Lewis & Anor v Metropolitan Property Realisations Ltd

This the judgment of the court on an appeal from a judgment of Proudman J dated 21^st November 2008 in which she refused a claim for a declaration that the respondents (Metropolitan Property Realisations Limited, “MPRL”) had no interest in property formerly belonging to the claimants (Mr and Mrs Lewis) known as 35 Little Common, Stanmore, Middlesex (“the property”). Mr and Mrs Lewis appeal with her permission. The appeal raises the question of what is meant by “realises” in s.283A(3)(a) of the Insolvency Act 1986.

Immediately before his bankruptcy on 12^th July 2004, the property was vested jointly in Mr and Mrs Lewis and was their sole or principal residence. Although the judge below made no finding about its value, evidence from MPRL indicates that at the time of the bankruptcy the property was worth approximately £1m, with charges of about £720,000 affecting it. The trustees investigated the nature, extent and enforceability of Mr Lewis’ interest, and Mrs Lewis claimed an equity of exoneration over it which, she said, made her in effect the sole owner of the equity in the property. The trustees did not accept this version, but decided not to incur expense in trying to get in the value of Mr Lewis’ share in the conventional way by seeking an order for sale of the property. The creditors as a whole were not prepared to fund any litigation to achieve that. MPRL, as the second largest creditor in the bankruptcy, was disappointed with that state of affairs and took an assignment of Mr Lewis’s beneficial interest, which has given rise to the questions determined by the judge below.

The assignment is dated 11^th July 2007 (the day before the third anniversary of the bankruptcy, the significance of which will appear shortly). It is, to our eyes, somewhat oddly worded. It recites that the trustees have agreed to assign the benefit of “the beneficial and equitable interest hereinafter referred to” to MPRL and recites the fact that Mr and Mrs Lewis were “registered proprietors of the Property” that is to say the whole of the 35 Little Common property. Its material wording then goes on as follows:

It is paragraph 5 which seems to us to contain odd wording. What was being assigned was a beneficial interest in property in respect of which Mr and Mrs Lewis remained the legal owners. The “Property” is the whole of the property, and not the interest assigned to MPRL. It is not readily apparent how MPRL can “effect a sale” of the Property thus defined. It could sell its own interest (in theory) but that would not generate a sum which can be seen to be a percentage of the proceeds of sale of “the Property”. Were MPRL to apply successfully for an order for sale, then it would not technically have “effected” a sale; but what if there is a voluntary sale? Furthermore, if there is a sale of the whole of the property by the legal owners, it might still be that MPRL is not in a position to pay 25% of the net proceeds; that would depend on what it manages to get in its own hands when all accounts are taken and all claims given effect to. The deed is therefore somewhat unsatisfactory. However, at the invitation of the parties, and in particular of Mr Stephen Davies QC who appeared for the Lewises, we have assumed for the purposes of this appeal that the assignment is one of Mr Lewis’s interest in the property, in exchange for an obligation to pay £1 immediately and a proportion of what MPRL receives when the money eventually falls in, however that might happen.

S.283A was added to the Insolvency Act 1986 by s.261 of the Enterprise Act 2002. It contains modifications of the rights of the trustee in order to restrict the possibility of a trustee hanging on to a beneficial interest for many years without taking any steps to realise it. It provides as follows:

This section applies where property comprised in the bankrupt’s estate consists of an interest in a dwelling house which at the date of the bankruptcy was the sole or principal residence of:

The point in this case concerns the extent to which the assignment which we have identified above amounts to a realisation for the purposes of subsection (3)(a). Mr and Mrs Lewis maintain that it does not and that Mr Lewis’s interest has now revested in him pursuant to subsection (2); MPRL maintains that the trustees “realised” the estate’s interest by virtue of the assignment.

In her judgment, the learned judge set out the short facts and the relevant provisions of the section, and identified the issue. She came to the conclusion that the assignment fell within the expression “realises” within subsection (3)(a) by considering the following:

The dictionary definition, which she did not find helpful.

The use of the word elsewhere in the 1986 Act, together with other provisions of the Act, which she found did not clearly support Mr and Mrs Lewis’s construction of “realises” in the subsection.

A trustee’s power to sell on deferred consideration, which she found did not sit well with the submission that a realisation required that all the cash should be got in (paragraph 17). This seems to have been an important point for the judge.

Other authorities on the meaning of “realise” in different contexts, which she found unhelpful.

The scheme of the section.

Ramsay v Hartley [1977] 1 WLR 686 which satisfied her that the assignment was absolute notwithstanding that part of the consideration to be paid by the bankrupt was a future consideration.

