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Divorce settlement no bar to creditors
11 June 2007
Debtors cannot escape creditors by using the divorce laws to
transfer assets. In a recent case the High Court set aside a court
order for the transfer of property from a husband to his wife
following their divorce, on the basis that it was a transaction at
an undervalue. It used to be thought that only agreed divorce
settlements could be challenged but, in Hill and Another v
Haines [2007] EWHC 1012, a Chancery judge ruled that no
distinction should be drawn between the situation where a bankrupt
husband consents to a property transfer on divorce and one where he
is ordered by the matrimonial court to transfer the property. In
both cases the trustee in bankruptcy could attack the transaction
if no proper consideration changed hands.
In Hill the wife, Mrs Haines,
petitioned for divorce and claimed ancillary relief. The court
ordered the husband to transfer his interest in their £500,000
Worcestershire home. Subsequently Mr Haines petitioned for
bankruptcy and some months afterwards a district judge executed a
transfer of the property on his behalf. The trustees in bankruptcy
tried to set the transaction aside on the grounds that the wife had
failed to give any, or any sufficient, consideration for the
transfer within the meaning of sections 339 and 399 of the
Insolvency Act 1986 but the court rejected this at first
instance.
The trustees appealed successfully. In
reaching its decision the court considered a case decided on
similar provisions in the Bankruptcy Act 1941. In the 1983 case of
re Abbott [1983] 1 Ch 45 the trustee in bankruptcy was
blocked from challenging the transfer of the matrimonial home
because, the court held, the wife was a purchaser for valuable
consideration as she had given up her legal right to pursue her
claim under family law in return for the house. The judge in
Hill distinguished that case though. First, the language
of the 1941 Act was quite different to that of the Insolvency Act
1986. Second, the court in re Abbott was wrong to conclude
that foregoing an ancillary relief claim amounted to giving
consideration. Subsequent court decisions had made it clear that
the consideration given by the transferee had to be measurable in
monetary terms, or in "money or money's worth", such that there
could be a comparison between the value obtained by the transferee
and the value given by the transferor.
The judge in Hill considered that
matrimonial settlements were not the same as other types of claim.
There was no legally enforceable contract created because in the
event that a party to the compromise had to go to the court to
convert the agreement into a court order, the court would not give
effect to the bargain automatically. Rather, the court would have
to carry out an independent assessment of the agreement under
matrimonial law. The judge concluded that the wife had not given
consideration for the transfer and it was therefore vulnerable to
challenge by the trustees. In the circumstances it upheld the
trustees' appeal.
Office holders will welcome this decision, as
clearly the ability to challenge matrimonial settlements is a
useful tool to increase the assets available to creditors.
For more information or advice, please contact Dominic or Vicki.
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