Avis v Turner & Anor

This is an appeal from an order made on 13 December 2006 by His Honour Judge Pelling QC, sitting as a judge of the High Court in the Liverpool District Registry of the Chancery Division, on an appeal from an order made on 4 May 2006 by District Judge Sykes in the Liverpool County Court on an application made in the bankruptcy of Edmund Charles Avis. Permission to appeal to this Court was granted by Sir Martin Nourse on 23 March 2007.

The appeal raises a question as to the powers of the court on an application by a trustee in bankruptcy for an order for the sale of a former matrimonial home in which the bankrupt had an interest in circumstances where there is an existing order, made in matrimonial proceedings between the bankrupt and his former wife, that sale be postponed until the happening of specified events which have not yet occurred.

Mr Avis and his former wife, Mrs Vivienne Avis, are registered at HM Land Registry as proprietors with title absolute to property known as 23 Malvern Close, Kirkby, Merseyside. In the course of matrimonial proceedings between them in 1985 it was ordered, by consent, that the trusts upon which they had formerly held the property be varied so as to provide that the proceeds of sale be held as to two thirds for Mrs Avis and as to one third for Mr Avis. On the bankruptcy of Mr Avis on 14 February 1989 – or, more accurately on the appointment of a trustee in bankruptcy to administer his estate - his one third interest in the proceeds of sale of the property vested in the trustee under section 306 of the Insolvency Act 1986. Mr and Mrs Avis remained the registered owners and the trustees of the trust for sale upon which the property is held.

The present trustee in bankruptcy, Mr Charles Turner, was appointed with effect from 14 October 2003. By application notice dated 18 November 2005, the trustee sought (amongst other relief) an order for sale in relation to the property at Malvern Close. Mr and Mrs Avis were named as respondents to that application. The application was expressed to be made under both the Trusts of Land and Appointment of Trustees Act 1996 and the Insolvency Act 1986.

The relevant provisions of the 1996 Act, in the present context, include those in sections 14 and 15. Section 14 of the Act, so far as material, is in these terms:

Section 15 of the 1996 Act sets out matters relevant in determining an application under section 14. Subsection (1) requires the court to have regard to: “(a) the intentions of the person or persons (if any) who created the trust, (b) the purposes for which the property subject to the trust is held, (c) the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home, and (d) the interests of any secured creditor of any beneficiary.” But that requirement must be read with sub-section (4):

Section 335A of the Insolvency Act 1986 – which, as section 15 (4) of the 1996 Act indicates, was inserted into the 1986 Act when the 1996 Act was enacted – is in these terms (following amendment by the Civil Partnership Act 2004) :

all the circumstances of the case other than the needs of the bankrupt.

The position when the application of 18 November 2005 was made was, and (so far as I am aware) remains, that Mrs Avis occupied and occupies the property at 23 Malvern Close as her home. Mr Avis has not lived there since the property adjustment order was made in 1985. By his application of 18 November 2005 the trustee in bankruptcy sought a declaration that he was beneficially interested in and entitled to a one third interest in the property. Subject to the qualification that his interest is in the proceeds of sale of the property and that that interest vests in him not beneficially but as trustee upon the statutory trusts applicable to the administration of the bankrupt’s estate, there can be no answer to that claim.

By paragraph 4 of his application notice, the trustee in bankruptcy sought an order that the property be sold. There were claims to further relief for the purpose of giving effect to a sale: paragraph 2 sought an order vesting the property in the trustee in bankruptcy and paragraph 3 an order that the respondents deliver up vacant possession. But the principal issue between the parties arises from the wish of the trustee in bankruptcy to have the property sold so that the proceeds can be applied to discharge the bankruptcy debt; and, no doubt, to pay his proper fees and expenses incurred in connection with his office.

