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Bankruptcy and the sale of your home

On the day of the Referendum vote, I was in London and had to take three taxis to get where I was going.

I don’t like Uber. Every time I’ve travelled in one the driver has been glued to the satnav and the experience hasn’t been pleasant. So I stick with the black cabs. I’m the chatty type and got into conversation with all of the cab drivers that day about how they were voting. What they said really surprised me.

I’m a lawyer, a professional who welcomes diversity, and had not thought realistically that the vote might be for Brexit. I was a ‘remainer’ but I got seriously worried when all the cabbies said they were certain there would be a vote for Brexit. When I asked why, they all unanimously said how hard hit they’d been by immigrants taking their jobs. I’m sure these comments were not intended as racist, rather as a matter of fact. Immigrant drivers for Uber working for very low pay affecting the black cabs, and immigrant builders from the EU undercutting their mates were putting them out of work.

I got out of the third cab absolutely stunned. I had no idea at all about the strength of feeling for Brexit or the extent to which Uber had so badly and so genuinely impacted on these cabbies’ daily lives. So when the Referendum result was announced I wasn’t as surprised as I might have been before I got in those cabs.

This week, I came across a case involving a black cab driver who went bankrupt. He said he had been affected by Uber which, given what I had heard during my day in London, I had no trouble accepting.  I took a close look at this case, because in family law, “fairness” is a principle which is exercised throughout the Family Division.

What is “just” and what is “reasonable” are the key questions a judge must ask himself, and I am well used to the exercise of judicial discretion in family law to arrive at a point which seems right and fair to all parties. In other areas of law, however, it is rather different, despite the best efforts of the senior judiciary to tell us otherwise.  I think there is still a difference in what we family lawyers regard as just and reasonable and elsewhere where black letter law – well established legal rules –might hold more sway.

A self-employed driver of a black cab found himself struggling financially because of the impact of Uber. His wife, a former carer for elderly people, was unemployed and on benefits following an operation that left her unable to lift heavy weights.

The husband had employed an accountant to help him with his taxes. Unfortunately for the taxi driver, this accountant had not properly accounted for the cabbie’s private use of taxi and fuel. Her Majesty’s Revenue and Customs (HMRC) re-examined his accounts and billed the driver £25,000 to make up the shortfall he had developed. They then opened a full scale investigation for good measure, going back five years, and this bill incredibly jumped to just under £52,000. He and his wife had no other debts and never had any beforehand.

As you might imagine, by the end of this exercise, it was impossible for the cabbie to raise this kind of money. His offer of £10,000 to settle the debt via a bank loan, the maximum he could afford, was refused. He owned only one asset – a half share in his home, a bungalow, owned jointly with his wife.

HMRC applied to have the cabbie declared bankrupt and appointed Trustees in Bankruptcy – people who administer the affairs of the bankrupt and who stand in the bankrupt’s shoes – sought an order for the man to sell his bungalow which would raise an estimated £30,000 towards the debt. But this would still leave a substantial shortfall towards costs and the original debt. Trustees must, by law, apply within three years for an order for sale or lose the right entirely. The reasoning behind this was to stop the practice that had developed of applications being made by Trustees many years later, when the value of the property had increased; ironically something that might have provided a useful solution in this case.

So far, so miserable. The cabbie probably couldn’t believe what had happened to him out of the blue. Worse still, the man and his wife did not live alone. They had a nearly 30 year-old daughter with a mental age of only eight or nine. She was unable to live alone, so her parents cared for her in their bungalow home which was appropriate for her needs.

Unsurprisingly, they objected to being forced to sell their home. They would not be left with enough from the wife’s half share to buy anywhere else. Neither could they afford to rent long term. Once the wife’s share of the sale had run out, the family would be unable to keep up with the payments. The Local Authority would provide accommodation only for the child, not for them all to live together.

Because there was no legal aid available to the couple, although the Trustees could pay for lawyers to represent them, the cabbie and his wife could not. They attended court on their own to try and stop a sale of their home.

Whilst the law is almost always on the side of the creditors of the bankrupt, the court has the right to postpone a sale for as much time as it deems fit if the court finds the circumstances to be exceptional. The court must make an order that is just and reasonable.

In the lower court, the District Judge decided that the circumstances were exceptional and ordered a postponement of sale until the couple’s daughter no longer lived with them.

The Trustees appealed. They argued the circumstances were not exceptional. Sale should be ordered within a few months. The cabbie turned up again at court on his own, his wife managed to obtain representation through the Pro Bono Unit of the Bar.

His Lordship considered the relevant authorities and said:

“To state the obvious, the interests of the bankrupt’s creditors will normally require that the property be sold so that the bankrupt’s share in it can be realised for their benefit. Moreover, by virtue of section 335A(2)(c)Insolvency Act 1986, the needs of the bankrupt himself are to be disregarded. It follows that any successful defence to an application for sale brought after expiry of the one year period will normally depend on establishing that the circumstances of the case are exceptional, leaving aside the needs of the bankrupt. If this condition is satisfied, the court must then make such order as it thinks just and reasonable having regard to all the matters specified in subsection (2). In making that assessment, the interests of the bankrupt’s creditors must still be taken into account, by virtue of paragraph (a), but the appropriate weight to attach to them will be in the discretion of the court.”

Subsection (2) requires the Judge to consider:

“(a) the interests of the bankrupt’s creditors;

(b) where the application is made in respect of land which includes a dwelling house which is or has been the home of the bankrupt or the bankrupt’s spouse … –

(i) the conduct of the spouse …, so far as contributing to the bankruptcy,

(ii) the needs and financial resources of the spouse …, and

(iii) the needs of any children; and

(c) all the circumstances of the case other than the needs of the bankrupt.

