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Trustee must show fraud or collusion to set aside divorce settlement

7 December 2007

Only where a trustee in bankruptcy can show fraud or collusion on the part of divorcing spouses can a property adjustment order made in contested proceedings be set aside as a transaction at an undervalue. This is the result of a Court of Appeal judgment this week.

Section 339 of the Insolvency Act 1986 ("the Act") allows a trustee in bankruptcy to challenge and set aside the transfer of property by a bankrupt made previously to his or her former spouse if that transfer was made at an undervalue. How to establish undervalue, however, has been the subject of debate in the courts. The Act requires that in order for the transaction to be deemed an undervalue there had to have been either no consideration provided by the recipient, or any consideration that was given must have been significantly less than the value of the property transferred "in money or moneys worth".

In Haines v Hill and Another [2007] EWCA (Civ) 1284 the lower court had allowed the trustee to set aside the transfer of a husbands interest in the matrimonial home as being a transaction at an undervalue. The transfer had been ordered as part of a property adjustment made by the matrimonial court. The High Court judge took the view that when the wife gave up her claim for ancillary relief on the making of the property adjustment this did not amount to consideration. While foregoing a legal claim could constitute consideration, matrimonial settlements were not the same as other types of claim. This was because no legally enforceable contract was created if a settlement was agreed. If a party to a divorce compromise had to go to the court to convert the agreement into a court order, the court would not automatically give effect to it. Neither was consideration given if the matter was settled by court order, rather than by agreement. (See our June bulletin Divorce settlement no bar to creditors).

The Court of Appeal disagreed with the High Courts reasoning. It was wrong to liken the position of the wife to a "purchaser" - a word used in previous insolvency legislation but not in this context in the Act. The economic reality is that the matrimonial court quantifies the value of the parties statutory rights, equating the value of the petitioning spouses statutory right to relief against the value of the property ordered to be transferred to him or her.

If "fraud, mistake or misrepresentation" is established, the Court of Appeal said, this balance would not be considered to be a true one and the transaction may be liable to be set aside. On the facts the wife had given consideration. The transaction could not be set aside, therefore, and the Court of Appeal allowed her appeal.

As the Court of Appeal recognised, there is always a tension between matrimonial law and insolvency law, with creditors and family competing for the same pot. Matrimonial legislation provides that a transfer or settlement can still be challenged by the trustee in bankruptcy as a transaction at an undervalue even though it had to be made in order to comply with a property adjustment order made by the matrimonial court. However, the Haines judgment confines this to cases of fraud, collusion, mistake, misrepresentation and where the spouse has failed to make full and frank disclosure. It is not easy to show mistake or misrepresentation and, as anyone who has attempted to bring a claim under section 423 of the Act (transaction defrauding creditors) will know, it is extremely difficult to establish evidence of fraud or collusion. So in practice the opportunity for a trustee to increase the funds available to creditors by setting aside divorce settlements must be few and far between unless this decision is reversed by the House of Lords.

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