Posted on 15th November 2017
By way of general overview: the 1986 Act allows a trustee in bankruptcy, or a liquidator of a company, to disclaim onerous property and, apart from some limited circumstances in bankruptcy, it's not necessary to obtain the Court’s permission to disclaim the property.
Disclaimer brings an end to the rights, interests and liabilities of the bankrupt in the property but doesn't affect liabilities that accrued prior to the notice. For example, in a case involving disclaimer of a lease: the rent that accrued prior to the disclaimer will be a debt that the landlord can prove for, in the bankruptcy, but the landlord cannot prove for future rent as the disclaimer “operates to bring an end to the tenant’s liability to pay rent and the landlord’s right to receive it.” However, by virtue of section 315(5) of the 1986 Act, any person sustaining loss or damage in consequence of the operation of the disclaimer is deemed a creditor and can prove for that loss or damage as a bankruptcy debt. Therefore, this example, the subject matter of the landlord’s proof is compensation for loss of his right to future rent not the rent itself.
The position where others have liabilities in respect of the lease, for example, a guarantor, is less straightforward. In Hindcastle Ltd v Barbara Attenborough Associates Ltd, Lord Nichols held that the statute takes effect as a deeming provision so far as the other person’s rights and obligations are concerned. Further, he held that the Court should interpret the disclaimer provisions in a way that releases the bankrupt from the liabilities in relation to the property but does so with the minimum amount of violence being caused to the other parties’ property rights. The appellant in Abdulla v Whelan relied on Hindcastle in support of his argument.
Mrs Sarah Omer Hassan Amin (“the Bankrupt”) was made bankrupt, on the 8 of June 2010, and Mr Whelan was appointed as the Trustee in bankruptcy. At the time of her bankruptcy, she was a joint tenant at law with Mr Elhilali (“the Tenants”) of a business premises in Kingston (“the Property”). The Property was held by the Tenants under the terms of an Underlease, granted on the 26 September 2003 and, which was due to expire on the 31 July 2018 (“the Underlease”).
On the 24 June 2011, the Trustee served a notice of disclaimer. The Official Receiver had previously served a notice of disclaimer on the 12 July 2010.
The matter came before District Judge Gold, on the 7 June 2016, and the District Judge had to decide whether the notice of disclaimer prevented the landlords from proving for rents falling due after the date on which notice of the disclaimer had been served. District Judge Gold held that the “purported disclaimers” did not prevent the landlords from proving for rents.
An appeal was subsequently brought by Dr Abdulla who claimed to be a creditor of the bankrupt and who is also her husband.
Dr Abdulla, relying on Lord Nichols’ reasoning in Hindcastle, argued that primary purpose of the disclaimer provisions was to free the Bankrupt from liability. Dr Abdulla argued that to achieve this purpose, whilst doing the minimum violence to property law principles, the Trustee should be able to disclaim the Bankrupt’s legal interest in the Underlease and that strict property law principles should give way to the statutory scheme.
In response, the Trustee submitted that the interest that had vested in the Trustee was Bankrupt’s interest in the Underlease as one of two beneficial tenants in common and legal estate did not fall within the Bankrupt’s estate and, therefore, did not pass to the Trustee. The notice of disclaimer, therefore, had no effect on the legal estate, in the Underlease, as the Trustee was unable to disclaim something that is not in his ownership. Further, the Trustee submitted that any step taken in relation to trust property, such as the Underlease, could only be taken by the two Trustees acting together and a joint tenancy at law cannot not be severed. The Trustee also distinguished the Hindcastle case on the basis that the Hindcastle case concerned a situation where there was a lack of clarity between property law and insolvency law but in the present case there was no such lack of clarity.
The landlords adopted and supported the arguments advanced by the Trustee but in addition, they submitted that the obligation to pay rent is a contractual, legal obligation, which flows from the legal interest in a lease and not from the beneficial interest. Pursuant to this, it was argued that Dr Abdulla’s approach failed to distinguish between the rights and liabilities that flowed the legal estate as opposed to the beneficial interest. Further, it was argued that the Bankrupt and the co-owner were one joint entity and, as trustees, they could not be divided by the provisions of the 1986 Act.
In reply, Dr Abdulla sought to rely on the word “other” in the sentence the “property held by the bankrupt on trust for any other person” to argue that section 283(3)(a) of the 1986 Act did not apply.
John Male QC (sitting as Deputy High Court Judge) held that the starting point was the Tenants held the Underlease as joint legal owners on trust for themselves and the legal estate, of the Underlease, therefore, did not fall within the Bankrupt’s Estate as the exception in section 283(a) of the 1986 (i.e. “property held by the bankrupt on trust for any other person”) meant legal estate was excluded. Further, the Hindcastle case could be distinguished as in that case there was a lack of clarity in the interaction between property law and the 1986 Act. However, no such problem arose as the 1986 Act was clear that property held on trust should be excluded from the Bankrupt’s estate and the Trustee could only disclaim what is the comprised in the Bankrupt’s estate.
The Deputy Judge also rejected the “any other person” argument as it is inconsistent with Justice Goff’s (as he then was) decision in Re McCarthy and held in relation to the other arguments raised that:
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 Section 315 of the Insolvency Act 1986
 Section 178 of the Insolvency Act 1986
 Defined in section 178(3) and section 315(2) as (a) any unprofitable contract and (b) any other property which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform the onerous act.
 For the circumstances were the Trustee must obtain the Court’s permission to disclaim property, see section 315(4) the 1986 Act.
 Section 315(3)(a) of the 1986 Act.
 Section 315(3)(b) of the 1986 Act.
 Re Park Air Services Plc  p.183 at F
 Re Park Air Services Plc  p.184 at A-B
 Hindcastle Ltd v Barbara Attenborough Associates Ltd  AC 70
 At the time of judgment, the Trustee had not accepted or rejected the creditor’s proof
  1 WLR 807;  2 All ER 857
  WL 478205