Henry Hood discusses further developments in the interaction between bankruptcy & divorce cases in New Law Journal

  • February 03, 2017
  • By Hunters Law

Cashing out a second time

This article follows one which I wrote concerning the matter of Ian Robert (Trustee and Bankruptcy of Mr. Elichaoff deceased) v Sarah Jane Duncanson Woodall [2016] EWHC 538 (Ch), [2016] All ER (D) 233 (Mar) which was concerned with the interaction of the laws relating to bankruptcy and divorce (see “Cashing out”, NLJ, 10 June 2016, p 7).

As I then described, some of the applications made by the trustee in bankruptcy were positively surreal. This applied in particular to the trustee’s application that he should be allowed to pursue lump sum and property adjustment orders under ss 23 & 24 of the Matrimonial Causes Act 1973 (MCA 1973) against the bankrupt’s former wife. In reporting the dismissal of such an application (which is ludicrous at first blush, and does not improve on further consideration), I little thought that I would be writing again on the subject only six months later. However, I reckoned without the dogged persistence of this particular trustee who felt that that the refusal of leave was unjustified and should be tested.

Relevant timeline

The relevant timeline is set out below. I refer to “the bankrupt” although he was  obviously not that throughout:

  • September 1999: Bankrupt and W marry
  • 19 November 2008: Divorce petition filed by W
  • 31 January 2009: Bankrupt served with statutory demand for bankruptcy
  • 9 March 2009: Bankruptcy petition was issued
  • 5 June 2009: W and bankrupt agree terms of a final divorce settlement (the relevant provisions are the bankrupt pay periodical payments for W and their child, and that he make a lump sum payment to W of £1.4m)
  • 7 July 2009: Bankruptcy order made (pursuant to statutory demand)
  • 16 July 2009: Kingston County Court approve divorce settlement (as in (v) above) and makes order in same terms (the district judge was apparently not informed of the bankruptcy order nine days before)
  • 13 November 2014: Bankrupt committed suicide
  • July 2015: Trustee’s application for orders within the bankruptcy proceedings
  • March 2016: Hearing before registrar of bankruptcy applications
  • June 2016: Morgan J’s denies trustee leave to appeal some of registrar’s findings
  • November 2016: Review of denial of leave by Robin Dicker QC (as Deputy High Court Judge)

To an extent this timeline can be used to emphasise an important reality in cases where divorce and bankruptcy collide. One of the applications the trustee made in July 2015 within the bankruptcy proceedings (and almost six years after its start) was for the matrimonial consent order made in July 2009 to be set aside pursuant to s 284 of the Insolvency Act 1986 (IA 1986). This provides that where a person is adjudged bankrupt, any disposition of property made during the period beginning with the date of the presentation of the petition (9 March 2009 in this case) and ending with the bankruptcy order (which vests the bankrupt’s estate in the trustee) will be void unless approved beforehand or ratified subsequently. The original hearing in March 2016 confirmed two fixed points of law: first, that the mere terms of a negotiated agreement (the stage reached on 5 June 2009) could not be a disposition of property, but second that such terms, when approved by the court, (the point reached on 16 July 2009), were such a disposition. Accordingly, in March 2016 the registrar granted the trustee’s applications to set aside the provisions within the consent order for spousal and child maintenance and for the lump sum payment.

Fancy took flight

So far, so straightforward. However, fancy then took flight in relation to the trustee’s MCA 1973 applications, with him suggesting that the court make lump sum and property adjustment orders in his favour (or in favour of the bankrupt’s estate). At the original hearing in March 2016, the bankruptcy registrar (having set aside the consent order) struck out this application on the basis that the MCA 1973 created rights only capable of benefitting spouses themselves and which do not extend beyond joint lives, and he (the registrar) expressed the view on that occasion that the trustee’s claim in this regard had no merit at all. (The epithet “novel” which he used to describe this claim can be equated with “brave” as used by Sir Humphrey Appleby’s for those of us old enough to remember Yes Minister).

Undaunted, the trustee sought leave to appeal this rejection. The trustee’s reasoning at this stage was as follows: the terms of the consent order approved by the court had fallen away courtesy of ss 284 of IA 1986 (see above). Accordingly, (so suggested the trustee) the bankrupt’s claims against his wife remain extant and available to be pursued notwithstanding the fact that he was not alive to do so. As such claims could include sums which could be paid to creditors, he argued that they could not be seen as entirely personal. As a result (the trustee continued) claims for financial provision were “property” within the meaning of the s 283 of IA 1986, and therefore vested, on the making of the bankruptcy order, in the trustee. Accordingly (he concluded) they were available, were vested in him, and capable of being pursued by him.

In support of this contention the trustee pointed to the general rule in s 1(1) of the Law Reform (Miscellaneous Provisions) Act 1934 (LR(MP)A 1934) by which causes of action against, or vested in a person will survive their death, as well as Lord Brandon’s comment in Barder v Caluori [1988] AC 20, [1987] 2  All ER 440 that there was no general rule that divorce proceedings ended when one of the parties died.

