England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, FAMILY DIVISION
MR JUSTICE PETER JACKSON

		Royal Courts of Justice Strand, London, WC2A 2LL
		2nd December 2011

Mr Justice Mann:

1. This is an application for permission to appeal, with the appeal to follow if permission is granted, in relation to a decision of Peter Jackson J given on 15 April 2011. Two matters were before him. The first was an appeal from a district judge as to the financial provision made for a wife, the appellant, Ms Mekarska, on her divorce, so in relation to that matter this is would be a second appeal. Second, there is a first appeal from his refusal to annul the husband's bankruptcy. Tucked away in those appeals is a novel point about Section 336 of the Insolvency Act 1986. It was this point that particularly caught the eye of Ward LJ when he ordered as he did, albeit reluctantly, that the permission to appeal application be heard on notice to the respondents with the appeal to follow if permission were granted.
2. The substantive respondent to this appeal is the husband's trustee in bankruptcy represented by Mr Stefan Ramel of counsel. The other respondent is the husband; he appeared in person but did not adopt a position. The appellant wife was unrepresented and had the assistance of a Mackenzie Friend, Mr Laurence Bothwell, whom we allowed to address us.

Chronology

3. I take the following short chronology from the judgment of the judge below whose judgment can be found at [2011] EWHC 913 (Fam). The husband and wife were married in 2001. In 2002 they moved into a house that had been bought by the husband and which remained in his sole name. It was and is unencumbered by a mortgage and represented the only substantial asset in the marriage. In 2006 the marriage broke down and divorce proceedings began in the county court. In October 2006 the wife obtained a freezing order over the husband's assets and in due course an occupation order. In December 2006 the husband proposed that the house be sold and that most of the equity to be given to the wife to purchase a two-bedroom flat. This offer was rejected. What has followed since demonstrates how unfortunate that that rejection was.
4. In 2006 and 2007 the husband started to run up large debts and on 21 December 2007 he presented his own bankruptcy petition at the High Court. The bankruptcy order was made on that day in accordance with the normal practice. His declared assets were almost £300,000 and the principal asset was the family home then valued at £279,000. He had a share trading account containing £18,000. Apart from that he had an occupational pension. His debts were just over £66,000. If steps had been taken at that point or shortly thereafter to realise assets to pay that debt, or those debts, the balance could have been saved and applied for the benefit of the parties. Alas, it did not happen.
5. By virtue of Section 30 of the Family Law Act 1996 the wife had "home rights" and she protected those by registration on 8 April 2004. On 3 November 2006 District Judge Wicks sitting in the Uxbridge County Court made an order under Section 33(5) that her rights should not come to an end after the divorce. Section 336(2) of the Insolvency Act 1986 provides that the charge created by the 1996 Act continues to subsist notwithstanding the bankruptcy. Accordingly her rights survived the divorce in May 2007 and persisted into the bankruptcy in December 2007. Unfortunately the wife was not immediately told of the bankruptcy. She only discovered it in March 2008. At that point her solicitors stated they were instructed to apply to annul the bankruptcy order. However it was not until September 2009 that the wife actually issued such an application. By April 2008 the amount required to discharge the bankruptcy had risen to some £117,000.
6. A trustee in bankruptcy was appointed in February 2008 and in due course he proposed, and the wife agreed, that the house should be sold. A buyer was found at a price of £270,000, so at that stage the wife was cooperating in the sale. That was the state of affairs when District Judge Wicks made the first of the orders challenged in this proposed appeal on 7 November 2008, namely the order for financial provision. At that stage, because of the bankruptcy, the court only had the net asset of the husband after payment of the bankruptcy debts and expenses to play with. The effect of the district judge's order was to award the wife the whole of that amount -- in essence the house plus the husband's capital of £18,000 less the bankruptcy debts and expenses -- leaving the husband with only his pension rights. That, if implemented, would have left the wife with a sum of just short of £150,000. Unfortunately there was no sale of the property at that stage.
7. Immediately after the hearing the prospective purchasers dropped their offer from £270,000 to £250,000. At that point the wife, believing the property was worth much more than that, withdrew instructions from her solicitor and stopped cooperating with the sale process. In December 2008 the trustee in bankruptcy asked her to sign a notice relinquishing her home rights so that the sale could go through, and he urged cooperation in order to avoid incurring further costs. He did not get that cooperation. Accordingly he commenced possession proceedings in January 2009 and those proceedings have been adjourned from time to time and are still outstanding.
8. As the judge below observed in paragraph 25 of his judgment, by this stage it would have been obvious to anyone who had looked that the assets were, as he put it, haemorrhaging. For my part I would more simply say that they were being needlessly wasted.
9. There had been no attempt to appeal the ancillary provision order within the time limit for appeals, but in May 2009 the wife made an application to appeal out of time and an unnecessary application for permission to appeal. In due course an extension and the unnecessary permission were given. In his judgment below Peter Jackson J implicitly questioned the wisdom of that decision. For my part, I respectfully agree with that stance.
10. Eventually on 15 September 2009 the wife made her application for an annulment of the bankruptcy. On 4 March 2010 Registrar Nicholls ordered that the annulment application be transferred to the family division to be heard with the appeal against the ancillary provision order. Thus the two matters from which the appellant seeks to appeal arrived before Peter Jackson J.

