An ex-wife’s court battle could have implications for the many thousands of people whose former partners are made bankrupt, says Michelle Ashworth of law firm DWF.

Ex-spouses who are granted the family home under the terms of the divorce settlement may have been shocked to learn that they could lose the property if their former partner is later made bankrupt.

It is widely believed that divorce settlements, once granted, are untouchable afterwards in the eyes of the law.

A recent case, however, has highlighted a little-known provision within insolvency law which can allow ‘gifts’ or transfers made by a partner in the five years before the bankruptcy to be clawed back to pay debtors.

Ongoing court battle 

Housewife Wendy Haines, whose former husband David was made bankrupt shortly after their divorce, has fought an ongoing court battle for the right to keep her home.

She has recently struck a blow for the many thousands of ex-spouses in this position by winning her case at the Court of Appeal.

The trustees in charge of her husband’s bankruptcy have said, however, that they will now go to the House of Lords in an attempt to have this decision overturned.

Mrs Haines’ case centres on a farmhouse in Dunhampton, Worcestershire which she bought with her husband in 2002.

The couple later separated and in 2004, Mr Haines was ordered to transfer his share of the property to her as part of the divorce settlement, along with their Mercedes. The following year he declared himself bankrupt with debts of £132,000.

The trustees administering the bankruptcy case applied to the courts to have Mr Haines’ share of the farmhouse returned to help pay off his bankruptcy debts. 

Although a district judge initially turned down the trustees’ request, the High Court agreed with the trustees. Now, in this latest judgement, the Court of Appeal has backed the decision of the original judge and has ruled that Mrs Haines can keep the property.

Bankrupt's share of assets

The legal argument is based on provisions within the Insolvency Act. If, on an application to the court, a trustee can successfully argue that property transferred to another person within divorce proceedings was transferred 'at an undervalue’, then an order can be sought for to have the spouses’ financial position restored to what it was before the divorce.

If this is achieved, a trustee can take back assets transferred under the divorce order and use the bankrupt's share of those assets towards paying off their debts. In Mrs Haines’ case that would have meant the sale of her and her child's home.

The High Court judge based his decision on the fact that he felt the couple had lived beyond their means when married and the acquisition of the house, which at the time of the bankruptcy was valued at £500,000, was extravagant.

He ruled that, because Mrs Haines had given nothing to her husband in exchange for the home, he considered it to be a ‘gift’ and therefore a transaction at an undervalue for the purposes of the insolvency rules.

Future lump sum claims 

The Court of Appeal felt, however, that the High Court judge had misunderstood the matrimonial case law.

Matrimonial law provides that when a partner agrees to a divorce settlement, or asks the court to make a final financial order within divorce proceedings, they give up the right to any future lump sum claims.

The appeal judges said because of this it would not be fair for a partner to lose their home at a later stage because their ex-spouse had been declared bankrupt.

It would also be alien to the concept of a clean break if the husband’s creditors could come and take the wife’s property away for a period of up to five years after a divorce settlement had been finalised.

The appeal court felt that if the trustees’ claim was allowed to stand, it would deprive Mrs Haines and the couple’s child of their security.

It could also encourage a ‘disaffected husband’ to go bankrupt deliberately in an attempt to defeat a court 's decision made within divorce proceedings.

Open the floodgates 

Whatever the final outcome of Mrs Haines’ court battle, in cases which involve dishonesty, it is almost certain that bankruptcy trustees will still be able to have property returned – and rightly so.

Where both partners have colluded and transferred property between each other deliberately to put it beyond reach of debtors, it is unlikely that any court would hesitate to order its return.

The Haines case is being keenly watched by divorce lawyers and bankruptcy trustees everywhere, and of course divorced people themselves.

If the House of Lords overturns this latest decision and allows the trustees’ claim to stand it could open the floodgates to a rash of similar cases.

The transfer of property, normally the family home, is one of the most common orders in divorce settlements.

Based on the total number of bankruptcy cases each year, and the proportion of those who are likely to have had a divorce settlement of this type, over 20,000 people could be affected.

The final decision of the House of Lords will have major implications for the financial security of them and their children.

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Related links

• DWF

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