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PART 3
May 2008
FACTORS AFFECTING THE VALUE OF THE BANKRUPT’S INTEREST IN THE PROPERTY
Once the official receiver has established that the bankrupt has an interest in a property (see Part 2) and that interest has been protected (see Part 5), consideration should be given to calculating the value of the bankrupt’s interest.
The guidance in Part 1 should be applied in all cases where section 283A applies and the bankruptcy petition was presented on or after 1 April 2004. (Details of the provisions of section 283A are given in paragraph 33.7)
In cases where the bankruptcy order was made on a petition presented before 1 April 2004, refer to Annex 3 where section 283A applies. (Details of the transitional provisions of section 283A are given in paragraph 3 of Annex 3). The official receiver should have also have regard to the guidance in this part and in Part 2 and Parts 4 to 8 of this chapter.
There are various types of mortgage used to purchase the family home as detailed below.
With a capital and interest mortgage (repayment mortgage) the borrower’s repayments are made up of both capital and interest on the mortgage advance. In the early years the monthly repayment pays more interest and the capital reduces slowly. As the mortgage becomes more mature each payment pays off more capital and the interest element is smaller. The liability to the mortgagee can ultimately be paid from the sale proceeds of the property if it is not paid off before sale.
An interest only mortgage is where the borrower(s) pays only interest and the capital remains outstanding until the end of the mortgage term. The borrower(s) must have some method of repaying the capital at the end of the term. Paragraphs 33.81 to 33.88 describe the methods of repayment which may be encountered.
An endowment mortgage is one in which the liability to the mortgagee is intended to be repaid from an endowment policy when it matures. An endowment policy is usually funded by monthly contributions made separately to the mortgage payments. In these cases the official receiver should establish from the insurance company [note 1]:
(a) The name(s) of the policyholder(s);
(b) The surrender value or other realisable value of the policy; and
(c) Details of any charges on the policy.
The official receiver should check whether the policy has been formally charged to ascertain whether any policy value is a free asset for the benefit of the estate. The insurance company should be asked to note the official receiver’s interest where applicable. See paragraph 33.85 for how to deal with an endowment policy where the mortgage company is deemed to have an equitable charge.
33.82 Disposal of property and endowment policy
Where the official receiver has to deal with the property’s disposal, the bankrupt’s interest in the endowment policy should, if possible, be disposed of at the same time. The official receiver should endeavour to realise at least the surrender value of the policy. The bankrupt’s overall equity in the property will be the value of his/her beneficial interest in the property plus at least his/her interest in the surrender value of the endowment policy. This is assuming the policy is not charged to the mortgagee or the mortgagee’s debt is discharged by the proceeds of the sale of the property, in which case the bankrupt’s interest in the endowment policy would be a free asset available for the benefit of the estate. It should be remembered that any policy in joint names can only be disposed of with the consent of the other beneficiary of the policy. When calculating the bankrupt’s interest in an endowment policy the official receiver should consider whether it is more appropriate to use the re-saleable value of the uncharged policy (see paragraphs 33.83 and 33.13 or Annex 3, paragraph 9 if the bankruptcy order was made on a petition presented before 1 April 2004).
33.83 Disposal of endowment policy only
If it is not possible to dispose of the property and the endowment policy together, and the policy is in the sole name of the bankrupt or all the policyholders are bankrupt, the official receiver may be able to sell the policy if the surrender value exceeds approximately £1,500. Selling a policy will normally realise a higher value than surrendering it to the insurance company concerned. There are numerous companies who purchase or auction second-hand with-profit endowment policies. Details of these companies can be found on the internet by searching for ‘sale of endowment policies’. Generally the policy should have been running for 5 years or more. These companies will give an instant valuation of the policy and no fee is payable for the valuation.
If the official receiver is trustee of the estate and the bankrupt dies, he/she should immediately make enquiries of the mortgagee(s) and the insurance company to establish the details of any death benefit nomination stated in the policy. As the policy vests in the official receiver, as trustee, the official receiver should be able to nominate, in accordance with the terms of the policy, the trustee to receive the death benefit. The official receiver should then ensure that any sums due to the estate under the endowment policy are paid to him/her. Where an insolvency practitioner is acting as trustee, the official receiver should ensure that he/she is aware of the bankrupt’s death and the interest in the policy.
33.85 Equitable charge - policy not assigned to lender
It is a standard condition in many mortgage agreements that the borrower will take out a life policy in support of the mortgage, but a number of mortgage lenders no longer take a legal charge over the policy as security for the mortgage advance. For an equitable charge to be created there needs to have been agreement between the parties and some consideration (e.g. the mortgage advance) needs to have changed hands. If it is clear from the relevant documents and the surrounding circumstances that the parties intended that the life policy in question be appropriated to the repayment of the mortgage advance, then an equitable charge will have been created over the policy in favour of the lender and the official receiver should regard the policy as a secured asset.