The decision below

11. The judge carefully considered the jurisdiction to annul a bankruptcy, and in particular cases where the debtor's assets exceeded his liabilities and his petition was for an ulterior motive. He also considered the extent to which a trustee would be entitled to his costs and expenses on an annulment. He concluded that the husband was in fact unable to pay his debts and so could establish the degree of insolvency necessary to a petition. He did not find that there was any evidence that the husband's motivation for petitioning was to frustrate the wife's legitimate claims in ancillary provision proceedings and found that the husband had accurately declared his assets. He found that the bankruptcy was "unnecessary but it was not tactical" (paragraph 82.2). He then dealt with what was then a new argument under Section 336 of the 1986 Act, which was deployed by the wife in order to establish that it gave her a right which persisted through the bankruptcy and could not be removed. He rejected those arguments. Apparently the arguments were advanced in support of the annulment application although it is not clear from his judgment how the two inter related. He came to the conclusion that the wife had not established the threshold of demonstrating that the bankruptcy order ought not to have been made and he therefore refused the annulment. He then went on to consider that whether he would have granted the application if the threshold (whether the order ought not to have been made) had been crossed and came to the conclusion that if he had had the discretion he would not have exercised it in favour of annulment. He also rejected the idea that if he had ordered an annulment he would disallow the trustee's fees in full.
12. So far as the appeal from the financial provision order is concerned, he rejected the argument that the district judge proceeded on a false assumption that no challenge to the bankruptcy was possible. The wife at the time was not challenging the bankruptcy order and the district judge had no application or case to disturb it. An adjournment of the ancillary provision hearing -- which no one was asking for anyway -- would not have been sensible; nor did the annulment application in due course invalidate the basis on which the district judge's order was made. There was no basis on which a district judge should have found that the husband had hidden assets and the district judge did not err in applying the checklist and factors set out in section 336(4) of the Insolvency Act 1986. He found that the district judge showed a "sensible and pragmatic balancing" of the information before him. In all the circumstances he rejected that appeal.

This appeal

13. Through Mr Bothwell, Ms Mekarska challenges both limbs of the judgment below. Section 336 has featured heavily in the arguments, though this time more in relation to the financial provision order than in relation to the annulment aspect.

