A nervous disposition

11 June 2021

Section 284 of the Insolvency Act 1986 (the “IA86”) deals with the restrictions on a bankrupt in dealing with their property in the period between the making (practically speaking, the presentation) of a bankruptcy application and the vesting of the estate in the trustee. This period is defined as the “Relevant Period”. If a bankruptcy order is made, any disposition of property in the Relevant Period is automatically void. Any person in receipt of disposed property is treated as holding it on trust for the benefit of the bankrupt’s estate. A disposition is void unless it had prior approval of the court and/or is retrospectively ratified (known as a validation order). There is a defence to a section 284 claim, otherwise known as “equity’s darling”, that the disposition will not be void as against property received by a third party if they are a bona fide purchaser without notice for value. In other words, they must be unaware at the time of the disposition of the existence of the bankruptcy application and deal with the bankrupt in good faith and for value.

Property will certainly include any real estate property owned by the bankrupt (i.e. his share of the matrimonial home) and any other interests (legal or equitable) such as shares in a company. It will also include cash at bank.

The principle of the rule is evident: to prevent the bankrupt, after presentation of a bankruptcy application against them, from dissipating his/her assets quickly to frustrate the bankruptcy process by reducing the available assets that would otherwise be realisable for the benefit of paying creditors.

A common issue of concern is the effect of the insolvency of one spouse on the ability of the non-bankrupt spouse to enforce orders made in their favour in family proceedings. A spouse may seek to deliberately petition for their own bankruptcy or allow a creditor petition to be made against them to avoid making any payment to their ex-spouse, preferring their assets to fall into the bankruptcy estate rather than pay a penny to their ex. An interesting dichotomy has arisen between the jurisdiction, on the one hand, of the insolvency courts and, on the other, the family courts. Insolvency courts are, understandably, principally concerned with securing the interests of all creditors, not just one. The family court will be concerned with seeing justice done and ensuring, as a matter of public policy, that proper legal effect is given to its orders.

This article explores that inherent tension, specifically, focusing on the authorities that highlight this conflict as regards both sections 283 and 284 IA86 and explores whether one court’s jurisdiction trumps the other.

Insolvency court 1 v Family court 0

The case of Re Flint is often cited as authority for the principle that where a conflict exists between the two jurisdictions, the insolvency courts will invariably prevail.

In Re Flint a consent order had been made under section 24 of the Matrimonial Causes Act 1973 (the “MCA”) in divorce proceedings ordering the husband to transfer his entire interest in the matrimonial home to the wife. However, three weeks earlier a bankruptcy petition had been made against the husband. A week after the consent order was made he was made bankrupt. On appointment, the husband’s trustee applied to set aside the consent order on the basis it was void under section 284 as a disposition of property made in the Relevant Period.

The court agreed and held that notwithstanding that the consent order had the legal effect of transferring the husband’s equitable interest in the home immediately (equity treating that which ought to be done as done) and the effect of the consent order on the couple as being compulsory in nature, this did not in any way prevent it being a disposition under section 284. Once the husband was bankrupted it was automatically voided unless ratified. Ratification was a matter for judicial discretion and there was no reason to interfere with the judge’s exercise of discretion. The wife’s appeal failed despite the insolvency court expressing “great sympathy” for her position.

The insolvency court jurisdiction trumped the family court and Re Flint remains good law.

A further example of the competing interests of the two jurisdictions continued in later years – the 1997 case of Harper v O’Reilley [1997] BPIR 656 and the 2001 Mountney v Treharne [2002] EWCA Civ 1174.

 

Insolvency court 1 v Family court 1

In Harper v O’Reilley, the marriage has been dissolved in February 1995. The matrimonial home was held in their joint names in equal shares. In May 1995 an order was made on the wife’s application for ancillary relief whereby the property was to be sold and the net proceeds of sale were to be paid to the wife. The order did not state under which section of the MCA it had been made. On 13 December 1995, before the property was sold, the husband petitioned for his own bankruptcy and a bankruptcy order was made against him the day. Thus, this was not a case to which section 284 would have applied. The wife made an application against the husband’s trustee in bankruptcy for a declaration that she was solely beneficially entitled to the matrimonial home and the husband’s beneficial interest did not fall within the definition of the bankruptcy estate under section 283 of the Act and had not automatically vested by virtue of section 306.

It was held, on its true construction, the May 1995 order had been made under sections 24(1)(c) or possibly 24(1)(d) of the MCA such that the effect of the May 1995 order was to vary, immediately, the pre-existing beneficial interests in the home by a post-nuptial settlement. The wife was entitled to the whole property and it did not vest.

 

Insolvency court 1 v Family court 2

The later 2002 Court of Appeal case of Mountney v Treharne (No 2) concerned another divorce case. Here the husband was the sole owner of the matrimonial home and had been ordered by the family court to transfer his entire interest in it to the wife forthwith under section 24(1)(a) of the MCA (a property adjustment order). In the event of his failure to do so the order provided that within 14 days of the order the family court could affect the transfer on his behalf. A decree absolute was granted 7 days later. The next day, the husband, rather than give effect to the order, before expiry of the 14 days, petitioned for his own bankruptcy and was declared bankrupt the same day. Again, this was therefore not a case that fell in the remit of section 284 IA86. There was a large deficit in his estate with the matrimonial home being the sole asset available for creditors.