Policy considerations, which she found did not point against the assignment being a realisation.

In the light of the foregoing, she found that:

Mr Davies said that the judge was wrong in the conclusions that she reached. His basic criticism of the judgment of Proudman J was that she confused or elided the concepts of realisation and sale, gave an inappropriate emphasis to the powers of the trustee in bankruptcy to sell on deferred consideration (which he said did not affect what was meant by “realise” in the section in question), failed to have due regard to what he described as the “concept” behind the relevant provisions of the Act, and wrongly relied on Ramsey v Hartley. What “realise” meant in subsection (3)(a) was “turn into cash”; nothing less would do. The transaction between the trustees and MPRL did not achieve that, and it was therefore without the section, with the effect that the interest of Mr Lewis reverted to him after the statutory 3 years. Mr Briggs, who appeared for MPRL, said that the judge, and her approach, were right. The scheme of the section did not require Mr Davies’s conclusion, and that any potential abuse of the technique of selling to third parties on deferred consideration (or indeed any other abuse) was safeguarded against by the Trusts of Land and Appointment of Trustees Act 1996, which would be capable of operating so as to prevent any such third party obtaining a sale.

All words which require construction or interpreting have to be placed in their proper context. The same is true of “realise” in subsection (3)(a). The question that we have to consider is whether, in its context, it is capable of covering a transaction where there is a deferred monetary consideration during the period before that consideration comes in. Nonetheless, it is an ordinary English word and it is appropriate to start with a consideration of what the normal English meaning of the word is.

The Oxford English Dictionary definition of “realise” is:

The Lewis’s case is further advanced by the use of the word in authorities. Two somewhat historic cases were cited to the judge and referred to by her in her judgment. In Re Oxford Benefit Building and Investment Company (1886) 35 Ch D 502 Kay J had to consider the meaning of a provision that “no dividends shall be paid except out of the realised profits arising from the business of the company”, and in that context said:

In Board of Trade v Block (1888) 13 App Cas 570 Lord Fitzgerald had to consider the expression “realisation of [a bankrupt’s] property, which a bankrupt was to do his utmost to aid, and said:

In her judgment Proudman J set out those passages and then observed:

The first sentence of her remark is true so far as it goes, but the observation does not seem to us quite to address the point. Those cases, like the first dictionary definition, are both cases in which the judges accepted that the concept of realising something involved the reduction into cash, and strongly suggest that it does not happen until the cash is all actually available. These cases do not determine what “realise” means in subsection (3)(a), but they are helpful pointers towards an application of the normal English meaning of the word.

In a bankruptcy context the word has been given a similar meaning. In Re a Debtor (No 29 of 1986) Vinelott and Warner JJ had to consider section 82 of the Bankruptcy Act 1914 which provided for a commission or percentage to be paid to the trustee “on the amount realised by the trustee”. The question before them was whether the “amount realised” included money passed to him by a mortgagee who sold a property notwithstanding that the trustee had not himself done anything to get that money in – he had merely accepted it. The county court judge held that realisation required some positive acts by the trustee so the money was not an “amount realised by the trustee”. Vinelott J disagreed and at page 185H said:

We turn next to the all-important question of context. Reliance on the context of the word has various aspects. One is the immediate surroundings of the word itself. Another is the wider context of the Act itself, and how that word is used (if at all) in other parts of the same statute. While an undefined term does not have to bear the same meaning throughout the statute, it is prima facie likely that it was intended to. Mr Davies took us through each occurrence of the word “realise”, or words arising of its stem (“realisations”, “realised”, and so on) in the remainder of the Act and in various pieces of subordinate legislation. In the Insolvency Act 1986 the relevant provisions were sections 143, 305(2), 306A(3), 306C(3), 313(1), 330(1), 332, 421(4), and Sched B1 para 3(1)(c). In the Insolvency Rules he drew our attention to rules 2.100, 4.107(4) and (5), 4.127(2), 4.127A(2)(a), 4.127B(1) and (2), 6.125(4) to (6), 6.138A(2)(a), 6.139(1), 6.237D(3)(c). We were also taken to the Insolvency Fees Order 1986 (now revoked). We will not set out each of those provisions in this judgment. Mr Davies’s point was that in all those provisions the “realisation” word in question was used in a sense which involved the turning of the realised property into cash, and was inconsistent with part of its value being left outstanding in an unfulfilled monetary (or other) obligation. In other words, they seemed to be being used in a sense which accords with the normal English meaning identified above. We agree with him on most of them (as indeed did Mr John Briggs, who appeared for MPRL), though one or two of them might be thought to be less compelling than others. For example, section 313 allows the imposition of a charge on a dwelling house where the trustee is “for any reason, unable for the time being to realise that property”. It would not be unnatural to allow the word “realise” in that section to encompass a sale for deferred consideration, or conceivably any exchange for other property. However, that is the most that can be said about it. For the most part the use of the “realise” word in the other sections strongly suggests that it involves a final and completed change of identity into distributable or usable cash. That supports Mr Davies’s submissions as to the meaning in subsection (3)(a).

