At the time of writing this article, the Court of Appeal was hearing its second day of argument in the appeal against HHJ Pelling QC's judgment in Hill & Bangham -v- Haines [2007] EWHC 1012(Ch) (see news item dated 18.05.07). Judgment is expected to be reserved, not least in view of the public policy arguments raised by Mrs Haines' counsel that the High Court judgment amounts to a charter to disgruntled husbands to maliciously bring about their own bankruptcies after divorce. In the meantime, however, practitioners will wish to be mindful of another recent occasion upon which an order of HHJ Pelling QC came before the Court and in a not dissimilar context, that of Avis -v- Turner [2007] EWCA Civ 748, [2007] 2 FCR 695, [2007] All ER (D) 309 (Jul).

This significant appeal decision upheld the High Court's finding that a prior matrimonial order suspending sale was no bar to a trustee's possession action.

This article will focus mainly on Avis -v- Turner because – whatever the outcome in Hill -v- Haines, (which has of course already been followed in the case of Segal -v- Pasram LTL 12/6/2007 (Unreported elsewhere)) – it is clear that insolvency practitioners must now be alert to the possibility that closed matters involving ancillary relief may require investigation in case there are additional assets or funds available for the insolvent estate or possibilities for accelerating the realisation of assets for the benefit of creditors.

facts

Mr and Mrs Avis were registered as joint proprietors of the property in question. The terms of a property adjustment order in matrimonial proceedings in 1985 directed that the terms of the trust for sale upon which they held the property be varied to provide that the proceeds of sale be held two thirds for Mrs Avis and one third for Mr Avis and for the sale of the property to be postponed until the death or remarriage of Mrs Avis, pending which Mrs Avis was to have exclusive occupation. Mrs Avis had neither died nor remarried by the time of the instant case.

Mr Avis was declared bankrupt in February 1989. While Mr and Mrs Avis remained registered owners and trustees of the trust for sale, Mr Avis' interest in the proceeds of sale vested in his trustee pursuant to s.306 Insolvency Act 1986 (IA).

The present trustee was appointed with effect from 14 October 2003 and he applied for sale of the property under both the Trusts of Land and Appointment of Trustees Act 1996 (TLATA) and IA. Mr and Mrs Avis opposed the application based on the property adjustment order.

High Court decision

After noting that the trustee in Bankruptcy's interest is more properly characterised as an interest in the proceeds of sale as trustee upon the statutory trusts applicable to the administration of the bankruptcy estate, (as opposed to a pure beneficial interest), HH Judge Pelling QC moved on to assess the interaction between TLATA and IA.

The Court considered the principle that a trustee in bankruptcy takes a bankrupt's property subject to the equities and liabilities to which it was subject in the hands of the bankrupt. The Court asked the question whether, absent the bankruptcy, the bankrupt could have made application under s.14 TLATA. If he could, then so could his trustee in bankruptcy and (because of the supervening bankruptcy) s335A IA would apply.

The judge concluded that the rights conferred upon Mrs Avis were always in fact subject to the rights of the other person interested in the property (Mr Avis or his Trustee) to apply for an order for sale. The Court considered whether its jurisdiction to make a possession and sale order was fettered in any way by the existence of the matrimonial order and ruled that unless the property adjustment order had some special force going beyond the agreement of the parties in the order, any argument based on s. 283(5) IA (restrictions on proceedings and remedies) must fail.

Ultimately there was no escaping the conclusion that Mr Avis had always had standing to apply to court for sale notwithstanding the terms of the matrimonial order. The fact that he might have faced short shrift if he had so applied was neither here nor there for the purposes of confirming that the Court had jurisdiction to entertain his trustee's application. It followed that the Court had jurisdiction and that the exercise of that jurisdiction (again because of the supervening bankruptcy) fell to be performed in accordance with s.335A IA. Consequently the interests of bankruptcy creditors would outweigh all other considerations unless the circumstances were exceptional within the meaning of s.335A IA.

the appeal

The issue that arose on appeal to the Court of Appeal was whether, having regard to the terms of the order and the provisions of s.6(6) of the 1996 Act, it was open to a court as a matter of jurisdiction to make an order for sale of the property in the exercise of powers conferred by s.14(2)(a) of that Act. Broadly, the Court of Appeal held that it was (because s.6(6) was not strictly applicable anyway) and the High Court order was accordingly upheld.

The issue of the existence or otherwise of exceptional circumstances sufficient to displace the statutory presumption in favour of the creditors, having regard to the terms of the matrimonial order is still to be considered and adjudicated upon at a separate hearing. No doubt the battle lines will be redrawn when that hearing takes place.

implications for insolvency practitioners

These decisions will inevitably have a particular significance for those involved with ancillary relief proceedings but, at the same time, they will potentially result in the re-examination of existing matters by insolvency practitioners given that old assumptions will have to be challenged.

It will now be appropriate for trustees in bankruptcy (and for that matter IVA nominees) to investigate the results of ancillary relief and whether there are additional assets or funds which would or ought to be available to the insolvent estate.

Finally, whilst eyes will no doubt turn to the Court of Appeal's anticipated decision in Hill -v- Haines, the authors believe that Avis -v- Turner has perhaps not been accorded the significance it deserves. If the Haines appeal is upheld, recent matrimonial settlements involving property adjustment orders (although arguably not lump sum orders) will be (or more properly remain) in jeopardy. By contrast, the reach of the Avis -v- Turner decision takes in settlements which may be decades old and where trustees are now likely to be advised to commence proceedings for possession and sale, having previously thought that the property was not yet realisable.

One consequence of this redrawing of the bankruptcy and matrimonial property landscape will, in the authors' view, be that many more exceptional circumstances defences will be raised, which in turn will lead to the further development of the human rights-related caselaw summarised in our news item dated 04.12.06.

Further information on the Hill -v- Haines appeal will appear here in due course.

STOP PRESS: readers should be aware that Judge Pelling's decision in Hill -v- Haines was overturned in the Court of Appeal on 05.12.2007. Comment on the basis of the Court of Appeal's conclusions will appear on our news pages soon. In the meantime, the full text of the judgment can be found at: http://www.bailii.org/ew/cases/EWCA/Civ/20
07/1284.html

STOP PRESS 2: Click here to see the updated article on this topic.

For more information on this topic, please contact Rachel Dannan or Mike Pavitt of Blake Lapthorn’ Insolvency and Business Recovery team.