UK: Personal Insolvency – Bankruptcy

Last Updated: 2 August 2007
Article by Nicholas Pike

S.335A Insolvency Act 1986

Foyle & Foyle v Turner (2007)

Unreported

The trustee in bankruptcy of Mr Foyle applied for an order for possession and sale of the matrimonial home, which was jointly owned by Mr and Mrs Foyle. The trustee’s application was made some 13 years after the bankruptcy order, at which time there was no equity in the property. Since the order was made, house price inflation had created significant equity.

Mr and Mrs Foyle appealed against the decision on the basis that the decision contravened Articles 6 and 8 of the European Convention of Human Rights ("ECHR") (right to a fair and expeditious hearing and right to respect for home and family life). The court considered whether the 13 year delay was an "exceptional circumstance" within section 335A of the Insolvency Act 1986 and whether this would be sufficient to rebut the statutory presumption in favour of creditors.

It was held that there was no violation of Article 6 as the administration of a bankrupt’s estate was not a process which resulted in the determination of the civil rights and obligations of the bankrupt.

In considering Article 8, the judge referred to the balancing exercise required of the court under section 335A IA 1986. The only circumstance relied upon by Mr and Mrs Foyle was the 13 year delay. It was held that "exceptional circumstance" required something out of the ordinary run of events and a bankrupt could not resist realisation of his estate to pay the debts of his bankruptcy simply because the creditors may not have pressed for payment since the bankruptcy order was made. Therefore, this was not an exceptional circumstance sufficient to deprive creditors of the presumption in favour of realisation of the property to pay their claims.

Nicholls v Lan

(2006) EWHC 1255 Ch

Mr Nicholls, a former solicitor, was made bankrupt on 1 September 1995. At the date of the bankruptcy order, Mr Nicholls and his wife were joint owners of a property. A trustee in bankruptcy was appointed on 19 May 2003. The trustee made an application for possession and sale of the property on 2 August 2004 under section 14 of the Trusts of Land and Appointment of Trustees Act 1996. and section 335A of the Insolvency Act 1986

At the hearing of the trustee’s application, the District Judge found that there were "exceptional circumstances", on the basis of psychiatric reports on Mrs Nicholls. The assumption in favour of the interests of the bankrupt’s creditors was disapplied and the judge was required to consider what was "just and reasonable" having regard to the matters in section 335A(2). This required a balancing exercise taking into account the interests of creditors and the needs of someone like Mrs Nicholls. In the circumstances, the court made an order for possession and sale of the property (suspended for 18 months).

Mrs Nicholls appealed against the order. It was submitted on her behalf that the District Judge had given too much weight to the interests of the bankrupt’s creditors as there was no evidence as to the creditors’ identity or the amount of their individual debts.

The appeal was dismissed as the court held that the District Judge had not committed any error which would allow an appellate court to interfere with his discretion as to what was just and reasonable for the purposes of section 335A.

It was held that although the interests of the bankrupt’s spouse had to be balanced, each had a different character and quality. Creditors clearly want to get paid as soon as possible. The judge commented that in view of the normal approach of the Court to the interests of the creditors, the trustee does not need to give much positive evidence as to their interests. In particular, creditors’ interests are not to be dismissed as having no weight where there is little or no evidence of their concerns. The fact that the trustee has made the application reflects his view that it is in the creditors’ interests that there be an order for sale.

The judge also commented, however, that it may be open to a party resisting an order for sale to investigate the circumstances of creditors with a view to persuading the court to give less than the conventional weight to the interests of creditors.

Vivienne Joan Avis v (1) Charles Hamilton Turner (2) Edmund Charles Avis

Unreported 15 November 2006 ChD

A matrimonial consent order or "Martin Order" was executed between Mrs Avis and Mr Avis under which Mrs Avis had a right of exclusive occupation of the matrimonial home until remarriage, cohabitation or death. Mr Avis was subsequently made bankrupt and Mr Turner was appointed as trustee.

