A recent article in the Law Society Gazette (“Bankruptcy in conveyancing”, 1 August 2016) addresses the risks of a sole vendor becoming bankrupt, or subject to bankruptcy proceedings, during a property sale, and considers the extent to which a buyer’s conveyancer might be considered negligent for failing to discover the proceedings. It concludes by suggesting that “there seems to be a very fair argument that the reasonably competent conveyancing solicitor should add this simple additional step [a Form K16 bankruptcy search] to the completion process.” The article proceeds on the premise that a property sale completes without the buyer becoming aware of the proceedings. However, in such circumstances, is the buyer prejudiced?
In most cases of bankruptcy, a buyer will become aware of bankruptcy proceedings instituted against a seller. Under provisions in the Insolvency Rules 1986, where a petition in bankruptcy is presented to the court, the court is required to send notice of the bankruptcy petition to the Land Registry, so that a pending action in bankruptcy (PA(B)) can be registered as a land charge against the name of the debtor under the petition. In turn, the Land Registry will enter a creditors’ notice on the title of any registered estate the debtor appears to own as sole registered proprietor. The purpose of these automatic registrations is to protect a bankrupt’s estate against disposals of land after the date of the petition. A similar procedure is followed on the making of a bankruptcy order so that the order (WO(B)) can be registered as a land charge against the name of the bankrupt, and a bankruptcy restriction can be entered against any registered titles the bankrupt appears to own as sole registered proprietor. The purpose of the bankruptcy restriction is to protect the statutory vesting of title in the trustee in bankruptcy.
What if, for some reason, these automatic registrations are not effective, so that the official copies inspected by the buyer do not disclose any bankruptcy entries, and the buyer’s pre-completion Form OS1 search is clear? Will the buyer be prejudiced? It appears not. Section 86(5) LRA 2002 protects the buyer in these circumstances. Section 85(5) provides that:
“Where the proprietor of a registered estate or charge is made bankrupt, the title of his trustee in bankruptcy is void as against a person to whom a registrable disposition of the estate or charge is made if: (a) the disposition is made for valuable consideration, (b) the person to whom the disposition is made acts in good faith, and (c) at the time of the disposition— (i) no notice or restriction is entered under this section in relation to the registered estate or charge, and (ii) the person to whom the disposition is made has no notice of the bankruptcy application or petition or the adjudication.”
This means that, provided evidence of the bankruptcy does not appear on the register (by way of creditor’s notice or bankruptcy restriction) at the time of the disposition to the buyer (i.e. completion of the transfer), the title of the trustee in bankruptcy is void as against a purchaser in good faith, and for value, subject to the purchaser attending to the registration requirements in respect of the transfer. The purchaser must be “in good faith”. Accordingly, a purchaser who chooses to proceed despite knowledge of the bankruptcy proceedings from another source could not claim protection under section 86(5). However, section 86(7) LRA 2002 specifically says:
“(7) Nothing in this section requires a person to whom a registrable disposition is made to make any search under the Land Charges Act 1972.”
Title to the property of a bankrupt vests in the trustee in bankruptcy by operation of law (under section 306 Insolvency Act 1986) on the appointment of the trustee in bankruptcy. During the period between the making of a bankruptcy order and the appointment of the trustee in bankruptcy, title remains vested in the registered proprietor. However, absent contrary entries on the register, the registered proprietor continues to enjoy owner’s powers under section 24 LRA 2002 and is able to make valid dispositions of the property. Even if the Official Receiver wished to challenge the validity of the transaction, any attempt to set aside the transaction on grounds of its being void would only ultimately lead to a vesting of title in the trustee in bankruptcy (or in the Official Receiver as trustee in bankruptcy) whose own title, as above, is void against a purchaser in good faith. So, provided the buyer is in good faith, it appears that a bankruptcy search does not need to be added to pre-completion requirements.