That conclusion gets further support from an analysis of the structure and apparent Parliamentary purpose of the provision. The provision was new in 2002, and it formed part of a package of measures affecting bankruptcies on or after 1^st April 2004. Some of those measures have no direct bearing on the point at issue in this appeal (for example the reduction of the discharge period from 3 years to 1 year) but others seem to form part of a scheme, albeit not necessarily an overall consistent one. The scheme reinforces the views expressed by Lawrence Collins J in Re Byford decd, Byford v Butler [2004] P & CR 12. That was a case under the old regime in which the question was as to the allowances that the wife and the trustee in bankruptcy should be allowed in adjusting their respective interests in a jointly owned house. The trustee had waited almost 10 years before taking steps to realise the property. Lawrence Collins J reflected on the position and said (at page 163):

We agree that the overall purpose of the provision (summarised by Mr Davies as a “use it or lose it” purpose) is along the lines referred to by Lawrence Collins J, though that does not determine the question in this appeal since the question for us is as to detail.

Other changes introduced by the 2002 Act assist in determining our question. Section 313 gives the trustee the right to apply for a charging order over the bankrupt’s interest in the same sort of property as is described in section 283A. (By doing so, rather than leaving the equitable interest outstanding, the trustee can hold a final meeting under section 332 and vacate office.) Until amendments made by the 2002 Act the value secured by that charge was, or could be, up to the value of the interest from time to time. Thus the trustee would have the benefit of any increase in value of the property over the years until the charge was satisfied by payment. The 2002 Act introduced subsection (2A) which provided that the charged value in subsection (2) should be:

The other relevant new provision is section 313A, again introduced by the 2002 Act. This section (which we do not need to set out) effectively prevents the trustee from enforcing his rights over an interest in the relevant property where it is of low value (currently fixed at £1,000). Where that is the case any application for an order for sale, an order for possession or a charging order must be dismissed. So if the bankrupt’s interest has a very low value at the end of the third year of his bankruptcy, the bankrupt’s interest becomes unavailable to the trustee by a combination of the removal of any enforcement mechanism and then the lapse of 3 years under section 283A, so that any subsequent increase in value of that interest arising out of an increase in property prices accrues to the bankrupt who has reacquired his interest.

If one pulls these strands together the scheme of section 283A begins to emerge. It is as follows. We assume for the purposes of this paragraph a jointly owned home, and put on one side for the moment the possibility of a sale of the interest at a deferred consideration.

The section only applies to that part of the bankrupt’s estate comprising his or his spouse/civil partner’s dwelling-house. It does not apply to other property.

The trustee has three years to decide what to do where the estate has such an interest.

If he does nothing, then (subject to the provisions of subsection (6), which presumably allow for special cases which we do not consider further) the estate loses the property interest.

If the interest is of low value (within the meaning of the Act) the trustee, while technically owning the interest, will in practice have no enforcement mechanism available to him. If he does nothing, the interest reverts to the bankrupt under section 283A. If he starts proceedings (whether for an order for sale or a charging order), that will technically keep his interest alive while the proceedings are pending (section 283A(3)(b) and (d)) but the interest will revest when the proceedings are dismissed under section 313A (see section 283A(4)).

If the interest is of significant value, the trustee can do the following:

Apply for an order for sale. This keeps the interest out of the scope of section 283A while the proceedings are alive and gives the co-owner the opportunity to buy the trustee out at the then value. Alternatively the property will be ordered to be sold and the trustee gets the then value.

Apply for a charging order (if the conditions of section 313 are fulfilled). This secures the then value to the trustee, with future increases going to the bankrupt.

Reach an agreement with the bankrupt under subsection (3)(e) – in effect, sell to the bankrupt. That will obviously reflect the then value and secure future increases for the bankrupt.

Sell the interest to someone other than the bankrupt or the civil partner/spouse at a price payable and paid on sale. It is accepted by the Lewises that this would be a realisation. It would be a sale at the then value, with future increases accruing to the purchaser.

It should not be forgotten that he might agree with the co-owner to sell, or the co-owner might want to sell anyway, in which case the trustee gets the estate’s interest at its then value.