If the policy document is deposited with the lender and/or the lender’s interest is noted with the insurance company, it must be presumed that the parties intended that the proceeds of the policy should be available to repay the mortgage and the lender will have a valid equitable charge on the policy which should be regarded as a secured asset.
Where the policy document is retained by the borrower (i.e. the bankrupt) and confirmation of its existence has not been communicated to the lender, it is doubtful that an equitable charge exists and the official receiver should realise the policy for the benefit of the creditors (free of any charge).
A pension mortgage is similar to an endowment mortgage but the pension is not formally charged to the mortgagee since it cannot be assigned. The tax free lump sum portion of the pension is the sum which will be used to repay the mortgage. The mortgagee must therefore look to the property as well as any life policy as security. The official receiver should consider carefully the terms of the pension policy as at least part of the fund it contains may form part of the bankrupt’s estate (see Chapter 61).
Term assurance for a sum assured equal to the amount of the loan and for the same term must run alongside the pension policy to provide a benefit in the event of the borrower’s death. This term assurance may have accumulated a value to the estate so full details of the policy should be obtained. The bankrupt may have straight term assurance where the sum assured does not reduce with the mortgage debt. The official receiver should obtain full details of the policy and if he/she encounters difficulty in dealing with this type of mortgage he/she should seek advice from Technical Section.
33.88 Personal Equity Plans (PEPs) and Individual Savings Accounts (ISAs)
The use of PEPs and ISAs is another method of accumulating capital to repay an interest only mortgage. It would normally be expected that the capital sum would be repaid at the end of the loan period from the PEP or ISA. Other sources such as an interest under a will or other investments can be used to repay the capital sum of the mortgage at the end of the term. Normally, term assurance is also taken out for a sum assured equivalent to the loan to cover the life or lives of the borrower(s). Enquiries should be made to establish if the PEPs, ISAs or assurance policy have accumulated a value for the estate.
33.89 Islamic Sharia’s Law compliant home purchase plans
Loans which are interest based do not comply with the tenets of Islamic Sharia'a law. In principle all forms of interest are forbidden, finance and investment being conducted on the basis of partnership and shared risk.
Islamic banks lend monies without interest requiring only expenses to be covered by the borrower. In response to a demand for "Islamic mortgages" a number of lenders within the UK have developed, along with a variety of financial products which are Sharia'a compliant, home purchase plans (HPPs) where no interest is charged. HPPs are essentially sale and re-sale or leaseback arrangements. Under English law they are not regarded as mortgages and the borrower and their family have less protection than that currently afforded to a mortgagor. This is a developing market which has only recently come within the scope of Financial Services Authority regulation (for further information please see Chapter 80.)
There are 3 main types of Sharia’a compliant HPP’s; Murabaha (paragraph 33.90), Ijara (paragraph 33.91) and Diminishing Musharaka (paragraph 33.92).
This is a form of credit where the bank buys an item and sells it to the customer on a deferred basis. Under Murabaha, the bank buys the property from the vendor at market value and then immediately enters an agreement to resell the property to the customer (borrower) at a higher price, which includes the bank’s profit element. The resale price is paid by equal instalments over an agreed period with the bank securing the payments by means of a charge on the property.
As the customer (the bankrupt) has purchased the property at the beginning of the arrangement and is the registered proprietor of the property; the property would vest in the bankruptcy estate in the usual way. The bank would be a secured creditor in the proceedings for the balance of the purchase price. The arrangement is very broadly similar to a traditional mortgage loan.
This is a leasing agreement, where the customer is able to buy the item at the end of the contract. The HPP Ijara-wa-Iqtina is a variation. Generally under Ijara, the bank will buy the property from the vendor and become the legal owner. The bank will then enter into an agreement with the customer (the bankrupt) to sell the property at the original purchase price at the end of a specified period. The bank will then grant a lease of the property to the customer for a term of years equal to the period of the agreement for sale. The customer will make fixed monthly payments to the bank, calculated partly as rent under the lease (the lender’s profit element) and partly as a payment towards the purchase price of the property.
