Bankruptcy of one of the parties is a common issue in financial remedy proceedings following divorce, and it can obviously have a serious bearing upon the settlement that each party receives. Sometimes the bankruptcy is genuine – financial problems are, after all, often a contributing factor to marriage breakdown, and sometimes the bankruptcy is used as a method of trying to defeat the other party’s claims.
Essentially, when a person is made bankrupt their assets pass to their trustee in bankruptcy, who will then use them to pay the bankrupt’s creditors. Accordingly, if a matrimonial home is owned jointly in equal shares, as of course is often the case, then if one of the parties is made bankrupt their half share passes to their trustee. This means, of course, that the other party cannot proceed with a claim against that half share.
I don’t want to get too deep into the (enormous) complexities of bankruptcy, but there are special rules designed to protect the bankrupt’s creditors. One of these is section 339 of the Insolvency Act 1986. Obviously, if a person believes they are at risk of becoming bankrupt they may, before it happens, give assets to friends or relatives, to avoid those assets falling into the hands of the trustee. Under section 339 the trustee can apply to the court for an order setting aside any such transaction made within the previous five years, if the bankrupt did not receive the full value of the asset from the person to whom they transferred it (known as a ‘transaction at an undervalue’).
What happens, though, if the divorce court has already ordered that the property be transferred to the other party, before the bankruptcy order is made? Can the trustee still get their hands on the bankrupt’s half share? This was the situation in Haines v Hill & Another, decided by the Court of Appeal in 2007.
The facts in Haines v Hill were that the parties married in 1991. In April 2002 they bought a farm together in equal shares, with the aid of a mortgage. They separated in March 2003 and the wife issued divorce proceedings the following month. She then applied for a financial settlement and in December 2004 the court ordered the husband to transfer his interest in the farm to the wife, by the 28th of February 2005.
The husband did not comply with this order. However, he did apply to make himself bankrupt, and a bankruptcy order was made on the 31st of March 2005. The district judge eventually signed the transfer of the farm to the wife on behalf of the husband in September 2005, and the farm was subsequently sold.
In April 2006 the husband’s trustees in bankruptcy made an application under section 339, claiming that as the husband had not received any consideration for his share of the farm the transfer to the wife had been at an undervalue. The transfer could therefore be set aside, and the trustees could get their hands on the husband’s half share.
The trustees’ application was initially dismissed by the court. However, they appealed and the High Court granted their application. The wife then appealed to the Court of Appeal.
The Court of Appeal held that the transfer of the farm to the wife had not been at an undervalue. The husband had received consideration for it – the extinguishing of the wife’s claim against him. Accordingly, section 339 did not apply, and the wife’s appeal was therefore allowed.
I remember when this decision was handed down family lawyers breathed a collective sigh of relief. As Lord Justice Rix said at the end of his judgment, it would be “unfortunate in the extreme” if a settlement approved in a divorce court could be undone for up to five years because the husband goes bankrupt – “that could even encourage such bankruptcy on the part of a disaffected husband”. Indeed it could.
Photo by EJP Photo under a Creative Commons licence