Nowhere to run: insolvency is no protection from possession proceedings. SEPTEMBER 2011 Peter Marcus

Transcription

1 Nowhere to run: insolvency is no protection from possession proceedings SEPTEMBER 2011 Peter Marcus

2 About the author Peter represents local authorities, ALMOs, housing associations, private landlords and tenants, encompassing all aspects of housing law (particularly ASB and possession, as well as homelessness and allocations, disrepair, trespass and illegal evictions) and related areas of local authority law (including statutory nuisance, licensing, some planning issues and some prosecution work). He has found himself specialising in the law of gas inspections, particularly on forced entry through injunctions and environmental law, an issue on which he has written many articles and spoken at housing conferences and training events. Peter specialises in all types of ASB law, particularly ASB and other injunctions (and committals), freestanding and county court ASBOs, possession, statutory nuisance, harassment, and the crossover between them all. He represents private landlords and tenants on a range of matters, including ASB, possession, forfeiture, disrepair, fraud and illegal eviction. Peter came to the Bar following a career in public housing and regeneration, in particular for Camden LBC and the Joseph Rowntree Foundation. He is a CEDR-accredited mediator. Peter regularly delivers training in all the areas of law and practice listed above, some in association with HQN and RIEN, and is a regular contributor to Inside Housing s legal coverage. In addition, he is an advisor to The Big Issue in the North and is on the Professional Advisory Panel for BPP law school. 2 Nowhere to run: Insolvency is no protection from possession proceedings

3 Introduction Social landlords face a constant struggle trying to persuade heavily indebted tenants that paying rent is a priority over paying off the tenants bigger, more threatening creditors. Such creditors are well known to social landlords credit card and loan companies, buy-now-pay-much-more-later hire purchase furniture companies, and many more besides. These companies depend for their livelihoods on chasing and recovering debts, and are experts in enforcing debt payments. But while a tenant is concentrating on paying these creditors off, what is happening to their mounting rent arrears? Some tenants unable to manage their debts have turned to personal insolvency, which in 2010 had reached an all-time high in England and Wales. A key question for landlords and tenants is whether insolvency offers a tenant protection from possession proceedings. In this briefing, Barrister and expert on housing law Peter Marcus considers this question in light of the outcomes of two recent cases: Case 1 (Bankruptcy): Sharples v Places for People Homes Ltd (2011) EWCA Civ 813 Case 2 (Debt Relief Order): Godfrey v A2 Dominion Homes Ltd (2011) EWCA Civ 813. Peter summarises the current framework for personal insolvency, the background to these cases and a summary of the judgments and their implications. He also provides some practical tips for social landlords and tenants. The relevant statutory provisions are included in the appendix to this briefing. We hope that you find this briefing helpful and we welcome your comments. Peter will be speaking on this topic and other significant legal issues at this year s RIEN annual conference in London on 29 September: Nowhere to run: Insolvency is no protection from possession proceedings

4 Insolvency? Those facing high levels of indebtedness have various insolvency options: 1 Bankruptcy 1 is the most widely known form of insolvency. A creditor may petition for the debtor s bankruptcy. If bankruptcy is ordered, the debtor s assets are vested in a trustee for fair distribution among the debtor s creditors. The state of bankruptcy ends after one year, and meanwhile the bankrupt s assets are used to fund the money going to the creditors. 2 Individual voluntary arrangement (IVA): 2 this is a deal between a debtor and their creditors, overseen by an insolvency practitioner. An IVA involves paying some debts immediately or over a number of years, and generally is felt to carry less stigma than bankruptcy. 3 Debt Relief Order (DRO): 3 introduced in April 2009, and nicknamed fast-track bankruptcy, the DRO allows nonhomeowners with debts of under 15,000 and minimal assets (none over 300) or surplus income (over 50 per month) to write off debts without the intervention of the court, after a 12-month moratorium when creditors cannot pursue those debts. Not all the debtor s creditors need be included in the order, as a creditor can challenge a debt s inclusion in the DRO. 4 Administration Order: 4 a fourth, less well-known way to write off or minimise debts, the poor person s bankruptcy is overseen by the county court. If a person s indebtedness is under 5,000, the court may agree to write off their debts, or order that they be paid off at a very low rate, perhaps only a few pence in the pound. Although accused of being both out of date and out of line with the modern law of insolvency, 5 applications for administrative orders are still often seen at county courts. Two of these types of personal insolvency bankruptcy and DROs are the subject of a recent Court of Appeal ruling as to how they affect a tenant liability in possession proceedings for rent arrears. Two assured tenants one declared bankrupt, one with a DRO claimed that their insolvent status protected them against their landlord claiming possession of their property. The law of insolvency applicable in these cases In both cases, heard together by the Court of Appeal, the tenant s indebtedness involved rent arrears owed to a social landlord. The question was whether a landlord s possession 4 Nowhere to run: Insolvency is no protection from possession proceedings