The trustee’s arguments failed and leave to appeal the registrar’s order was denied by Morgan J in June 2016, on which I reported. My article suggested that the judge’s reasoning was somewhat tortuous, and relied, to an extent that was not entirely comfortable, on the fact that the bankrupt was dead, and that this seemed to leave open the possibility that the trustee might be able to take over the bankrupt’s divorce claims if he had still been alive, and that this was therefore something that other trustees might attempt. Other commentators, such as Chris Stirling, barrister of Field Court Chambers, have reassured me that that was an unnecessarily gloomy interpretation of the judgment, and this view is reinforced by the recent judgment in the further (and surely final) attempt by this trustee to breathe life into the contention that financial orders under MCA 1973 are available to be pursued by a trustee in bankruptcy.

November appeal

The trustee applied to renew his application for leave to appeal against the part of the March 2016 order which struck out his claims under MCA 1973. This came before Mr Robin Dicker QC (sitting as a Deputy High Court Judge) in November 2016.

The test for the trustee was to show that there was a real prospect that the original order was wrong. His contentions had not materially changed. He began by pointing to the definition of the bankrupt’s estate in s283 of IA 1986 which he said was very wide in scope. He then considered the definition of “property” in s 436 of IA 1986 suggesting that this includes the bankrupt’s rights against his wife either a “thing in action”, or because they arose out of, or were incidental to, property. In particular, he pointed to the provisions of

s 25(2) of MCA 1973, and particularly its reference to “the obligations” to which the court was required to have regard, suggesting that this included those which the bankrupt owed to his creditors.

Vigorous judgment

The judgment was vigorous. The judge said that his surprise at the trustee’s application had been reinforced by the submissions he  had made in its support. There was, in his view, no doubt but that claims under MCA 1973 were personal in nature and did not amount to a cause of action that would survive death through the operation of the Law Reform Act. Ormrod J was again quoted in saying (in D’Este v D’Este [1973] Fam 55, [1973] 1 All ER 349) “the whole of the matrimonial causes legislation, right back to 1857, is essentially a personal jurisdiction arising between parties to the marriage” and Dyson LJ in saying (in Harb v King Fahd Bin Abdul Azis [2005] EWCA Civ 1324, [2005] All ER (D) 110 (Nov)) that “No case has been cited to this court before (or since) D’Este’s case was decided, in which the application for, or in relation to, financial relief by one party to a marriage, did not abate on the death of one of them”—all to good effect.

The trustee had endeavoured to distinguish the terms of s 27 of MCA 1973 (neglect to maintain), which was the issue in Harb on the one hand, and ss 23 & 24 of MCA 1973 on the other. The trustee pointed to the fact that, unlike s 27, ss 23 & 24 made no actual reference to marriage and were therefore available to be brought or pursued by persons outside the marriage. The judge found no such distinction, pointing in particular to the terms of s 21 of MCA 1973. This refers to each of s 23, s 24 and s 27, making clear the marital basis of each of these sections.

Every aspect of the trustee’s application was assailed, and so comprehensively did Ms Woodall’s counsel (Caroline Hely-Hutchinson) dismantle his propositions that the judge was able to leave undecided a number of her later applications. Iif applications for financial relief were not causes of action for the purposes of s 1(1) of LR(MP)A 1934 quoted above, as the House of Lords had found in Barder v Caluori, how (the judge enquired) could they possibly constitute causes of action for the purpose of s 436 of IA 1986, to which the trustee offered no explanation. Compelling reference was also made to the Insolvency Service Technical Manual and Muir Hunter on Personal Insolvency, each of which specifically denied the possibility that a trustee could bring claims under ss 23 & 24 of MCA 1973, and the judge saw no justification at all to alter this long held view.

Useful reassurance

In relation to my anxiety (perhaps unfounded) that the failure of the trustee’s case was dependant on the bankrupt’s death rather than fundamental principle, the judgment provides useful reassurance. The trustee had suggested that  in setting aside the orders pursuant to ss 23 & 24 of MCA 1973 as dispositions of property for the purposes of s 284 of IA 1986, the registrar was being inconsistent in not finding that the ability to make such claims was property which vested in the trustee under s 283 of IA 1986. The trustee also argued that as the bankrupt in this case had been made bankrupt before his death, the property (the ability to make such claims under ss 23 & 24 of MCA 1973) was already vested in the trustee by the time of death, and that Harb was not relevant at all.

Happily, the judge found that this was a complete misreading of the registrar’s original order. He interpreted this order (with approval) to the effect that a claim under MCA 1973 could never be property capable of vesting in a trustee in bankruptcy, and that this conclusion was not dependent upon the more narrow circumstance of death.

We are therefore spared the bizarre spectacle of a trustee applying for decrees nisi or absolute (which are necessary to empower the court to make enforceable financial orders in divorce proceedings) in the place of a party to a marriage, and one hopes that no further attempt to make that a possibility will be made.

Henry Hood

Partner, Hunters incorporating May, May & Merrimans

This article was originally published in New Law Journal, and can be found here.

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