The appeal from the ancillary provision part of the judgment

14. This is an attempt at a second appeal. As such permission should only be given if it raises an important point of principle or practice or there is some other compelling reason for the Court of Appeal to hear it. I am quite satisfied that these criteria are not fulfilled. Indeed, I am satisfied that there is no point worthy of an appeal; Mr Bothwell failed to raise any arguable point.
15. His first point concerned section 336(2)(a) of the Insolvency Act 1986. This section refers to the Family Law Act 1996 without which it cannot be understood, so I first set that out. That Act provides for rights of occupations of homes in favour of spouses and civil partners. Section 30 applies to cases such as the present where one spouse, here Ms Mekarska, the appellant, does not have a beneficial interest in the home. It provides:

"(1) This section applies if

(a) one spouse or civil partner (Person A) is entitled to occupy a dwelling-house by virtue of

(i) a beneficial estate or interest or contract, or

(ii) any enactment giving that spouse the right to remain in occupation, and

(b)the other spouse or civil partner (Person B) is not so entitled."

In those circumstances, Person B has the following matrimonial home rights under subsection (2):

"(a) if in occupation, a right not to be evicted or excluded from the dwelling-house or any part of it by Person A except with the leave of the court given by an order under section 33;

(b) if not in occupation, a right with the leave of the court so given to enter into and occupy the dwelling-house."

16. The rights provided by this Section prima facie subsist only until the end of the marriage, or death, unless extended by the court. This point is dealt with by subsection (8):

"(8) These home rights continue a) only so long as the marriage … subsists except to the extent that an order under Section 33(5) otherwise provides… "

Here the rights were extended as narrated above.

17. The rights can be enforced by a court order under section 33, which they were in this case. The order lasted until further order.
18. The rights give rise to a charge on the property as if it were an equitable interest – section 31. This technique means the charge can bind third parties and provides the means for preventing the rights being defeated by a disposition of the property. It lies at the heart of Mr Bothwell's submissions on the point.
19. An order made under section 33 can be varied or discharged on the application of the original respondent or of a successor in title. This is provided by Section 49:

"49. (1) An occupation order or non-molestation order may be varied or discharged by the court on an application by-

(a) the respondent, or

(b) the person on whose application the order was made.

(2) In the case of a non-molestation order made by virtue of section 42(2)(b), the order may be varied or discharged by the court even though no such application has been made.

(3) If a spouse's matrimonial home rights are a charge on the estate or interest of the other spouse or of trustees for the other spouse, an order under section 33 against the other spouse may also be varied or discharged by the court on an application by any person deriving title under the other spouse or under the trustees and affected by the charge."

20. Mr Bothwell then points to section 336(2)(a) of the Insolvency Act 1986. I need not read subsection (1); subsection (2) reads as follows:

"(2) Where a spouse's or civil partner's home rights under the Act of 1996 are a charge on the estate or interest of the other spouse or civil partner, or of trustees for the other spouse or civil partner, and the other spouse or civil partner 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 and persons deriving title under the trustee, and

(b) any application for an order under section 33 of that Act shall be made to the court having jurisdiction in relation to the bankruptcy."

21. Mr Bothwell spells out of this addition to the regime an entitlement on the part of the registering spouse or partner to remain in the house for as long as he or she wishes. That, he says, is the effect of section 336(2); it provides for the charge to continue for as long as the spouse wants once there is a bankruptcy. He says that what the district judge did in the ancillary relief proceedings was contrary to these provisions and this entitlement. Section 336 has precedence over the bankruptcy debts. That is what is meant by binding on the trustee in bankruptcy. The judge below and the district judge below him were wrong in failing to give effect to that.
22. There are several fundamental flaws with this line of reasoning. The first is a simple one of fact. While the appellant had home rights under the statute, she was also apparently not going to insist on them because she had in principle agreed on a sale by the time of the ancillary provision hearing. The judgment of the district judge recalls at paragraph 24 that:

"The applicant wife accepts that she is in no position to be able to continue to reside in the matrimonial home."

Any entitlement was therefore academic.

