The trials of being exceptional in bankruptcy
Friday, 7th October 2016
As there is no clear definition in s.335A(3) of the Insolvency Act 1986 of what amounts to exceptional circumstances, the courts must apply the judgments of case law when determining whether to delay an order for possession and sale.
When a trustee in bankruptcy applies to the court for possession and sale of a family home, the court must consider several different factors before granting the order, including the needs of any spouse or children of the bankrupt.
However, if it has been more than a year since the vesting of the bankrupt's estate in the trustee, as s.335A(3) states, the court will assume that the interest of the bankrupt's creditors outweigh all other considerations, unless the circumstances of the case are exceptional.
Back in 1998, while giving judgment in the case of Claughton v Charalambous ( BPIR 558), Justice Jonathan Parker summed up the court's position in relation to exceptional circumstances:
"What is required of the court in applying s.335A(3) is, in effect, a value judgment. The court must look at all the circumstances and conclude whether or not they are exceptional."
Given this need for a value judgment as a result of the absence of a clear definition of 'exceptional', it is perhaps inevitable that the court's approach to this sensitive area of law has evolved slightly over time.
Cases that emerged within the first decade of the Insolvency Act becoming law show the courts taking a hard line as to what would constitute an exceptional circumstance.
Lord Justice Nourse in Re Citro ((Domenico) (a bankrupt)  (Ch) 142) made it clear that the circumstance would have to be outside of the usual melancholy consequences of debt and improvidence to be deemed exceptional, which rules out any general hardship suffered by the children or spouse of the bankrupt if a family home is taken away. Similarly, any disruption to a child's education that is caused by loss of the home has been shown not to amount to an exceptional consequence of bankruptcy (Salmon's Trustee v Salmon 1989 SLT (Sh Ct) 49).
As time passed, however, the courts started to recognise certain types of hardship to be exceptional. In the 1998 case of Re Reval ( B.P.I.R. 384) the bankrupt's wife suffered from paranoid schizophrenia, which was deemed exceptional, since moving to a smaller property away from her friends and family could have caused a relapse in her condition.
Meanwhile, in Claughton, the exceptional circumstance was that the bankrupt's wife had renal failure and chronic osteoarthritis, which meant that her mobility was severely restricted and the house in question had been adapted to meet her needs.
The following year the case of Re Bremner ( B.P.I.R. 185) emerged, the exceptional circumstance being that the bankrupt, following a diagnosis of terminal cancer, was being cared for solely by his wife and had a life expectancy of only six months. The judge consequently held that the sale of the property should be deferred until three months after the bankrupt's death. Even then, the judge also took account of the fact there was enough equity in the property to pay creditors in full.
Although the courts have therefore found situations in which the rule of exceptional circumstances can be applied, in reality, these cases only serve to illustrate how severe a situation must be for the courts to allow the presumption in favour of the creditors to be rebutted.
Furthermore, it should be noted that the presence of an exceptional circumstance does not prevent the court from making an order for sale; it is only a question of how long before the order comes into force. This was made clear by Justice Lawrence Collins in Dean v Stout ( EWHC 3315 (Ch)), and more recently reinforced by the 2016 case of Grant v Baker ( EWHC 1782 (Ch)), in which it was decided on appeal that the sale of the bankrupt's home should only be postponed for 12 months (rather than indefinitely), despite the fact that the bankrupt's daughter who suffered from global developmental delay, dyspraxia and obsessive compulsive disorder was living there. It is clear from the case law therefore that, while a finding of exceptionality can delay a possession and sale order, it will not postpone it indefinitely.
At this point, one might reasonably ask how the European Convention on Human Rights and the Human Rights Act 1998 fit into this strict application of s.335A. Article 8 (the right to respect for private and family life and the home) has been raised several times as a defence to possession proceedings, but never successfully.
Rather, the courts have invariably found that s.335A provides a necessary balance as between the rights of creditors and the respect for privacy and the home of the debtor and therefore that the requirements of this section ?satisfy the test of being necessary in a democratic society and are thus proportionate (Smith J in Ford & Ford v John Alexander (Trustee in Bankruptcy)  EWHC 266 (Ch)). Consequently, Article 8 defences have often caused considerable delay and expense to the bankrupt's estate, while never assisting the bankrupt in gaining the postponement of sale that they desire.
Despite an increase in findings of exceptionality over time, the court's threshold for postponing a possession and sale order remains very high, so that only severe or terminal illnesses, often coupled with specific interior adaptations that have been made to the home to deal with these illnesses, are recognised to be sufficiently exceptional circumstances. Crucially, even when such circumstances are found to be exceptional, possession proceedings will not be thrown out, but simply postponed for a limited period of time.