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Divorce and the matrimonial home – some lessons from Hill and Bangham v Haines

Gareth Schofield, of Clarke Willmott, looks at how divorce settlements may be attacked by insolvency proceedings in the wake of Hill v Haines

Divorce and the matrimonial home – some lessons from Hill and Bangham v Haines

picture of gareth schofield

Gareth Schofield, Clarke Willmott

Background
Matrimonial practitioners do not often have to deal with the issue of the possible bankruptcy of either their client or the other spouse, but when such issues arise they are faced with dealing with the Insolvency Act 1986, and an insolvency regime which has much tighter rules than those imposed by the matrimonial discretionary system.

One important issue however of which all practitioners should be aware (and of which the Haines case is a very useful reminder) is the wide ranging effect of s339 of the Insolvency Act 1986.

Under s339 where an individual is adjudged bankrupt and he has:

then the trustee of the bankrupt's estate can apply for such order as he thinks fit restoring the position towhat it would have been had the individual had not entered into that transaction.

This may appear complex but essentially it gives a trustee in bankruptcy very wide ranging powers to investigate divorce settlements which fall within the law as set out above.

There have been several cases in which consent orders were reached where this has been done. In general those reported have dealt with unusual circumstances – see for instance Re Kumar [1993] 1 WLR 224.

However it had always been felt that this did not affect settlements which were the subject of a contested judicially imposed order because (perhaps misguidedly) it was felt that the court order removed any implication that the transaction was contrived.

The issue was to come before the Court of Appeal in the case of Jackson v Bell [2001] EWCA Civ 387 in 2001 but was settled before it did so. The case of Hill & Anor v Haines [2007] EWHC 1012 (Ch) therefore sheds new light on this issue.

The facts
In May 2003 the Wife commenced ancillary relief proceedings. The final hearing was in October 2004 at Worcester County Court with judgment handed down on 22 December 2004. The order provided that the Husband was to transfer all his interest in the main property to the Wife (it was held in their joint names) and pay her a nominal joint lives maintenance order, and that her lump sum claims were to be left open.

The District Judge concluded that it was likely that the Husband was "hopelessly insolvent" although the position was not definite, and there was a substantial risk that he could be made bankrupt. He therefore decided to leave open the Wife's claims for a lump sum because he could foresee certain circumstances in which the trustee in bankruptcy would seek to overturn the order he had made.

Shortly after the ancillary relief order the Husband was made bankrupt on his own petition. In September 2005 the property was transferred to the Wife further to the order but subject to agreement with the trustee in bankruptcy to secure a sum from the husband's interest in the property sufficient to meet his debts. The trustee in bankruptcy applied to set the order aside in December 2006 but failed and appealed to the High Court.
The court's decision

In a very careful judgment, His Honour Judge Pelling QC considered the constituent elements of s 339 and found that:

Section 39 states:

39. 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 section 339 or 340 of the Insolvency Act 1986(transactions at an undervalue and preferences.)

The key point however turned on whether a property adjustment order was made for sufficient consideration to avoid it being caught under s339 (3)(c) of the Act. The Judge considered in detail the issue of whether consideration passed in matrimonial orders. In particular he considered three cases which practitioners will be familiar with but for different reasons. He took comfort from Xydhias v Xydhias [1999] 2 AER 386 where the Court of Appeal held that an agreement reached in ancillary relief proceedings did not amount to a contract enforceable in law as the Court always had the final say as to whether any agreement became an order. He also considered G v G (Financial Provision: Equal Division) [2002] 2 FLR 1143 where Coleridge J had concluded that consideration did not pass on a transfer of shares pursuant to a matrimonial order. Finally he looked at McMinn v McMinn [2003] 2 FLR 839 which had concluded that a claim for ancillary relief was not a cause of action.

His conclusion was that if a compromise agreement cannot give rise to binding contractual obligations, and if an applicant for ancillary relief does not have a cause of action, then an applicant cannot give consideration by purporting to compromise his claims for such relief by entering into a settlement agreement that is by definition not binding until the court has reviewed it. He extended this to contested Court orders.

Finally he looked at whether the Judge should exercise his discretion to set aside the order. He concluded that cases where he should not would be extremely rare, and on that basis the property adjustment order was set aside.

The case may be appealed but, as it stands, clients need to be advised of the risk of contested orders being set aside at a later date, especially where insolvency of one of the parties is an issue. A judicial finding of fact as to solvency could, in theory, limit the operation of s 339 but might demonstrate an awareness of the possibility of impending insolvency.

In the light of this decision, the concern of matrimonial lawyers must be that trustees in bankruptcy, who have welcomed this decision, are going through their filing cabinets as you are reading this.