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Bankruptcy

Bankruptcy of the tenant and debt relief orders

Do they prevent possession?

Summary

Although a money judgment cannot be made in respect of rent arrears after the tenant was declared bankrupt, or the subject of a Debt Relief Order, the making of a possession order on the ground of arrears is not precluded. It should not be made a condition of a suspended order that the tenant make payment of the arrears by instalments. It is possible to suspend the order on condition that future rent is paid.

Sharples v Places For People Limited
[2011] EWCA Civ 813

Background

Two tenants were assured tenants who had accrued rent arrears. Proceedings for possession were commenced against both on the grounds of rent arrears.

S was made bankrupt before the possession hearing.

Section 285 (3) (a) of the Insolvency Act 1986 provides that:
    "After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall – (a) have any remedy against the property or person of the bankrupt in respect of that debt, or (b) before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt except with the leave of the court and on such terns as the court may impose …"
S resisted the possession claim on the basis that the rent arrears were provable in the bankruptcy and therefore s285 (3) precluded an order for possession on the basis of arrears. An order for possession was made as the judge was satisfied that Ground 8 of Schedule 2 to the Housing Act 1988 had been made out. However, no money judgment was made on the arrears given the bankruptcy. An appeal was dismissed by the circuit judge.

G obtained a debt relief order prior to the possession hearing.

Such an order is similar to a bankruptcy order, but is more suitable in cases where the debtor has little assets or financial means and the outstanding debt is low. Section 251G of the Insolvency Act 1986 provides that when an order is made:
    "(1) A moratorium commences on the effective date for a debt relief order in relation to each qualifying debt specified in the order (‘a specified qualifying debt’).
    (2) During the moratorium, the creditor to whom a specified qualifying debt is owed (a) has no remedy in respect of the debt, and (b) may not – … (ii) otherwise commence any action or other legal proceedings against the debtor for the debt, except with the permission of the court and on such terms as the court may impose."
G sought a stay of the proceedings in light of the debt relief order. That was refused. An order for possession was made with a money judgment on the arrears of £2,335.84 and costs. Execution of order for possession was stayed on payment of £5 per week towards the arrears and costs.

Appeal

Both tenants appealed against the possession orders on the basis that the legislation precluded an order for possession on the grounds of rent arrears in their circumstances. They argued that an order for possession based upon rent arrears went against the moratorium on seeking a remedy in respect of the debt as provided for by sections 285 and 251. It was also argued that a claim for possession based on rent arrears was a means of securing payment of the arrears.

Decision

The Court of Appeal rejected these arguments. Etherton LJ at paragraph 63
    "First, the grant of a tenancy, including an assured tenancy, creates a property interest in the tenant which is an incumbrance on the landlord’s title. An order for possession is a remedy which restores to the landlord full proprietary rights, including rights of occupation and letting, in respect the property. Secondly, the failure to pay rent is a breach of a contractual obligation. Neither forfeiture, nor a court order for possession, nor recovery of possession by the landlord, nor an order for bankruptcy, eliminates the personal indebtedness constituted by the rent arrears. Thirdly, it follows, as a matter of general principle, that an order for possession of property, whether let under an ordinary contractual tenancy or a secure tenancy or an assured tenancy, is not a remedy “in respect of” the debt represented by the rent arrears which gave the landlord an entitlement to the order for possession."
And at paragraph 65
    "Moreover, I do not agree with the submissions of Mr Luba and Ms Bretherton that the object of a claim for possession for arrears of rent and an order for possession made in those proceedings is to secure payment of the arrears. It is important to distinguish between motive, which may vary from claimant to claimant, and the object of the remedy for the purposes of interpreting IA s.285(3)(a). An order for possession is not obtained with a view to payment of arrears of rent at all. Its object is to restore to the landlord the right to full possession and enjoyment of the landlord’s property. "
In G’s case, execution of the order had been suspended on payment of arrears. The Court of Appeal found that this was possible, but did not agree that it was a reasonable order to make:
    "It would be contrary to that policy for the same debt to be recovered by court order, even if the form of the order is by way of a condition for suspension of a possession order. (para 81)

    A suspended order may, and indeed should, be made conditional on the payment of current rent. That does not in any way interfere with the policy of the insolvency legislation as regards past debt (which is subject to a DRO or provable in the bankruptcy), and enables the social landlord, through court order, to control for the future the management of its housing stock in the case of late payers." (para 83)


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