There are often difficult issues encountered when the worlds of bankruptcy and probate collide. This case is a good example.
The case concerns section 283A of the Insolvency Act 1986 ("s283A") which provides that a bankruptcy trustee must deal with a bankrupt's interest in their home within three years, otherwise the property re-vests in the bankrupt on expiry of this period. It is commonly known at the "use it or lose it" provision.
Importantly, where a trustee is not informed of the bankrupt's interest within three months of the date of the bankruptcy, the three year period only commences from when the trustee becomes aware of the interest.
The case of Khilji provides guidance on two issues.
- The quality of knowledge required to trigger the three year period in s283A; and
- The nature of the bankrupt's interest in the property for the purposes of the section.
Mr Khilji died intestate in August 2014. Mr Hartwell was appointed personal representative of his estate, that included the matrimonial home ("the Property).
In July 2018, a bankruptcy order was made against Ms Khilji. Two months after, Ms Khilji was interviewed by an examiner for the Official Receiver. She told the examiner that the Property was in her late husband's sole name and that she was not a joint owner of the Property, although she did tell the examiner that she contributed to the mortgage after her husband had passed away.
In April 2019, Mr Hartwell commenced proceedings for possession of the Property. In the course of defending those proceedings, Ms Khilji claimed a one-third beneficial interest in the Property, arising under a common intention constructive trust. She later attempted to argue that the three year period in s283A had expired and as a result, her beneficial interest had re-vested in her.
Ms Khilji's trustee applied to the court for a declaration that the Property had not re-vested in the bankrupt. The question to be answered by the court was whether Ms Khilji had done enough to "inform" the Official Receiver of her interest in the Property when she made the statements in her interview with the examiner in September 2018. If she had, the three year period from when the bankruptcy order was made would have expired in July 2021 and her interest in the Property, would vest in her, not the Trustee.
In reaching his decision that neither the Trustee nor the Official Receiver had been informed or become aware of Ms Khilji's interest in the three month period from the beginning of her bankruptcy, Deputy ICC Judge Curl KC considered the quality of knowledge received by the Trustee and Official Receiver and the nature of the interest, in particular, whether what the Trustee or Official Receiver was told could fall within the meaning of an "interest" under s283A.
The judge considered that to "inform" or for the Trustee or Official Receiver to "become aware" of the interest, something more than notice of a "potential claim" is required. The Trustee or Official Receiver must have some sort of knowledge of the interest. As he saw it, the court will "be slow" to find that the Trustee or Official Receiver has "become aware" or "been informed" through "inference from equivocal facts" where the bankrupt has not told the Trustee or Official Receiver "in clear terms."
Key to his decision was the nature of the interest that the Trustee or Official Receiver had been informed of and whether it fell within the meaning of "interest" under s283A. Under s283A(1), it was considered that neither Ms Khilji's interest in the intestate estate, nor her matrimonial home rights in the Property were "interests" under s238A(1). Therefore, while she might arguably have notified the Official Receiver of those interests, they did not trigger the three year period.
However, her interest under common intention constructive trust would be considered an interest for the purposes of s283A(1). Therefore, the case turned on whether Ms Khilji had "informed" the Official Receiver of this interest during her initial interview.
In short, the judge held that what Ms Khilji told the Official Receiver did not imply the existence of an interest under common intention constructive trust. Her interest in the intestate estate was to have the estate "administered in accordance with the law" but this did not "confer any sort of legal or beneficial property interest". Further, despite her statements as to her mortgage contributions, having provided a contradictory statement that she did not consider that she had been a joint owner of the Property, the Official Receiver could not have "become aware," at this point, of the interest under common intention constructive trust.
Therefore, the Trustee and Official Receiver had not become aware of the relevant interest under s283A(1) until service of the defence and counterclaim. The Property had thus, not re-vested in Ms Khilji.
Trustees will take comfort from this case that awareness of the bankrupt's interest will only come through clear statements given by the bankrupt. The case is also helpful in clarifying the nature of the interest in question. Not every interest that a bankrupt might have in a property will necessarily be the relevant interest for the purposes of s283A.