In the present case the bankrupt’s estate - which included the one-third interest of Mr Avis in the proceeds of sale of the property at 23 Malvern Close - had first vested in a trustee in bankruptcy, at the latest, on 14 October 2003 when the present trustee was appointed. The application under the 1996 Act was made some two years after that date. At first sight, therefore – in giving effect to section 335A of the 1986 Act in conjunction with section 14 of the 1996 Act – the court was required to assume (unless the circumstances of the case were exceptional) that the interests of the bankrupt’s creditors outweighed all other considerations.

Mr and Mrs Avis opposed an order for sale. Their opposition was founded on the 1985 property adjustment order. As I have said that order (at paragraph 1) directed that the terms of the trust for sale upon which they held the property be varied so as to provide that the proceeds of sale be held as to two thirds for Mrs Avis and as to one third for Mr Avis. Paragraph 2 of the order is in these terms:

The application made by the notice of 18 November 2005 came before the district judge on 4 May 2006. Her task was not made easier by the contention – which seems to have been adopted both by counsel for the trustee in bankruptcy and by counsel for Mrs Avis in their respective skeleton arguments – that the relevant provision in the Insolvency Act 1986 was not section 335A, but section 336. That contention – wherever it originated – was misconceived. Section 336 of the 1986 Act is concerned with “home rights” under Part IV of the Family Law Act 1996 – that is to say, rights of occupation which do not arise by virtue of a beneficial interest in the property occupied – see section 30 of the Family Law Act 1996. But the underlying question under each of sections 335A and 336 of the 1986 Act is not dissimilar: section 336(5) of that Act is in the same terms as section 335A(3).

The district judge’s judgment must be read with the contention that had been advanced before her in mind. Having referred (at paragraph 3) to a dispute between counsel as to the nature and effect of the order made in the matrimonial proceedings, she went on to say this:

The district judge was persuaded that she should not address that central issue at the hearing on 4 May 2006. She adjourned the application for a further hearing to enable Mrs Avis to file evidence on the question whether there were, in this case, such exceptional circumstances as should displace the assumption which the court would otherwise be required to make (under section 336(5) of the 1986 Act) that the interests of the bankrupt’s creditors outweighed all other considerations. At paragraph 10 of her judgment the district judge said that she was invited by counsel for Mrs Avis to make a declaration that section 336(5) of the 1986 Act applied. In the light of subsequent events it is, perhaps, surprising that the invitation came from Mrs Avis (if it did); but nothing turns on that. A declaration that section 336(5) of the 1986 Act applies is incorporated in the order of 4 May 2006.

The adjourned hearing of the application before the district judge was fixed for 24 August 2006. That hearing was overtaken by events and was vacated. By an appellant’s notice filed on 18 May 2006 Mrs Avis appealed to the High Court. She sought to discharge the whole of the district judge’s order. In substance the basis of that appeal was that no order for sale could be made on the trustee in bankruptcy’s application because none of the events specified in the 1985 order had occurred. Accordingly, there was no purpose in a further hearing of the adjourned application: the application should have been dismissed in limine.

His Honour Judge Pelling QC rejected that contention. The misconception that the relevant section of the 1986 Act was section 336 – rather than section 353A – had been corrected in the skeleton argument filed on her behalf: see paragraphs 5.7 and 5.8. Accordingly, when the judge held that the appeal should otherwise be dismissed, he varied the order of 4 May 2006 so as to substitute a declaration that it was section 335A – and, in particular, section 335A(3) – of the 1986 Act that was applicable in the present case. He remitted the matter to District Judge Sykes for the remaining issues (outstanding under her order of 4 May 2006) to be determined. He identified those issues as (i) whether there were exceptional circumstances to displace the statutory assumption and (ii) whether Mrs Avis was entitled to credit for capital repayments under the mortgage.

