Bankruptcy In Conveyancing
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...
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