Distributions of Personalty: Beware the Trustee in Bankruptcy

Catherine Burton

Dibb, Lupton Alsop, Solicitors

(From Issue 7,April, 1999)

The Court of Appeal’s recent decision in Cardona -v- Rooney (9th February) brought to mind a `ticklish` issue concerning section 27(2)(b) of the Trustee Act 1925 – does it apply to distributions of personalty?  Should trustees/personal representa­tives perform bankruptcy searches before distributing?

Whilst not perhaps the jolliest of introductions there can probably be no better place to start than an examination of the section:

`27.  Protection by means of advertisements

 (1) With a  view to the conveyance to or distribution among the persons entitled to any real or personal property, the trustees of a settlement or of a disposition on trust for sale or personal representatives, may give notice by advertisement in the Gazette…… of their intention to make such conveyance or distribution as aforesaid, and requiring any person interested to send to the trustees or personal representatives within the time …fixed in the notice … particulars of his claim in respect of the property or any part thereof to which the notice relates.

(2) At the expiration of the time fixed by the notice the trustees or personal representatives may convey or distribute the property or any part thereof to which the notice relates, to or among the persons entitled thereto, having regard only to the claims… of which the trustee then had notice and shall not, as respects the property so conveyed or distributed, be liable to any person of whose claim the trustees have not had notice at the time of conveyance or distribution; but nothing in this section –

            (a) prejudices the right of any person to follow the property, or any property representing the same, into the hands of any person, other than a purchaser, who may have received it; or

            (b) frees the trustees from any obligation to make searches or obtain official certificates of search similar to those which an intending purchaser would be advised to make or obtain.` [Emphasis added]

Thus a trustee is only protected against a later claim by a beneficiary of whose existence he was unaware (which would include a trustee of a beneficiary’s bankrupt estate) if he can satisfy two tests:

(i) that before distribution he performed all searches which `an intending purchaser would be advised to make or obtain` (the `intending purchaser test`); and

(ii) that he had no notice of the claim (the `notice test`).

1          The Intending Purchaser Test

The wording of subsection (2)(b) is ambiguous.  Does it mean that before distributing the estate assets, the trustee must, in respect of each asset, perform all searches which a purchaser of that particular asset would be advised to make?  Or is it suggesting that the trustee is at risk if, before distributing, regardless of the type of asset in question, he fails to perform some or all of the usual searches which a purchaser of real property would undertake, at least to the extent that such searches might contain relevant information – such as details of the vendor’s bankruptcy?

An `intending purchaser` of personal property would be unlikely to undertake any searches.  Most of the usual conveyancing searches (mining, local authority, register of common land)  would be wholly inappropriate.  `Bankruptcy Only` searches at the Land Charges Registry may be prudent, but unless the transaction involves the acquisition of a substantial business interest, few advisors would consider recommending that a client should per­form a bankruptcy search.

  1. The Notice Test

Even if a trustee, intending to distribute personalty, is legitimately excused from performing a bankruptcy search of the Land Charges Register, could he otherwise be deemed to have notice of the beneficiary’s bankruptcy?

2.1            Registration of bankruptcy proceed­ings: protecting the estate for creditors.

The Insolvency Act 1986 provides for the bankrupt’s assets to vest automatically in his trustee without the need for any conveyance, assignment or transfer.  To ensure that the trustee in bankruptcy also has the right to claim the benefit of property which the bankrupt acquires or is devolved upon him after the making of the order but before his discharge, the Act entitles the trustee to claim the benefit of such property by serving a notice on the bankrupt within 42 days of the trustee becoming aware of the existence of such property.

2.2        Effect of advertisement in the London Gazette

Rule 12.20 of the Insolvency Rules 1986 (IR1986) provides that a copy of the London Gazette containing any notice required by IA1986 or IR1986 to be gazetted is `evidence of the facts stated in the notice`.  It does not constitute either actual or constructive notice of the bankruptcy.

2.3        Effect of registration of bankruptcy petition/order in Land Charges Register

Section 198(1) of the Law of Property Act 1925 provides:

`The registration of any instrument or matter in any register kept under the Land Charges Act 1972 … shall be deemed to constitute actual noticeof such instrument or matter and of the fact of such registration, to all persons and for all purposes connected with the land affected, as from the date of registration …and for so long as the registration continues in force`.

