Do you own property jointly with someone else -- your girlfriend/boyfriend, say, or your wife/husband or domestic partner? Are you concerned about what could happen to your interest in the property if you split up and your ex- is declared bankrupt? Read on...
Invariably when someone enters bankruptcy the only thing in their estate worth anything of real value is the home they live in.
In adjudicating the disposition of property in this instance, the courts have to balance two competing interests: (1) the interests of the bankrupt's ex- or still current living partner (who may wish to remain in the property); and (2) the bankrupt's creditors (who probably want the property sold to claw back the money they're owed).
This delicate balancing act surfaced comparatively recently in Hill v. Haines.
In this case, a couple separated and the court ordered the husband to transfer his interest in the matrimonial home to his wife.
Shortly afterwards, the husband was declared bankrupt, and the trustee in bankruptcy (a legal term, this simply means the person who represents the creditors' interests) applied to void the transfer under the Insolvency Act 1986.
'Transactions at an undervalue'
Section 339 of the Act allows the court to set aside transactions made by a bankrupt at an 'undervalue' -- i.e., for significantly less than the true market value of the property -- up to two years (or five years in some cases) before he/she enters bankruptcy.
The case ended up in the Court of Appeal, where the main issues presented were: (1) whether the court order instructing the husband to transfer his interest in the matrimonial home involved "consideration" (another legal term, which essentially means a bargained for exchange of value, e.g., a car sold in exchange for money); and (2) did the court have authority to void the court-ordered transfer on the basis of inadequate consideration?
On the first issue the wife pointed to incontrovertible authority that compromising a claim to financial relief, even where a compromise is imposed by court order, constitutes consideration.
On the second issue, the trustee in bankruptcy argued that the value of the property provided by the husband significantly outweighed the value of the claim compromised by the wife. In particular, the trustee highlighted that the wife's income far outstretched her husband's and that the husband's share in the home was his sole remaining capital interest.
The Court of Appeal considered this an over-simplification of the situation.
In siding with the wife, the court highlighted that during divorce proceedings the husband had been adjudged "evasive, disingenuous and ... deliberately hidden matters from his wife and/or failed to disclose what he could and should have disclosed" -- which partially explained the harshness of the order.
Another key fact was that the wife had sole responsibility for the care of the seven-year-old daughter of the marriage. Her overwhelming need, and the overwhelming priority of the court at first instance, was to help her rehouse herself and her daughter in suitable accommodation.
In conclusion, the appellate judges said the court instruction to the husband to transfer the property to the wife could only be reviewed if there was evidence of fraud, mistake, or misrepresentation. Absent evidence of such fraud, etc, their lordships said they had no option but to rule against the husband's creditors.
Visit Bailii to read the decision in full: Hill v. Haines [2007] EWCA Civ 1284.
You can also read an excellent analysis of the law in this area written by Joseph Curl in the latest subscription issue of Insolvency Intelligence: The spouse v. the creditors: a turn against creditors?
Resources:
- Insolvency Act 1986 (Legislation.gov)
- Insolvency law news (The Solicitor)
- Dealing with debt (Findlaw.co.uk)
- Bankruptcy law (Findlaw.co.uk)
- Marriage, family law and divorce (Findlaw.co.uk)
- Legal Q&A (Community)
- Find a solicitor (Contact Law)
