"Use it or lose it" does not apply to Transaction at an Undervalue cases

Court of Appeal success for Ashfords' Restructuring and Insolvency Team. 

In a landmark judgment delivered this morning, Lord Justices Lloyd, Rix and Longmore dismissed the appeal of a  bankrupt and his wife against the earlier decision of Mr Justice Mann, who had refused a late challenge against his ability to make a possession order on the basis of the "Use it or Lose it" provisions.

The Facts  
The husband was made bankrupt in 1995.  Within a few weeks of the 5 year relation back period he had transferred the matrimonial home from his sole name to his wife's sole name for "natural love and affection".

The Trustee issued proceedings challenging the Transfer as a Transaction at an Undervalue within a few days of the 12 year limitation period (given the claim related to a "specialty"). 

At first instance Registrar Simmonds made an order declaring the Transfer to be a sham or, alternatively, a Transaction at an Undervalue.  The sham declaration was made as a result of discovery at trial that the Transfer to the wife was a forgery perpetrated by the bankrupt with the intention to deceive creditors, the Trustee and the Land Registry.

Notwithstanding the declarations the Registrar refused (citing Paramount Airways and Singla v Brown) to exercise discretion in the Trustee's favour and accordingly made no consequential order.  The Registrar undertook a balancing exercise (as we previously reported) and found the bankrupt and his wife would suffer severe prejudice principally due to the delay to bring proceedings by the Trustee.

On appeal before Mann J, the Trustee succeeded in obtaining orders for possession and sale. While Mann J indicated delay was a factor in exercising discretion, there had to be exceptional reasons not to exercise discretion in the Trustee's favour.

Mann J also delivered a second judgment in which he made it clear that, even if the "Use it or Lose it" provisions did apply to Transaction at an Undervalue cases, the Trustee was entitled to rely on s283A(5) Insolvency Act 1986 (that time only began to run from discovery of the sham at trial).

Appeal to the Court of Appeal
The bankrupt and his wife obtained permission to appeal (solely on the "Use it or Lose it" point) and the matter came on for hearing on 3 February 2011.

Counsel for the bankrupt and his wife argued that:

• The introduction of s283A gave a strong indication of public policy that bankrupts should have certainty as to a Trustee's intentions concerning the matrimonial home;
• Once a Trustee becomes aware of a cause of action entitling him to vindicate and realise an interest in the bankrupt's home he must bring the claim within 3 years or the interest will re-vest in the bankrupt;
• The net result of this would mean a de facto displacement of the 12 year limitation period; and
• Once the interest is lost it is lost forever and it doesn't matter if the Trustee discovers an alternative cause of action outside the 3 year time limit. 

The Trustee's Counsel argued in response that:

• It is necessary to look further than the broad statement of purpose of the "Use it or Lose it" regime and examine the detail of the provisions. (Lewis v Metropolitan Properties);
• "Use it or Lose it" assumes the Trustee has the legal power to stop the clock.  In Transaction at an Undervalue cases the Trustee has to first investigate and prosecute a claim before he can use it;
• It is not knowledge of a cause of action that triggers s283A, but knowledge that the interest forms part of the bankrupt's estate; and
• If a Trustee discovers the interest has been transferred by an apparent valid transfer time does not start to run.  Put simply, the Trustee can't lose what he can't use.

Decision of the Court of Appeal 
Lord Justice Lloyd, in the leading judgment, agreed with the submissions on behalf of the Trustee.  He cited the bankrupt's obligations to give to his Trustee the information he requires to administer the bankruptcy (to include the submission of a Statement of Affairs), and commented on the lack of information provided by the bankrupt in this case.

He also made it clear that for s283A to operate the bankrupt's interest in the matrimonial home must be first comprised within the bankruptcy estate, which it clearly is not in a Transaction at an Undervalue case.

Furthermore, he stated there would be serious difficulties in identifying when the Trustee became aware of the claim to start time running for s283A purposes.  More fundamentally, he concluded, that s283A could not apply to cases where there was no interest within the bankruptcy estate as the Trustee could not avail himself of the various options in s283A(3) (i.e. the ability to stop the clock).

Comment
The Court of Appeal, in a unanimous decision, have provided long overdue clarity for officeholders on the interaction between "Use it or Lose it" and Transaction at an Undervalue provisions.

However, officeholders should be aware of obiter comments made by Lord Justices Lloyd and Rix on the delay in bringing proceedings to reverse transactions concerning the matrimonial home.

Both indicated that the policy behind s283A could be relevant to the exercise of discretion to make a remedial order under s342 Insolvency Act, with Lord Justice Rix commenting:

"However, Trustees who for no good reason sit on their hands when aware of a claim under section 339 in respect of a matrimonial home, may find themselves in difficulty." 

Stephen Davies Q.C and Richard Ascroft, both of Guildhall Chambers, were briefed by Alan Bennett of Ashfords LLP on behalf of the Trustee. 

Click here for our briefing following the appeal hearing before Mann J.