Margaret Hatwood
Family Law Journal - February 2008
In May 2007 the High Court decision in Hill v Haines [2007] EWHC 1012 (Ch), [2007] 2 FLR 983 overturned the long-held understanding among family lawyers that a decision made after a fully contested hearing could not be challenged by a trustee in bankruptcy. This led to concern among family lawyers that trustees in bankruptcy would rummage through their filing cabinets to see if they had any cases where orders made in divorce proceedings could be set aside. The decision meant that any wife who had obtained her divorce settlement following a contested hearing in the last 5 years, whose husband subsequently went bankrupt, could find the assets that had been transferred to her vulnerable to attack, even where, as in Haines, the transfer pre-dated the bankruptcy.
Thankfully for such wives, a strongly constituted Court of Appeal overturned this decision on appeal in Haines v Hill [2007] EWCA Civ 1284, [2008] 1 FLR (forthcoming), where Thorpe LJ said with admirable clarity:
‘There is an obvious tension between the statutory scheme for the protection of a bankrupt’s creditors and the statutory scheme for the financial protection of the bankrupt’s former wife and child. Bankruptcy Acts and Matrimonial Causes Acts may be said to compete for shares in the fund which will always be incapable of satisfying both. Clearly if the act of bankruptcy precedes an order made under the Matrimonial Causes Act the legal and practical outcome is straightforward. Difficulties arise when the order under the Matrimonial Causes Act precedes the bankruptcy.’
THE FACTS OF HAINES v HILL
The wife obtained a divorce on her husband’s adultery after 12 years of marriage. There was one child who lived with the mother. At the end of the matrimonial proceedings in the county court, District Judge McKenzie found that there were only two assets – a matrimonial home (MH) and a Mercedes motor car. The district judge found that the husband had been ‘evasive, disingenuous and has quite deliberately hidden matters from the wife’. Section 25 of the Matrimonial Causes Act 1973 required the district judge to give first consideration to the welfare of the only child of the marriage. On 22 December 2004 an order was made in matrimonial proceedings that the MH be transferred to the wife. The MH could not be retained as it was heavily mortgaged, so it was always envisaged that the wife would have to sell. However, on 31 March 2005 a bankruptcy order was made against the bankrupt on his own petition. On 22 September 2005 the MH was transferred to the wife pursuant to the December 2004 order. On 13 April 2006 the trustees applied to the court for a declaration that the transfer of the beneficial interest of the bankrupt in the MH was a transfer at an undervalue pursuant to s 339 of the Insolvency Act 1986. Section 339 provides:
‘(1) Subject as follows in this section and section 341 and section 342 where an individual is adjudged bankrupt and he has at a relevant time entered into a transaction with any person at an undervalue, the Trustee of the bankrupt’s estate may apply to a court for an order under this section…
(2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had
not entered into that transaction.
(3) For the purposes of this section and sections 341 and 342 an individual enters into a transaction with an individual at an undervalue if—(a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no
consideration,
(b) … or
(c) he enters into a transaction with that person for a consideration, the value of which in money or money’s worth, is significantly less than the value, in money or money’s worth of the consideration provided by the individual.’
The terms of s 339 indicate that the jurisdiction of the court to make an order under subsection (2) depends on a number of pre-conditions. These include that:
- a transaction is entered into at a relevant time by an individual who is subsequently adjudged bankrupt; and either
- on terms that provide for him to receive no consideration; or
- for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual.
Moreover, the decision of the Court of Appeal in Re Paramount Airways Ltd (In Administration) [1993] Ch 223 established that even if all those preconditions are established, there remains a discretion in the court as to whether any and if so what order should be made under s 339(2). In the county court, District Judge Cooke dismissed the trustees’ application, considering that the circumstances did not come within either subpara (a) or (c) of subsection (3).
THE HIGH COURT DECISION
District Judge Cooke in the county court and Judge Pelling QC in the High Court agreed that it was the order of the court exercising the matrimonial jurisdiction that constituted the ‘transaction’ and that it had been entered into by the bankrupt, however unwillingly. District Judge Cooke found that there was consideration for the transfer, consisting of the satisfaction or partial satisfaction of the wife’s claims for ancillary relief. In respect of the third precondition,
District Judge Cooke held that the decision of the matrimonial court had determined the extent of the wife’s claim and its value as the equivalent of the value of the assets transferred by the order. In those circumstances the court did not have to consider the exercise of any discretion under s 339(2). Section 39 of the Matrimonial Causes Act 1973 provides that:
‘The fact that a settlement or transfer of property had to be made in order to comply with a property adjustment order shall not prevent that settlement or transfer from being a transaction in respect of which an order may be made under ss 339 or 340 of the Insolvency Act 1986 (transactions at an undervalue and preferences).’