At the date of the bankruptcy order the property would not vest in the bankruptcy estate as the legal and beneficial owner is the bank. The agreement to purchase the property would be a contract which was capable of vesting in a trustee in bankruptcy as would the lease agreement. The payments made towards the purchase price at the date of the bankruptcy order may give rise to a beneficial interest in the property which would form part of the bankruptcy estate, or a debt payable by the bank to the bankruptcy estate (the contract for sale being uncompleted). However, forfeiture or disclaimer of the lease might defeat any interest the trustee in bankruptcy holds in the property. The bank would not be a creditor in the bankruptcy estate except in respect of arrears under the lease agreement.
Musharaka is an investment partnership. A Diminishing Musharaka HPP is another type of Ijara. The purchaser of the property will, usually, be a sub-division of the bank who will hold the property on trust for the bank and the customer (the bankrupt) as beneficial tenants in common. The purchase is funded by a payment to the trustees from the bank and the customer. The customer will usually need to pay at least 10% towards the purchase price. As with the Ijara agreement the bank will enter into an agreement to sell its share of the property to the customer at the original purchase price paid by the bank at the end of a specified period. The borrower will agree to pay the purchase price in fixed instalments over a number of years. The trustees will grant a lease to the borrower for a period equal to the agreement with the bank. The bank’s beneficial interest will transfer to the borrower in instalments once agreed payment stages are completed. By the end of the rental period, the customer will hold 100% of the beneficial interest and will require the trustees to transfer the legal title.
The bankrupt’s beneficial interest in the property would form part of the bankruptcy estate in the usual way. The bank would not be a creditor in the bankruptcy, although the trustees would have a claim in respect of any arrears under the lease agreement. The lease agreement would be capable of vesting. In many ways it would appear that a Diminishing Musharaka has many similarities to shared or part ownership agreements with housing associations where the tenant has the opportunity over time to acquire the whole of the legal and beneficial interest in a property. Care should be taken, if a disclaimer is considered, that a beneficial interest in the property is not lost through a carelessly worded disclaimer aimed at the lease agreement.
The official receiver should check with the mortgagee or chargee that any mortgage or charge created over the bankrupt’s interest in the property has been properly executed and that the amount of the loan secured was received in full, particularly if a relative or associate of the bankrupt provided the funds [note 2].
33.94 Mortgage payments made by the bankrupt after the bankruptcy order
Where a bankrupt occupies a property which is part of his/her estate on condition that he/she makes payments under a mortgage or for other outgoings after the date of the bankruptcy order, he/she does not personally accrue any interest in the property. Interest in a property is also not accrued after the bankrupt’s discharge. Any capital element of the repayments made to the mortgagee increases the amount available to the bankrupt’s creditors when the property is sold.
33.95 Mortgage payments made by the bankrupt’s spouse/civil partner/cohabitant after the bankruptcy order
If the bankrupt’s spouse, civil partner or cohabitant makes repayments after the bankruptcy order, any capital element of such payments should be added to that person’s interest in the proceeds of sale, or they will create an interest in the proceeds of sale for that amount, either because the spouse, civil partner or cohabitant is joint owner of the property or by virtue of the principles outlined in paragraphs 33.52 to 33.64.
If the spouse, civil partner or cohabitant pays only an interest element of the mortgage, this does not reduce the capital sum owing on the mortgage and will not increase the spouse, civil partner or cohabitant’s interest. If the spouse, civil partner or cohabitant remains in occupation of the property to the exclusion of the bankrupt co-owner, the court may order that the spouse, civil partner or cohabitant pay an occupation rent for the use and enjoyment of the property. The court may also order that interest payments made by the spouse, civil partner or cohabitant should be set off against such rent (see Leake v Bruzzi [1974] 2 All ER 1196 and Re Pavlou (a bankrupt [1993] 3 All ER 955).
33.96 Property used as security for a business loan
(Amended September 2008)
The family home is often the most significant asset a person owns and when seeking finance for a business it is not unusual for the family home to be used as security. If the property is jointly owned, the lender will normally ensure that both owners execute charges over the property for the loan.
33.97A Equity of exoneration - charge discharged firstly out of the bankrupt’s interest
(Amended September 2008)
If there is a charge on a jointly owned property to secure the debts of only one of the joint owners, the other joint owner, being in the position of a surety, may be entitled to have the secured indebtedness discharged so far as possible out of the equitable interest of the debtor. This is known as the equity of exoneration
If it is proven that the loan on which the charge was created was purely for the bankrupt’s business and the non-bankrupt owner derived no direct benefit from it, the non-bankrupt owner (usually the bankrupt’s spouse or civil partner) may be entitled to have the secured debt discharged, as far as possible, out of the bankrupt’s share in any equity in the property (see also paragraph 33.98A). This would also apply where the money secured by the charge was used to pay expenses of a bankrupt’s second household or to support another person, as the non-bankrupt owner would not have derived any benefit from those debts. For a worked example applying the principle of exoneration see Annex 4.