(3)Where such an application is made after the end of the period of one year beginning with the first vesting under Chapter IV of this Part of the bankrupt’s estate in a trustee, the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations.”

So was this an exceptional case which ousted the interests of the creditors?  What does “exceptional circumstances of the case” mean? His Lordship gave examples, such as the terminal or serious illness of another occupant of the property.

But then the order the court makes must be “just and reasonable”.  In one case his Lordship cited where exceptional circumstances existed, there was no stated period to postpone the sale, in another there was. So the court has clear discretion to arrive at a “just and reasonable” order.

In this particular case, the District Judge found the daughter’s circumstances to be exceptional and went on to find that there was no guarantee that if a sale went ahead the disabled child would have a home with her parents for the rest of her life. Accordingly, she found it just and reasonable to postpone the sale until the child no longer lived at the property.

Mr Justice Henderson set out the test if the Judge was wrong:

“Before the court can interfere it must be shown that the judge has either erred in principle in his approach, or has left out of account, or taken into account, some feature that he should, or should not, have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale.”

Also frequently cited in this connection are the observations of Lord Fraser of Tullybelton in G. v G. (Minors: Custody Appeal) [1985] 1 WLR 647 at 652, where he emphasised the point:

‘that the appellate court should only interfere when they consider that the judge of first instance has not merely preferred an imperfect solution which is different from an alternative imperfect solution which the [appellate court] might or would have adopted, but has exceeded the generous ambit within which a reasonable disagreement is possible.’”

His Lordship found that the District Judge had exercised her “value judgement” correctly, having heard all the evidence, and that the circumstances were indeed exceptional. However in exercising her discretion by postponing the sale with no fixed date the District Judge had “erred significantly.”

The Trustees had to bring their action within three years and were entitled to seek an order for sale. “The need for the Property to be sold within a reasonable period is therefore a nettle which has to be grasped” the Judge said.

He found that the wife would be able to earn some income despite her recovery from illness, even if she could not go back to being a carer, and that she could contribute towards the cost of rental for the next ten years from her capital and from income going forward. He decided to postpone sale for a further year to give the family time to find somewhere else to live and to perhaps take proceedings against the estate of the negligent accountant and try and do a deal with the Trustees. His Lordship felt “to allow a further year may be thought generous” since the Trustees needed to sell the property and complete their task.

But really. Was it fair to take such a stern Victorian approach to this problem turfing the entire family out of their home, when HMRC had been offered £10,000 before the proceedings? They had summarily refused it and after a hearing and an appeal would be lucky to clear that sum now. What exactly had they achieved? And from a practical perspective, imagine how difficult it is on a daily basis with reduced incomes to look after an adult disabled woman who will require care for the rest of her life. Not to mention the daily grind of having to find work when it has manifestly become much tougher and where one of the family is also ill and obliged to find work simply to pay the rent. Imagine dealing with all of that: after losing the home which provides an acknowledged safety net for the daughter, all for the original sin of not paying tax on the private use of a cab and fuel – in order to allow the Trustees to get their costs and to allow HMRC to get just some of their money back likely not as much as they had already refused?

Is that “just and reasonable?”

You decide.

Read the full judgment here.

The founder of Stowe Family Law, Marilyn Stowe is one of Britain’s best known family law solicitors and divorce lawyers. She retired from Stowe Family Law in 2017.

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  1. Andrew says:

    Marilyn: forgive me if I set out at some length why you are so wrong on two different matters in this post.
    First as to bankruptcy. Nobody loves creditors, nobody loves HMRC, and when HMRC is the sole creditor in a bankruptcy the result is to square the unpopularity, not to double it. But HMRC (on our behalf as taxpayers) are as entitled to fair play as any other creditor. Now it’s a fact that in most insolvencies (personal or corporate) the list of creditors includes many people in a small way of business for whom the insolvency of a major debtor will mean ruin which can be averted if and only if there is an early and substantial dividend – which means if and only if there is an early sale of the only significant asset in the bankruptcy. Section 261 of the Enterprise Act, which causes that asset to revert to the bankrupt unless application is made for sale within three years, may be regarded as an act of remarkable generosity with other people’s money. It is unfortunately very often the case that unless the bankrupt’s home is sold others will lose their homes and you just cannot transfer that misfortune from one to the other because of the family circumstances of the one. This is a sad case but Mr Justice Henderson was right.
    Second as to Uber. You use the black cabs if you want to; others will prefer Uber for all sorts of reasons – they are cheaper and easier to find in the wet, and you don’t have to listen to the driver’s political opinions. But they are doomed.
    Remember Grunwick? The brave pickets defending their rights – or if you prefer the brave workers defying the aggressive picketing – the entire area deprived of post – the threat to cut off the water from much of Neasden – and all the rest of it. Grunwick survived the strike but it’s gone now, and so are most of its competitors. And it’s not the wicked capitalists who’ve closed them, and it’s not the arrogant union either. It’s all of us who went out and bought digital cameras and stopped buying film and having it processed. I expect many of the people on the picket lines outside Grunwick have done that. And so have many London cabbies!
    And when film was invented and made photography cheap enough for the masses, people stopped spending money on other pleasures – which cost other people their jobs.
    Well, the black cabs are film cameras. Old-fashioned and being replaced by something made possible by a new technology. Rather as the trains replaced the canals. And all the sentiment in the world won’t stop it happening.
    There you go, two rants for the price of one!

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