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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 moneys 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.

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