In Re Ruiz (a bankrupt)  EWHC 913 (Fam) the High Court ruled that a wife’s right to occupy the matrimonial home did not prevent her husband’s trustee in bankruptcy (TiB) gaining and enforcing a proprietary interest in the property.
M and G married in 2001 and moved into a house purchased by M and registered in his sole name. In 2006 divorce proceedings were initiated, following which G obtained a freezing order over M’s assets and an occupation order over the marital home.
During 2006/7 M ran up large debts (some in breach of the freezing order). In December 2007, unable to make his repayments, M petitioned for his own bankruptcy. M disclosed that he was in the midst of divorce proceedings but did not disclose the freezing or occupation orders. He declared assets of £300,000 and debts of £66,000. Although M was not balance sheet insolvent, the court accepted that he could not pay his debts as they fell due, and duly made a bankruptcy order.
In November 2008, the financial order on divorce was made; G was to receive a lump sum equal to the entire surplus after the bankruptcy debts and costs were cleared (the Divorce Order). An offer of £270,000 had been received on the property and the amount required to discharge the bankruptcy was some £132,000.
Unfortunately, property prices then crashed and the prospective purchasers reduced their offer. G stopped cooperating with the sale and refused to relinquish her occupation rights. The TiB then applied for an order for possession and G made an application to appeal out of time against the Divorce Order. Permission to appeal was granted and in September 2009 (nearly two years after the bankruptcy order had been made), G also applied for M’s bankruptcy to be annulled. A hearing to consider both issues was eventually referred to the High Court and set for March 2011. Throughout this period the assets had been haemorrhaging and by March 2011 the overall amount required to clear the bankruptcy had risen to £260,000.
The Arguments and Decision
Under section 282 of the Insolvency Act 1986 (IA) a bankruptcy order may be annulled if it appears to the court that “on any grounds existing at the time the order was made, the order ought not to have been made”. In an earlier case (Paulin) there is authority for the proposition that, as the husband was balance sheet solvent at the date of the bankruptcy order, the burden was on him to justify why the court should not annul the bankruptcy. The judge rejected this argument; while he accepted that the husband’s petition may have been “unnecessary” and the freezing and occupation orders should have been disclosed, this was distinguished from the “tactical” bankruptcy manufactured by the husband in the Paulin case. It was dishonesty, not balance sheet solvency, which shifted the burden of proof.
Further arguments were raised in relation to the appeal of the Divorce Order:
- that the effect of section 336(2) IA (“Where a spouse’s or civil partner’s home rights…are a charge on the estate or interest of the other spouse...and the other spouse is adjudged bankrupt...the charge… binds the trustee of the bankrupt’s estate and persons deriving title under the trustee”) was to prevent the TiB from acquiring any proprietary interest in the marital home;
- the TiB could only disturb the wife’s rights via a possession order through the bankruptcy court (not under the Divorce Order); and/or
- the wife’s rights to the property had priority over the TiB’s, so the property should have been disclaimed as onerous.
The judge rejected all three arguments. He considered argument (a) amounted to giving the wife a right to remain in the property in perpetuity regardless of anyone else’s interest, which was “absurd”. The intention behind section 336(2) was to ensure that “where a wife’s home rights are concerned, a TiB is in no better short-term position than the husband would have been. The rights endure until they are brought to an end by an order of the court, whether in the divorce proceedings or by an order in the bankruptcy proceedings.” Accordingly, argument (b) failed as at the time the Divorce Order was made, the wife agreed to the sale and the trustee had no reason to apply to the bankruptcy court for an order for possession.
Onerous property is defined as “property comprised in the bankrupt’s estate which is...not readily saleable”. The judge rejected the argument that the wife’s rights to occupy the home meant that the property was not readily saleable (and therefore onerous) as it was open to the TiB to apply under section 336 IA for an order for possession.
The wife’s appeal therefore failed, meaning that the bankruptcy and Divorce Order remained in effect.
The case clarifies the relative priority of occupational rights in the context of bankruptcy; the practical effect of section 336(2) is to allow a spouse to remain in occupation of the matrimonial home pending a final order in divorce proceedings (or a possession order through bankruptcy proceedings). The section does not act to grant the spouse of a bankrupt debtor any form of proprietary interest superior to that of the TiB.
The judge suggested that even had the wife’s argument in respect of the annulment had been accepted, as the application had been made so late, the bankruptcy debts were such as to make it virtually pointless for the court to annul. Making an annulment application early on in the proceedings is therefore vital.
Finally, it was suggested that in situations where the debtor bringing a bankruptcy petition is also going through divorce proceedings, courts should consider adjourning the hearing to allow the debtor’s spouse to receive notice of the petitions and make representations to the court. Whether this will, in future, become common practice or help avoid situations similar to this, remains to be seen.