Bankruptcy and Matrimonial Settlements

by John Gordon

Financial difficulties often lead to matrimonial breakdown.   Quite often the entire family suffer as a consequence of one spouses’ difficulties and one spouse, usually the wife, faces the difficulty of trying to protect the matrimonial home from her husband’s Trustee in Bankruptcy and trying to raise sufficient monies to buy out his interest.  The Trustee in Bankruptcy never wants to put anyone out of their home and is always keen to reach an accommodation over his interest.  In most cases where the property is in joint names, the wife’s interest is set at 50% but in other cases some form of equitable accounting is required in order to determine the respective interests of the parties.   However, in recent years the matrimonial breakdown has occurred earlier than the final demise of the husband’s business and quite often divorce proceedings have been initiated and are at an advanced stage.  The vast majority of divorces are uncontested and although ancillary relief applications are generally contested, they quite frequently end up being resolved prior to a hearing.   Where it appears that bankruptcy is likely to occur then it is in the other spouse’s interest to try and secure an ancillary relief settlement, prior to an adjudication order.

A recent Chancery case called “Sands v Singh” has clarified the law.  Mr Singh’s wife filed for divorce and sought ancillary relief.   Agreement was reached with Mr Singh which saw the house being transferred into a Trust for their two children and his wife retaining exclusive occupation.   Mr Singh was then subsequently adjudicated bankrupt.

The ancillary relief agreement was challenged by Mr Singh’s Trustee in Bankruptcy on the grounds that it was either a transaction at under value or a transaction defrauding creditors.  The learned Judge held that ancillary relief settlement could be set aside if the Trustee could demonstrate a “vitiating factor” such as fraud, mistake or misrepresentation.  The Judge also accepted that a settlement could be set aside, even if there had been no collusion between the spouses and gave the particular example when a husband’s dishonestly failed to disclose the state of his affairs to his wife.

Finally, the Judge conceded that it was not necessary for the Trustee to proceed by intervening in the ancillary relief proceedings.  There are a number of practical lessons that can be distilled from this Judgment and one is that the spouse who is not in financial difficulties should seek independent legal advice as early as possible.  There is no doubt that a wife will obtain greater protection in an ancillary relief than any negotiations with a Trustee in Bankruptcy.   Bankruptcy ensures for the benefit of creditors and a wife’s interest is not paramount.   In ancillary relief proceedings the wife has a significantly better prospect of securing a settlement on much better terms than in a bankruptcy where her husband’s assets vest automatically in his Trustee.

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