Bankruptcy and divorce

'Where a spouse who has a beneficial interest in the matrimonial home has become bankrupt under debts which cannot be paid without the realisation of that interest, the voice of the creditors will usually prevail over the voice of the other spouse and a sale of the property ordered within a short period.' So said Lord Justice Nourse in Re Citro (A Bankrupt) [1991] Ch 142.

However, what if a property adjustment order postponing sale has already been made under the family jurisdiction?

Court of Appeal ruling

On 19 July 2007, the Court of Appeal ruled in Avis v Turner and Anor [2007] EWCA Civ 748 that the court could entertain an application for the sale of a co-owned property, notwithstanding the existence of a court order in earlier divorce proceedings that sale be postponed.

On divorce, the lack of sufficient capital to rehouse both parties immediately often results in an order to defer the sale of the home, allowing continued occupation by one of the parties (and the children of the marriage), while the beneficial share of the non-occupying party is locked up until the eventual sale of the property. Immediate reaction to the judgment was that it undermines such orders and makes them particularly vulnerable to a subsequent application for sale following the bankruptcy of the non-occupying spouse (see 'Interest of creditors takes priority over divorce order, Appeal Court rules', ((2007) 151, SJ 960, 27.07.07).

However, a closer examination of the reasons given by the Court of Appeal suggests that the scope of the ruling could be much narrower than originally thought.

Facts of case

Mr and Mrs Avis were registered joint proprietors of 23 Malvern Close, Kirkby, Merseyside in 1977. When the marriage broke down in 1984, Mr Avis left the home while Mrs Avis remained in occupation. In divorce proceedings, a consent order was made in 1985 including the following:

(a) the beneficial ownership of the property was varied to provide that they held in shares of two-thirds to Mrs Avis and one-third to Mr Avis;

(b) sale was postponed until the remarriage or cohabitation of Mrs Avis, her request for a sale or her death;

(c) until sale, Mrs Avis was to have the exclusive right of occupation.

In 1989, a bankruptcy order was made against Mr Avis. The present trustee in bankruptcy, Mr Turner, was appointed in 2003. In 2005, Mr Turner applied to court for a sale of the property under s14 Trusts of Land and Appointment of Trustees Act 1996 (TOLATA). Throughout these events, Mrs Avis remained in occupation in accordance with the terms of the consent order.

As co-owners from 1977, Mr and Mrs Avis held the property as trustees on a trust for sale. Following the bankruptcy of Mr Avis, his beneficial share in the property vested in his trustee in bankruptcy under s306

Insolvency Act 1986. When TOLATA came into force on 1 January 1997, the trust for sale became a trust of land regulated by the Act.

By the time of the trustee in bankruptcy's application for sale in 2005, therefore, Mr and Mrs Avis held the legal estate of the property on a trust of land for Mrs Avis as to two-thirds and Mr Turner, as trustee in bankruptcy, as to one-third.

Machinery for the legal resolution of disputes concerning co-owned land is contained in s14 of TOLATA. Under s14(2)(a), the court may make any such order as it thinks fit relating to the exercise by the trustees of any of their functions '“ this includes, therefore, an order for the sale of the co-owned property. Under s14(1), an application for such an order may be made by a trustee (Mr or Mrs Avis) or a person who 'has an interest' in the property (Mr Turner as trustee in bankruptcy).

Application for sale on bankruptcy

In an application for sale under s14 by a trustee in bankruptcy, one is directed to s335A Insolvency Act 1986 to find the matters to which the court must have regard. Crucially, s335A(3) provides that, where the application is made more than one year after the first vesting of a bankrupt's estate in a trustee in bankruptcy, 'the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt's creditors outweigh all other considerations'. Thus, the court will order sale in the absence of exceptional circumstances.

The issue was whether the existence of the consent order, providing for postponement of sale of the property, ruled out the possibility of the court either hearing an application for sale under s14 or making an order for sale under that section.

Lord Justice Chadwick found that Mr and Mrs Avis held the property on an express trust for sale (as opposed to a statutory trust for sale). In view of the direction taken by the case in the Court of Appeal, the distinction between a statutory trust for sale and an express trust for sale is highly significant.

When TOLATA came into force, pre-existing statutory trusts for sale (applied by s34 and s36 Law of Property Act 1925 in all cases of co-ownership in the absence of an express trust) were converted into trusts of land. The duty to sell, with a power to postpone sale, was replaced by a power to sell, embraced by s6(1) TOLATA which gives the trustees all the powers of an absolute owner.

In contrast, pre-existing express trusts for sale, although also becoming trusts of land under TOLATA, continued as trusts for sale under s4 thus preserving the trustees' duty to sell. This was tempered by s4(1) which provides for a non-excludable power for the trustees to postpone sale.