For the sake of completeness we observe that the same sort of position will be reached if the bankrupt is the sole owner of the home. In that case the trustee will be spared the necessity of having to fight a co-owner but he will still have to make up his mind what to do in the same way as outlined above.

There may be some other permutations, but that is the basic scheme which emerges from a consideration of the section. The central feature which emerges is that which appears in the underlined words - the trustee, if he can achieve anything worthwhile at all, gets the equivalent of the then value of the property and is not allowed to hang on for ever as a co-owner, waiting to see property values rise. The provisions also achieve a reasonable degree of certainty for the bankrupt and the co-owner in that by the end of the third year (or the end of litigation commenced within 3 years) they will by and large know whether the property has to be sold, how much the trustee will get out of the property, that the trustee will no longer be a co-owner, and that the opportunity to make money out of a rising market will not remain with the trustee (giving him an incentive to hang on for some considerable time) but will enure to the benefit of the bankrupt, the co-owner or some other assignee.

This certainty regime is not perfect, and the regime is not totally internally consistent, at least in theory. On any footing the trustee can sell the beneficial interest for cash to someone, who would then be able to sit and wait for property values to rise, and provide a source of an unknown and unpredictable future request for a sale or application for an order for sale. That possibility compromises the desire for certainty that otherwise seems to underpin the section. It might be thought to be as undesirable that such a person should sit and wait as for the trustee to do so (see the observations of Lawrence Collins J in Byford). However, that is not a particularly likely scenario. There is no market in beneficial interests in matrimonial homes; in general the only likely cash purchasers are the co-owner, or perhaps a member of the family. The same certainty objections do not arise when such person becomes a co-owner. If one is looking at out and out acquisitions, it is unlikely in practice that an unconnected third party would come in and occupy the same position as the trustee. So this compromise of the certainty objective is more apparent than real.

It can also fairly be said that the Act also permits a compromise of the certainty principle by allowing a charging order to be made. The existence of a charge over the interest creates the possibility of uncertainty as to when that charge will ultimately be enforced, if at all, by an application for an order for sale. However, the uncertainty of amount does not exist in this situation. The more limited uncertainty of time of enforcement generated by the existence of the charge (which is capable of being controlled by the court, since the charge is the creation of the court and not an act of the trustee) is, in our view, merely a limited inconsistency in the pattern and not something which fundamentally undermines what otherwise seems to be going on in the section and the Act as a whole.

Against that background it is now necessary to consider whether a sale of the beneficial interest in exchange for a future price, or a partially future price, would fit into that apparent background. Can it have been intended that such a transaction is a realisation within subsection (3)(a)? It seems to us that it cannot, for the following reasons:

For the reasons given above, it would extend the meaning of “realises” beyond its normal English sense.

It would be an unusual transaction for Parliament to have contemplated in these circumstances. Section 283A is designed to deal with a real world problem, operating in a world of real, not fanciful, commercial transactions. A sale of a beneficial interest to an outsider is unusual enough. A sale with fixed monetary consideration left outstanding would be even more unusual. It is hard to imagine who would do such a thing.

A sale with a contingent monetary consideration left outstanding is more conceivable, particularly if the consideration is dependent on a future sale of the property and is otherwise not payable, as the present case demonstrates. But the contingency of the obligation makes it look even less like a “realisation” in everyday terms (pending the fulfilment of the contingency), and it seems to create the very uncertainty that the rest of the scheme seems, by and large, to seek to remove. While the scheme is not spelled out and has to be inferred, and while it is not perfect, this sort of transaction sticks out like a sore thumb against the background of the rest of the section.

There is therefore little or no support from the apparent scheme of the section for what would have to be an extended meaning of “realise”, and we have concluded that it does not have that extended meaning. We are aware that it might be thought that approaching the matter in this way involves setting up a scheme for the section which by its very nature tends to exclude deferred consideration transactions, and is therefore a flawed logical process, but that would miss the point. The real point is that a deferred consideration transaction looks incongruous when one looks at how the section (and the Act) works overall, and such incongruity is inconsistent with allowing “realise” to bear the meaning contended for by the trustee in this case.

We therefore conclude that “realises” in the subsection involves getting in the full cash consideration for the deal.

