David Edwards explains how insolvency can hamper efforts for a fair split of matrimonial assets in a divorce case


It has long been the case that a property adjustment order made pursuant to a contested ancillary relief final hearing was immune from any action by the trustee in bankruptcy of the bankrupt former spouse.



However, the situation has changed dramatically with the ruling of Judge Pelling QC in Hill & another v Haines [2007] EWHC 1012 (Ch). In this recent High Court decision, the court ruled that the insolvency court had the power to overturn an order made in ancillary relief proceedings, for the benefit of the creditors of the bankrupt former spouse.



On 25 April 2003, Mrs Haines (the respondent) petitioned for divorce. On 15 May 2003, she commenced ancillary relief proceedings in which she sought relief under sections 23-25 of the Matrimonial Causes Act 1973, including a property adjustment order, lump sum and maintenance orders. In those proceedings, the court ordered inter alia that Mr Haines transfer to the respondent all his interest in the matrimonial home.



In March 2005, Mr Haines petitioned for his own bankruptcy. On 31 March 2005, an order was made declaring Mr Haines bankrupt, with total liabilities estimated to be approximately £132,000.



On 24 May 2005, the appellants, Richard Hill and John Bangham, were appointed as trustees in the bankruptcy of Mr Haines. On 22 September 2005, a district judge executed a transfer of the matrimonial home on behalf of Mr Haines to Mrs Haines pursuant to the ancillary relief final order.



The trustees' application was for an order to set aside the transfer of the property on the basis that it was a transaction at an undervalue, pursuant to section 339(3) of the Insolvency Act 1986, since the respondent had given no consideration under section 339(3)(a), or a consideration the value of which, in money or money's worth, was significantly less than the value, in money or money's worth, of the property under section 339(3)(c).



At first instance, District Judge Cooke dismissed the trustees' application. The trustees appealed that decision.



Judge Pelling, sitting in the High Court on 3 May 2007, allowed the appeal, finding that the district judge was wrong to conclude that the transfer of the property pursuant to the order made in favour of the respondent by the matrimonial court was not a transaction at an undervalue. The respondent's case was that pursuant to Re Abbott (A Bankrupt), ex parte Trustee of the property of the bankrupt v Abbott [1983] 1 Ch 45 and Re Kumar (A Bankrupt), ex parte Lewis v Kumar [1993] 1 WLR 224, she was to be treated as having given consideration equivalent to the value of the property, as she had given up a legal right to pursue a claim under the Matrimonial Causes Act. The judge did not accept these arguments on a number of counts, mainly their reliance upon the case of Re Abbott:

l Re Abbott concerned the application of section 42(1) of the Bankruptcy Act 1914. Under Re Bacon Limited [1990] BCLC 34, cases under the old law are of no assistance where the language of the statute has completely changed. Section 42(1) refers to 'valuable consideration' while section 339 refers to 'money or money's worth'. In Re Abbott, it was stated that the compromise of the rights 'were not measurable in money terms'. As section 339(3)(c) requires the balancing of incoming and outgoing consideration measurable in money terms, the compromise of a right was not consistent with the terms of this section. As such, Re Abbot was not binding upon the court.

l In Re Abbot, the judge had followed the reasoning in Re Pope ex parte Dicksee [1908] 2 KB 169, which was authority for the fact that the release of a right or the compromise of a claim may suffice to constitute a person a 'purchaser' within the meaning of section [42(1)]. Judge Pelling found that the reasoning in Re Pope was wrong, following the decisions in Xydhias v Xydhias [1999] 2 All ER 386, G v G (Financial Provision: Equal Division) [2002] 2 FLR 1143 and McMinn v McMinn [2003] 2 FLR 823, which determined that a compromise agreement cannot give rise to binding contractual obligations, and that if an applicant for ancillary relief does not have a cause of action, then consideration cannot be given if the agreement is not binding.



Judge Pelling agreed with the trustees and concluded that the transfer of property made by the bankrupt former spouse, either pursuant to a court order in ancillary relief proceedings or a consent order, was a transaction at an undervalue and should be set aside as in neither case was consideration given for money or money's worth.



The judgment does leave one avenue open for the former spouse of a bankrupt in the guise of judicial discretion under section 339(2), which states: '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 the individual had not entered into that transaction.' However, Judge Pelling commented that he thought such circumstances would be extremely rare.



This decision turns on its head what was the accepted position. Matrimonial lawyers will have to reconsider their advice upon the commencement of ancillary relief proceedings. It would appear that gone are the days when one could rely on an order of the court to bring closure to such matters when the giant spectre of insolvency is on the horizon.



One can sympathise with matrimonial lawyers, who are left with a totally unsatisfactory position. Faced with the prospect of their client's former spouse being in financial difficulties, how can they advise their client to proceed with ancillary relief proceedings?



However, this decision also affects those parties to whom bankruptcy may not be an issue at the time of the ancillary relief proceedings, but may be if it takes place within the five years afterwards. In such cases, there is a presumption of insolvency (section 341 of the 1986 Act). A clear warning must be given to clients that their efforts in trying to secure a fair split of the matrimonial assets may be for nothing if a party subsequently becomes insolvent.



Clearly, this is a major victory for creditors who would ordinarily face the prospect of recovering very little of their debt from a recently-divorced bankrupt. Trustees the breadth of the land are no doubt rummaging through their filing cabinets in the hope of bringing some good news to the creditors and some not-so-good news to the former spouse. Imagine the shock of the unfortunate former spouse who opens a demand letter over the breakfast table in the house they thought was secure and is no longer so. Imagine the phone calls to their solicitor.



It could be said that this decision is harsh on Mrs Haines, or limited to its facts, as the court had already noted that the couple in question had lived an extravagant lifestyle beyond their means, and thus the decision creates a fair result apropos the creditors.



However, the analysis of Judge Pelling is compelling, and despite the fact that there is to be an appeal, I believe the decision is likely to stand and cause a great deal of activity for the insolvency fraternity as it serves to level the playing field for creditors.



David Edwards is a litigation solicitor at Black Country firm Waldrons