditors outweigh all other considerations [note 25].

33.74 Debtor dies after presentation of petition

Where a debtor dies after the presentation of a bankruptcy petition but before the making of the order the bankruptcy estate comprises that property which is vested in the bankrupt at the date of the making of the bankruptcy order. At the time the bankruptcy order is made, the bankrupt’s share in property held on a joint tenancy is no longer vested in the bankrupt or his/her personal representative but passes to the surviving joint tenant. There is no action that the trustee can take with respect to the bankrupt’s share in the property in these cases. Section 284 (restrictions on dispositions of property) applies [note 26]. See Chapter 54, paragraph 54.39 for more information.

33.75 Unregistered land - debtor dies after presentation of petition

Where a debtor dies after presentation of a bankruptcy petition and the surviving joint owner has disposed of the property after the date of the deceased’s death, the Law of Property (Joint Tenants) Act 1964 section 1(1) should be considered. This Act, which only applies to unregistered land, provides protection for the purchaser who can acquire good title from the joint owner as if the joint owner were sole owner of the property unless prior to the conveyance a bankruptcy petition has been registered at the Land Charges Department against either joint owner. If the conveyance occurred after the registration of the petition, any interest the third party has acquired will be subject to the trustee’s claim. Wherever possible, such a recovery should be made by an insolvency practitioner acting as trustee. The official receiver, when trustee, should first seek to recover the value of the beneficial interest in the property of the deceased debtor from the other joint tenant(s) before pursuing the third party.

33.76 Further guidance

If the official receiver requires any further guidance on more complex cases, on dealing with property that has been conveyed after the deceased’s death, he/she should consult Technical Section.

For further information on deceased insolvents see Chapter 54.

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