Property Adjustment Orders and the Trustee in Bankruptcy
As practitioners will be aware, the financial settlement in divorce will often include a ‘property adjustment order’ usually either the transfer of a property to one party with the payment of a lump sum to the other or the sale of a property and division of the proceeds.
After the financial settlement is reached and the order approved difficulties can then arise where one party is made bankrupt. Trustees in bankruptcy often seek to challenge property adjustment orders, to enable them to recover value from assets to pay, at least in part, the creditors of the bankrupt and their own fees. Striking the correct balance is crucial to protect on one side, the creditors against collusive orders, and on the other, the family of the bankrupt. This article looks at how that balance is achieved.
The Insolvency Act 1986 (IA 1986), offers the trustee three points of challenge:
S339(3) IA 1986 – transactions at an undervalue, where an individual has made a gift to a person or enters into a transaction for no consideration, or for significantly less consideration that the true value of the transaction
S340 IA 1986 – preference, where the individual does anything or suffers anything to be done which has the effect of putting one creditor in a better position than the others in the event of the individual’s bankruptcy
S423 IA 1986 – transactions at an undervalue, as above, but where there is an intention to defraud creditors.
Following matrimonial proceedings challenges are often made where one party is believed to have done significantly better than the other. In investigating this, the trustee in bankruptcy has the right to see the bankrupt’s divorce file which could indicate if there has been any fraud/collusion. Two key cases deal with this situation:
The divorce court made an order that the husband transfer his beneficial interest in the matrimonial home to the wife. The order for transfer became effective 7 days after decree absolute was granted. Subsequently a bankruptcy order was made against the husband on his own petition. The matrimonial home was later sold providing £120,000 in respect of the husbands share.
The husband’s trustees in bankruptcy applied to the court for a declaration that the transfer of the beneficial interest was a transaction at an undervalue and as such was void as against the trustees. The district judge dismissed the application, holding that there had been consideration, namely the satisfaction of the wife’s claims for ancillary relief, and did not fall within section 339 IA 1986.
On appeal, that decision was overturned, and subsequently the wife appealed. The Court of Appeal clarified that when a property adjustment order has been made:
if the order has been made; and
an element of consideration passes under it; and
the decree absolute has been made; and
there is no dishonest collusion,
the order is highly unlikely to be successfully challenged. The decision of the district judge was upheld.
The conditions above must be satisfied in order to protect against a bankruptcy petition. If not, an intervening bankruptcy petition will defeat that transaction and the bankrupt’s share of the property will vest with the trustee in bankruptcy.
Ball v Jones  2 FLR 1969
Here the court considered the issue of dishonest collusion. In ancillary relief proceedings the husband and wife agreed, after protracted negotiations, to the making of a consent order under which the husband, who had been unwell with cancer, received 90% of the joint assets, enabling him to stay in the matrimonial home with the three children. It later emerged that the wife had overstated her income, understated her debts, and was probably insolvent at the time the order was made. She also went against the advice of her solicitors in accepting the terms of the order.
A year later, the Inland Revenue presented a bankruptcy petition against the wife, and a bankruptcy order was made shortly afterwards. The trustee in bankruptcy then sought to avoid the effect of the consent order arguing that it amounted to a transaction at an undervalue. He stated that the fact the wife had been acting contrary to her legal advice and may have misled the court concerning her financial position amounted to collusion, with the effect of preferring the husband and the children over the wife’s other creditors.
The trustees application was dismissed. The court held that the consent order could not be considered collusive. The scenario envisaged by Haines v Hill was one where the husband and wife reached an agreement specifically to avoid the creditors by seeking to put such assets beyond the reach of trustees. Although the assets had been put beyond the reach of the trustees, this was the collateral effect of a commonplace order in family proceedings.
The court had been in possession of all the facts, including the existence of creditors, when it sanctioned the order. Neither the court nor the husband were misled into making the order, and given the illness of the husband and his position as primary carer, the order was manifestly fair. The court therefore held there had been no transaction at an undervalue.
In s39 of the Matrimonial Causes Act 1973, it is specifically stated that a matrimonial consent order may be set aside if it is a transaction at an undervalue within the meaning of s339 IA 1986. There is no additional requirement for fraud. It appears following this case that fraud is a requirement, and the test is now under s423 IA 1986. This decision is therefore likely to be considered further.
Ball v Jones has cemented the Hill v Haines approach that a pre-bankruptcy property adjustment order, made in the context of ancillary relief proceedings is not susceptible to successful challenge by a trustee in bankruptcy. It is neither a voidable preference or a transaction at an undervalue, except where the order was procured through some form of mistake, concealment, misrepresentation or dishonest collusion.
Clients should be made aware of the impact that the possibility of bankruptcy can have on their possible claims and settlement, and advised that in a situation where insolvency is a possibility, a consent order, if sealed by the court with decree absolute obtained, should protect the non-bankrupt spouse if they are the recipient of a property adjustment order, provided the consideration point has been satisfied and there is no fraud.
Reviewed in 2015