Section 39 does not sit comfortably with the decision of the court in Mountney v Treharne [2002] EWCA Civ 1174, [2003] Ch 135, which provided that it is the order of the court exercising the matrimonial jurisdiction that effects the transfer of the beneficial interest, not the subsequent disposition made by or on behalf of the individual who later becomes bankrupt. District Judge Cooke assumed this without making any finding. With regard to the second precondition, he found that there was consideration for the transfer consisting of the satisfaction or partial satisfaction of the wife’s claims for ancillary relief. In relation to the third pre-condition, he held that the decision of the matrimonial court had determined the extent of the wife’s claim and its value as the equivalent of the value of the assets transferred by the order. Thus he did not have to consider the exercise of any discretion under s 339(2). However, Judge Pelling disagreed with the conclusions of the district judge on both the second and third pre-conditions, but decided there was no ground for exercising his discretion not to make an order under s 339(2).
THE COURT OF APPEAL
The Court of Appeal said ‘that it would be unfortunate in the extreme if a court-approved or even a court-determined property adjustment order would be liable in practice to be undone for up to 5 years because the husband goes bankrupt within that period. That could even encourage such bankruptcy on the part of a disaffected husband’. That, in the author’s view, was the strongest policy reason for the decision. Counsel for the wife submitted that Judge Pelling’s reasoning could be criticised on three grounds, saying the judge was wrong:
(1) to hold that only the release of a pre-existing right or cause of action is capable of constituting consideration for the purposes of s 339;
(2) to focus his attention on a compromise agreement rather than the relevant transaction, ie the order; and,
(3) to hold that consideration is not given by a party to an agreement compromising ancillary relief claims.
In relation to (1) the Chancellor said that in the context of the formation of a contract, any benefit or detriment to the relevant party will normally suffice. Thus, the compromise of a defence (see Banque de l’Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983] QB 711) may be sufficient consideration for the formation of a contract. So, the Chancellor saw no reason why some dealings with a pre-existing statutory right cannot constitute consideration.
So far as (2) was concerned, Judge Pelling focused on the decision of Xydhias v Xydhias [1999] 1 FLR 683, from which he extracted the proposition that the contractual agreement between an applicant and respondent for the compromise of an ancillary relief claim is not conclusive unless and until it is made the subject of a consent order of the court. The Chancellor disagreed and said that although it is recognised that the jurisdiction of the court under ss 21–26 of the MCA cannot be ousted by agreement of the parties, the existence of such an agreement is a relevant circumstance and may lead to an abbreviated procedure for translating it into an enforceable court order. However, the Chancellor went on to say that such a compromise cannot amount to a transaction for the purposes of s 339 of the Insolvency Act 1986, so the extent to which it may have been for consideration is immaterial.
In relation to (3), the Chancellor referred to Re Pope ex parte Dicksee [1908] 2 KB 169, which provided that an agreement to forbear from taking matrimonial proceedings was ‘valuable consideration’ for the purpose of s 47 of the Bankruptcy Act 1883. However, he went on to consider whether such consideration is ‘in money or money’s worth’ to enable a comparison of value for the purpose of s 339(3)(c). He criticised Judge Pelling’s reliance on a dissenting judgment of Buckley LJ in Re Pope, which he states was ‘misplaced’. He said that:
‘the order of the court quantifies the value of the applicant spouse’s statutory right by reference to the value of money or property thereby ordered to be paid or transferred by the respondent spouse to the applicant. In the case of such an order, whether following contested proceedings or by way of compromise, in the absence of the usual vitiating factors of fraud, mistake or misrepresentation; the one balances the other. But if any such factor is established by a trustee in bankruptcy on an application under s 339 then it will be apparent that the prima facie balance was not the true one and the transaction may be liable to be set aside.’
The Chancellor voiced concern that if the applicant spouse is not treated as providing consideration for the transfer either at all or in money or money’s worth, then all such transfers will be void. He concluded that he could not accept that Parliament intended that what must be one of the commonest orders made by courts exercising their matrimonial jurisdiction – namely that the husband do transfer his beneficial interest in the matrimonial home to the wife – should be capable of automatic nullification at the suit of the trustee in bankruptcy of the husband against whom a bankruptcy order was subsequently made on his own petition.
Thorpe LJ agreed with the Chancellor and said that the judge extracted from Xydhias v Xydhias and G v G (Financial Provision: Equal Division) [2002] EWHC 1339, [2002] 2 FLR 1143 that the compromise of an ancillary relief claim is not conclusive unless and until made a consent order of the court. However, the judge failed to have regard to the opposite side of the coin, namely that once the parties have reached an agreement to compromise an ancillary relief claim, the court will not permit either party to renege save in exceptional circumstances (Edgar v Edgar [1980] 1 WLR 1410). Thorpe LJ mentioned that the social and legal policy underlying the exercise of the court’s discretion had been developed by the House of Lords in White v White [2001] 1 AC 596 and Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, [2006] 1 FLR 1186:
‘In broad summary the affect of these decisions is that:
(a) the wife in bringing her claim for ancillary relief does not come as a suppliant but as one seeking the quantification of her entitlement.
