Insolvency Sales Of Property

The financial crisis has created turbulent sales conditions for property. The lack of supply of property (with owners and banks not selling in the hope that sales conditions improve) has artificially propped up the market maintained prices at a high rate. Now parts of the country (in particular Central London) have seen an isolated increase in prices. It has become increasingly difficult for practitioners to justify valuation and sale price.

Insolvency practitioners (acting as administrators, liquidators and trustees in bankruptcy) have a duty to take reasonable care to realise the best price on the sale of property within the insolvent estate. However, there is a discretion (or margin) as to how this duty is discharged.

This issue was rehearsed recently in the Northern Ireland case below.

McTeer v Lismore [2012] NI Ch7

In this case, a trustee in bankruptcy (acting in relation to an estate of a deceased debtor) defended an action brought by the widow of the debtor on the basis that a property had been sold at an undervalue.

Sitting in the High Court, Mr Justice Deeny set out a number of questions as guidelines as to whether the trustee had taken reasonable care to realise the best price on the sale.

These questions included:

How did the trustee go about discharging his duty of reasonable care in selling the property?

Was the trustee, vicariously or otherwise, in breach of the duty to take reasonable care?

If the answer to 2 is yes, was the property sold at an undervalue?

If the answers to 2 and 3 are both yes, did the breach of duty cause or contribute to the sale at an undervalue?

Would it be just to award compensation [pursuant to Section 304(1) of the Insolvency Act 1986] if the answers to 2, 3 and 4 are all yes?

In this case the trustee had failed to take reasonable care because:

The property had not been advertised since 2000.

It had not been valued for five years at the time of the sale.

No sale boards had been erected for the waiting period.

The sale had taken place in 2005 and the price did not reflect the significant price rises from 2002 to 2005.

The expert witnesses in the case agreed that the property had been sold far below the professional valuation of the property.

These guidelines create a significant challenge for a trustee (or other insolvency practitioners) in marketing and selling a property.

Where a property has not been marketed in an appropriate way (with an extended marketing period on the usual marketing...