Grant & Cork v Baker [2016] EWHC 1782 (Ch) – Exceptional Circumstances and TOLATA

In Grant & Cork v Baker, the High Court addressed the questions of (a) when there are exceptional circumstances such as to justify delaying sale of a property in cases of bankruptcy and (b) what effect these exceptional circumstances should have in relation to such a sale.

Mr and Mrs Baker had purchased a property in Essex to provide a comfortable and secure home for themselves and their children. In particular, they saw this an appropriate property for their daughter Samantha, who had complex mental needs, including suffering from global development delay disorder, which meant that she had the mental age of an 8 or 9 year-old child and was incapable of living on her own, navigating stairs unaided, and felt continually unsteady. Following the “assistance” of an (apparently negligent) accountant, Mr Baker found himself a significant debtor of HMRC who, recognizing that Mr Baker would be unable to pay the sums owed to them, refused to accept a compromise deal and as a result, Mr Baker was declared bankrupt. There were no assets in the bankruptcy apart from the Bakers’ house, in which Mrs Baker had a 50% share. The trustees in bankruptcy therefore applied to the court for an order for sale of the property. The judge at first instance in the County Court had found that Samantha’s special circumstances justified an indefinite delay of sale under section 335A Insolvency Act 1985. The trustees appealed against this decision to the High Court.

The questions for Henderson J were, therefore, firstly whether there were exceptional circumstances here sufficient to justify departure from the general rule in bankruptcy cases that sale should be ordered where an application is brought more than one year after the bankruptcy. Secondly, he had to determine, if such exceptional circumstances did exist, whether an indefinite delay of sale was appropriate. As will be seen, the decision in this case shows how much priority is given to creditors’ interests in cases of bankruptcy, and how even when exceptional circumstances are established, this does not necessarily assist the parties who will be adversely affected by sale to any great degree. In this, both Mr Baker’s original accountant (now deceased) and indeed HMRC’s unflinching pursuance of Mr Baker, might be validly criticized. As far as the judgment is concerned however, it seems to be an accurate reflection of the law as it stands, and, in taking account of the time limit with regards to recovery of a bankrupt’s home and the tone of the statutory rules, probably strikes as good a balance as was possible in the circumstances, albeit one with a very sad outcome.

On the first issue, i.e. the threshold question as to whether there were exceptional circumstances in the case, there a number of noteworthy elements to the discussion. First, it is clear from Henderson J’s remarks that physical adaptation of a property is likely to be more significant in terms of exceptional circumstances than emotional attachment to a property will be. In this case, it was clear that Samantha would find it emotionally and psychologically very difficult to move house, but as Henderson J notes, the house had not in fact been structurally altered in anyway to meet her needs ([17]), and this appears to have weighed against a finding of exceptional circumstances.

Second, Henderson J was clear that notwithstanding the lack of definition of ‘needs’ in section 335A, the term should be given a “broad interpretation”. Similarly, in section 335A(2)(b)(iii) the reference to the “needs of any children” ought not to be restricted to minors, but can include, as here, the adult child (Samantha was 30) of the bankrupt person.

Third, the judge considered at length the availability of alternative accommodation and the means by which the Bakers would be able to finance this. The discussion is detailed and makes a thorough assessment of the financial circumstances in which the couple would find themselves once the property had been sold. In doing-so, however, he highlighted that the family would be able to afford rented accommodation after the sale of their family home. He underplayed the significance of the lack of permanence that residential tenants may have, highlighting that the family are likely to be model tenants such that a landlord would not seek to evict them. This may be true in practice, but it seems somewhat speculative to rely on this when assessing Samantha’s needs.

Nevertheless, he reached the conclusion that the circumstances in the instant case were exceptional, concluding:

the judge was clearly entitled to find that the circumstances of the present case are indeed exceptional, thereby displacing the presumption that the interest of Mr Baker’s creditors are to outweigh all other considerations.
— per Henderson J, [39]

Furthermore, he confirms:

A medical or mental condition of one of the joint owners is a paradigm example of circumstances which the court may properly recognize as exceptional, and I can see no reason in principle why the same should not apply where the medical or mental condition is that of a child for whom the joint owners care in their home.
— per Henderson J, [41]

However, the next step was to ascertain what this meant in terms of delaying an order for sale and here Henderson J looks to the purpose of the bankruptcy provisions as a whole, i.e. to release as much of the assets for distribution amongst creditors. 

The circumstances of the case include the statutory scheme of the bankruptcy legislation, at the heart of which is the vesting of the bankrupt’s property in his trustee, with the object that the trustee should then realise the property and distribute the net proceeds among the unsecured creditors on a pari passu basis. Moreover, the clear effect of section 283A of the 1986 Act is that there is a limited period of three years within which the trustee must either take steps towards realisation of the bankrupt’s interest in his home, or forfeit that interest as part of the bankrupt’s estate. If, as in the present case, the trustee does take action within the requisite period, it seems to me that the court should then exercise its powers under section 335A with the object of enabling the bankrupt’s interest in the property to be realised and made available for distribution among his creditors. Only in that way can the underlying purpose of the bankruptcy legislation be achieved.
— per Henderson, [44]

Similarly, he reasons: 

she [the judge] failed to give appropriate weight to the fundamental point that an indefinite suspension of the order for sale, for a period that could be measured in decades, is incompatible with the underlying purpose of the bankruptcy code.
— per Henderson, [45]

Whilst this analysis must be correct if the purpose of the bankruptcy scheme as a whole is the distribution of assets and that alone, it is at least arguable that the purpose of the scheme is to achieve such distribution except in a very narrow range of exceptional cases where the needs of people other than the bankrupt person are so unusual and severe that to pursue this main purpose would be inappropriate. In the instant case however, although very sad, the situation is perhaps not so unusual and severe as would warrant this conclusion. Henderson J gives four key reasons why although exceptional, the case was not exceptional enough to justify indefinite delay:

1.    The practical reality of rented accommodation is not as unsecure as the County Court judge assumed;

2.     The judge was wrong to dismiss the ability of Mrs Baker to make up for any increase in monthly payment (rent versus mortgage) from her share in the (scant) proceeds of sale;

3.      Samantha had moved house eight years previously quite successfully. It was therefore not wholly unreasonable to inflict this upon her again. “Far more detailed and cogent medical evidence would have been needed… to justify a postponement for the sale of the Property for more than a relatively short period” ([49]); and

4.      There are alternatives to indefinite postponement which are more appropriate in the situation. 

On the basis of these reasons, Henderson J reached a middle ground and ordered a further 12-month delay to allow time for finding alternative accommodation.

As noted from the outset, this is an apparently ungenerous conclusion, but in reality, given that Mr Baker’s only asset was his share in the family home, in the long run there was no alternative. It is to be hoped however that the Bakers have and pursue a valid claim against the estate of the negligent accountant as the outcome here is unfortunate for all involved. In legal terms, this case is a noteworthy and rare example of the successful invocation of the exceptional circumstances test, but perhaps more importantly, it is one of the few exceptional circumstances cases where the needs of the person in question (i.e. someone other than the bankrupt person) are not in one way or another short term or time limited. This case therefore demonstrates how the courts might treat situations where the exceptional circumstances are long-term or permanent.

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