Learning Outcomes
By the end of this article, you will be able to explain the purpose and process of bankruptcy searches in property transactions, identify when and how to conduct these searches, interpret results, and understand the legal consequences of bankruptcy for both buyers and lenders. You will also be able to apply these principles to SQE1-style scenarios and avoid common pitfalls.
SQE1 Syllabus
For SQE1, you are required to understand the role of bankruptcy searches as part of pre-contract due diligence in property transactions. Focus your revision on:
- The purpose and timing of bankruptcy searches in conveyancing.
- The procedures for conducting bankruptcy searches against individuals and companies.
- The legal effects of bankruptcy on a seller’s capacity to transfer property.
- How to interpret and respond to positive or negative bankruptcy search results.
- The implications for buyers, lenders, and the validity of the transaction if bankruptcy is discovered.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the main purpose of a bankruptcy search in a property transaction?
- At what stages should a bankruptcy search be conducted?
- What form is used to search for bankruptcy against an individual seller?
- What are the legal consequences if a seller is declared bankrupt after exchange but before completion?
- How should a solicitor respond if a bankruptcy search reveals a pending bankruptcy petition against the seller?
Introduction
Bankruptcy searches are a critical part of the pre-contract due diligence process in property transactions. They protect buyers and lenders from the risk of acquiring property from a seller who is subject to bankruptcy proceedings, which could render the transfer void or expose the buyer to claims from a trustee in bankruptcy. This article explains when and how to conduct bankruptcy searches, how to interpret the results, and the legal consequences for the transaction.
The Purpose of Bankruptcy Searches
A bankruptcy search is carried out to check whether a party to a property transaction—usually the seller—is subject to bankruptcy proceedings. If a seller is bankrupt or becomes bankrupt before completion, their ability to transfer valid title is severely restricted. A bankruptcy search helps ensure that the seller has the legal capacity to sell and that the buyer (and any lender) will obtain good title.
Key Term: bankruptcy search
A search of the official bankruptcy registers to determine whether an individual or company is subject to bankruptcy or insolvency proceedings that could affect their ability to sell property.
When and How to Conduct Bankruptcy Searches
Timing of Searches
Bankruptcy searches should be conducted at two key stages:
- Pre-exchange of contracts: To confirm the seller is not bankrupt before the buyer becomes legally bound.
- Pre-completion: To catch any bankruptcy petitions or orders made after exchange but before completion.
This two-stage approach minimises the risk of missing a bankruptcy that arises during the transaction.
Who Conducts the Search
The buyer’s solicitor is responsible for carrying out bankruptcy searches. If the buyer is obtaining a mortgage, the lender will require a clear bankruptcy search against the buyer as well.
Procedure for Individuals
For individual sellers, the search is made using Form K16 at the Land Charges Department. The search covers the seller’s full name (and any variations) for at least the last five years.
Key Term: Form K16
The official form used to search the bankruptcy register for entries against an individual’s name.
Procedure for Companies
For company sellers, bankruptcy searches are conducted at Companies House. The search checks for:
- Winding-up petitions
- Administration orders
- Company Voluntary Arrangements (CVAs)
A company search should be carried out both before exchange and again immediately before completion.
Key Term: company search
A search at Companies House to check a company’s solvency status and any pending insolvency proceedings.
Legal Effects of Bankruptcy on Property Transactions
If a bankruptcy order is made against a seller, their assets—including any property—vest in the trustee in bankruptcy. The seller loses the power to dispose of the property, and any transfer made after the bankruptcy commencement may be void unless approved by the court or trustee.
Key Term: trustee in bankruptcy
The person appointed to manage the bankrupt’s estate, with the power to deal with assets and property for the benefit of creditors.
If a bankruptcy petition is pending but not yet made, the court may still set aside any transfer of property made after the petition was presented.
Key Term: bankruptcy petition
A formal application to the court for a bankruptcy order against an individual or company.
Interpreting Bankruptcy Search Results
Negative Result
A negative search result (no bankruptcy entries) means the transaction can proceed, but does not guarantee that a petition will not be presented after the search. This is why a second search is needed before completion.
Positive Result
A positive result (bankruptcy petition or order found) requires immediate action:
- Notify the client and any lender.
- Do not proceed to completion without further investigation.
- If a bankruptcy order exists, the seller cannot transfer valid title—completion must not proceed.
- If a petition is pending, seek urgent advice. The transaction may be at risk of being set aside.
Worked Example 1.1
A buyer’s solicitor conducts a pre-completion bankruptcy search against the seller and discovers a bankruptcy petition was presented three days earlier. What should the solicitor do?
Answer: The solicitor must immediately inform the buyer and any lender. Completion should not proceed, as any transfer made after the presentation of a bankruptcy petition may be void if a bankruptcy order is made. The solicitor should seek urgent advice and may need to contact the court or the petitioner.
Practical Implications for Buyers and Lenders
A failure to conduct timely bankruptcy searches can have serious consequences:
- The buyer may not acquire good title and could lose both the property and the purchase money.
- The lender’s security may be invalidated if the seller is bankrupt.
- The solicitor may be liable for negligence if searches are not performed or acted upon.
Worked Example 1.2
A buyer’s solicitor only conducts a bankruptcy search before exchange. The seller is made bankrupt after exchange but before completion. The transaction completes. What is the risk?
Answer: The transfer may be void under the Insolvency Act 1986, and the buyer could lose the property and the purchase money. The solicitor should have conducted a second search before completion to avoid this risk.
Special Considerations
- Always search against all known variations of the seller’s name.
- For unregistered land, searches should cover all estate owners in the chain of title for their period of ownership.
- If the seller is acting as a personal representative, search against both the deceased and the representative.
Revision Tip
Always diarise the need for a second bankruptcy search immediately before completion, especially in transactions with a long gap between exchange and completion.
Key Point Checklist
This article has covered the following key knowledge points:
- The purpose of bankruptcy searches is to check for bankruptcy or insolvency proceedings affecting a seller’s capacity to transfer property.
- Bankruptcy searches must be conducted both before exchange and before completion.
- Form K16 is used for individual bankruptcy searches; company searches are made at Companies House.
- A positive bankruptcy search result requires immediate action—do not proceed to completion without resolving the issue.
- Failure to conduct timely searches can result in loss of title, loss of funds, and professional negligence claims.
Key Terms and Concepts
- bankruptcy search
- Form K16
- company search
- trustee in bankruptcy
- bankruptcy petition