Qualified right

Lord Justice Chadwick agreed with His Honour Judge Pelling QC, in the court below, that the right of Mrs Avis to resist a sale was qualified by the right of other persons interested in the property to apply to the court for an order for sale. Therefore, her argument must fail unless the 1985 consent order had some 'special force' going beyond the agreement of the parties that it recorded.

However, the Court of Appeal also gave explicit consideration to s6(6) and s(7) of TOLATA which provide as follows:

'(6) The powers conferred by this section shall not be exercised in contravention of, or of any order made in pursuance of, any other enactment or any rule of law or equity.

(7) The reference in subsection (6) to an order includes an order of any court.'

The question was whether these provisions, in the circumstances of the case, removed the jurisdiction of the court to deal with the trustee in bankruptcy's application for a sale. If these provisions applied, the 1985 consent order would indeed have 'special force'.

Lord Justice Chadwick thought it important to keep in mind that the property was held by Mr and Mrs Avis upon an express trust for sale, imposing a duty to sell rather than a power of sale. Furthermore, the power to postpone sale was not conferred by s6(1) but by s4(1), in so far as not expressed in the original conveyance. The application was for an order either directing the trustees to execute the trust for sale or directing them to stop exercising their power to postpone sale. In neither case would the court be directing the trustees to exercise a power conferred by s6 and, therefore, s6(6) did not apply.

The Court of Appeal held that it would have been open to the court to make an order for the sale of the property, whether on an application by the trustee in bankruptcy or by Mr Avis himself if he had not been made bankrupt. Whether or not such an order should be made in this case was a separate question for a separate hearing on its merits, requiring a decision as to whether the circumstances of the case were exceptional so as to militate against a sale.

Trust of land

Given the importance attached by Lord Justice Chadwick to the existence of the express trust for sale, we should consider what the outcome might have been if there had been no express trust for sale but merely a straightforward trust of land.

Although he does not say as much explicitly, the inference to be drawn from his reasoning is that s6(6) would apply to the circumstances of the case and that it would not have been open to the court to make an order for sale. This is because, under a straightforward trust of land, the power of sale (along with the power to postpone sale) is embraced by the wide powers conferred by s6(1) and thus the court would now be directing the trustees to exercise a power conferred by s6. This would be in contravention of the 1985 consent order and therefore prohibited by s6(6) and s(7).

If this is correct, the result is startling, particularly since TOLATA is generally thought to have emasculated the trust for sale. As stated by Gray & Gray, Elements of Land Law, 4th ed, at p1091, para 11.144:

'Such [express] trusts for sale are now subsumed within the general machinery of the 'trust of land' and are, indeed, made relatively pointless by the overriding statutory mandate that the trustees have, in all cases, an irreducible implied power to postpone sale indefinitely.'

The Court of Appeal ruling appears then to create, some 10 years or so after the implementation of TOLATA, a significant practical distinction between an express trust for sale and a straightforward trust of land. That is to say, only in respect of the latter can a consent order oust the power of the court to make a subsequent order for sale under s14.

Perhaps there is some underlying logic to this, having regard to the predominance of the duty to sell in the case of disagreement between the trustees of a trust for sale (Re Mayo [1943] Ch 302). However, since Lord Justice Chadwick omitted to spell out the corollary of his reasoning, when applied to a straightforward trust of land, one can only come to the conclusion that any such distinction is fortuitous and unintended.

In the High Court, Judge Pelling found that there had been a statutory trust for sale. It is not clear exactly how the Court of Appeal reached the apparently contrary conclusion that it was, in fact, an express trust for sale, save to say that it was expressly acknowledged in the terms of the 1985 consent order.

It could well be that it was the wording of the order itself that persuaded Lord Justice Chadwick as to the existence of the express trust for sale, despite having described part of the order as 'ineptly drawn'.

The immediate fears of family lawyers that Avis may signal the end of orders deferring sale of the matrimonial home may prove unfounded in the cold light of day. On the contrary, it is insolvency lawyers, one suspects, who will be surprised and concerned by the implications of the ruling. True, the voice of the creditors will usually prevail, but only if their voice is allowed to be heard in the first place.

Narrow scope

Express trusts for sale are rarely created since TOLATA came into force on 1 January 1997. Even before that date, many co-owned properties were held on statutory (rather than express) trusts for sale and therefore ceased to be trusts for sale under TOLATA '“ this is particularly true of registered titles since the relevant land registry forms of the time made no specific provision for transferees to declare the trusts upon which they held the property. Most co-owned properties are now held on a straightforward trust of land, not a trust for sale, and will fall outside the narrow scope of the Court of Appeal ruling.

Care should therefore be taken by family lawyers to ensure, so far as possible, that such orders deferring sale of the matrimonial home avoid any reference to a trust for sale. As long as this is done, it seems that Avis might yet have the unexpected effect of taking such property beyond the reach of creditors on a subsequent bankruptcy of the non-occupier, at least until one of the conditions set out in the order is satisfied.