5 claim based on the rent arrears (as opposed to a debt claim for the rent arrears) qualified as a remedy in respect of the debt. In other words, can bankruptcy or a DRO be a shield against a landlord claiming possession on grounds of arrears? This involved an examination of relevant parts of the Insolvency Act 1986 which regulates both Bankruptcy and DROs (but is not necessarily familiar territory for most housing lawyers!). The Act provides 6 that once a Bankruptcy order is made, and the bankrupt delivers their estate to a trustee to administer payment to the creditors, the bankrupt is then protected from any creditor seeking a remedy against their property in respect of the debt that the bankrupt person owed them. Similarly, with a DRO, the 12-month moratorium is a period when the debtor s creditors normally cannot seek a legal remedy against the debtor in respect of the debt, which is then discharged. 7 The Court of Appeal focused on the meaning in the Act of the phrase in respect of the debt. 5 Nowhere to run: Insolvency is no protection from possession proceedings

6 Background facts Case 1 (Bankruptcy): Sharples v Places for People Homes Ltd (2011) EWCA Civ 813 Ms Sharples was an assured tenant of Places for People. After falling behind with her rent several times, Places for People served a notice seeking possession on mandatory Ground 8 (eight weeks arrears) and discretionary Grounds 10 (arrears) and 11 (persistent delay in paying rent). 8 The claim was adjourned on terms, but arrears subsequently climbed to more than 2,400 in 2009, at which point the landlord revived the proceedings. Five days before the possession hearing, a district judge adjudged Ms Sharples bankrupt. The official receiver was appointed receiver and manager of her estate. The possession hearing judge ruled that the arrears were a debt provable in her bankruptcy, and did not therefore make an order for the arrears. However, the judge did order outright possession of the property in 42 days. Ms Sharples lost her appeal to a circuit judge, and appealed to the Court of Appeal. Case 2 (Debt Relief Order): Godfrey v A2 Dominion Homes Ltd (2011) EWCA Civ 813 Mr Godfrey, also an assured tenant, following bad health and consequent unemployment, fell into arrears. When his arrears went over 2,000, his landlord issued Ground 10 possession proceedings. On 27 April 2009, the Insolvency Service approved a DRO that included Mr Godfrey s rent arrears. At a possession hearing three-and-a-half months later, the district judge ordered possession in 28 days. The judge also made an order for full arrears and costs, not to be enforced so long as Mr Godfrey paid 5.00 per week. Mr Godfrey lost his appeal to a circuit judge, so appealed to the Court of Appeal. The Court of Appeal s decision The Court of Appeal disallowed both tenants appeals. Drawing on established caselaw, 9 Lord Justice Etherton, giving the judgment of the Court, ruled that an order for possession was not a remedy in respect of a debt. The object of a claim for possession even one based on arrears is not (of itself) to recover arrears. Its object is to restore to the Landlord the right to full possession and enjoyment of the landlord s property. 6 Nowhere to run: Insolvency is no protection from possession proceedings

7 Many housing officers may query that conclusion, given that, in practice, possession proceedings are often, if not usually, issued as a tactical method of coming to an arrangement with the tenant for paying off their arrears. But in law there is such a division. The logic is that, even if possession is granted outright against the tenant, this does not affect the tenant s debt of arrears to the landlord, which continues and can be pursued well after eviction. However, the Court of Appeal did warn that rent arrears, if the subject of a bankruptcy or DRO, cannot be further pursued. Therefore, a court cannot order any payment in relation to them if the court decides to suspend or postpone the possession order on terms. All the court can and should do is to make a suspended order conditional upon payment of current rent, and possibly also a contribution towards legal costs. In each of these cases, the tenant s insolvency was effected after the issue of proceedings. However, the wording of the statutory provision, 10 if taken literally, appears to prevent legal proceedings being issued if the tenant has already been declared bankrupt. The Court therefore went on to clarify this aspect of the Insolvency Act, which should now be interpreted so as to allow such legal proceedings to be validly brought, whether the bankruptcy came before or after the issue of possession proceedings. 7 Nowhere to run: Insolvency is no protection from possession proceedings