33.97B Equity of exoneration - non-bankrupt joint owner
(Amended September 2008)
If a non bankrupt joint owner of a property wishes to rely on exoneration to establish a greater share in the equity of the property then the official receiver, in his/her capacity as trustee, should request evidence to show the extent that the expenditure secured by the charge was incurred solely for the benefit of the insolvent, and that the non bankrupt joint owner did not derive any consequential financial benefit
The court has held that payments made for the joint benefit of the household should be discharged out of the net proceeds of the sale of the house before division and exoneration should apply to payments made purely for business purposes and for the husband's sole benefit [note 3]. In that case the bankrupt and his spouse had acted jointly in their business affairs with the bankrupt’s wife being employed in her husband's restaurant.
Where the spouse/civil partner has no independent income and the household relies on the business interests of the bankrupt for financial support it is unlikely that that the remedy of exoneration would apply. Similarly if a non-bankrupt spouse/civil partner has undertaken full-time employment away from her husband's business and contributed jointly to household finances he/she may be entitled to rely upon exoneration.
Any agreement by the official receiver that a non-bankrupt joint owner is entitled to rely on exoneration does not affect his/her responsibility to discharge the debt to the relevant charge holder,
33.97C – Part of charge to be allowed under principle of exoneration
(Amended September 2008)
It is possible for the official receiver to conclude that only a part of the charge arose entirely through a business expense for the sole benefit of the bankrupt and to allow a proportion of the charge to be offset against the bankruptcy estate's beneficial interest rather than the full amount.
33.98A Circumstances where the charge may not be discharged firstly out of the bankrupt’s interest
(Amended September 2008)
A non-bankrupt owner will not be entitled to have a secured debt discharged firstly out of the bankrupt’s interest in the jointly owned property if it can be shown:
(a) That the non-bankrupt owner intended to make a gift to the bankrupt; or
(b) That the money raised was to pay debts of the bankrupt incurred to maintain an extravagant lifestyle on the part of both parties [note 4]; or
(c) That the money raised was used to discharge the debts of the non-bankrupt owner; or
(d) That the money was used for the benefit of the non-bankrupt owner, either wholly or jointly with the bankrupt. This will include money used to pay their general household and living expenses.
33.98B
Negative or minimal equity after applying equity of exoneration (amended February 2011)Where as a result of applying exoneration the bankrupt’s interest in the property is negative or minimal (less than £1000 should be used as a guide figure – see paragraphs 33.20), the official receiver, as trustee, should transfer the case to RTLU for review at a later date. Guidance on the review process for jointly owned property is given in paragraphs 33.29 to 33.31.
33.99 Charge in favour of non-bankrupt owner’s business
The principles outlined in paragraphs 33.96 to 33.98 will apply if the situation is in reverse and it is the non-bankrupt owner’s business debts which are secured by the charge. The trustee will be able to claim that the debt should be satisfied first out of the non-bankrupt’s interest, thus enhancing the bankrupt’s interest for the benefit of the estate.
33.100 Other reasons charges may be set aside
Apart from the matters referred to in paragraphs 33.93, 33.96 to 33.97 and 33.99 (relating to business loans), charges may be set aside for other reasons. If the charge is set aside for one of the reasons specified in paragraphs 33.101 to 33.103 and the bankrupt is the party in the wrong, the whole of the debt will fall to be recovered from any interest that the bankrupt may have in the property. The same principle will apply in reverse. Where the non-bankrupt party is in the wrong, the trustee may be able to have the charge set aside so far as it relates to the bankrupt’s interest, so enhancing that interest for the benefit of the estate. Paragraphs 33.101 to 33.105 are written on the basis that it is the bankrupt who is in the wrong.
The official receiver may become aware of a charging order nisi or absolute having been made over the bankrupt’s interest in the property under the Charging Orders Act 1979. Guidance on dealing with charging orders under that Act is given in Chapter 9, Part 4.
33.101 Charge set aside on grounds of fraud
A charge on a non-bankrupt owner’s interest in a property may be avoided or set aside if it can be proved that the charge was obtained by fraud, fraudulent misrepresentation or forgery of the non-bankrupt’s signature. In addition, the creditor may not be able to enforce the charge against the non-bankrupt owner if the creditor allowed the bankrupt to arrange for the non-bankrupt owner to sign the charge and the bankrupt obtained that signature by fraudulent misrepresentation. In that situation, the bankrupt would be acting as the creditor’s agent and the creditor would be bound by his acts [note 5].