The trustee applied for possession and sale under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 ("TLATA"). Where a trustee makes this type of application, section 335A of the Insolvency Act 1986 sets out the principles to be applied.

The court considered the distinction between the application of sections 335A and 336 IA 1986 and TLATA. The District Judge had held that the bankrupt’s interest in the property vested in the trustee free from any rights asserted by Mrs Avis and granted an order for possession and sale (subject to the outstanding question of exceptional circumstances).

Mrs Avis appealed this decision and argued that the trustee’s interest was fettered pursuant to section 283 IA 1986 and he was therefore prevented from obtaining an order for possession and sale until one of the triggering events in the Martin Order had occurred.

The court held that sections 14 and 15 of TLATA had the effect that whilst it is open to co-owners to agree the postponement of sale and who is to occupy the property, the terms upon which the co-owners agree are not indisputable. Where one co-owner wishes to vary the terms of such agreement, they can apply to the court under section 14 of TLATA. Any such agreement may be varied or discharged by the court pursuant to section 15 of TLATA. If this were not the case, the effects of TLATA and section 335A could be avoided in all co-ownership cases by the coowners expressly agreeing the circumstances in which a sale was to take place.

In this case the consent order and agreement to postpone the sale did not give rise to any absolute rights; therefore there was no conflict between section 283(5) and 335A IA 1986.

Comment

These three cases show that the insolvency courts are taking a tougher stance in favour of creditors’ interests when determining whether or not matrimonial home should be sold to pay creditors’ claims. Note also the swift rejection of an appeal on human rights grounds in Foyle and Foyle v Turner.

Transactions At Undervalue

Hill and Bangham v Haines

[2007] EWHC 1012 Ch

The bankrupt and his wife, Mrs Haines, were engaged in matrimonial litigation. After a contested hearing Mrs Haines obtained a property adjustment order from the matrimonial court that the bankrupt transfer to her all of his interest in the former matrimonial property. It was clear that the bankrupt was hopelessly insolvent, something which the matrimonial court recognised.

The trustees in bankruptcy contended that the property adjustment order made by the matrimonial court amounted, in effect, to a transaction at an undervalue, because the wife had provided no consideration for the receipt of the bankrupt’s share of the property. The wife argued that the giving up of her right to pursue the bankrupt once the order was made amounted to proper consideration.

The court reasoned that a claim for ancillary relief (such as the property adjustment order obtained by Mrs Haines) because of its discretionary nature is not a cause of action. As no cause of action exists to be compromised, the wife could not give consideration by seeking to compromise her claims for that relief in a settlement that, by definition, is not binding. The settlement only becomes binding when the court incorporates it into an order. Whether this is by way of consent order or on order made after a contested hearing makes no difference to a trustee in bankruptcy’s ability to seek to set the transaction aside as a transaction at an undervalue.

The court said that the test to determine whether or not a transaction was at an undervalue was whether or not it was for no consideration at all under Section 339(3)(a) of the Insolvency Act 1986 and/or whether under Section 339(3)(c), the transaction is for a consideration "the value of which is significantly less than the value of the consideration provided by the individual in money or money’s worth". Mrs Haines had provided no consideration in money or money’s worth. The court was satisfied that any order made in a contested matrimonial action was a "transaction" by the bankrupt for the purposes of Section 339 of The Insolvency Act. Indeed, Section 39 of the Matrimonial Causes Act provides that it can be.

Comment

The battle between the insolvency courts and matrimonial courts has continued. Until now, whilst property adjustment orders made by consent have been attackable, the same has not been true of orders made after contested hearings. In this case, the court said that there is no difference between the two. This is therefore a significant new case providing ammunition for trustees seeking to upset orders made in matrimonial proceedings immediately prior to bankruptcy. Insolvency practitioners will be familiar with the fact that matrimonial breakdown often occurs around bankruptcy; this clear statement of the law indicates that property adjustment orders made by matrimonial courts are not inviolate. Practitioners should review carefully cases where transfers following matrimonial proceedings have been made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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