23. The second is that this approach betrays a fundamental misunderstanding of how the sections work. The 1996 Act first gives rights of occupation to the non-owning spouse that operates against the owning spouse. In order to protect the home rights over against third parties, the interest is made a charge and Section 336 ensures that that charge and therefore the occupation rights operate against the trustee in bankruptcy and any person to whom the trustee in bankruptcy might sell it (persons deriving title under the trustee). However, nothing in the overall regime gives entrenched rights of the kind propounded by Mr Bothwell. The trustee in bankruptcy is successor in title to the husband, as indeed a purchaser to him would be, and it is plain that the legislation gives such a person the rights to apply to regulate the occupation rights of the wife: see section 49(3), which gives the husband's successors locus standi to apply under section 33.
24. This is reinforced by the remaining provisions of Section 336. Paragraph (b) of subsection (2) presupposes such an application. Subsection (4) provides for what the court takes into account and subsection (5) provides a presumption in favour of the creditors after a year in parallel with other provisions in the Act: see for example Section 335A(3). I will set out those sections:


"(4) On such an application [and I pause that is an application under 336(2)(b)] the court shall make such order as it thinks just and reasonable having regard to:


(a) the interests of the bankrupt's creditors;
(b) where the application is made in respect of land which includes a dwelling house which is or has been the home of the bankrupt or the [bankrupt's spouse or civil partner or former spouse or former civil partner]:


(i) the conduct of the [spouse, civil partner, former spouse or former civil partner], so far as contributing to the bankruptcy,
(ii) the needs and financial resources of the [spouse, civil partner, former spouse or former civil partner], and
(iii) the needs of any children; and


(c) all the circumstances of the case other than the needs of the bankrupt.


(5) Where such an application is made after the end of the period of one year beginning with the first vesting under Chapter IV of this Part 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 bankrupt's creditors outweigh all other considerations."

The last of those subsections is particularly significant.

25. All this is quite antithetical to the idea that somehow the wife has rights which cannot in effect be removed without her consent. The legal underpinnings of Mr Bothwell's arguments simply do not exist. The bankruptcy court clearly has the right to terminate the occupation rights if it thinks fit, and this is apparently part of the present trustee's possession application which has stood adjourned for so long. When the court determines the possession action it will not be able to find that the appellant has the entrenched rights that Mr Bothwell has relied on. It will by this time bear in mind firmly the statutory presumption in favour of the interests of the creditors under section 336(5).
26. Next, I am afraid that despite Mr Bothwell's best endeavours I simply fail to see how this point could have been relevant to the ancillary provision proceedings in this case in any event. Mr Bothwell was unable to explain to my satisfaction how it is that his point might have operated in circumstances in which the wife was apparently consented to a sale which would require her to give up such rights as she had. Mr Bothwell asserted that somehow the effect of section 336 was to give the wife precedence over the bankruptcy creditors. I assumed that he would say that the consequence of this is that the district judge, and therefore the judge below, ought to have made some sort of award which did not provide for the bankruptcy debts. But this is conceptually wrong. Section 336(5) acknowledges the presumed the primacy of bankruptcy debts, not their subordination.
27. Mr Bothwell's main argument therefore fails. He then ran a series of subsidiary points.

1) He referred to section 313A of the 1986 Act which restricts the trustee's rights to get possession and sale of low value homes. He complained that the statutory instrument which sets the relevant low value at £1,000 was ultra vires because that amount is absurdly low; no house is worth that small amount of money. I think he probably misunderstands what the relevant value is for these purposes; it is in fact the value of the interest in the house, not the house itself: see paragraph 5 of the Insolvency Proceedings Monetary Limits Order 1986 SI 1986/1996. But in any event, I do not see how that section has anything to do with this case.

2) He had various complaints about the conduct of the trustee. He criticised what he described as the inefficient conduct of the trustee in bankruptcy, as a result of which fees were run up which ought not to have been run up. Once he knew of Ms Mekarska's home rights he ought to have realised that there was no valuable asset, and indeed that it was onerous and he ought to have disclaimed it. I assume that this is another reason for saying that the award ought not to have proceeded on the footing that it operated only in relation to the then apparent surplus, which reflected very significant fees and expenses. Quite apart from the problem that this point was not taken before the district judge, this argument depends on the success of his section 336 argument. Since that fails, any argument along these lines fails too. There are other problems with the disclaimer analysis but I do not need to deal with them.

