Bankruptcy in conveyancing

28 Jul 2016

A version of this article was first published in The Law Society Gazette and Prime Resi.

The scenario is straightforward if probably unusual. A solicitor acts for the purchaser of a house in the usual way. Contracts are exchanged. Between exchange and completion, unbeknown to the conveyancing solicitors (on either side because the vendor has failed to disclose or perhaps even he doesn’t know) the vendor has been made bankrupt. In the absence of any knowledge that the vendor has been made bankrupt the transaction proceeds to completion and funds are transferred in the normal way. 

In our case the transfer was completed by the sale of shares in a company owning the freehold to the property so there was no involvement of the Land Registry but it is far from guaranteed that a bankruptcy restriction would be added to the title before completion took place.

The transaction is plainly void, probably because the petition was pending at the date of exchange so void pursuant to section 284 of the Insolvency Act 1986 and void on completion because the vendor at that stage had no power to deal with the property then under the control of the Official Receiver by virtue of section 287 of the Insolvency Act 1986 (it is unlikely that a trustee would be in office by this stage and the property would not consequently have vested by virtue of section 306 Insolvency Act 1986).

Even assuming the most ordinary of circumstances where a new property is purchased with the proceeds there will still be costs incurred in dealing with the Official Receiver or the Trustee and obtaining an order validating the transaction that will probably run to a number of thousands of pounds. One can obviously imagine numerous other factual scenarios that might complicate the application for a validation order and might mean that the purchaser’s losses are much greater. I should say that I recognise that there will inevitably be contractual remedies that the purchaser will have but they are likely to be of little practical assistance in this scenario – what the purchaser will want and need is good title to the property that he was intending to purchase.

So the question arises, is the purchaser’s solicitor negligent in this scenario?  There seems to be no authority on the point. On the upside for the solicitor there is nothing in the conveyancing handbook to suggest that a purchaser’s solicitor ought to do a bankruptcy search against a vendor before completing a purchase. Equally there is nothing in the Council of Mortgage Lender’s conditions to suggest that such a search is necessary – the only reference to a bankruptcy search is to a search on one’s own client when also acting for the lender. Furthermore, it seems that the industry standard is that conveyancing solicitors do not carry out a bankruptcy search – that would seem to lend shelter given the test in (Bolam v Friern Hospital Management Committee [1957] 1 WLR 582).

The head note summarises the test with which we are all familiar more than adequately:

“a doctor who had acted in accordance with a practice accepted at the time as proper by a responsible body of medical opinion skilled in the particular form of treatment in question was not guilty of negligence merely because there was a body of competent professional opinion which might adopt a different technique.”

However, one then has to consider the position under Edward Wong Finance Co Ltd v Johnson Stokes and Master [1984] 2 WLR 1 – a case with which many will be equally familiar. There the solicitor adopted the ‘Hong Kong completion method’. By that method the purchaser’s solicitor would advance funds on the basis of an undertaking from the vendor’s solicitor to later provide the completion documents. The perhaps inevitable happened whereby a fraudulent vendor’s solicitor made off with the money, didn’t comply with his undertaking and the borrower didn’t get title to the property. The Court concluded that the risk was obvious, and could and should have been guarded against. The conveyancer was consequently found liable in negligence. 

Lord Brightman said this:

"The risk inherent in the Hong Kong style of completion as operated in the instant case being foreseeable, and readily avoidable, there can be only an affirmative answer to the third question, whether the respondents were negligent in not foreseeing and avoiding that risk."

That finding was specifically in the face of evidence, which the Court accepted, that the conveyancer had used a completion method that was the universally adopted method of completing property transactions in Hong Kong. 

One should also not ignore the general approach adopted by Courts to claims involving the alleged negligence of a conveyancer. Obtaining good title is almost always the single most important outcome that a conveyancer is required to achieve by the conclusion of his retainer. Consequently Courts will always start the trial from the position that any conveyancing process that has failed to achieve good title for the purchaser must have involved acts or omissions which were negligent.

Going back to this scenario and analysing the issues against the backdrop of Edward Wong Finance and the general approach of Courts to matters of conveyancing it seems to me relatively straightforward to see how a Court would find the purchaser’s solicitor to be negligent. Given that:

  1. the risk is fairly obvious,
  2. the ease with which a bankruptcy search can now be completed,
  3. the insignificant cost of that search; and
  4. the seriousness of the consequences for the client who completes upon the sale of a property but does not receive good title.

it seems to me that there is a very fair argument that the reasonably competent conveyancing solicitor should add this simple additional step to the completion process.

As is frequently the outcome with matters where an interesting points arises, the claim has now settled, but in my view this is an issue that conveyancers ought to take on board and guard against if they are to avoid likely successful claims on their indemnity policies.


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