Reid-Roberts & Anor v Mei-Lin & Anor

The 2032 date for possession was fixed having regard to “exceptional circumstances” within the meaning of s 335A(3) Insolvency Act 1986 identified by the deputy judge which resulted in his exercising his discretion pursuant to s 335A(2) IA 1986 to defer the date for giving vacant possession. On appeal, Cawson J held that:

(1) the deputy judge had been right to find, as he had, that Mr Gudmundsson had not transferred his beneficial interest in the property to Ms Lin prior to his bankruptcy (as was contended), albeit for different reasons than those given by the deputy judge;

(2) the deputy judge had been entitled to find that there were “exceptional circumstances” for the purposes of s 335A(3) IA 1986; but

(3) he had been wrong to defer possession and sale for over eight years: a period of just over 18 months was appropriate, so vacant possession was to be given by 31 July 2027.

It was the deputy judge’s reliance on the Court of Appeal’s decision in Xydhias v Xydhias without having considered it in the light of the later Court of Appeal decision in Soulsbury v Soulsbury that led to the judge’s first conclusion. The decisions of both the judge on appeal and below are fact dependent. Suffice it for present purposes to note, first, Cawson J’s finding that “to the extent that the Deputy Judge did find that there was an immediate disposition of Mr Gudmundsson’s interest, he was wrong to find that Xydhias provided authority to the effect that such disposition was ineffective.” Secondly, the judgment on this issue contains a helpful analysis of the authorities as to what constitutes compliance with s 53 Law of Property Act 1925 (see paragraphs 80-96). Thirdly, it comments on the weight likely to be given to WhatsApp messages in that context:

“Whilst it might be technically possible for a WhatsApp message to have the requisite dispositive intent and satisfy the requirements of s 53(1) LPA 1925, the use of such a medium does, as I see it, and considering the matter objectively, point against an intention to [e]ffect such a significant transaction as the transfer of a beneficial interest in a relatively high value property such as the Property” (paragraph 67).

Of greater interest to insolvency professionals are the judge’s reasons for upholding the deputy judge’s finding on “exceptional circumstances” but substituting a much shorter period for possession and sale to be given: as Cawson J himself put it, “The central question for the Deputy Judge was as to how he should exercise his discretion under s 14 of the Trusts of Land and Appointment of Trustees Act 1996…on the Trustees’ application pursuant thereto for an order for sale of the Property in which both Ms Lin and Mr Gudmundsson’s bankruptcy estate have an equal beneficial interest. Such an application is required by s 335A IA 1986 to be made to the bankruptcy court and dealt with as provided for by this provision.”

The judge identified two main factors relied on by the deputy judge as constituting “exceptional circumstances.” The first was alleged misconduct on the part of Mr Gudmundsson in not informing the court or Ms Lin in family proceedings of the service on him of a statutory demand and the resulting bankruptcy with a view to delaying the handing down of judgment and thus frustrating Ms Lin’s efforts to secure sole beneficial ownership of the property. The second was Ms Lin’s mental health condition and that of her son.

Cawson J drew on the judgment of Lawrence Collins J in Dean v Stout for the principles applicable to s 335A(2) and (3) IA 1986, which he paraphrased as follows:

(1) the presence of exceptional circumstances is a necessary condition to displace the presumption that the interests of creditors outweigh all other considerations, but the presence of exceptional circumstances does not debar the court from making an order for sale;

(2) typically, exceptional circumstances relate to the personal circumstances of one of the owners such as a medical or mental condition;

(3) the categories of exceptional circumstances are not to be categorised or defined and the court makes a value judgment after looking at all the circumstances;

(4) the circumstances must be exceptional and this expression is intended to apply the same test as that applied in decisions made prior to IA 1986 such as Re Citro (a bankrupt) [1991] Ch 142;

(5) it is not uncommon for a wife with children to be faced with eviction in circumstances where the realisation of her beneficial interest will not produce enough to buy a comparable home in the same neighbourhood or indeed elsewhere, but such circumstances could not be described as exceptional;

(6) for the purposes of weighing the interests of creditors, the creditors have an interest in the order for sale being made even if the whole of the net proceeds will go towards the expenses of the bankruptcy and such fact is not an exceptional circumstance justifying the displacement of the presumption that the interests of creditors outweigh all other considerations.

Also relevant to the present case was the issue of the extent to which the court was entitled to have regard to the conduct of the bankrupt leading up to the making of the bankruptcy order in connection with a finding of “exceptional circumstances.” Counsel for the trustees relied on the decision of Henderson J in  Everitt v Budhram, in support of the contention that the court was not entitled to have regard to such matters. Counsel for Ms Lin relied on Re Holliday and Walton J’s observations in Re Lowrie, where he described Re Holliday as a “brilliant example” of a case where there were exceptional circumstances, noting that it was a case in which the bankruptcy petition had been presented by the husband himself “as a tactical move” to avoid a property transfer. The decision of the Court of Appeal in Re Citro also figured heavily in the submissions, as it does in Cawson J’s judgment. He noted, for example, Nourse LJ’s having said that he would not have regarded it as an exceptional circumstance that the husband had presented his own petition, even as a tactical move: “That was not something of the creditors’ choosing and could not fairly have been held against them”.