33.102 Charge set aside on the grounds of duress
To avoid a charge on the grounds of duress, the non-bankrupt owner must show that the charge was executed because the non-bankrupt owner was subjected to violence, threat of violence or actual or threatened imprisonment.
33.103 Charge set aside on grounds of undue influence
Before a presumption of undue influence can arise the relevant transaction has to be shown to have been manifestly disadvantageous to the party influenced [note 6]. For a transaction to be manifestly disadvantageous it must be viewed objectively at the date at which it was entered into. In Barclays Bank plc v Coleman and another [2000] 3 WLR 405, the charge over the home secured not only money borrowed under the proposed transaction, but also money under any other transaction the husband might embark on. This enabled the husband, without resort to the wife, to subject the house to much greater financial risk than she could have known of. The wife showed a clear and obvious disadvantage which entitled her to have the charge set aside by reason of her husband’s presumed undue influence over her.
33.104 Establish undue influence
The presumption of undue influence can also arise in transactions between persons in certain relationships that are not between husband and wife or civil partners. If the presumption does not arise, it is for the person seeking to avoid the charge to establish undue influence. Where the presumption does arise, it is for the person who benefits from the transaction to justify that it was free from undue influence, once it has shown that it was disadvantageous to the other party.
33.105 Enforceability of mortgage
Where a loan is entered into between a lender and both a husband and wife or civil partners, any undue influence will not affect the enforceability of the mortgage provided the lender did not know, or had no reason to suspect, that there was undue influence and the lender believed that the transaction was for the benefit of both spouses/civil partners [note 7]. If the spouse/civil partner merely guaranteed the loan to the other spouse/civil partner, the security will be rendered invalid if the lender did not take steps to ensure that the spouse/civil partner gave an informed and true consent to the guarantee [note 8].
The effect of independent legal advice available to the spouse on the lender’s ability to enforce its security against her when she alleged that the transaction was procured by undue influence was considered in Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705. This case deals fully with the position regarding independent advice. Where the lender had asked a solicitor to explain the transaction to the wife but had not confirmed it had done so, the bank should not be affected by its failure to obtain confirmation before completing the transaction.
Matrimonial/Civil Partnership Proceedings
33.106 Previously engaged couples
Where an agreement to marry is terminated, the Law Reform (Miscellaneous Provisions) Act 1970 [note 9], which relates to the rights of spouses in relation to property in which either or both spouse(s) has or have an interest, applies to any property in which either or both of the previously engaged couple has or have an interest. The CPA04 has not been applied to the act.
33.107 Matrimonial/civil partnership proceedings completed prior to bankruptcy
Where matrimonial or civil partnership proceedings have been completed prior to the bankruptcy order, consideration should be given to their effect upon the bankrupt’s interest in the property. In particular, a property adjustment order may have been made which may have resulted in the property being transferred in whole or part to the bankrupt’s spouse or civil partner. Such settlement or transfer may be capable of being set aside as a transaction at an undervalue or a preference [note 10].
The Matrimonial Causes Act 1973 provides that any property transfer order in matrimonial proceedings is capable of being set aside [note 11]. Similar provisions exist relating to property transfer orders in civil partnership proceedings [note 12]. (See also paragraphs 33.119 to 33.125). An application for a property adjustment order can be made under the Matrimonial Causes Act 1973 [note 13]. The official receiver should note that any settlement made will have sought to balance the interests of the divorcing spouses, civil partners seeking a dissolution or separated couples between themselves. The family court will not have taken into account creditors rights. When the official receiver is trustee he/she should only seek to challenge orders where it is evident that creditors have suffered.
The bankrupt’s interest in property may also be adjusted [note 14].
33.108 Interaction of an order by the family court and bankruptcy order
In the case of a property adjustment order the transfer of the property does not have to have been effected before the bankruptcy order for the interest in the property to have passed. This was the decision of the Court of Appeal in the case of Mountney v Treharne [2002] EWCA CIV 1174. In this case a property adjustment order under section 24(1) (a) Matrimonial Causes Act 1973 was made transferring the interest in the property from husband to wife. It took effect shortly afterwards when the decree absolute was pronounced [note 15] but a bankruptcy order was made the following day before the transfer could be effected. It was decided that the bankrupt’s wife acquired an equitable interest in the property from the time the order took effect, and as she had ‘rights’ in respect of it, it did not vest in the trustee [note 16]. In delivering judgment Lord Justice Jonathan Parker declared his prior contrary decision in the case of Beer v Higham [1997] BPIR 349 to have been ‘erroneous’.
