Partner Article

Transfer of Property before Divorce - The position on Insolvency

With Watson Burton LLP Law Firm

A judgment given on May 3 2007 in Hill & Bangham -v- Haines (2007) EWHC 1012 (Ch) has changed the position of Trustees in Bankruptcy in pursuing transaction at undervalue claims where an interest in property is transferred during divorce proceedings and the spouse subsequently becomes bankrupt. At one time, the Trustee in Bankruptcy had very considerable difficulties in pursuing this type of claim. However, this is no longer the case.

Mr and Mrs Haines were married and joint legal and beneficial owners of a property known as Strudges Farm located in Worcestershire (“the Property”). In April 2003, Mrs Haines petitioned for divorce then commenced ancillary relief proceedings for property adjustment, lump sum and maintenance orders. The Matrimonial Court ordered Mr Haines to transfer his interest in the Property to Mrs Haines (“the property adjustment order”).

On 31 March 2005, Mr Haines was made bankrupt on the basis of his own petition. The Appellants in this action were the Trustees who estimated Mr Haines’ liabilities at approximately £132,000. The transfer was executed and the property was then sold, with half of the net proceeds of sale being retained until the outcome of the appeal.

An original application by the Trustees was dismissed by the District Judge. Their case on appeal was that the property adjustment order made did not involve the wife giving consideration at all or consideration was significantly less than the value of the Property transferred. They submitted that on this basis, therefore, the transfer was a transaction at an undervalue in accordance with Section 339(3)(a) or (c) Insolvency Act 1986 and upon their application, the Court had no discretion other than as to make an order to achieve the purpose of restoring the position as if Mr Haines had not entered into the transaction.

Mrs Haines’ case was that a transfer made pursuant to such an order is regarded as having given consideration equal to the value of the property being transferred.

Judge Pelling QC rejected Mrs Haines’ submissions and allowed the appeal, holding that where an interest in property was transferred under a property adjustment order in matrimonial proceedings and the spouse was later made bankrupt, the Trustees could apply to the Court to have the transfer set aside as a transaction at an undervalue. The creditors were therefore able to look to Mrs Haines to seek discharge of her ex-husband’s debts from the property (the home and a Mercedes) transferred to her.

This judgment was recently approved in the Segal v Pasram (2007) where it was held that claims for ancillary relief could not be given consideration and that the amount paid by the bankrupt in respect of his interest in the property was significantly less than the value in money or money’s worth.

This leaves property transfers made up to five years prior to the bankruptcy of a spouse wide open to attack and divorcees benefiting from these orders or transfers are left at risk.

If you have any queries relating to this article, or any other Insolvency matter, please contact Sara Stanwix at Watson Burton LLP on 0191 244 4225 or email sara.stanwix@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .