Bankruptcy Searches Recommended In All Property Purchases. Why Take The Risk?
Whilst the judgement in the case of Karmjeet Singh Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch) does not itself provide that bankruptcy searches should be undertaken in all cases, the facts of the case confirm that for the relatively low cost and effort of undertaking a bankruptcy search, the risk to your firm and your client can (and should!) be significantly reduced.
In the case of Karmjeet Singh Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch) a negligence claim was made against Mr. Kandola’s conveyancing solicitors who, Mr. Kandola claimed, had failed to advise him regarding the bankruptcy status of the seller of the property which he was purchasing.
The facts were that the claimant was an experienced property investor who was a long term client of the defendant solicitors, having instructed them in 23 previous property transactions.
The transaction involved the purchase of three neighbouring building plots for £420,000. The claimant knew the seller of the property personally which resulted in the claimant paying a substantially increased deposit of £96,800 on exchange of contracts to the seller’s solicitors. The deposit was to be held by the solicitors as agents for the seller.
An unusually long period between exchange and completion was agreed and so the claimants decided to register the contract with the Land Registry by way of a Notice in the Charges Register of the title.
The claimants made a priority search at the Land Registry to safeguard this before the Notice could be filed. The search revealed that a Bankruptcy Petition had been presented against the seller.
The transaction therefore collapsed and the claimant lost the £96,800 deposit. He subsequently sued his solicitors in negligence.
Fortunately for the defendant solicitors, Honour Judge David Cooke denied the claim, stating that “It is not, in general, a [conveyancing] solicitor’s duty to check on the credit status of his client’s counterpart unless instructed to do so.” However he went on to say that “There may be circumstances in which a solicitor should check specifically for the commencement of bankruptcy proceedings, since that may affect a party’s ability to complete a transaction or give a good title.“
This case highlights the potential risks of failing to undertake a bankruptcy search against the seller of a property prior to the exchange of contracts. Good practice (and common sense) would suggest that bankruptcy searches should be undertaken on the buyer and seller in all cases , before contracts are exchanged to ensure that the transaction can proceed.
If the seller is bankrupt, then the property is not theirs to sell. It vests in their trustee in bankruptcy.
If the purchaser is bankrupt, then this begs the important question of where is the money coming from as the bankrupt’s money vests in their trustee. This also poses serious AML questions which all conveyancers would need to have satisfied before proceeding.
Whilst a recommendation to make a bankruptcy search in all cases was not part of the judgment in Singh v Mirza, there has been a lot of criticism of the judgement, which is often considered to hinge on the particular facts of the case (ie that the claimant was an experienced property investor and the particular advise given by the solicitors to their client about the danger of paying the inflated deposit and paying it to the seller’s solicitors as “agents for the seller”). It is widely considered that a similar case bought today not have the same outcome.
Ultimately, had the defendant solicitors undertaken a bankruptcy search against the seller of the property for the relatively small cost and effort, they would not have been sued, and the claimant would not have lost £96,800 plus the considerable litigation costs.
To avoid the unnecessary risk to your firm and your client, bankruptcy searches should ideally be undertaken against the buyer and seller before exchange of contracts in all cases. (You are obligated to undertake a bankruptcy search against a purchaser where there is a lender and bankruptcy searches against any party to a deed of gift in any event).
If the seller or purchaser resides (or has previously resided) overseas, bankruptcy searches should also be undertaken in that country to ensure that there are no foreign bankruptcy orders which would affect the purchase.
Here at International Bankruptcy Searches, we regularly undertake overseas bankruptcy searches for conveyancers. Please contact us to see how we can assist you.
contact us on 01244 478201