Personal Insolvency verses Matrimonial Law

Article by Ian Defty, Partner at Begbies Traynor and Insolvency Advisor at IDR.

It is fair to say that there has, for many years, been a “difference of opinion” between the law governing personal insolvency and matrimonial law with each “side” believing that they are right and should take precedence.

The principal, sometimes conflicting, legislation is covered in the Insolvency Act 1986 and the Matrimonial Causes Act 1973. However, the differing courts can and will give wide discretion when determining whether and how a married couple’s assets are to be divided.

In accordance with the Matrimonial Causes Act 1973 there is an expectation that assets accrued during the marriage should be regarded as jointly owned between the spouses and normally be divided equally between the parties, whereas assets held by one spouse or the other before the marriage should be left to that party unless there is good reason to divide them. The matrimonial home is usually always considered as a matrimonial asset to which the sharing principle applies.

In personal insolvency the overriding principle is to see that the creditors as a whole get dealt with fairly and in accordance with insolvency law which may often seem to go against matrimonial law which seeks to ensure that a spouse and maybe children are dealt with first and foremost.

In general terms, all property belonging to or vested in the bankrupt at the commencement of the bankruptcy forms part of the bankruptcy estate and will vest automatically in the trustee in bankruptcy immediately upon their appointment. On the face of it, this may appear unhelpful to the bankrupt’s spouse, especially if they are divorcing.

Section 306 of the Insolvency Act 1986 sets out that the bankrupt’s estate shall vest in the trustee immediately on their appointment taking effect or, in the case of the official receiver, on his becoming trustee.

The Insolvency Act 1986 goes on to set out the relevant insolvency legislation regarding what defines a bankrupt’s affairs (S.283) and the restrictions on dispositions of property (S.284).

Section 283 defines a bankrupt’s estate as;-

  • all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and
  • any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling with the preceding paragraph.

Section 284 sets out the restrictions on dispositions of property as follows; –

  • Where a person is made bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court or is or was subsequently ratified by the court.
  • Subsection (1) applies to a payment (whether in cash or otherwise) as it applies to a disposition of property and, accordingly, where any payment is void by virtue of that subsection, the person paid shall hold the sum paid for the bankrupt as part of his estate.
  • This section applies to the period beginning with the day of the making of the bankruptcy application or (as the case may be) the presentation of the bankruptcy petition] and ending with the vesting, under Chapter IV of this Part, of the bankrupt’s estate in a trustee.
  • The preceding provisions of this section do not give a remedy against any person-
    1. in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the bankruptcy application had been made or (as the case may be) that the bankruptcy] petition had been presented, or
    2. in respect of any interest in property which derives from an interest in respect of which there is, by virtue of this subsection, no remedy.
  • Where after the commencement of his bankruptcy the bankrupt has incurred a debt to a banker or other person by reason of the making of a payment which is void under this section, that debt is deemed for the purposes of any of this Group of Parts to have been incurred before the commencement of the bankruptcy unless—
    1. that banker or person had notice of the bankruptcy before the debt was incurred, or
    2. it is not reasonably practicable for the amount of the payment to be recovered from the person to whom it was made.
  • A disposition of property is void under this section notwithstanding that the property is not or, as the case may be, would not be comprised in the bankrupt’s estate; but nothing in this section affects any disposition made by a person of property held by him on trust for any other person.

If bankruptcy precedes an order made under the Matrimonial Causes Act the legal and practical outcome is straightforward and the assets vest in the trustee. Difficulties arise when the order under the Matrimonial Causes Act 1973 precedes the bankruptcy. The impact of the making of a bankruptcy order on matrimonial proceedings will therefore depend on the point that the matrimonial proceedings have reached.

Where a person has been declared bankrupt (or a bankruptcy petition has been presented against the debtor) prior to the making of a financial remedy order under matrimonial law, the matrimonial court is restricted in the financial remedy order it can make. Generally speaking, the matrimonial court cannot make a property adjustment order as the bankrupt’s estate will have vested in the trustee under the Insolvency Act 1986.

In accordance with S.336 of the Insolvency Act 1986, where an application is made by the trustee to realise the matrimonial home after a year since the vesting of the bankrupt’s estate in the trustee, there is a presumption that the interests of creditors outweigh all other considerations that will include that of the spouse (and other family members such as children).

The transfer of an interest in the matrimonial home pursuant to a consent order made under s.24 of the Matrimonial Causes Act 1973 constitutes a “disposition” for these purposes and is therefore void (Re Flint [1993]). This was reinforced in 1994 with Woodley v Woodley (No. 2) [1993] 2 FLR 477 by where the Court of Appeal held that the presentation of a bankruptcy petition is not a disposition for the purposes of s.37 of the Matrimonial Causes Act 1973 and cannot be challenged as an attempt to avoid an order for matrimonial relief. Therefore, the correct way to attempt to challenge an allegation of a spouse using bankruptcy as a fraudulent device to defeat his/her divorcing spouse’s matrimonial claim ‘s claim is to seek for the bankruptcy order to be annulled under s 282(1)(a) by the court exercising insolvency jurisdiction. It is not open to a judge of the Family Court to use the Civil Procedure Rules to transfer insolvency proceedings to the Family Court be dealt with as part of the financial remedy proceedings, per Arif v Zar [2012] EWCA Civ 986.

A matrimonial property transfer order made after the presentation of the bankruptcy petition is a void disposition by the debtor for the purposes of s.284 of the Insolvency Act. In 2010 a matrimonial settlement by ex-spouses which had not been finalised by the time a creditor issued a bankruptcy petition against the husband was struck out by the court as it constituted a disposition of the spouse’s property.

Greg Williams, a barrister at Coram Chambers, London, who specialises in matrimonial finance cases, said: “During the last decade, ultralow interest rates combined with a generally high rate of employment has meant that our day-to-day divorce cases rarely feature bankruptcy issues. That may be about to change: the impact of Covid 19 and Brexit is likely to be felt this year. If personal or household debts becomes unsustainable, practitioners and their clients need to be alert to potential insolvency issues. Assets which would otherwise form part of the matrimonial pot can be lost entirely to a successful bankruptcy petition. Or we may see an increase in applications from trustees in bankruptcy to sell family homes to the chagrin of the remaining spouse and children.”

This article was submitted to be published by Integrated Dispute Resolution as part of their advertising agreement with Today’s Family Lawyer. The views expressed in this article are those of the submitter and not those of Today’s Family Lawyer.

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