Provided `to all persons` can be read independently of `connected with the land affected`, regardless of whether he searches or not, the trustee is deemed to be fixed with actual knowledge of the existence of the bankruptcy order and section 27 can provide no protection.  The effect of this section was mitigated by the introduction of s 24 of the Law of Property Act 1969:

`Where under a contract for the sale or other disposition of any estate or interest in land the title to which is not registered … any question arises whether the purchaser had knowledge, at the  time of entering into the contract, of a registered land charge, that question shall be determined by reference to his actual knowledge and without regard to the provisions of section 198 of the Law of Property Act 1925`.

However, as the section is prefixed by specific reference to contracts for the sale or other disposition of interests in land it arguably has no relevance to the question of the extent to which a trustee proposing to distribute personalty has notice of bankruptcy petitions or orders registered at the Land Charges department.

3          Rooney -v-  Cardona

This case concerned a trustee in bankruptcy’s claim to moneys payable in respect of a Black Horse Life Assurance Company Limited policy taken out by Mr Cardona and his wife.  Mrs Cardona died, triggering the death benefit at a time when her husband was an undischarged bankrupt.  He completed a declaration that he was legally entitled to the policy and received the payment which he then transferred to the United States to where he soon absconded.  His trustee in bankruptcy commenced proceedings against him, his son (as the alleged ultimate beneficiary of the money) and Black Horse.  The trustee claimed that Black Horse knew or was deemed to know of Mr Cardona’s bankruptcy by reason of the notice in the Gazette and by certain specific communications which it received from the trustee.  The question of deemed notice by virtue of s 198(1) LPA 1925 did not arise.  In the leading Court of Appeal judgment, Lord Justice Robert Walker held:

`After his bankruptcy Mr Cardona was not entitled to require payment of the policy moneys to himself, and he could not give a good receipt for them.  Black Horse was induced to part with the death benefit on the strength of a death certificate and forms of indemnity and discharge which clearly proceeded on the footing that Mr Cardona was the survivor of the grantees and as such solely entitled beneficially.  Black Horse was deceived but as between itself and Mr Cardona’s creditors it is Black Horse that must bear the loss, whether or not it had actual notice of the bankruptcy.  If it did have actual notice then its loss is due to its own carelessness.  The notice in the London Gazette does not by itself have any relevant consequences`.

4          New Register of Bankruptcy Orders

On 22nd March 1999 the Insolvency (Amendment) Rules 1999 came into force.  They provide, inter alia, for the Secretary of State to maintain a new register of bankruptcy orders which will be open for public inspection and will contain information about the address, gender, age and occupation of the bankrupt, details of any trustee appointed, names of the bankrupt’s businesses, details of any previous bankruptcies within the last 15 years and the automatic discharge date.  The information will be deleted from the register on the expiration of specified periods but broadly on or before two years of the bankruptcy coming to an end.  The Department of Trade and Industry has confirmed that the register is already in existence and maintained in Birmingham.  At the time of writing the author is unable to confirm the manner in which searches may be performed and whether a fee will be levied.

 5            Conclusion

Few professional trustees undertake searches be­fore distributing assets other than land. On the above analysis, the omission to do so is risky.  However the extent of such risk can only really be measured by a consideration of the circumstances under which a trustee in bankruptcy might become aware of the bankrupt’s interest in the assets in question.  He is entirely dependant upon informa­tion which he receives from creditors and which the bankrupt provides during his initial interview or volunteers during the course of the bankruptcy.  It is not difficult to appreciate why this issue does not appear to have generated much public debate.  But with the likely introduction later this year of the Government’s Welfare Reform and Pensions Bill, which if enacted in its current form will deprive a trustee in bankruptcy of almost any claim to a bankrupt’s pension benefits, he may soon become a hungrier animal and explore deeper into the jungle of testamentary dispositions.  The most prudent course of action must therefore be the adoption of a procedure whereby bankruptcy searches are performed  before the distribution of any assets over a certain value.

© Catherine Burton April 1999

Dibb Lupton Alsop, Solicitors