Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 21st December 2001
B e f o r e :
-----------------------------------
Between
(Appellant)
- and -
(Respondent)
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William Hansen (instructed by Jefferies ) for
the Appellant
Raquel Agnello (instructed by Sprecher Grier Halberstam LLP) for the Respondent
1. This is an appeal against the order of District Judge Dudley dated 23 August 2001, by which he declared that the property know as 227 Main Road, Hawkwell, Hockley, Essex ("the property") vested in the Respondent by virtue of Section 306 of the Insolvency Act 1986.
2. The Respondent is the trustee in bankruptcy of Stewart Richard Mountney (" the bankrupt"). The property was owned by the bankrupt. The Appellant is his former wife. The property is the former matrimonial home, where she lives with the three children of the family. In February 2000, the Appellant presented a divorce petition on the grounds of the bankrupt's unreasonable behaviour. On 6 July 2000, District Judge Dudley ordered, pursuant to Section 24(1)(a) of the Matrimonial Causes Act 1973, that:
2. All (the bankrupt's) interest (both legal and beneficial in the property...(and its content) shall be transferred forthwith by him to (the Appellant) absolutely subject to the mortgage with Cheltenham & Gloucester plc.
3. In the event (bankrupt) fails to sign and return the transfer documents and any relevant documentation in connection with the transfer ordered at paragraph 2 above within 14 days of them being sent by first class post to him..., the said documents may be signed by the District Judge.
6. It is hereby certified that pursuant to the Legal Aid Regulations, the property and monies transferred to or retained by (the Appellants) under this Order are intended to be used to provide a home for (the Appellants) and her dependants.
3. The bankrupt did not sign any transfer documents. On 14 July 2000, before
the expiration of the period of 14 days referred to in paragraph 3 of the order
dated 6 July 2000, a bankruptcy order was made against Mr Mountney on his own
petition. The Respondent was appointed as trustee on 28 September 2000. The
deficit in the bankrupt's estate is approximately £195,000. The only asset
that may be available to meet the claims of creditors in the bankruptcy is the
former matrimonial home.
4. Before the District Judge, the only arguments put forward on behalf of the Appellant were that the bankruptcy was an abuse of the process of the Court, having been designed to defeat the matrimonial order; and that in any event by reason of the order of 6 July 2000 the property was subject to a constructive trust in favour of the Appellants which bound the trustee. The District Judge rejected both arguments. So far as the contention that the bankruptcy was an abuse of the process of the Court is concerned, the District Judge held that the remedy of the Appellant, if any, was to apply to annul the bankruptcy. Parenthetically, the Appellant's argument as to abuse of process faces the formidable obstacle of the judgment of the Court of Appeal in re Holliday [1981] 2 WLR 996. With regard to the contention that the order of 6 July 2000 created a constructive trust in favour of the Appellant, he held that the judgment of Jonathan Parker J in Beer v. Higham [1997] BPIR 349 was determinative of the issue and was against the Appellant. He therefore held that the property, which at the commencement of the bankruptcy remained vested in the sole name of the bankrupt, passed to the trustee in bankruptcy.
5. Before me, Mr Hansen, on behalf of the Appellant, has put forward arguments that were not before the District Judge. He also sought to rely on documents that were not before the District Judge. He submitted:
(i) That the District Judge was wrong in holding that the order of 6 July 2000 did not create a constructive trust.
(ii) That the right of the Appellant under the order of 6 July 2000 was effective as against the trustee by virtue of Section 283(5) of the Insolvency Act 1986 and/or the rule in Ex parte James (1874) LR 9 Ch 609.
(iii) That the Appellant's right to the property is protected under Article 8 of the European Convention on Human Rights; and that either Section 283(5) of the Act ought to be construed so as to safeguard that right or the right should be protected by this Court on the hearing of the appeal.
6. Mr Hansen's new grounds were put forward without opposition from Miss Agnello, who however did object to my considering evidence that was not before the District Judge.
7. Mr Hansen's object in wishing to put before me documents that were not before the District Judge was to establish that the conduct of the bankrupt had been unconscionable. Since I was prepared to assume, for the purposes of the appeal, that the bankrupt had behaved unconscionably towards his former wife, in seeking to avoid or to defeat her claims for ancillary relief, in the event it was unnecessary for me to look at the documents.
8. Mr Hansen submitted that the order of 6 July 2000 was to be interpreted, and its effect determined, by reference to the previous unconscionable conduct of the bankrupt. I cannot accept this submission. Whether the order created a constructive trust must depend on the terms of the order itself. Furthermore, I reject the submission that the unconscionable conduct of the bankrupt before 6 July 2000 of itself gave rise to a constructive trust in relation to the property. Unconscionable conduct must relate to specific property if that property is to be subject to a constructive trust. There was and is no evidence of any unconscionable conduct that could have given rise to a constructive trust of the property.
