Can leasehold property be disclaimed by a trustee in bankruptcy?
In the recent decision of Abdulla v Whelan  EWHC 605 (Ch) the court of appeal was asked to consider whether the first instance decision that a notice of disclaimer under Section 315 of the Insolvency Act 1986 (“the Act”) could not terminate the legal ownership of an underlease was correct.
Mrs A was a joint tenant, with a Mr E, of business premises, under an underlease. Mrs A was made bankrupt and her Trustee in Bankruptcy (“the Trustee”) subsequently served a notice of disclaimer under Section 315 of the Act, disclaiming all his interest in the property. The Trustee took the view that the notice of disclaimer did not end the legal estate in the underlease, and the landlords could continue to prove for rents falling due after the date of service of the notice of disclaimer. Mrs A’s husband, who claimed to be a creditor, disputed this and argued there was no further liability for rent, and the landlords could not prove for any rent falling due after service of the notice of disclaimer. On an application by the Trustee for directions, the district judge at first instance accepted the Trustee’s argument.
On appeal the court found in favour of the Trustee and the Mrs A’s husbands appeal was dismissed. It was held that as the legal estate in the underlease did not fall within the bankruptcy estate, it could not be disclaimed by the Trustee under Section 315 of the Act.
The judge rejected the appellant’s argument that the court should take a more flexible approach to the effect of disclaimer, based on the comments of Lord Nicholls in Hindcastle Limited v Barbara Attenborough Associates Limited  AC 70 when, in considering the position on disclaimer as between an insolvent tenant, a guarantor and a landlord, he referred to it as a “puzzling conundrum”, which required “an interpretation of the legislation which will….[fulfil] the primary purpose of freeing the insolvent from all liability while, overall, doing the minimum violence to accepted property principles”. In this case the legislation was clear in that the legal estate in the underlease was excluded from the bankrupt estate and could not be disclaimed so there was no “conundrum”. The court also considered the decision of Lee v Lee  BCC 500, which proceeded on the basis that there could be a disclaimer of the legal estate, there was no argument that the possible existence of a trust had any effect. In the present case, there had been such argument and given the existence of the trust the assumption made by the Court of Appeal did not require that the present appeal be allowed.
Whilst, as the appellant argued, the outcome was “not fair”, and there are obvious implications for the bankruptcy estates of debtors who are joint lessees, the decision was a consequence of the legislative scheme and the exclusion from the bankruptcy estate of property held on trust. In the circumstances it is recommended that practitioners take advice on the effects of a disclaimer before agreeing landlords claims.
For any further enquiries regarding this case or for general insolvency enquiries please contact Lauren Hartigan-Pritchard on 01905 677045 or firstname.lastname@example.org