The Court of Appeal’s decision in the case of Haines - v - Hill & Another is now available.
This is a case where an Order was made within divorce proceedings transferring the matrimonial home outright to the wife. Some time later the husband was made bankrupt. The Trustee made application to the Court on the basis that the property had been transferred at an undervalue. The District Judge, within the bankruptcy proceedings, concluded that the transfer was not a transaction at an undervalue. This decision was subsequently appealed to the High Court by the Trustee. It was the view of the higher Court that transfer of the property was at an undervalue and it allowed the appeal; a decision which caused consternation amongst family law practioners given its potential impact on all Orders made in ancillary proceedings going forward and over the past five years.
The matter was then appealed to the Court of Appeal by Mrs Haines. The Court had to take account of the cross over of law between the Matrimonial Causes Act 1973 and the Insolvency Act 1986 and the conflicting interests that they protect.
Under the Matrimonial Causes Act 1973 a divorcing party is given a statutory right to apply for ancillary relief. The Family Court can grant ancillary relief, amongst others, by ordering maintenance payments and/or ordering a transfer of the matrimonial home to one party.
It is for the Family Court to ensure that each party to the marriage receives a fair share of the available property. The Court is given discretion to decide what constitutes a fair share in each individual case. In exercising its discretion the Court will take into account certain matters. In particular, the Court will prioritise to the needs of any minor child of the marriage.
The Insolvency Act 1986 overriding aim is to protect the interests of creditors. With regard to transactions at an undervalue it enables the Trustee of a bankrupt’s estate to apply to the court for an Order restoring the position to what it would have been if the transaction at an undervalue had not taken place, thus making the asset transferred or its value available for payment of the bankrupt’s creditors.
Transactions at an undervalue are defined as transactions entered into by the bankrupt with another person for which he receives no consideration or a consideration which is worth significantly less, in money or money’s worth, than the consideration provided by the bankrupt. For the Trustee to be able to attack transactions at an undervalue, they must have taken place within the period of 5 years preceding the bankruptcy.
In the present case Mrs Haines had been awarded the property as she had the sole responsibility for the care of the seven year old daughter of the marriage and there was no likelihood that that responsibility would be shared in the foreseeable future. Her overwhelming need and the Court’s overwhelming priority was to enable her to re-house herself and her daughter in suitable accommodation.
If the High Court Judge was correct, then the Order of the Family Court would be undone and the Court’s primary objective frustrated. The property would have been transferred back into the joint names of Mr and Mrs Haines, and the Trustee would have been able to realise Mr Haines’ share for the benefit of his creditors.
The Court of Appeal found in Mrs Haines’ favour. It did not agree with the High Court Judge that an agreement to forego or compromise ancillary relief claims is not capable of constituting consideration for the purpose of the Insolvency Act 1986.
The Court of Appeal decided furthermore that an ancillary relief Order quantifies the value of the applicant spouse’s statutory right to ancillary relief by reference to the value of the money or property ordered to be paid or transferred by the other spouse. In other words, in the case of an ancillary relief Order, whether made following contested proceedings or in accordance with an agreement reached between the divorcing parties, the one balances the other. Under the terms of an ancillary relief Order, each party provides equal consideration.
In the Court of Appeal one Judge referred to policy and stated that it would be unfortunate in the extreme if a Court approved a property adjustment Order in ancillary relief proceedings which would be liable to be undone for up to five years after because the husband goes bankrupt within that period.
Another Judge commented that between the two systems of law there needs to be a fair balance which on the one hand protects the creditors and on the other protects Orders justly made at arms length for the protection of the applicant spouse (within ancillary relief proceedings) and the children of the family.
Does this mean that there is no protection for creditors?
The Court of Appeal decision does not mean that no successful applications can be made at all by a Trustee in Bankruptcy for transactions at an undervalue in cases where the matrimonial home is awarded to the non-bankrupt spouse. However, the circumstances in which such an application will be successful are now extremely limited.
Whilst the Court of Appeal decision in principle protects ancillary relief Orders, the Orders can be attacked where it can be shown that an ancillary relief Order is the result of a collusion between the divorcing parties designed to adversely affect the creditors of the bankrupt spouse.
Another instance where an ancillary relief Order might be set aside, is if there is some other element of fraud or misrepresentation, such as a failure by the wife to disclose all of her assets.
This case does, of course, relate to a spouse’s bankruptcy after a final ancillary relief Order is made and the outcome would be different where the spouse becomes bankrupt during the proceedings.
This article was first published in the Spring 2008 NewsBrief