8 So what should landlords do now? Both the DRO and Administration Order procedures allow objections to be made by creditors in respect of debts to be included in the orders. This opportunity to challenge is a landlord s first chance to object, by putting their case regarding (for example) the importance of rent in relation to other debts, the correct level of arrears (if disputed) and the harm that the resulting order may do to the tenant, other tenants, the housing organisation, and social housing generally. Landlords may want to consider expressly stating in their tenancy agreements that the making of a DRO or other order writing off rent arrears may in itself constitute an actionable breach of tenancy (some prescient social landlords have already taken this step.) It should be noted that although these two cases involved assured tenancies, this ruling applies equally to secure tenancies. This Court of Appeal case should be referred to on any occasion in legal proceedings where bankruptcy or another form of insolvency arises, particularly if the insolvency appears to be being used as a form of defence. And what should tenants do now? Independent and landlord advisors should make it clear to tenants that insolvency may help the tenant escape rent arrears, but it will not avoid the consequences of rent arrears, including in particular being evicted. In fact, given that DROs can already of themselves constitute breaches of some tenancies, it may do the tenant much more harm than good to enter into such an arrangement, as this step alone could trigger possession proceedings for breach of tenancy. Although insolvency may write off the actual arrears, if a tenant in debt takes the insolvency route, they may increase the chances that they will lose their home. For those tenants (and, anecdotally, 11 there are some) who regard their home as a worthwhile sacrifice to write off their total debt, eviction may be the practical outcome. However, for those tenants (one suspects, the vast majority) whose home is their utmost priority, understanding this new caselaw s implications may encourage them to take greater advantage of financial advice services that their landlord and other reliable organisations offer them, rather than to rush into insolvency. 8 Nowhere to run: Insolvency is no protection from possession proceedings

9 Appendix Relevant statutory provisions HOUSING ACT 1988 s.7. Orders for possession (1) The court shall not make an order for possession of a dwelling-house let on an assured tenancy except on one or more of the grounds set out in Schedule 2 to this Act [ ] (3) If the court is satisfied that any of the grounds in Part I of Schedule 2 to this Act is established then the court SHALL make an order for possession. (4) If the court is satisfied that any of the grounds in Part II of Schedule 2 to this Act is established, then the court MAY make an order for possession if it considers it reasonable to do so. SCHEDULE 2: Grounds for possession of dwelling-houses let on assured tenancies Part 1: Grounds on which court must order possession Ground 8 Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing (a) if rent is payable weekly or fortnightly, at least (eight weeks ) rent is unpaid; (b) if rent is payable monthly, at least (two months ) rent is unpaid; (c) if rent is payable quarterly, at least one quarter's rent is more than three months in arrears; and (d) if rent is payable yearly, at least three months' rent is more than three months in arrears; and for the purpose of this ground rent means rent lawfully due from the tenant. Part 2: Grounds on which court may order possession Ground 10 Some rent lawfully due from the tenant (a) is unpaid on the date on which the proceedings for possession are begun; and (b) except where subsection (1)(b) of section 8 of this Act applies, was in arrears at the date of the service of the notice under that section relating to those proceedings. Ground 11 Whether or not any rent is in arrears on the date on which proceedings for possession are begun, the tenant has persistently delayed paying rent which has become lawfully due. Ground 12 Any obligation of the tenancy (other than one related to the payment of rent) has been broken or not performed. 9 Nowhere to run: Insolvency is no protection from possession proceedings

10 INSOLVENCY ACT 1986 (Protection of bankrupt s estate and investigation of his affairs) s.285. Restriction on proceedings and remedies (3) 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 terms as the court may impose. (Debt relief order) s.251g Moratorium from qualifying debts (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 (i) commence a creditor's petition in respect of the debt, or (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. HOUSING ACT 1985 s.84. Grounds and orders for possession (1) The court shall not make an order for the possession of a dwelling-house let under a secure tenancy except on one or more of the grounds set out in Schedule 2. (2) The court shall not make an order for possession (a) on the grounds set out in Part I of that Schedule (grounds 1 to 8), unless it considers it reasonable to make the order SCHEDULE 2: Grounds for possession of dwelling-houses let under secure tenancies Part I: Grounds on which court may order possession if it considers it reasonable Ground 1 Rent lawfully due from the tenant has not been paid or an obligation of the tenancy has been broken or not performed Part IX, Insolvency Act 1986 Part VIII Insolvency Act 1986 s.251a Insolvency Act 1986 County Court Rules Order 39 Civil Procedure White Book 2011, Vol.1, p.2440 s.285(3) Insolvency Act 1986 s.251g Insolvency Act 1986 See Appendix for the full wording of the Grounds for Possession (Sched.2, Housing Act 1988) Particularly the forfeiture case of Ezekiel v Orakpo [1977] 1 QB 260 s.285(3)(b) Insolvency Act 1986 Elaine Upton, specialist consultant in this field, cites actual examples of tenants preferring to keep their hire-purchase furniture at the price of losing their home 10 Nowhere to run: Insolvency is no protection from possession proceedings