Insolvency (Northern Ireland) Order 1989 Art 256A – the “use it or lose it” provisions

November 11, 2014

A key part of the role of a trustee in bankruptcy is to realise the value of the bankrupt’s assets and use the proceeds to pay the money owed to the bankrupt’s creditors. In the case of personal insolvency, this often involves selling the property in which the bankrupt resides, which is a valuable asset. Thus, art 279(1) of the Insolvency (Northern Ireland) Order 1989 provides that the bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect, allowing him to dispose of this interest.

Prior to 2005 (2004 in England and Wales), the trustee could delay the sale of the property indefinitely, allowing it to increase in value before realising the interest in it. This benefitted the creditors, who received a greater sum than if the property had been sold for a lower amount, but was considered unfair to the bankrupt.

Parliament has now made it clear that trustees are not to wait for many years before realising their interest in the property. The Insolvency (Northern Ireland) Order 2005 amended the 1989 Order to insert art 256A, which contains the so-called “use it or lose it” provisions.

Art 256A applies where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house which, at the date of the bankruptcy, was the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt.¹

In the case of the above properties, art 256A(2) provides that, at the end of three years dating from the date of the bankruptcy, the interest vested in the trustee shall cease to be comprised in the bankrupt’s estate and shall vest in the bankrupt without conveyance, assignment or transfer. (For all other types of property, the trustee’s interest remains indefinitely.)

However, this provision is subject to art 256A(3). It provides that art 256A(2) shall not apply if the trustee realises the interest, applies for an order for sale, an order for possession or an order under art 286, or reaches agreement with the bankrupt that the bankrupt will incur a specified liability to his estate in consideration of which the interest shall cease to form part of the estate. Essentially, if the trustee does not take any action in respect of the property within the period of three years, then the interest in that property shall revert automatically to the bankrupt.

The trustee has to be careful as, if he makes any of the applications listed in art 256A(3) and that application is dismissed, the interest to which the application relates will cease to form part of the bankrupt’s estate and will re-vest in the bankrupt, unless the High Court orders otherwise.²

However, art 256A does contain some provisions which assist the trustee. Art 256A(5) applies where the bankrupt fails to disclose his interest in the property before the end of three months beginning with the date of the bankruptcy. In such circumstances, the period of three years does not begin until the trustee in bankruptcy becomes aware of the existence of the property.

Furthermore, art 256A(6), together with rule 6.229C of the Insolvency Rules 1991, gives the Court a discretion to extend the three year time limit in prescribed circumstances and in “such other circumstances as the court thinks appropriate”. However, in a recent case in Northern Ireland, Master Kelly confirmed that the substitution of a longer period can only be made before the expiry of the three year period. ³ In this case, the trustee in bankruptcy was conscious of his obligation to realise the bankrupt’s interest in the dwelling house and had repossession proceedings drafted and ready for issue. However, he subsequently delayed issuing the proceedings as the bankrupt had indicated an intention to annul his bankruptcy. When no annulment application materialised, the trustee revisited the repossession proceedings. However, a diary error meant that the third anniversary of the bankruptcy had already passed. The Master held that the period could not be extended retrospectively once art 256A(2) had effected a re-vesting and the trustee’s application under art 256A(6) was therefore refused.

It is clear that trustees must take great care if the bankrupt’s estate contains a dwelling house as defined in art 256A(1). They must act quickly to avoid the interest in the property re-vesting in the bankrupt. However, they must also ensure that any application made has a good chance of succeeding as the dismissal of an application by the court will have the same effect as a failure to act. Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.

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¹ Insolvency (Northern Ireland) Order 1989 art 256A(1)

² Ibid art 256A(4)

³ Lismore (Trustee in Bankruptcy of Davey) v Davey [2013] NIMaster 5