Mr Briggs would have us rely on matters pointing the other way. He points out, correctly, that Schedule 5 of the Act allows a trustee to sell in exchange for money “payable at a future time” (see paragraph 3), and says that this supports his submission that such a sale can be a realisation. The judge below also seems to have relied on that point at paragraphs 17 and 18 of her judgment, and paragraph 32 (cited above) also demonstrates that the point probably lay at the heart of her reasoning. We do not think that that provision assists. The point in this case is what is meant by “realise” in the Act (or, more precisely, in one particular provision, though as appears above it appears to have a uniform meaning throughout the Act). In order to “realise” assets the trustee can sell for future consideration. He has power to do so. But that is a different point from the question of when the realisation takes place, and says nothing about that latter point. It is quite consistent with that power that the realisation should only take place when all the cash is in. The deal done by the trustee in this case might have been technically within his powers, but it was not, at the point of time when it was entered into, a realisation. It was, at most, a step on the road to a realisation which would inevitably take place too late for the purposes of section 283A.

Nor are we convinced by Mr Briggs’s arguments that the section is not intended to prevent the trustee from doing the best deal that he can for the benefit of creditors. It actually seems designed to do just that, in that it tilts a balance back towards the bankrupt or his family. On any footing it imposes restraints which will work against the creditors. The real question is how far the restraints go in that direction, not whether they exist or not.

Mr Briggs also sought to rely on the fact that if Mr Davies were right, it would deprive a co-owner of the opportunity of buying out the trustee by instalments if those instalments went beyond the 3 year mark. That, he said, cannot have been Parliament’s intention. It would work an unfairness on both the spouse and the creditors. Mr Briggs is obviously right about the consequences of Mr Davies’s argument in this respect – the spouse would be thus deprived. But we consider it unlikely that Parliament would have had this effect in mind when creating the bigger picture, and in any event there would be a means of avoiding that consequence in appropriate circumstances. If the bankrupt consented to the transaction, and agreed to waive the re-vesting, we can see no objection to a spouse-instalment transaction taking place. Many bankrupts who wished to stay in the property with their spouses might well be prepared to allow such a thing to happen if the alternative was a loss of the home in a forced sale. We therefore do not think that this potential drawback points away from the interpretation of “realise” that we otherwise think to be correct.

In his skeleton argument Mr Davies sought to rely on the legislative history of the provision, starting with background consultation papers, moving through a White Paper, a private member’s original proposal and the ultimate ministerially-introduced final form of the provision. In his skeleton argument Mr Briggs disputed Mr Davies’s right to rely on this material, since he said it did not come within the Pepper v Hart principles, but said that in any event the material did not support Mr Davies’s case. This dispute was not developed in the oral submissions before us. Nor was any of the material deployed before Proudman J. It seems to us that the dispute as to the meaning of the word “realise” in this case justifies resort to proper Parliamentary material to try to see the mischief aimed at in, or the legislative intent behind, the provision, but the assistance given by that material is very limited. The White Paper deals with a different broad target of reducing bankruptcy stigma and disabilities, and the issues raised by what is now section 283A were not addressed by it. When the section was introduced by the minister on 17^th June 2002 she did so on such general terms that they do not assist in the analysis which we have to conduct. We therefore place no reliance on this material and prefer the schematic analysis that we have sought to carry out above.

We have also not taken any account of the following arguments or factors:

Mr Davies sought, from time to time, to deploy the claim of Mrs Lewis to an equity of exoneration which he said, on the facts of this case, reduced the bankrupt’s interest to a low value one for the purposes of disentitling the trustee to a charging order. There has been no determination of Mrs Lewis’s rights in this respect, and we ignore the possibility of such a claim.

Mr Davies’s skeleton argument sought to say that the transaction between the trustee and MPRL was collusive or a sham, “done in a corner”. This issue was not raised in the application, in the evidence or in the court below. It is too late to raise it now.

For the reasons given above we consider that “realise” in section 283A(3)(a) does not include effecting a sale for future cash consideration, at the stage before that cash is got in. That means that the transaction in this case does not fall within that provision, with the result that bankrupt’s interest has reverted to him and MPRL does not own any interest now. We emphasise that our reasoning depends on the fact that not all the cash to be obtained from the transaction was got in within 3 years. It does not depend on the contingent nature of MPRL’s obligation, though it is entirely in accordance with what we have found to be the scheme of the provision that such a device should fail. The reasoning of the judge seems to fail to distinguish between the concepts of sale and realisation, and the differing significance of the powers of a trustee in bankruptcy and the limits placed on the exercise of those powers, and is thereby flawed. We would, however, add that we are not convinced that she had the benefit of the full analysis of the use of “realise” and its derivatives to which we were treated. Nor did she have the benefit of Mr Davies’s powerful analysis of how the various sections interlock, which is reflected in this judgment. All these factors are highly material to our conclusion.

We therefore allow this appeal.