33.109 Initial action when proceedings in progress
When the official receiver becomes aware of matrimonial or civil partnership proceedings still in progress and, in particular, an application for a property adjustment order, the official receiver should, unless an insolvency practitioner has been appointed trustee, immediately contact the court in which the proceedings are taking place to inform it of the bankruptcy proceedings. The official receiver should also give notice of the bankruptcy proceedings to the bankrupt’s spouse or civil partner and the solicitors acting for him/her, where known, to ensure that the parties are aware of the bankruptcy and the official receiver’s interest in the property (and also that of any insolvency practitioner, if the official receiver is unlikely to be trustee).
Step should be taken to ensure that either the official receiver or an insolvency practitioner is appointed as trustee, so that the bankrupt’s interest in the property vests in the trustee and is beyond claim by the (former) spouse or civil partner. If it is appropriate for an insolvency practitioner to be appointed as trustee, then an urgent application for a Secretary of State appointment should be made. (See Chapter 17, Part 5 for further information.)
33.110 Effect of property adjustment orders when the official receiver is receiver and manager
Property adjustment orders made under the provisions referred to in paragraph 33.107 adjust the rights of the spouses or civil partners and their respective interests in the property. It is possible that the order may be made between the date of the bankruptcy order and the date when the property vests in the trustee, because between those dates the estate still belongs to the bankrupt. However the bankrupt cannot dispose of any of his/her property between the date of the presentation of the bankruptcy petition and the vesting in the trustee without the consent of, or subsequent ratification by, the court dealing with the bankruptcy [note 17]. If the bankruptcy court consents to or subsequently ratifies a property adjustment order made before the vesting, the transfer of the property by the bankrupt will have to be effected. In these circumstances, early steps should be taken to appoint a trustee either the official receiver or, if appropriate an insolvency practitioner, so that the property vests in the bankruptcy estate and will not be available for any other claims. If it is appropriate for an insolvency practitioner to be appointed as trustee, then an application for a Secretary of State appointment should be made. (See Chapter 17, Part 5 for further information.)
33.111 Stay or adjournment of property adjustment order
The official receiver should endeavour to have any action for a property adjustment order, or similar order, stayed or adjourned (see paragraph 33.116) pending the appointment of a trustee or, failing that, he/she should consider whether it is appropriate to oppose the making of such an order during this period, or to apply to have it set aside. However, the official receiver should only enter into such proceedings with legal advice, where he/she has adequate funds or indemnities to cover the likely costs including any potential adverse costs, and where there is likely to be a reasonable benefit to the estate.
33.112 Order made against bankrupt’s spouse/civil partner prior to bankruptcy order
An order made against the bankrupt’s spouse or civil partner requiring him/her to transfer or settle property on the bankrupt will be effective and the property will become part of the estate if the property adjustment order, or similar order, is made before the bankruptcy order.
33.113 Effect of orders transferring interest in property - official receiver as trustee
If a property adjustment order is made under the provisions outlined in paragraph 33.107 after the bankrupt’s estate has vested in the trustee, it will be irrelevant if it requires the bankrupt to settle or transfer any property which forms part of his/her estate. This is because the bankrupt is no longer entitled to the property, as his/her interest will have passed to the trustee. The bankrupt is therefore unable to transfer the property, or any part of it, in accordance with such an order. Any requests for the official receiver to transfer any part of the property should be resisted. The Matrimonial Causes Act 1973 and CPA04 [note 13] only applies to parties to the marriage/civil partnership and so the court has no jurisdiction to make an order against a trustee under this section [note 18].
33.114 Order made against bankrupt’s spouse/civil partner after bankruptcy order
A property adjustment order (or similar) made after the date of the bankruptcy order, against a bankrupt’s spouse or civil partner, requiring him/her to settle property on or transfer property to the bankrupt will be effective. Such property may be claimed, within the appropriate time limit, by the trustee as after-acquired property [note 19].
33.115 Secured maintenance order
A secured maintenance payments order may be made by the court in matrimonial and civil partnership proceedings [note 20]. Such an order would give the spouse/civil partner security against the property of the bankrupt if payments ordered by the court were not made. For the reasons outlined in paragraph 33.113, in relation to property adjustment orders, secured maintenance orders should not be made after the estate vests in the trustee if they affect property in the estate.
