It is a sad but true fact that bankruptcy has become particularly topical. Here, we examine its potential impact upon family properties.

When debts are greater than an individual’s assets or debts cannot be paid as they fall due, creditors may petition for an individual’s bankruptcy. On bankruptcy a Trustee is appointed to collect any assets owned by the Bankrupt and divide them between the Bankrupt’s creditors.

The Insolvency Act 1986 allows a Trustee to apply to the Court for an order to ’set aside‘ transactions that the Bankrupt entered into up to 5 years before presentation of the Bankruptcy Petition. This is to take account of transactions completed at a value lower than the open market value, which may have been carried out to avoid assets being seized at bankruptcy.

These types of transactions are known as “transactions at an undervalue” and the onus is on the Trustee to prove that the Bankrupt received an insufficient amount. Legislation allows the Trustee the possibility of undoing actions which would have defeated creditor claims.

Historically, where a financial award is made to a spouse in divorce proceedings and is recorded in a court order, the receiving spouse has been protected from subsequent claims against the Bankrupt’s estate. This has particularly been the case where the financial award was made after contested divorce proceedings, since there was less chance that the Bankrupt’s motives were to deprive his or her creditors of their money.

However, the case of Hill v Haines (2007) which was heard in the High Court, undermined this precedent by allowing the Trustee to bring such a claim. The case was complex but initially it seemed that the Trustee would be able to overcome a transfer of property between divorced couples because no money (or money’s worth) was paid, although the Court of Appeal overturned this decision.

The effect (in broad terms) reinforces the rule that a Trustee cannot set aside a transfer of property between a divorced couple in order to meet creditor demands; provided the transfer was made as a result of contested divorce proceedings and there is no evidence of collusion (i.e. to defeat the creditors’ claims), fraud or mistake and the transfer is made before a party to the divorce becomes bankrupt.

This is not good news for Creditors who are likely to have an uphill struggle trying to convince a court to set aside a divorce settlement arising from contested proceedings.

The Court of Appeal decision does not mean that all applications made by a Trustee to set aside transfers of matrimonial homes to a spouse will be unsuccessful. Where transfer of a marital home occurs due to collaborative divorce proceedings, it may still be possible for the Trustee to successfully set aside a transfer for the benefit of creditors, if there is evidence of intention to defeat creditors or the transfer has occurred at an undervalue.

This is a complex area of law that needs interpretation and advice. Contact the Rural Business Team at Birkett Long LLP on 01206 217300 or the firm’s Insolvency or Family Departments for further information.