Bankruptcy and its Affect on Legal Ownership of Land
When a person enters bankruptcy, whether voluntarily or as a result of a petition by creditors, all of his assets vest in (in other words belong to) the Official Receiver or if one is appointed, the trustee in bankruptcy, (for convenience for the remainder of this article we will use the term “trustee in bankruptcy” to refer to both the trustee and the Official Receiver) who holds them on behalf of the bankrupt’s creditors. This includes any land that the bankrupt owns. If buying land from someone who is or has in the past been bankrupt there are some very important points to consider.
How you proceed will depend on whether the land is registered solely in the name of the bankrupt or jointly with another (whether or not the other joint owner is bankrupt).
How Do I Know if Land is Affected by Bankruptcy?
There are two broad stages to the process of being declared bankrupt. First there will be a bankruptcy petition, where the debtor himself or his creditors apply to make him bankrupt and second there will be a bankruptcy order.
Once a petition is lodges, the courts must inform the Land Charges department at Land Registry who search their records to see if the debtor is registered as the proprietor of any land. If he is, they will register a Bankruptcy Notice against the title to any property he owns. This will state that the proprietor appears to be affected by an application for a bankruptcy order and it warns potential buyers that they may need to deal with a trustee.
Once a bankruptcy order is made against the debtor the Land Charges department will then replace each notice with a Bankruptcy Restriction. This prevents a transfer of ownership being registered without the trustee either signing the transfer (in the case of a sole proprietor) or being served with notice (in the case of joint proprietors). So to find out if a property is affected you will need to obtain an up to date copy of the title. In addition, just prior to completion of the purchase, you will need to perform an OS1 search to check there have been no entries registered since you obtained the copy of the register. This search also freezes the register for 6 weeks to allow you to register the transfer before further entries can be added.
Proprietor is Bankrupt But No Entries Have Been Registered?
There is inevitably a small lag between a bankruptcy petition being lodged and the registers of title being updated and occasionally a property is bound to be overlooked. Also, a seller may become bankrupt shortly after the transaction completes. Provided you are paying full market value for the property then you should be ok. You are entitled to rely on the register of title and in any event since the trustee is only interested in the equity then provided the sale realises all of the equity, he should have no cause for concern.
Problems can arise however if you do not pay full market value so that some of the equity is not realised and therefore not made available to creditors. This because the trustee in bankruptcy can reverse a transaction at under value up to 5 years after it has completed if it appears that the full value was not paid and the bankrupt’s creditors suffered as a result.
Buying Land from a Bankrupt – Sole Legal Owner
Where land is registered to a sole proprietor and the proprietor owned the land at the time he became bankrupt then it will actual belong to the trustee in bankruptcy. Even though the trustee may not be registered on the legal title as proprietor he is still the sole legal owner in place of the bankrupt. He is actually entitled to have the property put in his name but this is often not done as it is not necessary to perfect the trustee’s title.
What this means is that you cannot buy land directly from a sole proprietor bankrupt. If you attempt to do so, the Land Registry will not register you as the owner. Instead, you must buy it from the trustee in bankruptcy. Unless the property has already been transferred into his name you will need a copy of the trustee’s certificate of appointment as well as the transfer signed by him.
A common misconception is that once a bankrupt is discharged (i.e. he is no longer bankrupt) he is once more free to sell his land. This is not the case. Once assets are vested in the trustee they do not return to the bankrupt unless the trustee transfers them back. When the asset is land the process is known as re-vesting. If the owner claims this has been done you will need to see evidence and the bankruptcy entries will need to have been removed from the register of title.
Buying Land from a Bankrupt – Joint Legal Owners
Where the legal title to land is held in joint names then legal ownership will not pass to the trustee. This is true even when both owners are bankrupt. Instead, the trustee will be entitled to the equity in the property (i.e. the net proceeds of sale after deduction of the costs of sale and any money owing under any mortgages).
Since the bankrupt(s) remain the legal owners it is they who the land needs to be bought from. Technically it is sufficient for the buyer to simply serve a notice on the trustee that the property has been sold though it is wise to involve him prior to exchange of contracts to ensure he is happy with the purchase price and so avoid the risk of the transaction being reversed afterwards.
Buying Land from Mortgagee Where Legal Owner(s) are Bankrupt
Often when a person has a mortgage on property and becomes bankrupt, the property will be repossessed by the mortgage lender. If this is the case then the seller will be the lender and provided the bankruptcy happened after the mortgage was registered the trustee does not need to be involved, whether the property is registered to a sole or multiple owners.
