Bankruptcy and insolvency - overviewGeneral principles

The basic principle of bankruptcy is that, while bankrupt, a person is divested of all their property and is thus protected from their creditors. The effect of a bankruptcy order is to vest in the trustee in bankruptcy all the bankrupt’s assets. Since the trustee is not a party to the marriage or civil partnership, no order for financial provision may be made against the trustee in the ancillary relief (financial order) jurisdiction. Accordingly, the court’s powers to make financial provision are circumscribed by the respondent’s bankruptcy.

Where a bankruptcy order is obtained as a fraudulent device to defeat a claim for ancillary relief (financial order), it can be annulled as an abuse of process under the Insolvency Act 1986 (IA 1986) where the debtor was not insolvent at the time the petition was presented.

Effect upon periodical payments

Periodical payments made after presentation of the petition but before the appointment of the trustee in bankruptcy are a disposition void, except to the extent that they are made with the consent or ratification of the bankruptcy court, unless the recipient spouse or civil partner received those payments in good faith, for value and without notice of petition.

A periodical payments order may be made against a bankrupt, but the amount of income available to the applicant would be circumscribed by any income payments order made by the bankruptcy court under IA 1986.

Orders for periodical payments are not provable. However, a bankruptcy order does not prevent enforcement proceedings in relation to any debt arising under such an order.

Effect upon lump sum orders

Since the court has to have regard to assets to which the respondent would be entitled in the foreseeable future, it can make a lump sum order where there is a clear picture of the assets and liabilities, and it appears there will be a surplus left at the end of the bankruptcy. However, an order cannot be made against the trustee in bankruptcy.

Lump sums paid after the petition but before the appointment of the trustee are subject to the avoidance provisions of IA 1986 unless received before the bankruptcy order in good faith, for value and without notice of petition.

In respect of bankruptcies commencing on or after 1 April 2005, an obligation to pay a lump sum or costs arising under an order in family proceedings are provable in bankruptcy. This enables a spouse or civil partner with an order for lump sum or costs that have not been paid to present a petition based on the payer’s debts.

Effect upon property adjustment orders

Where an order has been made and decree made absolute or a dissolution order made and then the transferor becomes bankrupt before the transfer is completed, the effect of a property adjustment order is to confer on the transferee an equitable interest in property at the moment the order is made. The trustee will take the estate subject to this equitable interest and it will be binding on the estate.

This does not prevent any property adjustment order being a transaction in respect of which an order setting it aside may be made. The object is to enable the trustee to recover property for the bankrupt’s estate where, before the petition is presented, an individual makes a gift to any person or enters into a transaction for no consideration, or for a consideration the value of which in money or money’s worth is less than value in money or money’s worth of the consideration provided by the individual. The transaction must have been entered into at a relevant time: within the period of five years ending with the day of presentation of the petition. It does not matter whether the individual was insolvent or not at the time of the transaction if the transaction was made within two years of the presentation of the petition. However, if the transaction took place within the preceding three years, insolvency must be proved.

This means that a trustee can apply to set aside a transaction whereby one spouse, or civil partner, transfers their interest in matrimonial property to the other in the absence of adequate consideration. The question of adequate consideration was considered in the 2007 case of Haines v Hill, where the Court of Appeal decided that an order in ancillary relief (financial order) proceedings, whether made after a contested hearing or by consent, constituted consideration. In the ordinary case a transferee is to be regarded as having given consideration in money or money’s worth unless the case was exceptional and it could be demonstrated that the property adjustment order had been obtained by fraud or some exceptional circumstance.

The court has no power to make a property adjustment order while the respondent remains bankrupt.

Former matrimonial home and the trustee in bankruptcy

A trustee in bankruptcy will often make a claim for the bankrupt’s share of the equity in the property, including an application for sale of the property to realise the bankrupt’s equity. The other spouse’s or civil partner's reaction is often to assert a greater claim in the former matrimonial home than 50%. The court will determine the equitable interests by the application of proprietary principles. Once the parties’ shares are quantified, the court will determine under IA 1986 whether a sale is appropriate, taking into account the following factors:

Where the application for sale is made more than one year after the vesting of the bankrupt’s estate in a trustee, the court shall assume, unless the circumstances of the case are exceptional, that the interests of the creditors outweigh all other considerations.

If the value of the equity in the former matrimonial home is £1,000 or less, any application by the trustee for sale must be dismissed. If the trustee fails to realise the bankrupt’s interest in the property within three years from the making of the order the property reverts to the bankrupt. The bankrupt can seek discharge of the bankruptcy after one year unless guilty of any bankruptcy offences.