INSOLVENCY

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INSOLVENCY ANCILLARY RELIEF

• Paul Beevers
• Solicitor and Deputy District Judge
• Chadwick Lawrence LLP, Huddersfield

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• 2009 Q2 Creditors Petitions 4,951
• Debtors Petitions 16,139

1999 (for year) Creditors Petitions
17,496 Debtors Petitions 12,393
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Pathways to Bankruptcy

• Debtors Petition
• Inability to pay debts s.272 IA 1986
• Creditors Petition
• Debt exceeds 750
• No reasonable prospect of being able to pay
• Unsatisfied execution or Statutory Demand
• S.267 and s.268 IA 1986
• Failed IVA
• Material omissions in the proposal
• Debtor failed to comply with IVA
• Debtor has failed to comply with supervisors
  reasonable request
• S.276 IA 1986

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Practical Points

• No advance warning for solvent spouse
• Except Land Registry notice to co-owner
• Assets may be held in trust for creditors under
  an IVA - see NT Gallagher Son Ltd 2002 All ER
  (D) 369

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Consequences of Bankruptcy

• Commences when a Bankruptcy Order made s.278 IA
  1986
• Discharge after one year or earlier on report
  from Official Receiver (but may be extended on
  application from OR) s.279 IA 1986
• Discharge releases debtor from bankruptcy debts
  (but not Ancillary Relief Orders and CSA
  assessments) s.281 IA 1986
• The bankrupts property vests in the Trustee
  s.306 IA 1986

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Consequences of Bankruptcycont

• Assets which do not pass Trustee on bankruptcy
  include
• Funds in an approved pension scheme s.11 Welfare
  Reform and Pensions Act 1999 (note possible
  clawback for excessive payments into pension
  scheme under S.342A IA 1986)
• General damages for personal injuries (but not
  special damages eg. loss of earnings) Re
  Campbell (a Bankrupt) 1996 2 All ER 537
• Money held on a discretionary trust where the
  bankrupt is one of the discretionary
  beneficiaries
• The Trustee can claim property acquired or
  received by the bankrupt between bankruptcy and
  discharge s.307 IA 1986

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Consequences of Bankruptcycont

• Income payments orders (for up to three years)
  s.310 IA 1986
• Transactions at an undervalue can be set aside
  s.339 IA 1986
• An individual enters into a transaction with a
  person at an undervalue if
• he makes a gift to that person or he otherwise
  enters into a transaction with that person on
  terms that provide for him to receive no
  consideration
• he enters into a transaction with that person in
  consideration of marriage or the formation of a
  civil partnership or

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Consequences of Bankruptcycont

• he enters into a transaction with that person for
  a consideration the value of which, in money or
  moneys worth, is significantly less than the
  value, in money or moneys worth of the
  consideration provided by the individual.
  s339(3) IA 1986
• burden on spouse to show that bankrupt not
  insolvent when assets are transferred s.341 IA
  1986
• Preferences can be set aside s.340 IA 1986
• eg. bankrupt pays overdraft secured on
  matrimonial home rather than creditors

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Practical Points

• With transactions at an undervalue, the Trustee
  can go back 5 years from the date that the
  petition was issued s.341 IA 1986
• Evidence of solvency required for agreements
• The solvent spouse is not released from joint
  debts
• It may be worth deferring an application for
  ancillary relief if one of the spouses is bankrupt

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The Matrimonial Home

• The bankrupts interest passes to the Trustee
  s.306 IA 1986
• Rights of occupation under s.30 Family Law Act
  1996 continue s.336 IA 1996
• Transfer on purchase of matrimonial home is
  likely to define the Trustees share Stack -v-
  Dowden 2007 UKHL 17
• Three year time limit for Trustees realisation
  of debtors interest and if not realised, it
  reverts to bankrupt s.283A IA 1986 see also Lewis
  -v- Metropolitan Property Realisations 2009
  EWCA Civ 448

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The Matrimonial Homecont

• Application by Trustee under s.14 of Trusts of
  Land and Appointment of Trustees Act 1996
• Balancing the needs of Creditors and the
  bankrupts family
• On an application (for an order under s.14 TOLATA
  1996), the Court shall make such order as it
  thinks just and reasonable having regard to
• the interests of the bankrupts creditors
• where the application is made in respect of land
  which includes a dwelling house which is or has
  been the home of the bankrupt or the bankrupts
  spouse or civil partner or former spouse or
  former civil partner
• the conduct of the spouse, civil partner, former
  spouse or former civil partner, so far as
  contributing to the bankruptcy
• the needs and financial resources of the spouse,
  civil partner, former spouse or former civil
  partner
• the needs of any children.

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The Matrimonial Homecont

• all the circumstances of the case other than the
  needs of the bankrupt. s335 A(2) IA 1986
• Where such an application is made after the end
  of the period of one year beginning with the
  first vesting under Chapter IV of this Part of
  the bankrupts estate in a trustee, the court
  shall assume, unless the circumstances of the
  case are exceptional, that the interests of the
  bankrupts creditors outweigh all other
  considerations. s.335A(3) IA 1986
• Trustees claim to be dismissed if equity under
  1,000 s.313A IA 1986
• Trustee may ask for a Charge over matrimonial
  home in lieu of a sale s.313 IA 1986
• Payments made by a bankrupt towards a mortgage on
  his home post-bankruptcy do not give him an
  interest in the property s.338 IA 1986
• Beware an equitable account French -v- Barcham
  2008 EWHC 1505