Faced with these and other opposing propositions, Cawson J steered a middle course:

“[T]hese authorities do not, in my judgment, provide an absolute bar against considering the circumstances leading up to the making of the bankruptcy order so long as it is fair to creditors to do so, and that doing so does not involve a challenge to the integrity of the bankruptcy order itself by suggesting that it ought not to have been made. Further, what Nourse LJ’s reasoning in Re Citro does demonstrate with regard to exceptional circumstances is that it is permissible to look at the particular circumstances of the creditors within the bankruptcy, such as those in Re Holliday, where one had creditors who were likely to be paid in full, albeit with some delay if sale were deferred.”

Turning back to the case before him, after expressing some reservations about the approach to pre-bankruptcy conduct taken by the deputy judge, he went on:

“Consistent with Nourse LJ’s analysis of Re Holliday in Re Citro at p. 157 D-H, this is, I consider, a circumstance leading up to the making of the bankruptcy order that the Court is entitled to take into account in that it does not involve a challenge to the integrity of the bankruptcy order itself, and is, I consider, something that can be taken into account in considering the position of creditors without any unfairness to them given the windfall likely to have resulted from the delay, however caused.”

Whilst he accepted that the evidence could have been stronger on the health problems relied on by Ms Lin, he again upheld the findings of the deputy judge:

“[O]n the basis of the evidence before him, I consider that the Deputy Judge was entitled to conclude that there were, in consequence of diagnosed mental health issues, features of the present case that distinguished it from the commonplace melancholy consequences of debt and improvidence suffered by a wife with children facing eviction in consequence of her husband’s bankruptcy. In particular, the evidence does suggest that having to move, and disturbing education would have a significant detrimental effect on Ms Lin’s son’s health, and that, although improving, her own mental health condition is liable to be detrimentally affected by, at least, a sudden move.

Consequently, whilst I consider that there were some errors in the Deputy Judge’s approach to the misconduct on the part of Mr Gudmundsson, and whilst there are deficiencies in the evidence as to the state of Ms Lin and her son’s mental health, I have come to the conclusion that the Deputy Judge’s overall evaluation that there are, in the present case, exceptional circumstances is one that he was entitled to come to.”

As to the timing of possession and sale, Cawson J recognised that, on the basis of the usual constraints on any appeal as to the exercise of discretion, it would only be appropriate to interfere with the exercise by the deputy judge of his discretion if he had “taken into account irrelevant matters, failed to take into account relevant matters, and/or was plainly wrong, recognising the wide ambit of the discretion open to [him].” He went on to say that he was satisfied that the deputy judge had erred in the exercise of his discretion under s 335A(2) in postponing the order for sale “for as long as in excess of 8 years.” He said that for a number of reasons:

(1) Whilst in Grant v Baker the court contemplated the possibility of a lengthy (and possibly) indefinite suspension, Henderson J recognised that the court’s primary obligation was to exercise its powers under s 335A with a view to enabling the bankrupt’s interest in property to be realised and made available to cover the costs and expenses of the bankruptcy and for distribution to creditors: it would only be in wholly exceptional circumstances that any delay measured in more than months would be appropriate.

(2) The deputy judge did not have proper regard to how the statutory scheme ought to operate in a case such as the present. Whilst the factual circumstances of the case potentially produced a windfall for creditors, there were costs and expenses within the bankruptcy that had to be put into the balance.

(3) The deputy judge had erred in having regard to the contention that one creditor was uncertain: he should have proceeded on the basis that there were other claims in the bankruptcy which were certain and which had been submitted for proof,

(4) The deputy judge had failed to give any real or sufficient consideration to the alternatives that might be available to Ms Lin, in particular the possibility of her finding a rental property.

He recognised that even the time he had fixed for possession and sale was more generous than that allowed in Grant v Baker but considered it justified on the basis that:

(1) as at 31 July 2027, Ms Lin’s son would be 17 and would have completed a further full school year;

(2) it would allow Ms Lin and her children time to adjust and buy or rent alternative accommodation;

(3) it ought to enable creditors’ claims (to the extent that there was likely to be a dividend) and the costs and expenses of bankruptcy to be met “within a not unreasonable period of time.”

The decision confirms that the “exceptional circumstances” jurisdiction remains very much alive. It also confirms, however, that its scope is far from generous to the bankrupt or his/her family.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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