1- Contracting out of the property principle

Question 1

What is the property principle?

Answer 1

The principle that all of the debtor’s property must form part of his estate, which will be made available to his creditors.

Question 2

A debtor cannot provide that any of his property will not be available to his creditors- cases?

Answer 2

Higginbottom v Holme (1812)- Eldon;

Question 3

Higginbottom v Holme (1812)- Eldon

Answer 3

Case: Husband put property on trust for himself. A term of the trust was that if he should embark on trade and become bankrupt then the beneficial interest should pass to his wide, in the form of a £150 yearly annuity.

Years later he entered the cotton trade and became bankrupt. He argued the term of the trust which passed the BI to his wife should be upheld because at the time he created the trust he had no intention of entering trade. He was a church minister with plans to remain in the church for life.

Decision: The inclusion of the term in the trust demonstrated that trade must have at least been in his contemplation at the time, so it would be a fraud on the bankruptcy laws to allow it.
Eldon- it would be a ‘subtraction from the creditors of something which the debtor enjoys and possesses for all other purposes’.

Question 4

A transferor cannot provide that the transfer property shall not be available to the debtor’s creditors- cases?

Answer 4

Dommet v Bedford (1796)

Brandon v Robinson (1811)- Eldon

Question 5

Dommet v Bedford (1796)

Answer 5

Decision: It is not a breach of the principle that a transferor cannot provide that transfer property shall be available to the debtor’s creditors where the transferor provides in the trust that the debtor’s proprietary interest should cease and determine on bankruptcy.

This is because it is not an attempt to subtract property from the creditors which the debtor continues to enjoy- it is fashioned to take property from the debtor.

Case: Uncle left a trust in his will to his niece providing for a twice annually annuity of £30, which was to cease and determine in ‘alienation’- i.e. only her hands were sufficient.

Question 6

Brandon v Robinson (1811)- Eldon

Answer 6

Contrast with Dommet.

‘A testator may limit the object of his bounty until bankruptcy. If there is a limitation on the object in the event of bankruptcy then it can be taken no further than the terms of the will (Dommet), but if there is a life interest, he cannot take away the incidents of that estate’.

Decision: A transferor (father) could not provide that a LIFE interest in the income from trust property which he left to his son was not ‘transferable or otherwise assignable’ (to his trustee in bankruptcy).

This is because the debtor would retain his proprietary interest in the property while the creditors were deprived of the property, so would be in breach of the property principle.

Question 7

Protective Trust Act 1925 s.33(1)

Answer 7

Allows a p to create a protective trust whose effect is that if the debtor is bankrupt the property shall be held on trust for the benefit/maintenance/support of:
(a) The principal beneficiary, their spouse and children, or
(b) If no spouse or CP, the primary beneficiary and the persons who would, if he were actually dead, be entitled to the trust property or its income or annuity.
As the trustee sees fit
• So the original trust automatically becomes a discretionary trust on a divesting act that means if a trust is specifically created as a protective trust (mentioned in the deed) then the property interest can be kept from his creditors.

Question 8

Leases are a limited proprietary interest and therefore the lessor can provide that the interest is not assignable- cases?

Answer 8

Hunters v Galliers (1787)- Grose;

LPA 1925 s.146

Question 9

Hunters v Galliers (1787)- Grose

Answer 9

A lessor may provide by an express term in a lease agreement that the lease is a limited proprietary interest and is thus not assignable in the event of the lessee’s bankruptcy.

This is because the interest in the property is not absolute, like it is with chattels.

Case: The lessor had reserved the right to reenter the property within the lease. This was enough to show that the debtor had only a limited proprietary interest in the lease and it was thus not assignable the his trustee in bankruptcy.

NB: it is in the interest of lessors to include terms such as these, because if the lease were assignable the lessor would have no control over the future tenants of the property. All leases generally contain these clauses as standard practice, so will not be assignable.

Question 10

s.146 LPA 1925

Answer 10

A provision which allowed a lessor to apply for relief against assignment of his lease on bankruptcy of the lessor (before LL’s tended to include the clause discussed in Hunters v Galliers).
- Nowdays both clauses mean basically the same thing, but both tend to be included anyway for safety.

Provision allows lessor to apply for relief against forfeiture of the lease under (2), but it is unlikely to be granted in bankruptcy because the breach of contract cannot be remedied.

(9) and (10).

Question 11

Hire purchase agreements- Cases?

Answer 11

Re Piggin (1962) CC;

Aus Commonwealth Bankruptcy Act 1966 s.301;

Transag Haulage v Leyland DAF (1994)- Knox;

On Demand Info v Michael Gerson (2003) HOL

Question 12

Re Piggin (1962) CC

Answer 12

1. A HP company may not include a clause in the HP agreement stating that in the even of the debtor’s bankruptcy the goods should be forfeited, as it would be in violation of the property principle by keeping the debtor’s property from his creditors.
   - This is probably incorrect. Lower court case, no past precedent to go on.

Correct analysis: A HP agreement is a hybrid of a lease and a contract of sale. BUT the only time when a bankruptcy arising would be problematic is during the hire stage, which has close similarities to a lease- i.e. the interest is probably still limited in the hire stage. So a forfeiture clause in a HP agreement does not seem to offend the property principe.

Correspondingly, once the contract moves in the purchase stage, there would be no question of the goods being forfeited to the HP co, because the debtor owns them absolutely, and they would pass to his creditors.

Forfeiture clauses are generally included in HP agreements, because this was a low court case.

2. It would be inequitable for the trustee in bankruptcy to be deprived of both the object of the agreement and the instalments already paid.
   - This is correct. BUT this does not mean that forfeiture agreements should be seen as breaching the property principle.
   - The better view is that if the HP co reclaims the property, it should pay the trustee the difference between the market value of the property and the instalments already paid, hence depriving the creditors of nothing and not breaching the property principle.

Question 13

Aus Commonwealth Bankruptcy Act 1966 s.301

Answer 13

Makes void any provision for forfeiture on bankruptcy in a HP agreement.

This is supportive of the Piggin 1 approach (but Nigel thinks it is probably incorrect).

Question 14

Transag Haulage v Leyland DAF (1994)

Answer 14

1. The trustee in bankruptcy may apply to the court for relief against forfeiture under a forfeiture clause in a HP agreement.
   - The court has jurisdiction to grant relief because the loss of right to buy can be considered loss of a property right in situations.
   - e.g. court may grant relief if the HP agreement is almost entirely paid up when bankruptcy occurs.
2. Knox applied Piggin 2- the principle that it would be inequitable for the trustee to be deprived of both the value of instalments paid and the property.
3. The solution to this inequity will usually be for the court to order the HP co to pay the trustee the difference between the market value of the property and the instalments already paid, thus depriving the creditors of nothing.

Question 15

On Demand Info v Micheal Gerson (2003) HOL

Answer 15

1) Analogous case with HP agreements in HOL, but in a non-HP case. This is probably how higher courts would eat with HP agreements.

2) A trustee can apply to the court for relief against forfeiture of a pure chattel lease, as loss of a proprietary interest.
- Very similar to Transag.

Case: Lessor leased video equipment to debtor on 2 leases:
(a) Primary lease for 2 years which required rent paid in full. Effectively paying for the goods.
(b) Secondary lease for an indefinite period where nominal rent was paid. Began after the primary lease ended. D gained the right to sell the property with the lessor’s consent and keep 95% of the profit.
BUT secondary lease included a term that if D went into receivership the contract would be repudiated for breach and he would forfeit the goods to the lessor.

Decision: Relief from the forfeiture was granted because debtor was held to have obtained a proprietary interest in the property during the secondary lease, so it would be in breach of the property principle to keep it from his creditors.

3) The court may still grant relief from forfeiture if the lease is no longer capable of being performed.
- At the time the case came to court the goods had been sold with the consent of the lessor in an attempt to get the best price.
- The proprietary interest simply moved to proceeds of the sale.

Question 16

An agreement may contain a term requiring shares or property to be transferred back at fair value on bankruptcy- Cases?

Answer 16

Whitmore v Mason (1861)- Page Wood;

Borland’s Trustees v Steel Brothers (1901)

Question 17

Whitmore v Mason (1861)- Page Wood

Answer 17

1. A term which requires that a debtor’s share in a partnership agreement should revert to the partnership on his bankruptcy for no value is invalid as it is against the property principle.
   - The debtor has an interest in his share in the partnership, so it would be to deprive creditors of this interest.

Case: the partnership deed expressly excluded the inclusion of a lease which was held on trust for the partnership from being divided and the debtor’s interest included in his estate. This was void.

2) Partnership is no an exceptional institution which is excluded from dividing all of its property on one partners’s bankruptcy.
- Partners argued that on entering a partnership each P makes a bargain with the others where he contributes his fund to the common good, giving the others the advantage of it, so should have the right to stipulate that his share in the interest should remain in the partnership.
- Argued similar to leases where the interest reverts back to the lessor.
- Not accepted.

3) Obiter- where such a term stipulates that the interest should be preserved by paying the debtor’s creditors the fair value of the interest, there is no fraud on the property principle.

Question 18

Bordland’s Trustees v Steel Brothers (1901)

Answer 18

Case: Co’s arts required SH should transfer shares back on bankruptcy. Allowed the SH 14 days to stipulate what he thought was a fair price, and after this nominal value would be paid if not stipulated.
Trustee did not respond so nominal value of £8,650 was paid.

Trustee disputed amount as worth £34,000. Argued it would breach property principle to allow the term by depriving debtor’s creditors of this sum.

1) A provision requiring a shareholder to transfer his shares back to the co on his bankruptcy is not an infringement of the property principle if fair value is paid to his estate for the shares.
2) It was impossible to obtain a valuation of shares by market value because of profit fluctuation.
3) By buying the shares the debtor had agreed to the method of valuation in the arts, which was not an unfair method, so it could be said that fair value had been obtained.
4) The obiter from Whitmore described exactly this situation, so it is permissible.