The judge reached his conclusion for the reasons set out at paragraphs 11 – 15 of his judgment. It is, I think, sufficient to summarise those reasons. After setting out the relevant provisions in the Insolvency Act 1986 and the Trusts of Land and Appointment of Trustees Act 1996, he observed that the effect of those provisions was that, whilst it was open to co-owners of land held upon trust for sale to agree that a sale be postponed until the happening of one of a number of specified events – and to agree which of them was to occupy the property pending sale - the terms on which they had agreed to postpone the sale were not necessarily determinative. Where one co-owner desired that the property be sold (notwithstanding the terms as to the postponement of sale which had been agreed) he was entitled to apply to the court under section 14 of the 1996 Act. In a case where there had been no intervening bankruptcy, the court would determine that application by reference to all relevant matters, including those set out in section 15 of the 1996 Act. Those matters included the intentions of the parties creating the trust, as evidenced by the agreement which they had made. But, where one co-owner had been adjudged bankrupt and the application under section 14 of the 1996 Act was made by the trustee in bankruptcy, section 15 of the 1996 Act was displaced by section 335A of the 1986 Act. In those circumstances the matters to which the court was to have regard were those set out in section 335A(2) of the Act. Those matters would include the intentions of the co-owners when they created the trust; as one of the circumstances of the case to which the court must have regard under paragraph (c) of section 335A(2). But, in a case where section 335A(3) applied, the intentions of the co-owners when they created the trust must yield to the interests of the bankrupt’s creditors, save in exceptional circumstances.

At paragraph 13 of his judgment, the judge referred to the submission, made on behalf of Mrs Avis, that section 283(5) of the 1986 Act had the effect that the trustee in bankruptcy took the bankrupt’s interest in the property subject to the right conferred on Mrs Avis by paragraphs 2 and 5 of the 1985 order. Section 283 of the 1986 Act defines the bankrupt’s estate. Sub-section (5) is in these terms – so far as material:

The judge rejected the submission founded on section 283(5) of the 1986 Act. At paragraph 15 of his judgment he said this:

Mrs Avis appeals to this court from the whole of the order made by Judge Pelling on 13 December 2006. The issue raised by the grounds of appeal attached to her appellant’s notice – albeit under a number of heads - is whether the judge was correct to decide that section 335A – and, in particular, section 335A(3) – of the 1986 Act was applicable in the context of the application made by the notice of 18 November 2005. But, in substance, her appeal to this Court is founded on the contentions which she had advanced before Judge Pelling: that no order for sale could be made on the trustee in bankruptcy’s application because none of the events specified in the 1985 order had occurred; there was no purpose in a further hearing of that application; and it should be dismissed without consideration under section 335A of the 1986 Act (or otherwise) of whatever merits it might have had if the 1985 order had not been made.

Mrs Avis has set out her grounds of appeal under 8 paragraphs. When giving permission for an appeal to this court Sir Martin Nourse observed that it was a possible view of this case that it bristled with important points of principle, but that it was enough to single out paragraph 8 of those grounds. Paragraph 8 relies on the argument based on section 283(5) of the 1986 Act which had been deployed before Judge Pelling.

For my part, I am satisfied that, unless the 1985 property adjustment order has some special force which goes beyond the agreement of the parties as reflected and recorded in that order, the argument based on section 283(5) of the 1986 Act must be rejected for what are, in substance, the reasons given by the judge. It is said that the section expresses the historic principle of bankruptcy law that the trustee in bankruptcy takes the bankrupt’s property subject to all equities and liabilities which affected it in the hands of the bankrupt; and that, in the circumstances of the present case, the effect of the terms agreed at the time of the 1985 order is that Mr Avis could not have sought an order for possession and sale of the property until one or other of the events for which paragraph 2 of that order provides had occurred. Reference is made to In re Scheibler, ex parte Holthausen (1874) LR 9 Ch App 722, Bendall v McWhirter [1952] 2 QB 466 and Bradley-Hole v Cusen [1953] 1 QB 300.