9. So far as the order of 6 July 2000 itself is concerned, I agree with the District Judge that the decision of Jonathan Parker J in Beer v. Higham is determinative of the issue. Beer v. Higham, like the present case, concerned an order for the transfer to a wife of her husband's interest in the matrimonial home. In that case, the matrimonial home had been vested in the joint names of the husband and wife. The order for ancillary relief in the matrimonial proceedings in that case required the husband to transfer his interest to the wife within three months of the date of the order. The bankrupt did not comply with the order before a bankruptcy order was made against him. Jonathan Parker J rejected the argument that a constructive trust had been brought into existence by the order made in the matrimonial proceedings on 3 grounds:
(i) The consent order did not of itself effect any transfer of the bankrupt's beneficial interests, rather it required the bankrupt to take the necessary steps to effect such a transfer.
(ii) To hold that the order effected a transfer of the husband's beneficial interest would be inconsistent with section 53(1) of the Law of Property Act 1925.
(iii) A constructive trust required, at the very least, a specifically enforceable contract, and there was none in that case.
He therefore concluded that the making of the order in that case did not effect a transfer of the beneficial interest.
10. I am bound to follow the decision of Jonathan Parker J in Beer v. Higham unless I consider it to be clearly wrong. Not only do I not consider it to be clearly wrong, I consider it to be clearly right. I would add that the concept of a constructive trust in a case such as the present seems to me to be wholly unnecessary. This is a case for wielding Occam's razor. If an order for ancillary relief in matrimonial proceedings such as that made in this case and in Beer v. Higham is to be effective as against a trustee in bankruptcy, notwithstanding that the order has not been carried out, it must be because the order creates a right which is valid as against a trustee in bankruptcy within the meaning of section 283(5) of the Insolvency Act 1986. If it does create such a right, a constructive trust is an unnecessary creation. On the other hand, if it is not a right binding the estate for the purposes of section 283(5), to hold that an order in matrimonial proceedings creates a constructive trust would be inconsistent with, and simply a means of circumventing, section 283(5).
11. This case differs in one relevant respect from Beer v. Higham. In Beer v. Higham, the time for the carrying out of the matrimonial order had not expired before the making of the bankruptcy order. In the present case, the bankrupt was required to execute the transfer of the property forthwith. He was therefore in default by the date of the bankruptcy order. In my judgement, however, that is not a material distinction. The simple fact remains that in both of these cases, the order made in the matrimonial proceedings was not effective of itself to vest the property in the wife, and the order had not been carried out, either by the husband executing the necessary transfer, or by its being executed on his behalf by a District Judge. The position of the Appellant might have been protected if the Order of 6 July 2000 had provided for the immediate execution of the necessary transfer documents by the District Judge on behalf of the bankrupt. Unfortunately, it did not so provide.
12. I also reject the submission that the conduct of either the bankrupt in this case or the trustee following the making of the Order of 6 July 2000 brought into existence a constructive trust. So far as the bankrupt is concerned, he did nothing relevant. He simply failed to comply with the order. Mr Hansen relies on his inclusion of the property among his assets in his statement of affairs. However, that was irrelevant. Even if it had been excluded from the list of assets he provided, it would have been available to his trustee in bankruptcy unless the Appellant has some right in or to the property binding on the trustee. So far as the trustee is concerned, I see no room for a finding of any unconscionable conduct on his part. He is simply seeking to get in what, on one view of the law, is an asset, indeed the only asset, of the bankrupt available to meet the claims of his creditors.
13. Accordingly, I reject the submission that any constructive trust of the property came into existence.
14. I turn to consider the questions of the effect of section 283(5) of the Insolvency Act 1986 and Ex parte James. Relying on the fact that the rule in Ex parte James is dealt with in Muir Hunter on Personal Insolvency, at paragraph 3-659 ff., in connection with section 283 of the Insolvency Act 1986, Mr Hansen submitted that the rule was a rule as to the correct interpretation of section 283(5). I do not accept this submission. The rule in Ex parte James is not a rule of statutory construction. It is a rule relating to the supervision by the Court of the conduct of officers of the Court, namely trustees in bankruptcy and liquidators. It is for this reason that the rule does not apply to a liquidator of a voluntary liquidation: Re T.H. Knitwear (Wholesale Limited) [1988] 1 Ch 275. The inapplicability of the ruling Ex parte James to voluntary liquidations is wholly inconsistent with the rule being one of statutory construction.
