Chancery Division
Published May 14, 2007
Hill and Another v Haines
Before Judge Pelling, QC
Judgment May 3, 2007

Where an interest in property was transferred under a property adjustment order in matrimonial proceedings by a spouse who was later made bankrupt, the transfer could constitute a transaction at an undervalue and be set aside on application by the trustees in bankruptcy.

Judge Pelling, QC, sitting as a Chancery Division judge, so held when allowing an appeal by Richard John Hill and John Ivor Bangham, trustees in bankruptcy of David Haines, the husband of the respondent, Wendy Pearl Haines, against the decision of District Judge Cooke dismissing their application under section 339 of the Insolvency Act 1986 for an order setting aside a transfer of property made, before the husband had been adjudicated bankrupt, in ancillary relief proceedings between the husband and the wife.

In ancillary relief proceedings under sections 23 to 25 of the Matrimonial Causes Act 1973, the family court made a property adjustment order, requiring the husband to transfer his interest in a property, known as Strudges Farm, Dunhampton, Worcestershire, to the wife.

The family judge adjourned an application for a lump sum order because of the risk that the husband might become bankrupt, as a result of his own deliberate actions, thereby guarding against the eventuality that the trustee in bankruptcy might seek to impugn the transfer of property.

The husband was made bankrupt on his own petition and the appellants were appointed trustees in bankruptcy. The transfer was executed and the property sold.

The trustees applied to the court for an order under under section 339(3) of the 1986 Act to set aside the transfer on the ground that it was a transaction at an undervalue, since the wife had provided no consideration (section 339(3)(a)), or the value of the wife’s consideration in money or money’s worth was significantly less than the value of the property transferred (section 339(3)(c)).

Section 39 of the 1973 Act provided that the fact that a settlement or transfer of property had to be made in order to comply with a property adjustment order did not prevent the settlement or transfer from being a transaction that could be set aside under section 339 of the 1986 Act.

The wife submitted that she was to be regarded as having given consideration equivalent to the value of the property transferred, relying on In re Abbott (a Bankrupt) ([1983] Ch 45) and In re Kumar (a Bankrupt)([1993] 1 WLR 224) which established the proposition that a transfer or settlement made pursuant to a compromise of ancillary relief proceedings, was supported by sufficient consideration to prevent an order under section 339 being made.

District Judge Cooke dismissed the trustees’ application and they appealed.

Mr Peter Arden, QC and Mr Niall McCulloch for the trustees in bankruptcy; Mr Avtar Khangure, QC and Mr Angus Burden for Mrs Haines. HIS LORDSHIP said that Abbott was concerned with the application of section 42(1) of the Bankruptcy Act 1914 to an ancillary relief order made following a compromise agreement.

That section provided that a settlement of property, not made in favour of a purchaser for valuable consideration would, if the settlor became bankrupt within two years, be void as against the trustee in bankruptcy.

The court adopted the proposition from In re Pope ([1908] 2 KB 169) that the release of a right or the compromise of a claim could suffice to constitute a person being a “purchaser” within section 42(1) and held that the wife was a purchaser for valuable consideration because she had given up a legal right to pursue her claim under section 24 of the 1973 Act in return for the transfer of property.

The reasoning in Abbott was not binding in the instant case for two reasons: First, cases decided under the old law were of no assistance when the language of the statute had been completely changed: In re M C Bacon Ltd (No 1) ([1990] BCLC 324, 335). There was no reference to “valuable consideration” in section 339 of the 1986 Act, and that phrase could not be equated with consideration “in money or money’s worth”.

Second, the court in Abbott proceeded on the basis that the reasoning in Pope meant that foregoing ancillary relief claims brought under sections 23 to 25 of the 1973 Act were capable of constituting consideration.

That was not a correct analysis in the light of Xydhias v Xydhias ( The Times January 13, 1999; [1999] 2 All ER 386, G v G (Financial provision: Equal division) ([2002] 2 FLR 1143) and McMinn v McMinn([2003] 2 FLR 823).

Those cases decided that a compromise agreement could not give rise to binding contractual obligations, and the applicant for ancillary relief had no cause of action, the settlement agreement being, by definition, not binding.

It followed that the proposition in Pope had no application to orders made under sections 23 to 25 of the 1973 Act nor to agreements in purported compromise of such applications.

In Kumar Mr Justice Ferris stated, obiter, that Abbott was applicable to section 339 of the 1986 Act. However, since the reference in the 1914 Act to “valuable consideration” was not consistent with the balancing of incoming and outgoing consideration that was a key element of section 339(3)(c), Kumar was not applicable to the instant case.

For the purposes of considering the applicability of section 339 to case such as the instant, the position was the same whether the matrimonial court made an order following a contested hearing or following a compromise agreement; in neither case did the receiving party give, nor the paying party receive consideration. Thus, such property transfers were subject to attack under subsection (3)(a) as well as (3)(b) of section 339.

It followed that the district judge was wrong to conclude that the transfer of the property pursuant to the matrimonial court order was not a transaction at an undervalue, and the appeal would be allowed.

Solicitors: Clarke Willmott, Birmingham; Harrison Clark LLP, Birmingham.

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