The Relationship between Family and Bankruptcy Law
The matrimonial home is an asset which is, understandably, of prime concern to anyone, or their partner, who is going through a divorce, bankruptcy or if a bank is trying to repossess the house given as security for business borrowings. This has become particularly significant following the economic downturn. It is also important in family break-ups when a trustee in bankruptcy becomes involved on behalf of one of the owners.
It may be possible for one party to show that the beneficial interest in the property does not belong to the party who owes the business debt. There are also many examples of where a family lawyer might "negotiate" with a bankruptcy lawyer and vice versa. In such cases, the non-bankrupt spouse will often consider that they are entitled to a share of the beneficial interest of the property and will have to satisfy the Trustee in Bankruptcy, or bank and in some cases, the court, that s/he is entitled to that interest. We will deal in more detail with claims by the bank later in this piece.
Establishing the Beneficial Interest
There is a great deal of case law surrounding this area which requires careful unravelling. In essence, a beneficial interest can be established via a constructive or a resulting trust and the basic requirements of each are set out below. Please note that the principles apply equally to solely or jointly owned properties.
Initial Presumption - the initial presumption is that the property is held as per the proprietorship register. This presumption can be rebutted in the ways set out below:
Written Declaration of Trust - a written declaration of trust is conclusive unless there are grounds for it to be set aside (i.e. as a transaction at undervalue). The declaration must be in writing, although there is no requirement for it to be made by deed. The declaration contained on the Land Registry TR1 form is sufficient, even if it is not signed. The contributions of parties to the purchase price are irrelevant.
Express Constructive Trust - to establish an interest under an express constructive trust there must be an express agreement or common intention that the claimant has a beneficial interest and the claimant must have acted to his / her detriment. The share of the beneficial interest is governed by the agreement. If there is no agreement, the court will infer a share and it will usually infer a 50% share where the parties are married and both made substantial contributions towards the purchase price.
Implied Constructive Trust - if there is no express agreement or common intention (see above), the court can infer an agreement or common intention. This usually occurs where there has been a direct contribution to the purchase price but some conduct may give rise to an interest under an implied constructive trust (such as contributions to the household expenditure if they allowed the other party to discharge the mortgage repayments) and some indirect contributions may also suffice (such as making payments into an account out of which the mortgage payments and household expenditure is paid). The share is calculated by the whole course of conduct of parties and, if the parties are married, the beneficial interest will usually be divided equally. If the parties are unmarried, the court will adopt a broad-brush mathematical approach.
Resulting Trust - to establish an interest under a resulting trust there must be a direct contribution to the purchase price. Indirect contributions will not suffice. The share of the beneficial interest is calculated according to the contribution.
Once the beneficial interest has been established, the parties may then go through an equitable accounting exercise to account for any debits and credits not already considered. This does not affect the beneficial interests but does affect the amount ultimately payable from the net proceeds of sale. It includes factors such as occupation rent, improvements and capital mortgage payments.
Case Study
The law is ever evolving in this area. The recent case of Hill v Haines involved a property transfer from a husband to a wife pursuant to a court order in the ancillary relief proceedings under ss 23 to 25 of the Matrimonial Causes Act (MCA) 1973. The joint Trustees in Bankruptcy successfully challenged the transfer as a transaction at undervalue (s339 Insolvency Act 1986) meaning that the property transfer was void against them.
Mrs. Haines, as expected, appealed to the Court of Appeal. The case was heard in December 2007 and it was held that an order made in matrimonial ancillary relief proceedings to convey property was not a transaction made without consideration, whether following a contested hearing or a compromise agreement, unless there was evidence of fraud, mistake or misrepresentation.
In stark contrast to the initial decision of the High Court, the Court of Appeal has made it difficult, but not impossible, for a Trustee in Bankruptcy to challenge a property transfer arising from ancillary proceedings.
This is a general and simplistic overview of a complex area. Each case turns on its own facts. If you require more detailed advice in this area, please contact Rachel Youngs of stevensdrake on 01293 596919 or Gavin Pickering on 01293 596976.
Published - October 2010
This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.