15. In essence, the rule in Ex parte James applies to prevent advantage being taken of conduct on the part of the liquidator or trustee which is regarded as improper, or where it would be inequitable for the estate to retain certain assets, having regard to the manner in which those assets were acquired by the estate. The trustee in this case has not been guilty of any impropriety. He has simply sought to enforce the insolvency law as he conceives it to be in the interests of the general body of creditors of the bankrupt. Furthermore, while I have the greatest sympathy with the position of the Appellant, if the Insolvency Act 1986 provides for the property to be comprised in the bankrupt's estate in the events which have happened, there is no equity to prevent the operation of the statute. If, in cases such as this, preference is to be given to a wife of former wife in priority to the general body of creditors of a bankrupt husband (or vice versa if the property is vested in the wife), that is a matter for the legislature.
16. Ultimately, therefore, it is clear that there is only one question in this appeal: is the right of the Appellant to the enforcement of the order dated 23 August 2001 a right to which property comprised in the bankrupt's estate is subject, within the meaning of section 283(5) of the Insolvency Act 1986? In order to answer this question, it is first necessary to deal with a preliminary submission made on behalf of the Appellant, namely that this provision falls to be construed so as to avoid any infringement of the Appellant's rights under Article 8 of the European Convention. The property is clearly the Appellant's home within the meaning of Article 8.1. For present purposes, I assume that for her to give up her home would also involve interference with her family life, within the meaning of Article 8. I must take account of section 3 of the Human Rights Act 1998. Equally, however, I must bear in mind section 6(1)of that act; that the court is a public authority; and that it follows that if the Appellant is unsuccessful in this appeal and the trustee seeks an order of the Court giving him possession of the property, the Court at that stage will be able to take account of the Appellant's Convention rights. It is also necessary to bear in mind that rights under Article 8 are by no means unqualified. The right is to "respect" for one's home, not a right to one's home. In addition the rights conferred by Article 8.1 are qualified in Article 8.2, in particular, in the present case by a reference to the economic well being of the country and the protection of the rights of others. The rights of others in the present case include those of the bankrupt's creditors. To exclude the former matrimonial home from the bankrupt's estate would confer on the Appellant an absolute right rather than the qualified right under Article 8. For these reasons, in my judgment the interpretation and effect of section 283 of the Insolvency Act 1986 are unaffected by section 3 of the Human Rights Act. The Convention rights of the Appellant are to be taken into account at a later stage, if she is unsuccessful in this appeal, on any application by the trustee for possession of the property.
17. I therefore turn to consider section 283 of the Insolvency Act 1986. So far as relevant it provides as follows:
(1) subject as follows, a bankrupt's estate for the purpose of any of this Group of Parts comprises –
(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and
(b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph.
(2) ...
(3) subsection (1) does not apply to –
(a) property held by the bankrupt on trust for any other person, or
(b) ...
…
(5) For the purposes of any such provision in this Group of Parts, property comprised in a bankrupt's estate is so comprised subject to the rights of any person other than the bankrupt (whether as a secured creditor of the bankrupt or otherwise) in relation thereto, but disregarding –
(a) any rights in relation to which a statement such as required by section 269(1)(a) was made in the petition on which the bankrupt was adjudged bankrupt, and
(b) any rights which have been otherwise given up in accordance with the rules.
(6) ...
18. Although the reference in section 283(5) to "the rights of any person other than the bankrupt" is general, one would expect it in the present context to refer to proprietary, rather than personal rights, since otherwise the general principle that creditors of a bankrupt share pari passu in the estate, in so far as they are not secured creditors, would be contravened: c.f. Re Goldcorp Exchange Ltd [1995] 1 AC 74 (a receivership case). That this is the correct interpretation of section 283(5) is supported by the reference to a secured creditor in the parentheses and the reference to section 269(1)(a), which can only apply to a creditor having a security. Against this, Mr Hansen cited the decision of the Court of Appeal in Bendall v. McWhirter [1952] 2 QB 466. In that case, a deserted wife was held to have a personal licence to occupy the former matrimonial home that was valid as against the trustee in bankruptcy of her husband. However, Mr Hansen's submission overlooked the fact that the decision of the Court of Appeal in that case was disapproved of and overruled by the House of Lords in National Provincial Bank Limited v. Ainsworth [1965] AC 1175.
