Trustee in bankruptcy’s application for possession and sale of property: get the procedure wrong at your peril!

Procedure does matter when making an application for possession and sale of a bankrupt’s property. Making the application using the wrong procedure is a problem. Case law has confirmed that the correct route is to make an insolvency application under the Insolvency Act 1986 (related rules), not Part 8 of the Civil Procedure Rules (as some less experienced lawyers mistakenly believe).

A trustee in bankruptcy may make an application under section 335A and 363 of the Insolvency Act 1986 (and associated provisions in the Trustees of Land and Appointment of Trustees Act 1996) for the possession and sale of a bankrupt’s property. Where the property falls within sec. 283A of the Insolvency Act 1986 (the “use it or lose it” rule) that an application should be made within three years of bankruptcy, or else the trustee in bankruptcy’s interest in the property will return to the bankrupt.

Previously, there was confusion over what form such an application may take; whether it should be under Rule 1.35 of the Insolvency (England and Wales) Rules 2016 or under Part 8 of the Civil Procedure Rules (CPR).  This has recently been clarified in the case of Gostelow and another v Hussain and others [2021] EWHC 3276 (Ch) which confirmed that applications should properly be made under Rule 1.35 of the Insolvency (England and Wales) Rules 2016.

So – what happens if the wrong procedure is used? A judge will usually have the power to correct an error of procedure under their inherent case management powers (CPR Part 3.10).  In practical terms this means that the issue will be flagged at the case management stage and an order may be made that the proceedings should continue subject to the error being corrected.

However, the position is not entirely clear when it comes to applications where limitation under has expired (i.e. the “use it or lose it” rule has passed).  Such applications are often made up against that three-year deadline and, if those proceedings are dismissed because the incorrect procedure was used, the trustee could find themselves out of time; but if a judge allows the proceedings to continue subject to the error being corrected this potentially deprives the bankrupt (or their spouse / former spouse) of a legitimate limitation defence. The judge in the Gostelow case declined to comment on this scenario as it was not relevant to the facts of the case in question.

This leaves a real question unanswered, and a real risk for trustees in bankruptcy if they (or their lawyers) use the wrong application when up against the ‘use it or lose it’ deadline. In a worst case scenario, the trustee could find themselves having lost their interest in the property, and having to explain that loss to creditors (if not facing claims from them for the loss of it).  Furthermore, even if the court uses its case management powers to correct the procedural error, there is a real risk that the trustee may be penalised in costs for using the incorrect procedure.

So – how do you prevent that risk?  Put simply, you use expert insolvency lawyers.  The temptation is often for trustees to view bankruptcy possession proceedings as simple, and as currency to give work back to non-specialist insolvency lawyers who give them referrals.  Bankruptcy possession applications are far from simple – getting them wrong can have serious consequences.

We have a strong expert restructuring & insolvency team here, including a specialist in acting for trustees in bankruptcy.  If you require practical advice, please contact us.

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