Re Hemming, decd

HTML VERSION OF JUDGMENT

Hearing date: 8 October 2008

Introduction

This claim raises a point of law concerning bankruptcy and the administration of estates. The issue is whether, if a sole residuary legatee under a will becomes bankrupt but is automatically discharged from bankruptcy before the completion of the administration of the estate of the testator, the money and assets which are thereafter ascertained to form the net residuary estate are payable to him or to his trustee in bankruptcy.

The facts

The relevant facts are not in dispute and can be shortly stated. I must, however, also set out a little of the background in order to explain the positions taken by the parties at the hearing before me.

Mrs. Bertha Hemming died on 18 July 2003. Under her will, after a few minor specific bequests, she left the entire residue of her estate to her son, Mr. Bernard Hemming, who was also named as one of her executors. At the time of her death, Mrs. Hemming and her son owned a farmhouse and a cottage at Guestling, East Sussex as tenants in common in equal shares.

Mr. Hemming was adjudicated bankrupt in the Hastings County Court on 24 September 2003. The Second Defendant (“the Trustee”) was appointed trustee in bankruptcy with effect from 14 October 2003.

Mr. Hemming took a grant of probate as the sole executor of his mother's will on 17 February 2005. Following the amendment of section 279 of the Insolvency Act 1986 by section 256 and Schedule 19 of the Enterprise Act 2002, Mr. Hemming was automatically discharged from bankruptcy on 1 April 2005.

The cottage at Guestling was sold for £125,000 in May 2005. Half of the net proceeds (representing Mr. Hemming's personal interest in the cottage) were paid to the Trustee. The balance (representing Mrs. Hemming's interest) was retained by the Claimants (“Raymond Saul & Co.”) who at the time were acting as solicitors for Mr. Hemming in his capacity as his mother's executor.

On 5 July 2005 the Trustee wrote to Raymond Saul & Co. requesting that they release the further sum of £28,969.69 from the monies which they held in order to satisfy the balance then due in Mr. Hemming's bankruptcy. On 26 July 2005 Raymond Saul & Co. replied, refusing that request.

The basis for that refusal was explored in subsequent correspondence. Raymond Saul & Co. argued that although Mr. Hemming had been the residuary legatee of his mother's estate at the date of his bankruptcy, that status gave him no legal or equitable interest in any of the assets in her estate and would not do so until the administration of the estate had been completed. They contended that the only right which a residuary legatee has is a right to have the deceased's estate properly administered. So, they said, the only thing that the Trustee could request was that Mrs. Hemming's estate should be administered.

Raymond Saul & Co. also made the further point that even when Mrs. Hemming's estate was fully administered, the Trustee would not be able to claim the assets then forming the residue. They said that this was because Mr. Hemming had been discharged from his bankruptcy, and an after-acquired property notice cannot be served in respect of any property which the bankrupt only acquires after his discharge: see section 307(2)(c) of the Insolvency Act 1986. In short, Raymond Saul & Co. contended that the proceeds of sale and the residue of Mrs. Hemming's estate would be payable to Mr. Hemming.

The Trustee did not accept this analysis. In correspondence, her solicitors contended that Mr. Hemming had an interest in his mother's residuary estate which had vested in the Trustee, and that the proceeds of sale of Mrs. Hemming's half-share in the cottage belonged to the Trustee.

By a letter dated 6 September 2005 Raymond Saul & Co. indicated that if the dispute between the Trustee and Mr. Hemming could not be resolved, then as solicitors to Mrs. Hemming's estate, they would have to commence proceedings so that the Court could determine which of the competing claims was correct. Raymond Saul & Co. suggested that in order to avoid the expense that such proceedings would involve, the Trustee should contact Mr. Hemming to resolve matters directly.