19. Miss Agnello referred me to the judgment of Goff J in Re Solomon [1967] 1 Ch 573. In that case the property that was the former matrimonial home was owned by the husband and wife jointly. In the matrimonial proceedings, the husband undertook to take all necessary steps to obtain vacant possession of the property, to allow the wife during her life to use and occupy the property rent-free and /or to let all or any part, to continue to pay the outgoings of the property, and not to dispose of or otherwise deal with the property without providing for the wife the right to live in it or use it. The husband was subsequently adjudicated bankrupt. Following National Provincial Bank Limited v. Ainsworth, Goff J held that the order in the matrimonial proceedings did not create an interest in land binding on the trustee in bankruptcy, but created solely a series of personal obligations on the part of the husband. The order in that case was in very different terms to that in the present case, and more obviously was not intended to create or transfer any proprietary interest. The bankruptcy legislation was also different. The case supports the Respondent's proposition that personal rights against the bankrupt do not bind the estate as against the trustee, but as I have indicated this must be so as a matter of general principle.
20. It is noteworthy that the argument pressed by Mr Hansen under section 283(5) was not raised in Beer v. Higham. I do not think that the reason that it was not raised, or noticed by Jonathan Parker J, was any difference between the facts of that case or those of this. It was not raised because it was assumed that the rights of the wife in that case were personal and ineffective as against the trustee.
21. Whether the order of 6 July 2000 created a right in the property binding on the trustee must turn on the effect of section 24 of the Matrimonial Causes Act 1973, pursuant to which the order was made. Section 24 provided, at the date of the order, so far as is relevant:
(1) On granting a decree of divorce, a decree of nullity of marriage or a decree of judicial separation or at any time thereafter (whether, in the case of a decree of divorce or of nullity of marriage, before or after the decree is made absolute), the court may make any one or more of the following orders, that is to say—
(a) an order that a party to the marriage shall transfer to the other party, to any child of the family or to such person as may be specified in the order for the benefit of such a child such property as may be so specified, being property to which the first-mentioned party is entitled, either in possession or reversion;
(b) an order that a settlement of such property as may be so specified, being property to which a party to the marriage is so entitled, be made to the satisfaction of the court for the benefit of the other party to the marriage and of the children of the family or either or any of them;
(c) an order varying for the benefit of the parties to the marriage and of the children of the family or either or any of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage;
(d) an order extinguishing or reducing the interest of either of the parties to the marriage under any such settlement;
subject, however, in the case of an order under paragraph (a) above, to the restrictions imposed by section 29(1) and (3) below on the making of orders for a transfer of property in favour of children who have attained the age of eighteen.
(2) ...
(3) Without prejudice to the power to give a direction under section 30 below for the settlement of an instrument by conveyancing counsel, where an order is made under this section on or after granting a decree of divorce or nullity of marriage, neither the order nor any settlement made in pursuance of the order shall take effect unless the decree has been made absolute.
22. The wording of subsection (1)(a), which is the provision pursuant to which the order of 6 July was made, is not suggestive of an order that of itself creates any proprietary interest: compare the wording of paragraphs (c) and (d). Subsection (3) points against the creation of an immediate right in the property. If, for example, a wife (assuming an order for the transfer of a former matrimonial home to her) were to die after the making of an order pursuant to subsection (1)(a) but before the decree absolute, the property adjustment order in her favour would cease to have any effect, and the property would not form part of her estate. Similarly, it would cease to have effect if the husband were to die before it was carried out. In the present case, this consideration is highlighted by the fact that at the date of the property adjustment order there had not yet been a decree absolute. As District Judge Dudley recognised when he made it, the order of 6 July 2000 was ther efore contingent on the making of the decree absolute, although the terms of the order did not so provide. If the order created a right in the property, it was a curious right.
23. For these reasons, in my judgment, the order of 6 July 2000 did not, of itself, create any proprietary interest in the property. It gave a personal right to the Appellant, and subjected the bankrupt to a personal obligation to execute the necessary transferdocuments. If the order had been carried out, by the husband or by the District Judge executing the relevant transfer on his behalf, and the completion of the transfer, the Appellant would have acquired a proprietary interest, and indeed she would have acquired title. The property would then have ceased to be part of the estate of the bankrupt. Regrettably, at the date of the bankruptcy, that had not occurred, and she had no right within the meaning of section 283(5) good against the trustee.
24. This conclusion is consistent with the judgments of the Court of Appeal in Re Holliday [1981] 1 Ch 405 and McGladdery v. McGladdery [1999] 2 FLR 1102 to the effect that a property adjustment order cannot be made against a trustee in bankruptcy, even if the application for that order was pending at the date of bankruptcy. There is, nonetheless, an obvious difference between bankruptcy commencing during the pendency of an application for such an order and bankruptcy commencing after an order is made but before it is carried out, which is the present case. In both cases, however, there is the potentiality for prejudice to the spouse of the bankrupt.
25. In the end, therefore, while my sympathies are with the Appellant, I am compelled to dismiss this appeal. The District Judge came to the correct conclusion.