Mekarska v Ruiz and another

JurisdictionEngland & Wales
Judgment Date2011
CourtFamily Division

Divorce – Financial provision – Ancillary relief – Bankruptcy – Wife obtaining freezing and occupation orders in course of divorce proceedings – Husband running up debts in breach of freezing order and petitioning for bankruptcy without wife’s knowledge – District judge making financial order in divorce proceedings – Order leaving wife with residue of bankrupt estate – Wife appealing against financial order and subsequently seeking annulment of bankruptcy order – Whether bankruptcy order improperly made – Whether district judge erring in approach to financial order – Matrimonial Causes Act 1973, s 25 – Insolvency Act 1986, ss 282(1), 336(2), (4), (5) – Family Law Act 1996, s 33.

The husband and wife were married in 2001. Their son was born the same year. In 2002, the family moved into a house that had been purchased by the husband in 1988, before the parties had met. The property was in his sole name and was unencumbered. In 2006, the marriage broke down and divorce proceedings were commenced in the county court. The wife obtained a freezing order over the husband’s assets in October, and an occupation order in November, at which point the husband left the family home. In 2006 and 2007, the husband ran up large debts at banks and on credit cards, latterly in breach of the freezing order. The creditors, some eleven financial institutions, were all unsecured. In December 2007, being unable to make the repayments, the husband petitioned for his own bankruptcy in the High Court. A bankruptcy order was made without notice to the wife, the court finding that, although not balance-sheet insolvent, the husband was commercially insolvent, being unable to pay his debts as they fell due. In his statement of affairs, he mentioned that he was in the middle of divorce proceedings, but no reference was made to the freezing and occupation orders. A trustee in bankruptcy was duly appointed. The wife subsequently became aware of the husband’s bankruptcy and, in April 2008, her solicitors wrote to the trustee advising that they had been instructed to make an immediate application to annul the bankruptcy. In the event, no such application was made at that time. The final hearing of the divorce proceedings was held before a district judge in September 2008, during the course of which the wife explicitly accepted that the home would have to be sold and the trustee paid. In his decision, the judge noted that the marriage had not been a long one and that the child’s situation had first to be considered. He concluded that a clean break order was appropriate and ordered that the wife should receive a lump sum equal to the entire surplus

after the bankruptcy debts and costs were cleared. The wife was also awarded the husband’s remaining capital of £18,000. Predicated on the sale of the property at £270,000 (an offer made by prospective purchasers), the wife would have received around £149,000 with which to re-house herself. The judge considered that the husband had unnecessarily made himself bankrupt when he could have kept his creditors at bay, but made no finding that the bankruptcy had been tactical in the sense of being motivated by a desire to defeat the wife’s claims. Immediately after the hearing, there was a downturn in the economy and the prospective purchasers dropped their offer to £250,000. The wife then withdrew her co-operation in the sale process, prompting an application by the trustee to the bankruptcy court for an order for possession, which was adjourned from time to time. In August 2009, the wife was granted permission to appeal out of time against the district judge’s financial order, arguing that it did not meet her needs or those of the child, whose welfare she believed should be paramount. In September, she finally applied for annulment of the bankruptcy order, relying upon s 282(1) of the Insolvency Act 1986, which provided that ‘The court may annul a bankruptcy order if it at any time appears to the court—(a) that, on any grounds existing at the time the order was made, the order ought not to have been made …’ The appeal was transferred to the High Court and the proceedings were joined together. The wife requested that the property be transferred to her absolutely, but at that point conceded that the trustee’s costs and expenses should be charged against the property, and that he could force a sale if they were not paid within a reasonable time; the husband should be left to pay all or most of the original debts himself. She submitted that the district judge had proceeded on the assumption that no challenge to the bankruptcy was possible, and that subsequent events had invalidated the basis of his order. She argued, inter alia, that her home rights under s 33 of the Family Law Act 1996, and the freezing and occupation orders, put the family home permanently beyond the reach of the trustee and the creditors. She relied on s 336(2) of the 1986 Act, which provided that ‘Where a spouse’s … home rights under [the 1996 Act] are a charge on the estate or interest of the other spouse … and the other spouse is adjudged bankrupt …(a) the charge continues to subsist notwithstanding the bankruptcy and, subject to the provisions of that Act, binds the trustee of the bankrupt’s estate …’ Section 336, she claimed, did not distinguish between proprietary and non-proprietary rights and had to be read at face value, with the result that the trustee should have disclaimed the property as being ‘onerous’ property under ss 315 and 320. She contended that, if he had wished to disturb her rights, the trustee should have applied to the bankruptcy court under s 336(4), and that, by failing to mention s 336, he had misled the divorce court. She also claimed that the district judge should have applied the checklist of factors mentioned in s 336(4), since the effect of the judge’s order was to deprive her of occupation of the home. A further submission was made to the effect that, by prioritising the creditors and the trustee, the judge had failed properly to apply s 25 of the Matrimonial