It is not, I think, necessary to refer to passages in those cases to which we were taken. The principle is not in doubt. The trustee in bankruptcy takes the bankrupt’s property subject to the equities and liabilities to which it was subject in the hands of the bankrupt. The relevant question is whether, absent bankruptcy, the bankrupt could have made an application under section 14 of the 1996 Act. If he could, then the trustee in bankruptcy can make such an application. And, if the trustee in bankruptcy can make application under section 14 of the 1996 Act, then section 335A of the 1986 Act must apply to that application. That is what section 335A(1) – read with section 15(4) of the 1996 Act - requires. It is pertinent to keep in mind, in this context, that section 335A was introduced into the 1986 Act by section 25(1) of, and paragraph 23 of schedule 3 to, the 1996 Act.

Put shortly, it is said that Mr Avis could not have made an application under section 14 of the 1996 Act; and so the trustee in bankruptcy cannot make such an application. But, unless the 1985 property adjustment order has some special force which goes beyond the agreement of the parties as reflected and recorded in that order, that submission cannot be sustained. The statutory scheme now enacted in sections 14 and 15 of the 1996 Act replaces that formerly enacted in section 30 of the Law of Property Act 1925 – see the observations of Sir Andrew Morritt, Chancellor, in Gotham v Doodes [2006] EWCA Civ 1080, [7] & [8]; [2007] 1 WLR 86, 90- 91. And as Lord Justice Nourse observed in In re Citro (a bankrupt) [1991] Ch 142, 150G-H:

It is important to keep in mind that the relevant question, in this context, goes to jurisdiction: could Mr Avis have made an application under section 14 of the 1996 Act? The question is not whether, as a matter of discretion, the court would or would not have made an order for sale on the application of Mr Avis: the question is whether the court would have had jurisdiction to make an order for sale. It is immaterial that, on an application by Mr Avis, the court might well have decided, as a matter of discretion, not to make an order for sale. The factors to which the court must have regard, in exercising its discretion on an application by the trustee in bankruptcy and the weight to be given to those factors are not the same as those to which it would have had regard, or to which it would have given weight, on an application by Mr Avis. A helpful review of the authorities and the practice before the enactment of the 1996 Act is found in the judgment of Mr Justice Goff in In re Solomon, a bankrupt [1967] Ch 573, 586-589 and (in this Court) in the judgment of Lord Justice Nourse in In re Citro (ibid, 150-157). The approach to an application made by a trustee in bankruptcy – in contrast to the approach to an application by the debtor (not in bankruptcy) beneficially interested in the property - which (as those authorities show) the court would have taken before the 1996 Act is now replicated in the provisions of section 335A of the 1986 Act and section 15 of the 1996 Act.

I turn, therefore, to the question whether the 1985 order has some special force which goes beyond the agreement of the parties as reflected and recorded in that order. Section 6(1) of the 1996 Act provides that, for the purpose of exercising their functions as trustees, the trustees of land have in relation to the land subject to the trust all the powers of an absolute owner. But that section must be read with section 6(6) and (7):

With those matters in mind, the narrow issue for decision on this appeal can be identified: whether, having regard to the terms of paragraph 2 of the 1985 property adjustment order and the provisions of section 6(6) of the 1996 Act, it is open to a court as a matter of jurisdiction to make an order for sale of the property, as sought by the trustee in bankruptcy in his application of 18 November 2005, in the exercise of powers conferred by section 14(2)(a) of that Act. It is accepted on behalf of the trustee in bankruptcy – and, if it were not, I would so hold – that, notwithstanding that he is, plainly, a person with an interest in the property subject to a trust of land within section 14(1) of the 1996 Act (and so a person who can apply to the court under that section), the application is not properly made (and so should be dismissed in limine) if the order sought is not an order which the court has power to make. It is, I think, accepted on behalf of the appellant – and, again, if it were not I would so hold – that, if the application is properly made under section 14 of the 1996 Act, then it is an application to which section 335A of the 1986 Act applies; and, in deciding whether to make the order sought, the court must have regard to matters in section 335A(2) and to the mandatory terms of section 335A(3). As I have said, that is what section 335A(1), in terms, requires.

