Accounting between a wife and a Trustee in Bankruptcy

Family Law|April 11th 2017

The things I do for my readers. I have just read a 91-paragraph judgment of the Chancery Division. I confess my eyes glazed over once or twice, but I made it in the end. In Chancery, you see, they do things differently, with the result that the family lawyer reading a Chancery report is faced with various strange and alien concepts rarely heard of in the Family Division.

One such concept is ‘equitable accounting’. OK, equitable accounting does crop up from time to time in family cases, most commonly in relation to property disputes between cohabitants, but it is not really a family law concept. Equitable accounting is a process whereby the proceeds of sale of a jointly owned property are adjusted between the parties, to take into account such things as who has had the benefit of the property, who has paid the mortgage and who has spent money on the property that has resulted in an increase in the property’s value.

Equitable accounting would normally have no part to play in deciding how a property should be divided in cases where the joint owners are married, as the divorce court uses a different set of rules to determine who should have what. Those rules empower the family court to adjust the ownership of the property in any way it sees fit, for example if it considers that the needs of one of the parties requires that they should have more than half. However, the situation changes entirely if one of the joint owners should be declared bankrupt.

Where the matrimonial home is owned jointly bankruptcy of the other spouse is a sort of nightmare scenario for anyone whose marriage has broken down. Instead of expecting a greater than half share of the property, perhaps even a 100 per cent share, suddenly the other spouse’s 50 per cent share is ripped away, passing to the Trustee in Bankruptcy, and removed from the adjustive powers of the family court.

This was the scenario in the judgment that I have just read, Davis (As Trustee In Bankruptcy of Jackson) v Jackson & Another. In the case the husband had been declared bankrupt, and the wife was left with the task of attempting to recover whatever she could of the husband’s half share, through the principles of equitable accounting (a task, incidentally, that she undertook without legal representation).

What was unusual about the case was that the husband had never lived in the property. The parties had separated in 2001 and the wife purchased the property, in her sole name, in 2003. Unfortunately, she was unable to keep up the mortgage payments and in 2007 the property was re-mortgaged. The new lender required that the property be transferred into the joint names of the husband and the wife, and for both of them to be liable for repayment of the new mortgage loan.

In fact, the husband never paid anything towards the mortgage. In 2013 he was made bankrupt owing some £83,000, and in 2015 the Trustee applied to the court for an order that the property be sold, and for half of the net proceeds of sale to pass to him.

In order to keep this post reasonably short I’m going to skip over the details of what happened next and move on to the hearing that was the subject of the judgment, when the Mr Justice Snowden dealt with the issue of equitable accounting.

It was agreed that the value of the property was £450,000. The amount outstanding on the mortgage was £203,000. The wife demonstrated that she had paid a total of £101,000 in interest payments towards the mortgage between the date of purchase of the property and the date of the husband’s bankruptcy. Since the bankruptcy she had made further payments of £22,000, making total payments of £123,000.

The Trustee argued that the wife should be given credit for half of the mortgage interest payments to the date of the bankruptcy, but that after that she should pay a rent to the Trustee for the fact that she was occupying the property (she was not liable to pay a rent to the husband, as it had never been intended that he would occupy the property), and that rent would offset the mortgage interest payments. The wife denied that she should pay any occupation rent, and claimed that she should be given credit for all the money she had spent on running and maintaining the property. The Trustee denied that she should be given credit for that expenditure, as there was no evidence that it had contributed to any increase in the value of the property.

Mr Justice Snowden gave long and detailed consideration to the principles of equitable accounting and concluded as follows:

  1. On the issue of money spent on the property, the wife did not contend that this had contributed to the increase in the value of the property, and therefore she should not be given any credit for it.
  2. On the issue of occupation rent, he did not see how the Trustee could be in a better position than the husband, and therefore the Trustee was not entitled to this.

Accordingly, he ordered that the proceeds of sale should be divided equally between the Trustee and the wife, with the wife being given credit for half of all the mortgage interest payments made by her, until the date the property is sold. He also indicated that he was prepared to stay the order for sale to give the wife an opportunity to purchase the Trustee’s interest in the property, thereby avoiding a sale.

The full report of the case can be read here, if you have the stomach for it.

Photo by GotCredit.

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