The solicitors acting for the Trustee responded on 14 September 2005, warning that if the Trustee became embroiled in proceedings over the distribution of Mrs. Hemming's estate, she might simply choose to seek an order for possession and sale of the farmhouse at Guestling, which was Mr. Hemming's matrimonial home. That farmhouse was said to be worth in the region of £450,000 and to be unencumbered. In these circumstances, the Trustee's solicitors' letter suggested that rather than there be a forced sale of the farmhouse, it would be “infinitely preferable” for Mr. Hemming simply to authorise Raymond Saul & Co. to pay the Trustee the amount needed to satisfy the bankruptcy debts and costs out of the money that they were holding. The Trustee subsequently wrote to Mr. Hemming to that effect.

Such overtures did not, however, result in resolution of the dispute. Instead, on 30 November 2005 Raymond Saul & Co. wrote again on behalf of Mrs. Hemming's estate to the solicitors for the Trustee. They stated that they had been advised by counsel that the correct course was for them to make payment of the residue of the estate to Mr. Hemming. The letter indicated that if the Trustee did not accept that payment could be made to Mr. Hemming, then “the estate” would have no choice but to issue proceedings pursuant to CPR Part 64 for determination of the issue. The letter added that “the executor” (i.e. Mr. Hemming) would be seeking an order that the costs of such proceedings should be paid by the Trustee personally.

On 21 April 2006, Raymond Saul & Co. issued the Claim Form in this case. It seeks a determination pursuant to CPR Part 64 of the question whether they should make payment of the residue of Mrs. Hemming's estate to Mr. Hemming as residuary beneficiary, or to the Trustee. The Defendants to the claim were Mr. Hemming and the Trustee.

Shortly thereafter, on 24 April 2006, the Trustee issued a claim in the Hastings County Court for possession and sale of Mr. Hemming's farmhouse. In June 2006 the possession action was transferred to this Court to be heard in conjunction with the claim under CPR Part 64.

Subsequent attempts to resolve the dispute came to nothing and were overtaken by events when, on 12 April 2007, Mr. Hemming died. The First Defendant (“the Executor”) is the sole executor by appointment of Mr. Hemming's will. In that capacity he was substituted for Mr. Hemming as a party to these proceedings. The Executor also became the executor of Mrs. Hemming's estate by succession.

After taking up his dual role, the Executor wrote to Raymond Saul & Co. and to the Trustee in October 2007, complaining that in his view the CPR Part 64 proceedings were “completely unnecessary and pointless”. In essence, the Executor contended that someone should have advised Mr. Hemming to avoid litigation and to agree that the balance of the proceeds following the sale of the cottage should be used to discharge his bankruptcy debts and costs.

By this stage, however, the difficulty was that the fees and costs claimed by the Trustee on the one hand and by Raymond Saul & Co. on the other, meant that it might not be possible for all the liabilities in Mr. Hemming's bankruptcy to be discharged from the monies in the hands of Raymond Saul & Co. In rough terms, the monies said by the Trustee to be required to discharge the bankruptcy debts and costs had risen to over £60,000, but the balance of the proceeds of sale of the cottage amounted only to about £50,000, of which Raymond Saul & Co. were claiming about £18,000 on account of their own fees, counsel's fees and disbursements. This situation caused the Executor to seek to question both the Trustee and Raymond Saul & Co. as to the level and justification for their fees and costs.

At the hearing before me, the Trustee maintained her argument that she would be entitled to be paid the residue of Mrs. Hemming's estate as and when ascertained. The Executor chose not to advance any positive case on behalf of Mr. Hemming's estate, but instead filed a skeleton argument reiterating the view that the proceedings had been a waste of time and costs. It was Raymond Saul & Co. who advanced the argument that the residue of Mrs. Hamming's estate should, when ascertained, be paid to the Executor on behalf of Mr. Hemming's estate.

The relevant statutory provisions

Section 306(1) of the Insolvency Act 1986 (“section 306” and “the 1986 Act”) provides that a bankrupt's estate vests in the trustee in bankruptcy immediately upon his appointment. Section 283(1) of the 1986 Act provides that (subject to certain provisions that are not relevant here) a bankrupt's estate comprises,

“all property belonging to or vested in the bankrupt at the commencement of the bankruptcy”.

By virtue of section 436 of the 1986 Act (“section 436”), “property” for this purpose,

“includes money, goods, things in action, land...