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Insolvency practioners and the housing slump

Recently, this firm acted for a well-known firm of insolvency practitioners to obtain an Order for Possession to realise the Trustee in Bankruptcy’s interest in the bankrupt’s property. The valuation of the property at the beginning of this firm’s instruction was in the region of £500,000 with the instruction being received in late 2007.

An application for the Trustee in Bankruptcy’s interest and an Order requiring possession of the property was made in February 2008. Due to the particular circumstances of the case and the interest of the bankrupt’s spouse in the property, the hearing of the matter was significantly delayed until earlier this month. The difficulties arose from assertions of beneficial interest by the spouse that were not substantiated by Land Registry documents and were not initially substantiated by any financial documentation.

Indeed, such allegations were only substantiated to a very limited extent. These allegations did however suffice to require the court to delay hearing the application for the Declaration and Possession Order until such time as evidence could be provided. Further evidential difficulties caused by lack of co-operation of the bankrupt and the bankrupt’s spouse and indeed frequent attempts by the bankrupt and his spouse to hinder matters meant that the hearing was delayed by some nine months.

As we are all fully aware, the property market has been in rapid decline for some time now and the valuation of the property upon initial instructions, even taking into account a substantial mortgage and potential interest by the spouse, meant that there was sufficient equity to justify incurring legal costs and incurring the insolvency practitioner’s costs to seek to recover the property for the benefit of the bankrupt’s creditors.

The initial valuation would have meant that all of these costs and the amounts owed to creditors would have been covered by the equity in the property. However, given the nine-month delay the valuation of the property at the time of the hearing reduced the value of the property by almost 20% which in this case knocked about £100,000 off the value of the property. This also meant that the value of the property would barely cover the outstanding mortgage on the property. This effectively left the insolvency practitioner with substantial legal bills, no equity in the property and a significant number of disgruntled creditors who would receive nothing. This, of course, is completely disregarding the costs that the insolvency practitioners themselves have incurred and would be unable to recover.

In the specific circumstances of this case, a settlement was reached whereby the property was not actually recovered by the Trustee in Bankruptcy and a cash settlement offer was made. This did go some way to mitigating the loss incurred by the insolvency practitioner and covered a contribution towards the legal costs but did not permit any payments being made to the creditors.

No doubt all insolvency practitioners are acutely aware of the declining value of properties in which they have interests as Trustee in Bankruptcy and should therefore treat this as a cautionary tale. Insolvency practitioners may find it of some benefit to avail themselves of the three-year time limit under the Enterprise Act 2002, within which they must commence proceedings to establish an interest in a property or to recover the property of a bankrupt. After all, this may be in the best interest of the creditors.

Whilst nobody appears to be able to give any specific advice on the likely progress of the housing market, it is perhaps a factor that insolvency practitioners should consider, particularly where they are seeking to recover interests in properties which are subject to a mortgage, even perhaps mortgages which were initially 50% loan to value.

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