3) It was said that it was wrong to get an order from District Judge Wicks which said that the bankruptcy debts come first. This argument misdescribes the district judge's order. The district judge's order operated only in relation to the bankruptcy surplus. Without an annulment it could do no other. It represented the apparent shared approach to the argument. It does not appear that anyone suggested that the order could operate in relation to anything else, judging from the district judge's judgment.

4) Last Mr Bothwell took a point in relation to the Secretary of State's fees in the insolvency which he said amounted to taxation, and double taxation insofar as VAT is charged on them. He said that they were ultra vires. I accept that there are many who think that they are, to put it at its lowest, unattractive, but that is no basis for saying they are ultra vires and there is in any event no apparent link between that and the ancillary provision order in this case.

28. The judge below came to the same conclusion on the ancillary relief appeal. In the light of the above not only does the second appeal from him not raise any factor within section 55; it does not raise any sustainable ground of appeal in any event. I would therefore refuse permission to appeal on that part of the judge's decision.

The appeal from the decision on annulment.

29. This is a first appeal, so it is not subject to the same constraints as the appeal in relation to the ancillary provision order. Nonetheless Ms Mekarska must establish a real prospect of success on some point or points.
30. The jurisdiction to allow an annulment is set out in section 282 of the Insolvency Act 1986, the relevant part of which reads as follows:

"(1) 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…"

31. Before us Mr Bothwell did not put Section 336 in the forefront of his argument on annulment, as apparently he did before the court below, but in case it is still live in this context I should say that it has no more merit under this head than it has in relation to the ancillary relief appeal. The main point he has argued before us is that the bankruptcy court ought to have waited and discovered how far the ancillary provision proceedings had got before making the bankruptcy order. The bankruptcy order ought not to have been made until the ancillary relief proceedings were determined. He advanced no authority or other material in support of this proposition and it does not seem to me to be accurate as a matter of law or practice. It is not correct as a matter of law to say that a bankruptcy order ought not to be made until divorce ancillary proceedings are out of the way. Such a principle, if it existed, ought to exist in relation to creditors' petitions as well as debtors' petitions, and I can see no merit in the principle. It would be far reaching if it were true. In my view there can be no impeachment of the determination of the judge below on that particular point. He held there was nothing in it, and I agree.
32. Mr Bothwell sought to say that if the husband had realised what the Trustee's fees were going to be, he would have taken another course, that other course being not to have made himself bankrupt. That may or may not be true; it is at least plausible. But even if true it does not mean that the order ought not to have been made for the purposes of section 282; it merely means that it was unwise.
33. Mr Bothwell went on to repeat his submissions about the level of the trustee's fees and expenses, claiming that they were unnecessary, but this has nothing to do with the statutory test for annulment which depends on facts and grounds existing at the time the order was made.
34. All in all, Mr Bothwell advanced no reason for saying that the judge was wrong on this point. In so saying I take into account the material in his various skeleton arguments and notices of appeal.
35. In the circumstances there is nothing in this appeal and I would refuse permission to appeal.

Conclusion

36. I would also express my hope that the waste of money in this case should come to an end now. A prolongation of the bankruptcy by the steps taken by the wife have caused the dissipation of the £150,000, or £130,000 after the reduction of the house price, which the wife would otherwise have had, had she taken the benefit of the order of District Judge Wicks. If there is any money left at all, which there may well no longer be, in my view it should not be wasted by the further prolongation of this dispute and further unnecessary hearings in and relating to this bankruptcy.

Lord Justice Kitchin:

37. I agree.

Lord Justice Thorpe:

38. I also agree.

Order: Application refused