In addressing the issue which I have just identified it is convenient, first, to note three features of the 1985 order. First, paragraph 2 – which directs that the trust for sale to which the property is then subject “shall be postponed” until the happening of one of the specified events – is ineptedly drawn. On a true analysis there was an existing trust for sale (as acknowledged in paragraph 1 of the order). The direction in paragraph 2 has effect as a direction that the trustees exercise their power to postpone execution of that trust until one of the specified events has occurred. Second, although not expressed, the direction in paragraph 2 that the sale of the property be postponed must be subject to any further agreement between Mr and Mrs Avis, as trustees for sale, that the property be sold notwithstanding the fact that none of the specified events had happened. It seems to me necessary to imply a term to that effect: it could not have been intended that Mr and Mrs Avis (if agreed upon a sale) would have to return to the court for a formal variation of the 1985 order. Third, the order itself confers liberty to apply.

I was, at first, attracted to the view that the answer to the jurisdictional issue which I have identified could be found in the liberty to apply conferred by the 1985 order. On further reflection I am persuaded that that would not be a correct view. It is, I think, clear that the 1985 order was made under section 24(1)(c) of the Matrimonial Causes Act 1973. The limited power to vary an order made under that provision, conferred by section 31(1) of that Act could not be exercised in circumstances such as those in the present case – see section 31(2)(e) and (4) and the observations of Lord Justice Oliver in Thompson v Thompson [1986] Fam 38, 46G.

Section 24A of the 1973 Act, introduced by section 7 of the Matrimonial Homes and Property Act 1981, enables the court, where a property adjustment order had been made in respect of property in which either or both the parties to the marriage had a beneficial interest, to make a further order for the sale of such property. The scope and effect of section 24A of the 1973 Act was considered by this Court in Thompson. In that case, the property adjustment order itself had been made in January 1981, at a time when the new section had not come into force. Nevertheless, this Court held (ibid, 53D) that section 24A of the 1973 Act did enable a court, on an application made under a liberty to apply conferred by the original property adjustment order, to make an order for sale of the property. But, in reaching that conclusion, the Court drew a distinction (ibid, 46H, 47A-H), between a sale which had the effect of varying the terms of the original property adjustment order (which was impermissible in the light of section 31 of the 1973 Act) and a sale which could be regarded as implementing, or working out, the original order as a response to changed circumstances. Lord Justice Oliver expressed the view (ibid, 51E) that the liberty to apply in a property adjustment order of this nature “is a liberty to apply to supplement the order as a matter of working it out in unforeseen circumstances. It is not inserted to enable application to be made for a variation prohibited by section 31”.

It is clear that the Court in Thompson would have regarded an application made by the trustee in bankruptcy of the party who was out of possession (that is to say, the party other than the party for whose benefit the postponement of sale was directed) as falling into the former category (ibid, 50B-E). It was not an application which the court having jurisdiction in the matrimonial proceedings could entertain under the power conferred by section 24A of the 1973 Act. On that point Lord Justice Oliver (with whom the other members of this Court agreed) expressly approved the decision of Mr Justice Wood in Norman v Norman [1983] 1 WLR 295: (ibid, 50F-51B). It follows, as it seems to me, that the liberty to apply conferred by the 1985 order provides no assistance in the present case.

It seems to have been common ground in Thompson that (absent jurisdiction in the matrimonial proceedings under the powers conferred by section 24A of the 1973 Act) an application for sale could have been made under the general equitable jurisdiction conferred by section 30 of the Law of Property Act 1925. That view received some encouragement from the Court (ibid, 43G). The problem, in that case, was that the value of the property put it outside the equity jurisdiction of the county court (ibid, 44C-D). That problem does arise in the present case.

I return, therefore, to the issue which I identified earlier in this judgment: having regard to the terms of paragraph 2 of the 1985 property adjustment order and the provisions of section 6(6) of the 1996 Act is it open to a court as a matter of jurisdiction to make an order for sale of the property in the exercise of powers conferred by section 14(2)(a) of that Act. On a true analysis that issue, as it seems to me, raises a short question of construction: to what extent, if at all, is the power of the court to make “any such order relating to the exercise by the trustees of any of their functions . . . as the court thinks fit” cut down by the restriction, in section 6(6), that “the powers conferred by this section shall not be exercised in contravention of . . . any order made in pursuance of any other enactment”.

