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Trustee must show fraud or collusion to set aside
divorce settlement
7 December 2007
Only where a trustee in bankruptcy can show
fraud or collusion on the part of divorcing spouses can a property
adjustment order made in contested proceedings be set aside as a
transaction at an undervalue. This is the result of a Court of
Appeal judgment this week.
Section 339 of the Insolvency Act 1986 ("the
Act") allows a trustee in bankruptcy to challenge and set aside the
transfer of property by a bankrupt made previously to his or her
former spouse if that transfer was made at an undervalue. How to
establish undervalue, however, has been the subject of debate in
the courts. The Act requires that in order for the transaction to
be deemed an undervalue there had to have been either no
consideration provided by the recipient, or any consideration that
was given must have been significantly less than the value of the
property transferred "in money or money's worth".
In Haines v Hill and Another
[2007] EWCA (Civ) 1284 the lower court had allowed the trustee to
set aside the transfer of a husband's interest in the matrimonial
home as being a transaction at an undervalue. The transfer had been
ordered as part of a property adjustment made by the matrimonial
court. The High Court judge took the view that when the wife gave
up her claim for ancillary relief on the making of the property
adjustment this did not amount to consideration. While foregoing a
legal claim could constitute consideration, matrimonial settlements
were not the same as other types of claim. This was because no
legally enforceable contract was created if a settlement was
agreed. If a party to a divorce compromise had to go to the court
to convert the agreement into a court order, the court would not
automatically give effect to it. Neither was consideration given if
the matter was settled by court order, rather than by agreement.
(See our June bulletin Divorce settlement no bar to
creditors).
The Court of Appeal disagreed with the High
Court's reasoning. It was wrong to liken the position of the wife
to a "purchaser" – a word used in previous insolvency legislation
but not in this context in the Act. The economic reality is that
the matrimonial court quantifies the value of the parties'
statutory rights, equating the value of the petitioning spouse's
statutory right to relief against the value of the property ordered
to be transferred to him or her.
If "fraud, mistake or misrepresentation" is
established, the Court of Appeal said, this balance would not be
considered to be a true one and the transaction may be liable to be
set aside. On the facts the wife had given consideration. The
transaction could not be set aside, therefore, and the Court of
Appeal allowed her appeal.
As the Court of Appeal recognised, there is
always a tension between matrimonial law and insolvency law, with
creditors and family competing for the same pot. Matrimonial
legislation provides that a transfer or settlement can still be
challenged by the trustee in bankruptcy as a transaction at an
undervalue even though it had to be made in order to comply with a
property adjustment order made by the matrimonial court. However,
the Haines judgment confines this to cases of
fraud, collusion, mistake, misrepresentation and where the spouse
has failed to make full and frank disclosure. It is not easy to
show mistake or misrepresentation and, as anyone who has attempted
to bring a claim under section 423 of the Act (transaction
defrauding creditors) will know, it is extremely difficult to
establish evidence of fraud or collusion. So in practice the
opportunity for a trustee to increase the funds available to
creditors by setting aside divorce settlements must be few and far
between unless this decision is reversed by the House of Lords.
For more information or advice, please
contact Dominic or Vicki.
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