In Haines v Hill & Bangham, the Court of Appeal had to consider whether a property transfer order made through the divorce courts could be set aside by a Trustee in Bankruptcy as a transaction at an undervalue. The matter had previously been decided in the High Court (see MFG Lenders' Casebook, July 2007) in favour of the Trustee in Bankruptcy, and the appeal was brought by Mrs Haines in relation to that decision.

Mr & Mrs Haines were the joint legal and beneficial owners of Strudges Farm. In the divorce proceedings, the matrimonial Court ordered that Mr Haines should transfer all of his interest in the farm to Mrs Haines as part of the financial settlement. Following the conclusion of the divorce proceedings, Mr Haines petitioned for his own bankruptcy. The Trustees appointed to administer his estate believed that the order transferring the farm to Mrs Haines constituted a transaction at an undervalue within section 339 of the Insolvency Act 1986, on the basis that Mrs Haines had not provided any consideration for the transfer of Mr Haines' interest in the farm to her. The Trustees therefore issued an application for the transfer to be set aside.

In the High Court, the judge found that there had been no consideration provided by Mrs Haines, and therefore ordered that the transfer of the farm to her should be set aside as a transaction at an undervalue. Mrs Haines appealed that decision to the Court of Appeal.

The key question for the Court of Appeal to decide was what would constitute "consideration" for the purposes of the Insolvency Act. The starting point for the Court was to determine the nature of settlements reached within matrimonial proceedings. The Court found that a divorce settlement does not amount to a 'largesse' payment: it is not a question of taking from one party to give to the other. Each party within a marriage is instead entitled to a fair share of the marital property, and the settlement simply divides the right to a proportion of those assets. The distribution of the marital property will therefore quantify the value of the right enjoyed by each party.

The Court therefore found that an order in divorce proceedings could be sufficient to provide consideration for the purposes of the Insolvency Act: it could not accept that one of the most common orders made in matrimonial proceedings should be capable of automatic nullification in every case by a Trustee in Bankruptcy.

The High Court's decision was therefore reversed, and the transfer of Mr Haines' interest in the farm to Mrs Haines was found to have been made with sufficient consideration. It could therefore not be set aside by the Trustee.

This decision is noteworthy, and reverses the High Court's previous finding which itself had widespread ramifications. In balancing the interests of spouses and creditors, the Court has found that there must be a fair balancing exercise to both protect creditors against any property adjustment orders that may have been made with the intent of putting assets out of the reach of creditors; but also to protect orders which had been made justly and to protect one of the parties to the marriage. The Court has therefore backed away from a straightforward choice in favour of creditors, and has required instead that each case must now be looked at on its own merits – a decision that will no doubt be significant in the increasingly uncertain economic times ahead.

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This published article may contain information of general interest about current legal issues, but does not give legal advice.