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Property Law - Trustee in bankruptcy cannot frustrate Family Court order

By : Philippa Harris

The recent Court of Appeal decision in the case of Haines v Hill and another [2007] EWCA Civ 1284 revisits the principles to be followed by the courts when considering creditors’ claims that property has been sold at an undervalue.

The parties, Mrs Haines (‘Wife’) and Mr Hill (‘Husband’), were joint legal and beneficial owners of a property called Strudges Farm, Worcestershire (the ‘Property’). On 25 April 2003, the Wife petitioned for divorce and commenced matrimonial ancillary relief proceedings. After a contested hearing in Worcester County Court, the Husband was ordered to convey his interest in the Property to the Wife. A short time later, on March 31 2005, a bankruptcy order was made against the Husband on his own petition and in December 2006, the trustees in bankruptcy applied to the court to set aside the order for the transfer of the Property in the ancillary relief proceedings under section 339 (3) of the Insolvency Act 1986.

Section 339 states that where an individual is adjudged to be bankrupt and has entered into a transaction with any person at an undervalue (i.e. a gift or transaction on terms that provide for no consideration or consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual) the trustee of the bankrupt’s estate can apply for ‘such an order it thinks fit to restore the position to what it would have been had the individual not entered into that transaction’.
 
The trustees’ case was that the transfer of the Property did not involve the Wife giving any consideration and certainly not such that could be measured as money or money’s worth within the meaning of section 339(3) and thus it was a transaction at an undervalue. The district judge at first instance dismissed the application, whereupon the trustees appealed to the High Court. The Wife submitted that she had provided consideration equivalent to the value of the property transferred relying on (In Re Abbott (A Bankrupt) (1983) Ch.45) and (In Re Kumar (A Bankrupt) (1993) I WLR 224) which established the proposition that a transfer or settlement made pursuant to a compromise of ancillary relief proceedings was supported by consideration to prevent an order under section 339 being made. However, the High Court ruled that the Wife could not argue that she had given consideration by purportedly compromising her claim for ancillary relief because such relief is discretionary and a claim for ancillary relief is not a cause of action. The appeal was upheld and the transfer of the Property set aside in favour of the trustees.
 
The Wife appealed to the Court of Appeal. The Court concluded that an order made in ancillary relief proceedings to convey property, in the absence of fraud and collusion, was not a transaction without consideration for the purpose of section 339(a). Section 339 was inapplicable because the Wife did give consideration. The consideration provided by the Wife was in money or money’s worth not less than the value of the consideration provided by the bankrupt. Therefore, the appeal was allowed.
 
The conclusion reached by the Court of Appeal was that between the systems of insolvency and ancillary relief law there needed to be a fair balance which protected creditors against collusive orders and orders justly made to protect the applicant and any children of the family. As a matter of policy it would be very unfortunate if the court approved that property orders could be reversed for up to five years later because the husband (or wife) became bankrupt within that period. It would also be contrary to the concept of a clean break in ancillary relief proceedings, if the husband’s creditors could seek to recover, in bankruptcy, the property transferred or its value. Such a position would require an overthrow of long established jurisprudence, a reinterpretation of section 339 and misunderstanding of the doctrine of consideration. The case may yet be appealed to the House of Lords which may have to consider these issues further but until then trustees in bankruptcy may be very reluctant to bear the litigation risk in pursuing claims under section 339 in all but the most blatant of cases.