Causes Act 1973, which required the court to have regard to all the circumstances of the case, first consideration being given to the welfare of the child.

Held – (1) The first question on the annulment application was whether, on any grounds existing at the time the bankruptcy order was made, the order ought not to have been made. Three conclusions were relevant in answering that question. The first was that the husband had in fact been unable to pay his debts as they became due and, at the time the order was made, it could not be said that there had been a tangible and immediate prospect of his being able to do so. Whilst some or all of his debts could have been paid once the divorce was concluded at some time in the foreseeable future, the information presented to the bankruptcy court had not made it inappropriate for it to have made the order when it had. Secondly, there was no evidence that the husband’s motivation for petitioning had been to frustrate the wife’s legitimate claims, although his actions were bound to impact on her; it was more likely that he had been motivated by a belated wish to put his affairs in order. Although his breach of the freezing order was reprehensible, he had been entitled to consider that he too had some interest in the family assets and, if anything, the bankruptcy had put an end to their dissipation. The bankruptcy was unnecessary but it had not been tactical. Thirdly, contrary to the wife’s assertion, s 336(2)(a) of the 1986 Act did not provide her, and all others in her position, with a position of cast-iron impregnability against any attack on the family home by creditors. The intention behind the subsection was to ensure that, where a wife’s home rights were concerned, a trustee in bankruptcy was in no better short-term position than a husband had been. The rights endured until they were brought to an end by an order of the court, whether in divorce proceedings, or by an order in the bankruptcy proceedings. The existence of such rights did not make the property onerous and the section did not give a person in the position of the wife a right to remain in the property in perpetuity regardless of anyone else’s interests. As a matter of law, the threshold for annulment had not been crossed and the wife’s application therefore had to be refused (see [82]–[83], below); Re Coney (a Bankrupt) [1998] BPIR 333 and Paulin v Paulin[2009] 2 FCR 477 applied.

(2) The wife’s claim that the district judge had failed to give first consideration to the child’s position had to be rejected, and it was not the case that his welfare was to be regarded as paramount in that context. The submission that the judge had proceeded on the assumption that no challenge to the bankruptcy was possible was also unfounded. The wife had not herself challenged the bankruptcy order; on the contrary, she appeared to have accepted it and, like the court, to have worked around it. Moreover, as the district judge had no power to disturb the bankruptcy, any challenge would have had to be made in the bankruptcy court, with the result that the financial application in the divorce would have had to be adjourned again. Given the fact that the assets were already wafer-thin and the debts a reality,

the judge could not be criticised for failing to adjourn the proceedings on his own initiative to allow the wife to make an application to annul. The reduction in the price offered by the purchaser was not a ground for the appellate court to interfere, particularly as the judge had specifically referred to the falling market. The wife’s argument that the judge should have applied the checklist of factors mentioned in s 336(4) of the 1986 Act could not be accepted; the trustee had had no reason to apply for an order for possession at that stage because, at the time of the hearing, the wife had agreed to a sale. In any event, under s 336(5), the interests of...

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