33.116 Stay of matrimonial/civil partnership proceedings
It is generally desirable for any property adjustment order (or similar order) to be determined in the court in which the bankruptcy order was made. Since the trustee has no interest in the other aspects of the matrimonial/civil partnership proceedings, which do not affect the property or income of the bankrupt, such as the divorce/dissolution itself, he/she should apply to the family court for a stay of the proceedings relating to the property or income of the bankrupt pending proceedings in the bankruptcy court. Such an application should be made either in the bankruptcy court or in the court hearing the matrimonial/civil partnership proceedings [note 21]. If a trustee has not been appointed and an insolvency practitioner is likely to be the trustee, an adjournment of the proceedings should be sought so that the trustee may consider the matter. If an application cannot be made prior to the hearing of the matrimonial/civil partnership proceedings, the official receiver should attend the hearing and make the application. The official receiver should consider the effect of the property adjustment order (or similar) upon the bankrupt’s income in relation to any income payments order that is, or may be, sought by the trustee [note 22] (see also Chapter 31.7).
Equitable accounting is an exercise whereby the court considers what contributions have been made by cohabitants towards a property and uses such contributions, whether direct or indirect, to ascertain what interest each party has in the property.
The principles of equitable accounting are generally established in, but not exclusive to, divorce proceedings; but would equally apply to civil partnership proceedings. Where partners have separated but one partner has remained in occupation of a (normally) jointly owned property, the non-bankrupt partner (or the trustee in bankruptcy) can require that an equitable accounting exercise is undertaken to determine the shares between the joint owner in occupation and the trustee of the bankruptcy estate as co-owner. It is more unusual (but not impossible) for both parties to be in occupation but to consider that the property is not held in equal shares.
In the first instance the official receiver should establish how the initial purchase of the property was financed i.e. how much each party contributed, and obtain any evidence that it was intended to hold the property either in equal shares or in shares which reflected the deposit paid or contribution to the maintenance and upkeep of the property. (See paragraph 33.45).
33.118 Equitable accounting – matters to consider
As a general rule if the partner remaining in occupation has paid the mortgage payments in full he/she will be credited with one-half of the increase in value of the equity as a result of the capital element of the mortgage repayments made. The same principle applies to structural improvements to the property which the partner demonstrates were entirely funded from their own resources after separation [note 23].
During the period in which the bankrupt (or the absent partner) did not occupy the property he/she is entitled to occupation rent from the partner who occupied the property. However, unless there is evidence establishing that payments in respect of mortgage interest paid by the occupant are not equal to a fair occupation rent, the notional occupational rent should simply be offset against the payments of mortgage interest which would have fallen to the bankrupt/non occupying partner but have instead been met by the partner in occupation [note 24].
Even when there has been no marital breakdown and the bankrupt has remained in the matrimonial home, where the bankrupt’s spouse claims credit for mortgage interest payments made, the trustee is entitled to a set-off for occupation rent against these payments when the bankrupt’s interest in a property is realized. This should be applied equally to civil partnerships [note 25].
Antecedent Recoveries
33.119 Transactions at an undervalue and preferences
The official receiver should make enquiries to ensure that he/she becomes aware of any property which the bankrupt may have transferred to any other person, including a spouse/civil partner or cohabitant, at a value less than its market value. Where the official receiver is aware that property has been transferred by the bankrupt to another at an undervalue or as a preference within the relevant time period (see paragraph 33.120), and that the recovery is likely to be complex, the official receiver should seek the appointment of an insolvency practitioner trustee, if one has not been appointed, by the creditors [note 26]. Antecedent recoveries, which include transactions at an undervalue and preferences, are dealt with in greater detail in Chapter 31.4A and 31.4B.
The ‘relevant time’ period for transactions at an undervalue is five years ending on the date of the presentation of the petition. The ‘relevant time’ period in respect of a preference is six months ending on that date, but it will be extended to two years if the preference was in favour of a person who was an associate of the bankrupt, otherwise than by reason only of his/her being an employee [note 27]. An associate includes a spouse/civil partner or former spouse/civil partner of the bankrupt as well as other relatives [note 28]. The term ‘reputed husband and wife’ and ’reputed civil partner’ used in section 435(8) has no specific definition but should be interpreted as referring to a person who has acquired the reputation of being married to, or a civil partner of, the bankrupt by virtue of co-habitation with that person. It is probably not sufficient that they have lived together as husband and wife or civil partners for a period of time: they would need to be regarded as husband and wife or civil partners by the local community e.g. if they were known as Mr and Mrs X, because of the way in which they held themselves out to others or through custom.
33.121 Setting aside settlements in matrimonial/civil partnership proceedings
Where a property is subject to a property adjustment order in matrimonial proceedings under The Matrimonial Causes Act 1973 [note 29] or a similar order (see paragraphs 33.109 to 33.114), the Matrimonial Causes Act 1973 [note 11] states that the making of such an order does not prevent the settlement relating to the property from being set aside by the court on the application of the trustee as a transaction at an undervalue or as a preference. The official receiver should therefore consider whether the transfer of the bankrupt’s interest in property under a property adjustment order (or similar order) may be set aside.
