News | March 22, 2023

Mehers v Khilji

Mehers v Khilji [2023] EWHC 298 (Ch) is an interesting case about the bankruptcy “use it or lose it” provision enshrined in s 283A Insolvency Act 1986. The provision gives a trustee in bankruptcy three years to decide what, if anything, to do about an interest in a property which is the home of the bankrupt, the bankrupt’s spouse or civil partner, or a former spouse or civil partner of the bankrupt and which forms part of the bankrupt’s estate. If the trustee does not take certain steps within the three-year period, the bankrupt’s former interest ceases to form part of the bankrupt’s estate and revests in the bankrupt. Time does not begin to run against the trustee if the bankrupt does not inform him/her or the official receiver of a property interest within three months of the date of the bankruptcy or until the trustee or OR “becomes aware” of the bankrupt’s interest (s 283A(5)). Mehers v Khilji, a judgment of Deputy ICC Judge Curl KC, deals with the meaning of  “inform” and “becomes aware” for the purposes of s 283A(5) Insolvency Act.

A bankruptcy order was made against Ms Khilji in 2018. Ms Khilji’s husband had died intestate in 2014. His estate consisted of a property registered in his sole name. Letters of administration had been granted. Under the statutory trusts arising on intestacy, the estate would devolve as: a statutory legacy to Ms Khilji of £250,000; a one-half interest in the remainder of the balance of the net estate to Ms Khilji absolutely; and the other one-half interest upon trust for the deceased’s children in equal shares. It was accepted that the bankruptcy estate included Ms Khilji’s rights under the unadministered intestate estate.

On 28 September 2018, Ms Khilji had attended an interview with the OR’s examiner and signed a statement. She had provided some information about the property which is set out in the judgment. She made reference, among other things, to Mr Khilji’s death, disputes about the estate, payment of a mortgage and so on, saying also that she did not believe she had ever jointly owned the property. Her case was that all that constituted notice. In her evidence she said:

“When I told [the OR] that I made contributions to the mortgage, this means that I should have a higher claim to some more of the Property that is in addition to my Statutory Legacy. [The OR] and the [Trustee] should have known this. In my limited knowledge of legal terminology, I do not know what other notice the [Trustee] expected me to give her. I disclosed everything I know about my entitlements to [the OR] as early as I could.”

Counsel for Ms Khilji argued that the trustee had been “on notice” (as he put it) that Ms Khilji had an interest in the property from 28 September 2018, which set the three year period in s.283A running. That date was within the three months beginning with the date of the bankruptcy. In those circumstances, the three-year period expired three years after the date of the bankruptcy, which in this case was 2 July 2021. That meant that the trustee had been  out of time when her bankruptcy application claiming the property was issued on 11 January 2022, since by then her interest had revested in Ms Khilji. The position of both the trustee in bankruptcy and the administrator of the bankrupt’s deceased husband’s estate was that issuing the bankruptcy application seeking relief in respect of the property on 11 January 2022 was within three years of the trustee’s becoming aware of Ms Khilji’s interest in the property. What Ms Khilji had told the OR’s examiner was not sufficient to constitute notice of her property interest or make her aware of the bankrupt’s intertest in it. The difference between the parties therefore went to what the deputy judge described as “the quality of knowledge required on the part of the Trustee.”

The deputy judge found no support in the words of s 283A for the proposition that “notice” to the trustee (or the OR) of a “potential claim” was sufficient. The trustee had to either be “inform[ed] by the bankrupt of an interest in a property or otherwise have “become aware” of one:

“It is plain from the drafting,” he said, “that both these concepts require knowledge on the part of the Trustee. Notice is not the same as knowledge: see, for example, In re Montagu’s Settlement Trusts [1987] 1 Ch 264.”

In concluding that he drew on Henderson J’s treatment in The Right Honourable Rhodri Viscount St Davids v Lewis of the bankrupt’s obligation to inform his trustee of after-acquired property, which he thought was apt to apply to the revesting regime under s 283A (although he  highlighted differences between the provisions as well). “In particular,” he said, “it is both pragmatically desirable and plainly just that a bankrupt who fails to comply with their duty to notify their trustee either of after-acquired property or of an interest in a property within the meaning of s 283A(1) will face an uphill struggle in persuading a court that the trustee was nonetheless aware of that interest such that the property is no longer available to the estate.”

A fact-sensitive approach was required: Henderson J observed that “the quality and cogency of the evidence needed to establish actual knowledge for the purposes of s 309(1) will vary according to the circumstances of the particular case.”

The deputy judge went on to express the view that a trustee in bankruptcy’s  becoming aware of an interest meant putting him or her in a position equivalent to that in which s/he would be, having received information from the bankrupt that he does have an interest in the property, from whatever source he may gain this knowledge:

“If becoming aware means anything less than that, then it does not put the trustee in bankruptcy into an equivalent position as regards knowledge as he would be in if the bankrupt had provided the information in the first place. It seems to me that there is no sufficient reason to suppose that the legislature intended the trustee in bankruptcy to be put on the spot, so to speak, with the limited time provided for under 283A in which to take steps with a view to the realisation in one way or another for the benefit of creditors of the interest of the bankrupt, unless he knows of an interest which is already vested in the bankrupt’s estate.”

He also rejected a submission made on behalf of Ms Khilji to the effect that her interest in her deceased husband’s intestacy or her registered matrimonial home rights in themselves constituted interests in the property within the meaning of s.283A(1).

For the foregoing reasons he found that neither the trustee nor the OR was informed or otherwise became aware that Ms Khilji had, at the date of her bankruptcy, an interest in the property falling within the meaning of s.283A(1) Insolvency Act 1986 before being put on notice of it by service on the trustee of a defence and counterclaim dated 6 September 2019 which referred to it. In issuing her bankruptcy application on 11 January 2022 the trustee had therefore acted within time.

The case is a salutary warning to a bankrupt of the need to be clear in informing the OR or trustee of a property interest in order to be able to take advantage of the revesting after three years, absent action on the part of the office-holder who is acting as trustee. By the same token, a prudent trustee will need to examine carefully any indications of a property interest to ensure that they are not construed as notice or becoming aware such as to start the three years running against him or her.