Bankruptcy: liability of Official Receiver for sale of land at undervalue

The Chancery Division has considered an appeal against refusal of permission for an application under s304 of the Insolvency Act 1986 for compensation from the Official Receiver for negligent sale of land at an undervalue in Martin Walker v The Official Receiver (as trustee in bankruptcy of Martin Walker) [2021] EWHC 2868 (Ch). The land was purchased in 1994 for £15,000. It was registered in the appellant’s sole name but a declaration of trust declared that he held it on trust for himself and his parents – who had contributed to the purchase price – in equal shares. The appellant was declared bankrupt in 1997 and discharged in 2006 with no distribution to creditors. The declaration was disclosed as part of that process and the appellants’ parents contacted over their interest in the land. In 2013 an unconnected enquiry was made to purchase the land. The OR assumed that the bankruptcy file had been destroyed, made limited enquiries and concluded that the land remained part of the appellant’s estate on bankruptcy. Neither the appellant nor his parents were contacted.  The land was sold in 2014 for £20,000. In 2019 the purchaser sold it for £175,000. S304 of the Insolvency Act 1986 provides that, on application, made with permission of the court, the court may order a trustee to pay compensation where it is satisfied that a bankrupt’s estate has suffered loss through misfeasance or breach of duty by the trustee in carrying out its functions. The court, in exercising its discretion to grant permission, must decide whether the applicant has shown a reasonably meritorious case; and whether, if permission is given, it will result in a benefit to the estate. McGuire v Rose [2013] EWCA Civ 219. The application for permission was made in December 2020 on the mistaken basis that – following the death of his parents – the appellant owned the land legally and beneficially and that those interests vested in the OR at the relevant time. The OR obtained from storage and disclosed the bankruptcy file, including the declaration and associated correspondence, shortly before the application was refused in January 2021. Consequently, the exercise of judicial discretion was flawed. The court granted permission to appeal, allowed the appeal and considered the application for permission afresh. As the land was held by the appellant as trustee, only his third share in it vested in the OR, who therefore had no authority to sell the land in 2014 without an order for sale under s14 of the Trusts of Land and Appointment of Trustees Act 1996. Having intermeddled with the trust property without authority, the OR was liable to account for the consequences of its dealings as a trustee de son tort. The OR accepted this position and so acknowledged liability but relied upon statutory defences under s61 of the Trustee Act 1925 and s303(3) of the Insolvency Act 1986. In granting permission to pursue an application under s304, the judge said that he could not conclude that the OR will show that it had acted honestly and reasonably and without negligence as required under the statutory defences. Louise Clark is a property law consultant and mediator