To sell or not to sell: that is the Insolvency Practitioner’s question
A recent Sheriff Court case has highlighted the factors involved in selling a debtor’s family home, and serves as a useful reminder to practitioners assessing whether or not to sell.
It’s all about Value
In any insolvency where there is property involved, one of the Insolvency Practitioner’s (IP) first steps is to value the property and ascertain if there is any equity available. Where there is little or no equity, the IP will usually leave well alone. Assuming the debtor keeps up the mortgage payments, the lender is unlikely to step in. In such cases, the debtor usually gets to keep his home without threat of ejection.
Where equity is available, the trustee will look to realise that equity for the benefit of creditors. The trustee will discuss the possibilities of remortgaging or of a buy-out from a family member, to allow the debtor to release the equity to the trustee but retain the property. Such solutions are not always possible, and in some cases the trustee has no option but to sell the property in order to get at the equity. Equally, if the debtor stops paying the mortgage, the decision will probably be taken out of the trustee’s hands by a lender repossession.
In the current market of dropping – or perhaps bottoming out, depending on who you speak to – property values, is it worth selling?
Wren’s Trustees v Wren
In this case, where the trustee sought authority to sell and warrant to eject, there were two large factors at play. The first was that the property was a family home, and accordingly subject to the considerations of section 40 of the Bankruptcy (Scotland) Act 1985. The second was that the debtor argued that following a sale, there would be no funds available for unsecured creditors, and more particularly that the lender was not forcing a sale.
The “Family Home” Argument
The family home was occupied by both debtors – husband and wife – together with their children aged from 13 to 24 years and Mrs Wren's mother. Some of the children were about to sit their standard grade exams and Mrs Wren had chronic arthritis.
As with any section 40 application, the Sheriff, in determining whether to consent, must have regard to the needs and financial resources of the debtor's spouse, any child or children of the debtor and the interests of the creditors.
The Sheriff took the view that the pleadings on section 40 were insufficient; while the debtor argued that to be ejected would be disruptive to the children and their upcoming exams, he did not go far enough. There was no averments about, for example, having to move schools. The Sheriff also took the view that the moving period would be over before any crucial exam period. In relation to Mrs Wren’s mother, the debtor had averred that they were planning on a refurbishment of the ground floor in order to better accommodate her. The Sheriff took this as a factor that the property was not suitable for her, and in the absence of any averments about the unavailability of alternative accommodation, he awarded authority to sell.
On appeal, the Court agreed with the Sheriff’s findings in this regard, but found that was not the end of the matter. The Sheriff’s findings that the ejection action should be dealt with in isolation of any consideration about the lender’s position was disagreed with. Rather, the Court found that the lender’s position was of relevance, especially where it was apparent that the lender did not consent to a sale. The Court was at pains to avoid situations where a family was ejected, but the house could not in fact be sold. In this way, the Court considered the interrelation between section 39 and section 40 of the Act.
The Lender’s Position Argument
The Trustee advised the Court that the property was worth £630,000 with outstanding secured loans of £516,133.00 and £54,000. Unsecured creditors totalled £330,000.
The debtors argued that:
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The property was unlikely to realise more than £550,000;
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Accordingly, the sale would not wholly pay off the secured creditors;
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There would be no benefit to the unsecured creditors; and
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They were continuing to pay the whole of the mortgage payments to the secured creditor and didn't believe that creditor was pushing for a sale.
On appeal, the averment that the lender was “not pushing for a sale” was enough for the Court to fix a proof before answering on the matter. That would allow parties to bottom out the potential realisable value of the subjects, the amount of the secured debt and the attitude of the lender towards a sale.
To Sell or not to Sell?
This decision reinforces the importance of knowing the full story before seeking to sell. What is the value? Is there any equity? Is the lender on-side with a sale? All these questions should be capable of being answered before raising proceedings for authority to sell or eject. The Court has made clear that it will not grant such authority where the position of the lender is unclear. The case also provides a useful reminder of the type of considerations influencing the Court’s treatment of “family home” arguments.
For further information please contact: Fiona Carlin