Preferential treatment?

Practitioners will be familiar with gratuitous alienations and unfair or fraudulent preferences, which have been part of the common law of Scotland as well as being governed by statute in the Bankruptcy Act 1985 and the Insolvency Act 1986.

In essence a challenge may be made where any of the insolvent debtor’s property has been transferred, or any claim of the debtor has been discharged or renounced, for less than full consideration. This would generally cover a situation where for example the debtor gifted his house to his wife or gave her a sum of money (if challenged under statute within the relevant period before bankruptcy).

The law in England & Wales is broadly similar, and has recently given rise to a number of cases where a trustee in bankruptcy has challenged a divorce settlement prior to bankruptcy which has involved the transfer of the bankrupt’s interest in property as part of a matrimonial settlement. During 2007 there have been a number of challenges by trustees to such transfers as constituting challengeable preferences.

Wife v trustee

In Avis v Turner & Avis (1 December 2006, unreported), for example, the co-owning spouse of the bankrupt unsuccessfully appealed from a decision of the district judge who had determined that the bankrupt’s one-third share of the matrimonial home vested in his trustee in bankruptcy free from any rights asserted by the spouse, and that the trustee was entitled to possession and an order for sale of the property.

In Hill and Bangam v Haines [2007] EWHC 1012 (Ch), the husband’s trustees in bankruptcy sought to overturn a property transfer order made in favour of the wife under the Matrimonial Causes Act 1973 after fully contested ancillary relief proceedings. The matrimonial court had ordered the husband to transfer his interest in the jointly owned property to his wife. When the husband subsequently became bankrupt, the trustees challenged the order as a transfer at an undervalue on the basis that the wife had not given any consideration in money or money’s worth to support the transfer of the husband’s interest to her.

The wife resisted the trustees’ application and succeeded before the district judge, relying on the decision in Re Abbott [1983] 1 Ch 45 that a compromised ancillary relief claim was capable of being valuable consideration sufficient to resist a claim by a trustee. The joint trustees appealed to the High Court, which held that a compromise agreement of an ancillary relief claim did not give rise to a binding contractual obligation as between the spouses. The relief sought was discretionary, so that a settlement agreement was not itself binding and the compromise only became binding when given effect by a court order. The parties’ rights to enforce the bargain derived from the order, not from their bargain.

This decision was followed in June in the case of Segal v Pasram [2007] BPIR 881, which also concerned the question of whether a transfer of property as part of a matrimonial settlement could withstand challenge as a transaction at an undervalue. Again, applying Hill v Haines, the deputy judge concluded that the case succeeded because relinquishing claims for ancillary relief was not consideration in money or money’s worth and the £1,000 which had been paid by the wife in this case pursuant to the settlement was significantly less than the value of the husband’s interest transferred to her.

Court of Appeal steps in

Hill v Haines was appealed and in its decision handed down on 5 December ([2007] EWCA Civ 1284), the Court of Appeal disagreed with the High Court judge and allowed Mrs Haines’ appeal. For the purposes of a property adjustment order made in matrimonial proceedings there had been valuable consideration and so the transfer could not be set aside by the trustees in bankruptcy as a transaction at an undervalue. A property adjustment order might still be liable to be set aside where there had been dishonest collusion between the parties to prejudice the bankrupt’s creditors, or some other vitiating factor such as fraud, mistake or misrepresentation.

The court recognised the tension between the competing claims of creditors and a bankrupt’s former wife and children, but concluded that the “automatic nullification” of ancillary relief orders could not have been what Parliament ever intended. The Court of Appeal decision therefore also casts doubt on the decision in Segal v Pasram, but gives comfort that a divorce settlement involving a property transfer may be less at risk of challenge than had appeared to be the case earlier in 2007.

Alistair Burrow, Head of Recovery, Tods Murray LLP