In my view the answer to that question is that, in the present case, the power conferred by section 14(2)(a) of the 1996 Act is not cut down by the restriction in section 6(6) of that Act. It is, I think, important to keep in mind that the property held by Mr and Mrs Avis is held by them upon an express trust for sale. As I have said, that is acknowledged in paragraph 1 of the 1985 order. The true position is not that they hold the property with a power to sell: the property is held upon trust to sell, but with power to postpone sale: see the observations of Mr Justice Simonds in In re Mayo, Mayo v Mayo [1943] Ch 302, 304, approved in this Court by Lord Justice Devlin in Jones v Challenger [1961] 1 QB 176, 181. Further, it is important to keep in mind that the power to postpone sale is not conferred by section 6(1) of the 1996 Act: in so far as not expressed in the original conveyance, it is conferred by section 4(1) of the 1996 Act. And, further, it is important to keep in mind that the restriction in section 6(6) applies only to the “powers conferred by this section”: that is to say, the restriction applies, in terms, to powers conferred by section 6, not to powers conferred by section 4(1) or by the original disposition.

Section 14(2)(a) of the 1996 Act confers on the court power to make any such order as it thinks fit relating to the exercise by trustees of any of their functions. That enables the court to direct trustees to execute the trust for sale; or (to put the point another way) to direct trustees to concur in a decision that they will no longer exercise their power to postpone sale. But, in neither case, will the court be directing trustees to exercise a power conferred by section 6 of the Act. The restriction in section 6(6) can have no application in such a case. It must follow, as it seems to me, that, notwithstanding paragraph 2 of the 1985 order, an order made under section 14(2)(a) directing Mr and Mrs Avis to sell the property cannot be said to be inconsistent with the restriction in section 6(6) of the Act. It is to be kept in mind that, absent a statutory restriction, section 14(2)(a) enables the court to override the need for the consent of any person.

For those reasons I would hold that, notwithstanding paragraph 2 of the 1985 order, it would have been open to the court, on an application made by Mr Avis (if he had not been adjudged bankrupt) under section 14 of the 1996 Act, to make an order for the sale of the property. It is immaterial, in this context, that on an application by Mr Avis, the court might well have decided, as a matter of discretion, that it would not order a sale. It follows that it is open to the court to make an order for sale on an application made by the trustee in bankruptcy under section 14 of the 1996 Act. It is not, I think, open to doubt that, on an application made by the trustee in bankruptcy under section 14 of the 1996 Act, section 335A of the 1986 Act requires: (i) that that application must be made to the bankruptcy court – section 335A(1); (ii) that the approach of that court to the application is prescribed by section 335A(2), displacing section 15(1) to (3) of the 1996 Act and (iii) that – in circumstances where section 335A(3) applies – the interests of the bankrupt’s creditors outweigh all other considerations unless the circumstances of the case are exceptional.

For those reasons I would hold that the judge was right to make the order that he did. I would dismiss this appeal.

I should add, for completeness, that the effect of dismissing this appeal is that the application made by the trustee in bankruptcy by the notice of 18 November 2005 will now proceed to a hearing on the merits; as both the district judge and Judge Pelling intended. On that hearing the court will need to decide whether the circumstances of this case are exceptional, so as to displace the assumption that the interests of the bankrupt’s creditors outweigh all other considerations. Nothing in this judgment should be taken as an indication that I have formed any view on that point. The procedural history of this application – which, in common with Judge Pelling, I regard as unfortunate – has had the result that that point is not before this Court on this appeal. But the circumstances of this case lead me to think (without intending any criticism of the district judge) that consideration should be given to listing the adjourned application for hearing in the High Court. I would be minded to include an appropriate direction in the order which this Court will make.

I agree that this appeal should be dismissed for the reasons given by Chadwick LJ.

I also agree.