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A landmark High Court ruling this month has changed the way that
assets divided in accordance with a court order on divorce may be
later applied to repay a bankrupt ex-spouse’s debts.
Prior to the ruling in Hill and another -v- Haines, it was
generally accepted that divorce settlements ordered by matrimonial
courts were ‘untouchable’ by the trustees in bankruptcy of a
bankrupt ex-spouse. The decision in this case however turns that
view upon its head, at least in certain circumstances.
In this case, Mr and Mrs Haines jointly owned a property. Mrs
Haines commenced divorce and financial proceedings in 2003. In the
financial proceedings Mr Haines was ordered to transfer the
property to his wife. Later, in 2005, Mr Haines was declared
bankrupt. His trustees in bankruptcy, initially unsuccessfully,
applied to the court to set aside the financial court order so as
to attack the assets held by Mrs Haines to satisfy Mr Haines’
debts. They appealed against the first instance ruling and were
successful in the High Court where their appeal was allowed. In the
High Court, the trustees in bankruptcy argued that the matrimonial
court order to transfer the property to Mrs Haines constituted a
‘transaction at an undervalue’ to her. Mr Haines’ award, by
contrast to his former wife’s, had been far less. The awards were
not financially balanced. The Insolvency Act 1986 allows for
transactions at an undervalue to be set aside. Their value may then
be applied to the bankrupt’s indebtedness.
Following the High Court decision, Mrs Haines may be required to
relinquish her former husband’s ‘share’ of the house, which has
since been sold, despite the original matrimonial court order in
her favour.
The implications, for divorcing parties and insolvency
practitioners alike, are clear. Where one ex-spouse is declared
bankrupt, the trustee in bankruptcy may call upon the solvent
ex-spouse’s assets, awarded under a matrimonial court order. This
will be the position for up to five years. The impact of this case
is also retrospective. It can apply not only to divorces in the
future but also to those court orders made within the past five
years.
The decision in this case is clearly intended to prevent an
adjustment of assets on divorce aimed at frustrating a bankrupt’s
creditors. However, there is some comfort for individuals whose
former spouses have been declared bankrupt after a matrimonial
court order dealing with financial division.
Firstly, if it can be shown that the solvent ex-spouse’s award
under the matrimonial court order was balanced, in value terms,
fairly equally against their former bankrupt spouse, it is
obviously harder to argue that any transaction at an undervalue
took place. Accordingly, the order would seem less likely to be set
aside, although this point was left open by the High Court
judge.
Secondly, and very importantly, even if the ex-spouse is
demonstrably solvent at the date of the Order it can still
constitute an undervalue capable of being set aside if the
ex-spouse is bankrupted on a petition issued within two
years. If the ex-spouse is bankrupted on a petition
issued between two and five years after the Order it will be a
defence to show that the ex-spouse was solvent at the time but the
burden of proof is then on the beneficiary of the Order or
undervalue to prove that solvency.
Christine Plews, head of the Family team at Blake Lapthorn said
of the judgment “This will profoundly impact upon the advice we
will be giving to our clients where there is any possibliity of the
future bankruptcy of either spouse. It makes the importance of
obtaining legal advice early on in these cases even more
vital”.
If you wish to discuss any of these issues within the context of
family breakdown, please contact Christine Plews, head of Blake
Lapthorn’ Family team on 01865 254213 (email: christine.plews@bllaw.co.uk).
In the context of personal bankruptcy, please contact Gemma
Smith, in London on 0207 421 3515 (email: gemma.smith@bllaw.co.uk) or
Mike Pavitt on 023 8085 7028 (email mike.pavitt@bllaw.co.uk)
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