(b) that quantification of the fair outcome will be driven by a number of considerations but principally needs, compensation and sharing.’
In conclusion, Thorpe LJ says that practitioners on either side of the boundary between insolvency and ancillary relief law have assumed that the principled approach taken by the courts in Re Pope and Re Abbott (A Bankrupt) ex parte Trustee of the Property of the Bankrupt v Abbott (PM) [1983] Ch 45 held
true:
‘Between the two systems of law there needs to be a fair balance which on the one hand protects the creditors against collusive orders in ancillary relief and on the other protects orders justly made at arm’s length for the protection of the applicant and the children of the family. In my judgment the approach adopted by Judge Pelling would destroy that balance.’
AND FROM AN INSOLVENCY LAWYER'S POINT OF VIEW?
Between May and December 2007, insolvency practitioners up and down the country were re-examining old cases to determine whether there were any ancillary relief orders made after a contested hearing which could be challenged in the light of the decision of the High Court in Hill v Haines. Those challenges must now be abandoned – for the moment at least. Section 39 of the Matrimonial Causes Act 1973 provides that a transfer of property pursuant to a property adjustment order shall not prevent that transfer from being a transaction that can be challenged as being a transaction at an undervalue. Yet trustees in bankruptcy can now never challenge such transfers as being a transaction at an undervalue. The exception appears to be where there is fraud, collusion or some other vitiating factor. Lord Justice Thorpe says in his judgment:
‘If the ancillary relief order was the product of collusion between the spouses, designed to adversely affect the creditors, the Trustee would intervene in the ancillary relief proceedings and apply for the order to be set aside … Additionally the ancillary relief order, like any other order might be set aside, if some other vitiating factor could be established, including a failure on the part of the wife to make full and frank disclosure of her own assets. It could be assumed that ancillary relief orders resulting from a hard fought trial are less likely to be tarnished by collusion or fraud on the creditors then consent orders.’
The suggestion that there must be fraud, collusion or some other vitiating factor for a trustee in bankruptcy to be able to set aside a contested ancillary relief order is disappointing news for insolvency practitioners. There is already provision in the Insolvency Act 1986 for transfers motivated by fraud and collusion to be set aside. Section 423 of the Insolvency Act 1986 provides that transactions entered into for the purpose of putting assets beyond the reach of creditors can be challenged by a trustee in bankruptcy. The recent decision by the Court of Appeal means that a property adjustment order can only be set aside if the factors set out in s 423 of the Insolvency Act 1986 exist.
It is accepted that some aggrieved debtors declare themselves bankrupt with the primary intention of obtaining revenge on their former spouse. This Court of Appeal judgment goes some way to preventing that. But the creditors of those debtors will lose out as a result of the decision. In the vast majority of cases, there is no fraud or collusion. Very often, the property transferred to the spouse will be the only asset in the bankruptcy. Even though the property may have been transferred just before bankruptcy, and the spouse does not appear to have given anything tangible in return, the trustee will be unable to challenge the transfer of the property and the creditors will receive absolutely nothing.
This brings us on to the question of consideration. One of the most important points to emerge from the judgment is that the value of the spouse’s claim to ancillary relief is capable of being consideration and is measurable in money or money’s worth. The conclusion of the Court of Appeal appears to be that the value of the consideration given by the spouse will always be equivalent to the value of the interest in the property transferred by the debtor. Historically, when considering whether a transaction at an undervalue has taken place, insolvency practitioners have considered the quantum of the value given for the asset. However, this judgment suggests that there does not have to be an assessment of the value of the consideration moving in each direction.
This will be frustrating for insolvency practitioners in certain situations. For instance where the debtor clearly had no other assets, minimal or no income and no prospect of ever earning any income, the value of any ancillary relief claim given up by the spouse in return for the property will in practice be worthless. But in accordance with this judgment, the value of the spouse’s ancillary relief claim will be held to be equal to the value of the asset that she received. As a result, the trustee will rarely be able to challenge orders made in matrimonial proceedings, regardless of the reality of the value of the release of claims by the debtor’s spouse. At the time of writing this article, it is not known whether the trustees in bankruptcy of Mr Haines will take the case to the House of Lords. But as things stand, the pendulum has swung in favour of applicants for ancillary relief, rather than creditors. Watch this space to see if this position remains the same.
Margaret Hatwood is an Associate in Anthony Gold's family law team. She specialises in medium to high value financial cases involving both married and unmarried couples.
This article was published by Family Law (a publishing imprint of Jordan Publishing Ltd) in the February 2008 issue of the journal Family Law, at [2008] Fam Law 123.