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Practical Points

• The bankruptcy of the insolvent spouse gives you
  a year to organise a purchase of the matrimonial
  home
• Where there is little equity, the Trustee is in a
  weak position
• Agreements to shelter assets from creditors can
  be set aside
• Cases on exceptional circumstances
• Re Citro 1991 Ch 142 CA
• Re Raval 1998 BPIR 384
• Re Bremner 1999 BPIR 185
• Re Barca -v- Mears 2004 EWHC 2170 (Ch)

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Bankruptcy as a response to an Ancillary Relief
Application

• A tactic now occasionally adopted by a devious
  husband confronted with an application by his
  wife for financial relief ancillary to divorce
  proceedings is to issue proceedings for a
  bankruptcy order to be made against himself.
  Following the making of such an order and upon
  the appointment or other emergence of a trustee
  in bankruptcy, all the husbands assets vest in
  the trustee pursuant to s.306 of the Insolvency
  Act 1986 (the Act of 1986), with the result
  that the divorce court suddenly becomes disabled
  from ordering him to make capital provision for
  the wife. The wifes response to the tactic is
  often to apply in the bankruptcy proceedings for
  the bankruptcy order to be annulled and a
  convenient practice has arisen for the bankruptcy
  proceedings thereupon to be transferred to the
  court which is conducting the divorce proceedings
  so that the same judge, at the same time, can
  determine the wifes application for annulment of
  the bankruptcy order and in the light thereof,
  her application for ancillary relief. Wilson LJ
  in Paulin v- Paulin anor

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Bankruptcy as a response to an Ancillary Relief
Application

• A Bankruptcy Order can be annulled on the
  application of a spouse
• The application is made under s.282(1)(a) IA 1986
  not s.37 Matrimonial Causes Act 1973 Woodley -v-
  Woodley (No.2) 1993 1010
• The application to annul may be transferred to
  the Court dealing with the ancillary relief
  application

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Bankruptcy as a response to an Ancillary Relief
Application cont

• To prove the Bankruptcy Order ought not to have
  been made (to the civil standard), you must show
  that when the Bankruptcy Order was made the
  bankrupt was able to pay his debts Paulin -v-
  Paulin anor 2009 EWCA Civ 221
• Presumptions may be made against a bankrupt who
  fails to give a candid account
• If there is balance sheet solvency the bankrupt
  has to establish commercial insolvency
• If the bankrupt is unable to pay his debts, abuse
  of process arguments are unlikely to be
  successful Whig -v- Whig 2007 EWHC 1856

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Practical Points

• It may be easier to deal with a Trustee
• Dont rush into an application to annul the
  burden of proof is on you

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Bankruptcy after an Ancillary Relief Order

• Timing has the Ancillary Relief Order taken
  effect when the Bankruptcy Order was made?
• Is the lump sum a bankruptcy debt?
• Yes (s.382 IA 1986) but the debt is not released
  on discharge (s.281 IA 1986)
• Is the Transfer of Property Order a transaction
  at an under value?

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Bankruptcy after an Ancillary Relief Order

• An individual enters into a transaction with a
  person at an undervalue if
• he makes a gift to that person or he otherwise
  enters into a transaction with that person on
  terms that provide for him to receive no
  consideration
• he enters into a transaction with that person in
  consideration of marriage or the formation of a
  civil partnership or
• he enters into a transaction with that person for
  a consideration the value of which, in money or
  moneys worth, is significantly less than the
  value, in money or moneys worth of the
  consideration provided by the individual.
  s339(3) IA 1986

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Bankruptcy after an Ancillary Relief Order cont

• The fact that a settlement or transfer of
  property had to be made in order to comply with a
  property adjustment order shall not prevent that
  settlement or transfer from being a transfer in
  respect of which an order may be made under s.339
  or 340 of the Insolvency Act 1986 (transactions
  at an undervalue and preferences). s.39
  Matrimonial Causes Act 1973
• Haines -v- Hill and anor 2007 EWCA Civ 1284
• In the ordinary case a transferee under a
  transfer made pursuant to a property transfer
  order is to be regarded as having given
  consideration (in the sense that word is to be
  understood in this context) equivalent to the
  value of the property being transferred, unless
  the case is an exceptional one where it can be
  demonstrated that the property transfer order was
  obtained by fraud or some broadly similar
  exceptional circumstances 38

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Bankruptcy after an Ancillary Relief Order cont

• The same principles apply to a Consent Order 48
• Thorpe LJ at 48 and Rix LJ at 82 refer to
  collusion between divorcing spouses as an example
  of dishonesty or fraud (on the creditors)
• Re Jones (a bankrupt) Ball -v- Jones 2008
  2FLR 1969
• Collusion and dishonest means something more than
  an agreement which is to the disadvantage to the
  creditors. It requires a collusion to do down
  the creditors or put assets beyond the reach of
  the Trustee 64

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Bankruptcy after an Ancillary Relief Order cont

• Pasram -v- Segal 2008 EWHC 3448
• An agreement not to pursue a claim for ancillary
  relief is not sufficient consideration
• Papanicola -v- Fagan 2008 EWHC 3348
• A transfer of the husbands share of the former
  matrimonial home to the wife to avoid divorce
  proceedings was held to be valid

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Practical Points

• If there is money due under an ancillary relief
  order, the solvent spouse has a right to a
  dividend from the Trustee, but the debt is still
  payable after the bankrupt is discharged
• Orders offer better protection than agreements
• Evidence of solvency should be preserved if there
  is an agreement full disclosure required
• An order cannot be used to shelter assets if a
  spouse is insolvent

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• Chadwick Lawrence website address
• www.chadwicklawrence.co.uk