At first instance and the first appeal to the High Court, the courts rejected the wife’s assertion that the bankruptcy had been an abuse of process and that the property was subject to a constructive trust in her favour which bound the trustee. At the commencement of the bankruptcy, the home remained vested in the sole name of the bankrupt as the order had not been given effect and therefore passed automatically to the trustee. There was no constructive trust and it was unnecessary to determine that question in any event as the property adjustment order only gave rise to personal rights, not proprietary rights, and were therefore not enforceable against the trustee under section 283(5) IA86. Had the husband complied “forthwith” with the order and still been later made bankrupt, the order would have created proprietary rights for the wife enforceable against the trustee. Sadly that was not the case here. The court also rejected that Article 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms was triggered as that right was, in any event, not absolute but was qualified by the competing rights of creditors.

On appeal to the Court of Appeal, however, the wife was successful. The court held that the property adjustment order did have the effect of conferring on the wife an equitable interest in the property on the making of the decree absolute, being the moment when the order took effect. The court approved the principle in Re Flint that “equity looks on that as done which ought to be done”.  The husband’s equitable interest had therefore transferred to the wife prior to bankruptcy. Accordingly, the effect of the decree absolute and the earlier property adjustment order was to create immediate proprietary rights in her favour enforceable by her against the trustee pursuant to section 283(5) IA86. The court upheld the previous decisions that there was no question of a constructive trust.

 

Insolvency court 2 v Family court 2

By 2003, in the case of Treharne and Sands v Forrester [2004] EWHC 2784 (Ch) the insolvency courts triumphed once again.

In February 2002, the Secretary of State for Trade and Industry presented a bankruptcy petition against the husband in respect of a debt of some £5m owed by him to the Inland Revenue. The  family court, in divorce proceedings, made property adjustment orders under section 24 MCA on 3 May and 28 May 2002, the husband’s interest in the family home and other assets being ordered to be transferred to the wife. A bankruptcy order was then made against the husband in July 2002.

The trustee subsequently brought an application under section 284 that the May orders were void dispositions. The wife argued that the orders were not “made by” the husband but by the court and therefore fell outside the remit of section 284.

The court considered the earlier cases of Re Flint and Mountney v Treharne and dismissed the wife’s defence. The court held that the property adjustment orders of May 2002 could not have been “made by” the court under the principle of 'nemo dat quod non habet' (no one gives what they do not have) nor could the disposition be attributable to no person.  It followed that the disposition of property had been effected by the husband and, accordingly, the property adjustment orders were void under s 284.

 

Insolvency court 3 v Family court 2

Fast forward a few years to 2010 and the case of Warwick v Trustee in Bankruptcy of Yarwood [2010] EWHC 2272 (Ch) and the issue of the effect of section 284 on family court proceedings arose yet again. The primacy of the insolvency courts triumphed.

In Warwick the wife appealed against an order of the county court that a payment to her of 75% of the net proceeds of the sale of the family home was void under section 284. The payment had been made on 26 March 2007 but a bankruptcy petition had been presented 6 days earlier against the husband on 20 March 2007. The bankruptcy order was not made until 13 September 2007.

The wife alleged that there had not been a disposition in the Relevant Period. The disposition occurred before the presentation of the petition on 20 March 2007 and therefore fell outside section 284’s effects. She argued the disposition had occurred either (a) pursuant to an agreement reached between solicitors in compromise of ancillary relief proceedings on 28 September 2006, the contention being that this amounted to a legally enforceable contract for immediate transfer to her of an additional 25% of the beneficial interest in the property (i.e. 75% in total taking into account her 50% share) or was otherwise sufficient to give rise to a constructive trust to the same effect, or to give rise to a proprietary estoppel, or (b) the exchange of contracts for sale of the property on 19 March 2007, the day before presentation of the petition, on the basis of instructions given by the husband to the solicitor dealing with the sale that the proceeds on completion were to be paid as to 75% to the wife. This too is said to give rise to a constructive trust or proprietary estoppel.

The court rejected both arguments. On the facts of the case, the court held there had never been any binding settlement contract or agreement between the wife and husband. This meant there could therefore be no question of a constructive trust or proprietary estoppel arising prior to the bankruptcy petition, the usual rules for contract formation had not been met; there being no agreement on all the terms prior to 28 September 2006. The terms of the sale contract also did also not assist her. On a true construction, it did not have an effect to transfer an immediate beneficial interest in the property to her but was an arrangement to pay an amount of money. The fact there was an order for sale did not itself imply that an interest in property was being transferred. The court accordingly found that the payment was caught by section 284 and was void.

 

Commentary

The authorities cited above, and the many more that have followed but which are not dealt with in this article, demonstrate that if there is a “winner” between the two jurisdictions that, invariably, the insolvency courts have prevailed. This certainly appears to be the case where, on the facts, the provision of section 284 IA86 is triggered rendering any disposition of property made under a family court order or proceedings void. Where the family court has prevailed has been in cases falling outside the remit of section 284, notably, engaging section 283 and the definition of the bankruptcy estate. Whilst these cases lean slightly more favourably in favour of the family court one thing that is clear is that the conflict between the two jurisdictions will continue to raise questions and issues and will not be solved any time soon. Jurisdiction battle aside, there will always be a “loser” here; whether that’s the non-bankrupt spouse (inequitably the majority of time the wife) losing out to the trustee or the bankrupt’s creditors when the non-bankrupt spouse wins.

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