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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

24 NOV 2009

Bankruptcy and Constructive Trusts - Re Sharpe [1980] 1 WLR 219

Last week we briefly examined bankruptcy and resulting trusts. This week we can turn our attention to bankruptcy and constructive trusts and the judgment of Mr Justice Browne-Wilkinson (later Lord Browne-Wilkinson) in Re Sharpe [1980] 1 WLR 219, a case which involved an Aunt going the extra mile for her bankrupt nephew and a battle for value between three nephews including the bankrupt nephew.

The facts of the case, as stated in the Official Law Reports, were as follows. On April 27, 1978, a receiving order was made against a bankrupt. He and his wife and his aunt, aged 82, were living together in a maisonette, which with a shop formed leasehold premises purchased by the bankrupt in 1975 for £17,000. The aunt had provided £12,000 of the purchase price, the remainder having been raised on mortgage. In providing the money, the aunt had been told according to her affidavit evidence, that she would be able to stay in the premises for as long as she liked, and that she would be looked after by the bankrupt and his wife.

The aunt had also paid some £2,271.16 for decorations and fittings for the property. She also paid some £9,000 in an attempt to stave off the bankrupt's bankruptcy. In September 1975 on the advice of her solicitor, the aunt got from the bankrupt a promissory note for £15,700, the reason being that by her will she had left her estate to her three nephews equally, and she felt that it would be unfair if the bankrupt were to take one third of what remained without bringing into account what he had already received.

The trustee in bankruptcy took steps to find out what rights, if any, the aunt claimed arising out of the provision by her of £12,000 towards the purchase price but the aunt did not reply to his letters. On April 30, 1979, the trustee in bankruptcy contracted to sell the premises to a purchaser for £17,000 with vacant possession, completion being fixed for May 29, 1979. After the date of the contract, the aunt, for the first time put forward a claim to an interest in the premises.

Brown Wilkinson, J held that there was no Resulting Trust and that the aunt had provided the £12,000 by way of loan and not as a gift and, accordingly, no interest in her favour was created under a resulting trust but since it was an essential feature of the loan that the aunt was to make her home in the premises to be acquired with the money lent, she had, as against the bankrupt, the right to occupy the premises for as long as she liked while the loan remained unrepaid, but that the aunt's right of occupation did confer some interest in the property under a constructive trust and that, since in the circumstances she was not barred from asserting her right by reason of any laches or acquiescence on her part, the trustee in bankruptcy took the property subject to her right and, accordingly, he was not entitled to an order for possession.

As Oakley has noted in his seminal book on the subject: “The interest of a beneficiary under a constructive trust is binding on the trustee in bankruptcy of the constructive trustee and take priority over the claims of his general creditors.” (Oakley, A. Parker & Mellows: The Modern Law of Trusts. 9th Edition. Sweet & Maxwell, London, 2008).

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