Bankruptcy and property ownership: understanding your rights and risks

Understanding bankruptcy and its implications

Bankruptcy is a legal process for resolving unpaid debts. It can be initiated either by the debtor or a creditor seeking to declare the debtor bankrupt.

Upon bankruptcy, any beneficial interest (equity) the bankrupt holds in property transfers to the trustee in bankruptcy (the “Trustee”). The Trustee’s role is to liquidate the bankrupt’s assets and distribute the proceeds to creditors.

Defining beneficial and legal ownership

A beneficial interest in property entitles an individual to a share of the sale proceeds. For example, holding a 25% beneficial interest means receiving 25% of the proceeds upon sale.

Legal ownership means being named as the owner on the title deeds or at the Land Registry.

By default, the law presumes that legal ownership reflects beneficial ownership—meaning a sole legal owner is presumed to have 100% of the beneficial interest, while joint legal owners are presumed to share it equally (50% each, if there are two of them).

This presumption, known as “equity follows the law,” can be challenged. A declaration of trust, for instance, may establish that one legal owner or a third party holds the entire beneficial interest. Similarly, a common intention constructive trust may have arisen before the bankruptcy. (For more details on common intention constructive trusts, see our previous articleNilsson v Cynberg: Express Trusts Over Property.

Disputes and court applications

Disputes over beneficial ownership may arise between Trustees, bankrupts, and third parties. If negotiations fail, the Trustee may apply to court for resolution. Below, we examine two court cases and their outcomes.

Re Iqbal (High Court, January 2024)

Joint legal owner Mrs Iqbal claimed 100% beneficial interest of a property. Initially, Mr Iqbal was the sole legal owner, but in 2003, the property was transferred into their joint names. The Land Registry TR1 form included a declaration of trust stating that they each held 50% of the beneficial interest. 

Following Mr Iqbal’s bankruptcy in 2020, the Trustees sought possession, sale, and a declaration of beneficial ownership. Mrs Iqbal argued that the declaration of trust had been superseded by an unwritten agreement between her and Mr Iqbal, granting her full beneficial interest.

Judge Burton rejected her claim, ruling that she held only a 50% beneficial interest, with the remaining 50% belonging to the Trustees. He found inconsistencies in her testimony and asserted that an unwritten agreement could not override a declaration of trust.

However, in Nilsson v Cynberg, Deputy High Court Judge James Pickering KC disagreed, holding that an unwritten agreement could indeed supersede a declaration of trust. He cited Re Iqbal but respectfully disagreed with Judge Burton on this point.

Fox v Bent (High Court, August 2024)

This case attracted media attention as it involved former Premier League footballer Marcus Bent. The court considered whether Marcus’ daughter, Aliyah Bent, held 100% of the beneficial interest in a property, despite Marcus being the sole legal owner. The Trustee argued that the entire beneficial interest vested in the Trustee, but the court disagreed. It ruled that Aliyah Bent was the sole beneficial owner under a common intention constructive trust, preventing the Trustees from possessing and selling the £2.2 million property.

The Birketts view

If you hold a beneficial interest in a property, it’s essential to protect it, especially if the legal owner (or a joint legal owner) faces bankruptcy. Real property is often the most valuable asset in a bankrupt’s estate. Trustees may be reluctant to recognise that a non-legal owner can own a share of the beneficial interest or that a joint legal owner may own more than 50% of it.

We can help safeguard your interest through formal declarations of trust. If the legal owner is already bankrupt, we can assist in negotiating with the Trustee and defending against court claims. Even if there is no dispute over beneficial ownership, we may still be able to help prevent or delay the sale of property.

Our Home Ownership Disputes Team specialises in property trusts and resolving disputes under the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA). Contact Birketts today to discuss your case – we’d be delighted to assist you.