Where legal proceedings under sections 339 or 340 are commenced on or after 15 September 2003 the trustee must first obtain sanction from the creditors' committee or court [note 30]. (See also Chapter 31.4A Part 3 - Transactions at an undervalue and Chapter 31.4A Part 2 – Preferences.)
33.122 Adequate consideration for a compromise
In deciding whether a settlement in matrimonial/civil proceedings can be set aside it is essential for the trustee to attempt to establish whether the recipient under a property adjustment order has given consideration which can be measured in money or money’s worth.
If the spouse/civil partner compromises his/her claim against the bankrupt (see paragraph 33.124 below) this may constitute sufficient consideration.
The Court of Appeal has held that, generally speaking, the spouse receiving property under a property adjustment order is considered to have given consideration equivalent to the value of the property being transferred. In such cases neither the provisions of section 339(a) or (c) are satisfied and the order cannot be attacked as a transaction at an undervalue [note 31].
33.123 Exceptional circumstances
Only if the case is exceptional and the trustee in bankruptcy can demonstrate collusion, fraud, mistake, misrepresentation or some broadly similar exceptional circumstances is the transaction capable of being challenged (see paragraph 31.4A.84). Following the decision of the Court of Appeal it is anticipated that applications to set aside property transfer orders as transactions at an undervalue will be rare. Each party to the marriage is entitled to a fair share of the available property but the court will seek to ensure that the applicant is provided with the appropriate means to look after themselves and any dependant children.
The official receiver should be reasonably satisfied that the agreement between the two parties was not reached with the intention of placing assets beyond the reach of creditors. In order to succeed on an application to set aside the property adjustment order the trustee in bankruptcy will need to demonstrate that the full facts, and financial circumstances of the parties, were not before the family court when the order was made. The solvent spouse, most likely the wife, may have main custody of dependent children and may have given up the right to pursue claims against assets which would not otherwise vest in the bankruptcy estate, for example a claim to pension benefits or maintenance.
33.124 Examples of transactions set aside
The following provides some assistance in deciding when a transfer of the bankrupt’s interest in property as part of matrimonial/civil partnership proceedings may be set aside:
(a) If the spouse/civil partner waives a claim to have the bankrupt’s share in a jointly owned home transferred to him/her in exchange for an enhanced share in the proceeds of sale of the home, this may amount to adequate consideration for a compromise [note 32];
(b) The compromise of a claim to financial provision in matrimonial/civil partnership proceedings can amount to consideration when deciding if a transaction was at an undervalue. Whether the compromise is relevant consideration depends upon its value; if the transferor had no other assets (except the property transferred) the compromise by the transferee of not seeking further financial provision will have no value [Note 31].
(c) If the transfer of the bankrupt’s interest in the jointly owned home was made prior to the matrimonial/civil partnership proceedings and no agreement was made at the time that the spouse/civil partner would not seek further assets from the bankrupt, the transfer will not be deemed to be relevant consideration. The assumption by the spouse/civil partner of sole liability for a mortgage on the property will not be sufficient to prevent the transaction being at an undervalue if the difference between the equity of redemption and the mortgage is sufficient [note 33].
33.125 Transactions defeating creditors
The court may make an order in respect of a transaction at an undervalue where it is satisfied that the bankrupt intended by the transfer of the property or other transaction to put it beyond the reach of a person who is making a claim against him/her (i.e. one of his/her creditors) or to otherwise prejudice the interests of such a person in relation to that claim. In all cases, intent by the bankrupt to put the assets beyond the reach of creditors, or otherwise prejudice their interests, must be shown. It is difficult to show such intent where the property is transferred into the joint names of the bankrupt and another from the bankrupt’s sole name as this could be explained as a desire to share the property, rather than an intention to defraud creditors, particularly where the bankrupt and his/her joint owner are living together in the property. For this reason it is preferable, where the facts of the case permit, to consider whether recovery can be sought on the basis that the transaction was at an undervalue or a preference, rather than a transaction to defraud creditors [note 34]. The pursuance of a claim as a transaction to defraud creditors should be made by an insolvency practitioner acting as a trustee or by a victim of the transaction, who may do so with permission of the court. There is no time limit on when an application can be made where the intention to defraud creditors can be established.
The official receiver needs to ensure that adequate funds are available in the estate or that the creditors are prepared to give an indemnity to cover the costs of the claim or otherwise undertake to meet the costs, before seeking the appointment of an insolvency practitioner.
[Back to Part 2 – Establishing the bankrupt’s interest in the property] [On to Part 4 – Matrimonial or civil partnership ‘home rights’ and applications to court for eviction]