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Enterprise Act 2002 introduced new time limits during which a trustee in
bankruptcy had to take action if he is to be able to make a claim on the family
home. Basically, if the property is the sole (or principal) residence of the
bankrupt, then there is a period of three years from the date of the bankruptcy
available to the trustee.
After that time, the interest in that property will cease
to be part of the bankrupt’s estate and so vest in the bankrupt without the need
for any conveyance or transfer. However, if during the three-year period the
trustee realises the interest in the property, applies for an order for sale or
possession, or applies to impose a charge on the property, then the property
will not form part of the bankrupt’s estate and will therefore be available to the
creditors. In simple terms, therefore, if no charge is obtained or other action
taken within the three years, then the property re-vests in the bankrupt.
There is also an exception for low-value homes, and the court cannot order
a charge or sale on the bankrupt’s interest if that is worth less than £1,000.
Note that, although the legislation refers to ‘low-value home’, it is the value
of the bankrupt’s interest in that property (and not the value of the property
itself) which is relevant.
In most cases, the trustee will take the necessary steps within the three-year
period. In that case, the real question is the extent of the charge in favour
of the trustee: does the trustee get the benefit of house inflation, or does
that go to the bankrupt? Under the original IA 1986 legislation, the trustee’s
charge over the property was enforceable ‘up to the value from time to time
of the property secured’. This meant that the benefit of any property inflation
would be available to the creditors. Now, however, as a result of Enterprise
Act 2002, the charge is only enforceable to the ‘charged value from time to
time’, and that means the amount specified in the charging order as the
value of the bankrupt’s interest in the property at the date of the order (plus
interest). Accordingly, the benefit of any increase in the value of the property
after the date of the order will accrue to the bankrupt – and not his estate.
This is an important change. As readers will know, what happened in the
property collapse of the early 1990s was that lenders were able to sit tight
and eventually recover many of their arrears when those properties
eventually benefited from house inflation. Such a scenario is not envisaged
by Enterprise Act 2002. Thus, a trustee in bankruptcy can no longer hope to
secure the benefit of any increase in value of a property. However, at the
same time, it is important for the trustee to make sure that steps to secure
a charge are taken within the three-year period.
One consequence of this change is that the recent arguments about the length
of the limitation period in mortgage claims are likely to become unimportant.
This is because the three-year period now provides little incentive for a lender
to retain the charge for a long period (such as 12 years), and indeed an order for sale or possession is now unlikely to be delayed for that length of time.
Accordingly, limitation arguments over long-standing debts (as discussed in last
month’s issue, p14) are less likely to be important in the future. For a note on
the effect of Enterprise Act 2002, see [2006] NLJ 534.
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