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A Worcestershire housewife has successfully appealed against the findings of the High Court, restoring the divorce settlement awarded to her by the matrimonial court after the breakdown of her marriage prior to her former husband declaring himself a bankrupt. The hearing took place before the Court of Appeal on the 13th and 14th November 2007.

Rob Taylor, a solicitor in the insolvency department and Tracy Lowe, a solicitor in the family department of leading Worcestershire law firm Harrison Clark LLP and Mr Avtar Kangure QC and Mr Angus Burden, both of St Philips Chambers, Birmingham represented Mrs Wendy Haines in her appeal against the decision of the High Court made in May 2007 in relation to the claim made against her by her ex-husband's trustees in bankruptcy.

Mrs Haines divorced her husband in early 2005. Prior to the decree absolute being pronounced in February 2005, Mrs Haines and her ex-husband had endured lengthy divorce proceedings culminating in a two day trial. The purpose of the trial, amongst other things, was to decide how the jointly owned matrimonial property should be divided. After a heavily contested hearing, District Judge Mackenzie awarded Mrs Haines a 100% interest in the former matrimonial home.

After many months of legal proceedings, Mrs Haines thought that matters had finally reached a conclusion.

However, just a few weeks after the pronouncement of the decree absolute, Mrs Haines' former husband petitioned for his own bankruptcy.

As a consequence of his bankruptcy, Mr Haines' entire estate vested in his trustees in bankruptcy, who held the responsibility of realising any assets so that his creditors might be paid at least part of what they were owed.

It should be noted that as well as having the power to realise any assets owned by a bankrupt at the time of his bankruptcy, a trustee in bankruptcy also has the responsibility and power to seek to challenge any transactions which took place shortly prior to an individual entering that bankruptcy where it is felt they were designed to dispose of assets and put them beyond the reach of creditors.

Such a challenge was initially raised by Mr Haines's trustees in a trial before District Judge Cooke on 14th December 2006.

The crux of the matter was to decide whether Mrs Haines had provided value which would entitle her to recover more than a half an interest in the former matrimonial home, given that her ex-husband had been declared bankrupt. District Judge Cooke favoured Mrs Haines argument that she had given proper value for the additional share in the property. It was argued that as Mrs Haines could not revert back to the divorce courts to ask them to reconsider their decision because she had already used this claim and had been successful. Therefore Mrs Haines' claim in the matrimonial court had a value to her and this was the value she gave up in return for the additional share in the property.

This was a previously untested area of law and potentially, the decision to allow Mrs Haines to keep the additional share in the property had wide ranging ramifications for the insolvency profession as a whole as transactions concerning transfers of property shortly prior to a bankruptcy are often investigated by trustees as a potential source of recovering assets for the benefit of creditors.

Accordingly, shortly after the hearing in Birmingham on 14th December 2006, Mr Haines' trustees appealed the decision.

The appeal was heard in the Royal Courts of Justice, London on 26th April 2007 before His Honour Judge Pelling QC, who overturned the decision of District Judge Cooke.

Therefore, it was ordered that Mrs Haines has to hand over to the trustee half of the proceeds of sale of the Property.

Mrs Haines immediately sought permission to appeal the judgment of His Honour Judge Pelling QC to the Court of Appeal and such permission was granted. The hearing took place on the 13th and 14th November 2007 before the Chancellor (Sir Andrew Morritt), Lord Justice Thorpe and Lord Justice Rix. The judgment was handed down today, 5th December 2007, in which their Lord Justices found unanimously in favour of Mrs Haines, thus setting aside the Order of His Honour Judge Pelling QC and restoring the original order of District Judge Cooke.

The case is hugely significant as, prior to today's decision, the law effectively undermined matrimonial clean break orders where the party that received a lesser share of the former matrimonial assets subsequently became bankrupt.

This is on the basis that pursuant to section 339 of the Insolvency Act 1986, in the event of either a divorcing husband or wife becoming bankrupt within certainly 2 years (and potentially 5 years) of any ancillary relief property adjustment order (that is to say a Court Order dealing with the distribution of former matrimonial assets), his or her trustee in bankruptcy can turn to the other divorcing party with a view to overturning the agreement as regards the distribution of former matrimonial assets.

Section 339 of the Insolvency Act 1986 provides that a trustee in bankruptcy can seek to overturn "transactions at an undervalue" of the bankrupt (that is to say where the bankrupt party has disposed of an asset for no financial consideration or alternatively for consideration the value of which, in money or monies worth, is significantly less than the value, in money or monies worth, of the consideration provided by the receiving party).

Mrs Haines argued that by compromising her claim for ancillary relief (i.e. by accepting the order of the District Judge who awarded her the entire proceeds of sale of the former matrimonial home) she had provided sufficient consideration in money or monies worth – in essence, her claim in ancillary relief had itself a value, and such value was equivalent to the value of the additional share in the proceeds of sale she received.

This argument was not accepted under the former judgment of His Honour Judge Pelling QC, and therefore such claims by trustees were effectively indefensible by parties whose former spouses had become bankrupt subsequent to the divorce.

However, in delivering the leading Judgment, the Chancellor found that:

" whatever the position may have been in earlier days, it is, in my view, self-evident that the ability of one spouse to apply to the court for one or more of the orders referred to in ss. 23 to 24D [of the Matrimonial Causes Act 1973] is a right conferred and recognised by the law. Further it has value in that its exercise may, and commonly does, lead to court orders entitling one spouse to property or money from or at the expense of the other. That money and property is, prima facie, the measure of the value of the right."

He continued:

"If one considers the economic realities, the order of the court quantifies the value of the applicant spouse’s statutory right by reference to the value of the money or property thereby ordered to be paid or transferred by the respondent spouse to the applicant. In the case of such an order, whether following contested proceedings or by way of compromise, in the absence of the usual vitiating factors of fraud, mistake or misrepresentation the one balances the other. But if any such factor is established by a trustee in bankruptcy on an application under s.339 then it will be apparent that the prima facie balance was not the true one and the transaction may be liable to be set aside."

Rob Taylor commented: "This verdict represents a victory for common sense. It restores the position whereby, a properly considered order of the family court, whether as a consequence of contested divorce proceedings or an agreed order properly approved by the court, awarding a spouse a financial settlement cannot subsequently be automatically undermined by the trustee in bankruptcy of the other spouse. Statutory protection for the trustee (and therefore creditors of the bankrupt) remains where it can be shown there is an element of fraud, mistake or misrepresentation. This can occur where there has been collusion between the divorcing parties to deliberately engineer a divorce settlement to put assets beyond the reach of creditors or alternatively where they have hidden assets from the family court. A fair balance is now struck between the rights of a divorcing party to obtain a clean break settlement that properly reflects their needs and entitlements and the rights of creditors not to be defrauded of monies which have been deliberately and consciously put beyond their reach".

However, the story does not end here as the trustees have indicated their intention to seek leave to appeal the decision yet again to the House of Lords.

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Photo: Tpny Flanagan: Old Cider Mill Droitwich Road Feckenham, Worcestershire B96 6JE Tel: 07831 605 267

Notes to editors: For further information on this press story please speak to Rob Taylor at Harrison Clark on 01905 612001 or e-mail: rtaylor@harrison-clark.co.uk

Alternatively you can speak to Angela Baker at Marketing IQ Ltd. on Tel: 01905 359475 or e-mail angela.baker@marketing-iq.co.uk

Mrs Haines has indicated that it is her intention not to speak to the media / press at this stage until the case has completely concluded. All enquiries should therefore be directed through the above contacts.







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