England and Wales High Court (Family Division) Decisions

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URL: http://www.bailii.org/ew/cases/EWHC/Fam/2011/913.html
Cite as: [2011] 2 FCR 608, [2011] Fam Law 802, [2011] EWHC 913 (Fam), [2011] 2 FLR 1351, [2011] BPIR 1139

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		Neutral Citation Number: [2011] EWHC 913 (Fam)
		Case No 12773 of 2007 / SL06D012025

IN THE HIGH COURT OF JUSTICE
FAMILY DIVISION
IN THE MATTER OF THE INSOLVENCY ACT 1986
AND IN THE MATTER OF THE MATRIMONIAL CAUSES ACT 1973
And in the matter of Martin Ruiz (a bankrupt)

Royal Courts of Justice
Strand, London, WC2A 2LL

9/5/2011

B e f o r e :

THE HONOURABLE MR JUSTICE PETER JACKSON
____________________

	GRAZYNA MEKARSKA (Wife)	Applicant/Appellant
	- and -
	(1) MARTIN RUIZ (Husband)
	(2) PATRICK BOYDEN (Trustee in Bankruptcy)	Respondents

____________________

Mr Laurence Bothwell (appearing with the permission of the court under the Legal Services Act 2007) for the Wife
Mr Henry Clayton, instructed by Anthony Louca Solicitors, for the Husband
Mr Stefan Ramel, instructed by Brachers LLP, for the Trustee in Bankruptcy
Hearing dates: 28 and 29 March 2011 / Judgment circulated for editorial correction 14 April 2011 / Judgment handed down 9 May 2011
____________________

HTML VERSION OF JUDGMENT (APPROVED)
____________________

Mr Justice Peter Jackson:

Introduction

Mr Laurence Bothwell, who presents the wife's case, is a deep thinker on legal matters. At one point during courteous submissions ranging widely over current legislation and historic authorities, he observed that if his main argument did not succeed, the resulting situation would be "a big mess, a fiasco". He is right. The events in this case are a financial disaster for a divorced couple and their child. On separation in 2006, they might with good sense and co-operation have just about stretched their modest means to meet their overall housing needs. Instead, by 2011, a combination of dissension, misfortune, improvidence, and over-lengthy litigation in three courts, has wiped them out financially and they will now lose their only significant asset, the home occupied by the wife and child. After five years, almost nothing remains of assets once valued at £300,000. A family that had difficulty supporting itself as a single unit cannot afford to dissipate limited assets in litigation, and certainly cannot support the professional expenses of lawyers and accountants over a period of years.

In its result, this case bears comparison with Evans v Evans (Practice Note) [1990] 1 FLR 319 (Fam), and with Piglowska v Piglowska [1999] 2 FLR (HL), but is if anything worse. In Evans, Booth J was appalled that parties with assets of £350,000 had run up costs of £60,000. In Piglowska, the parties had assets of £128,000 and costs in the same amount, but payment of the costs could at least be postponed as result of the legal aid charge. Here, the liabilities virtually extinguish the assets and there is no prospect of postponement of the legal aid charge. The parties made unnecessary applications and failed to make necessary ones. Procedurally, the overriding objective in the Civil Procedure Rules 1998 and the Family Procedure Rules 2010 has been soundly defeated. The case has not been dealt with expeditiously, and both the costs incurred and the court time spent have been wholly disproportionate to the issues involved. With the passage of time, the result has been to eliminate the possibility of any solution that is even minimally satisfactory.

The applications brought by the wife are for the annulment of a bankruptcy order, made in 2007, and an appeal against a financial order on divorce, made in 2008. But even if those applications succeeded, they would not in themselves be enough. For the wife's housing situation to be salvaged, she would also need the court to deprive the husband's creditors of some or all of the sums due to them, and to disallow the fees and expenses incurred in the past three years by the trustee in bankruptcy.

For the reasons set out in this judgment, I must dismiss these applications. An application to annul or suspend the bankruptcy order might possibly have succeeded if it had been brought promptly and on proper grounds three years ago, but it is now far too late, and even if the bankruptcy were annulled there is no proper basis upon which the trustee's fees could now be disallowed. As to the appeal against the order in the divorce proceedings, there was no error in the district judge's approach at the time, and subsequent events provide no grounds for interfering.

Bankruptcy and notice to third parties

This case emphatically shows that where a person affected by a bankruptcy order, such as a spouse or civil partner, considers that the order should not have been made, or that there are ways of getting it set aside, they must act immediately to have it annulled or suspended before the costs of the bankruptcy eat into or, as here, eat up, the family assets.

In the case of a creditor's petition, the Insolvency Rules 1986 (as amended) make appropriate provision for the proceedings be served on the debtor. There is no equivalent provision in the case of a debtor's petition, even though third parties may be affected as profoundly as the debtor himself. On the other hand, there is nothing to prevent the court taking bespoke measures to meet the needs of individual cases.

The standard statement of affairs accompanying a debtor's petition requires the applicant to disclose whether they have been involved in divorce proceedings at any time in the past five years. A positive reply should alert the court to the likelihood that a spouse or partner may have a legitimate interest in the outcome of the petition. I propose that the bankruptcy court should employ a simple expedient in cases where it is apparent that divorce proceedings are ongoing. When faced with such a petition, and particularly the petition of a debtor who is not being pressed for payment, the court should consider whether to adjourn for a short time to allow notice to be given to a spouse or partner who may be affected. They may be in a good position to say whether the debtor is in fact insolvent or, if he is, to make proposals for debts to be cleared without the need for bankruptcy and all it entails.

Even if adjournment is for some reason not appropriate, the bankruptcy order should at least be served on the spouse or partner at the time that it is made, so that they are immediately aware of what is going on. In the present case, it is of concern that the wife only became aware of the husband's bankruptcy by chance three months after the event, by which time the bankruptcy process was already gathering momentum.

The facts of this case

Marriage and divorce

The husband (now 51) and the wife, who is Polish (now 40), married in 2001 and their son (now 9) was born that year. In 2002 they moved into a house that had been bought by the husband in 1988, long before he met the wife. It was in his sole name and unencumbered, the mortgage having been paid off in the 1990s with some redundancy money. During the marriage, the husband worked as a therapist from a room in the home, but his ability to do this was affected following a conviction for common assault on the wife in 2005. She did not work, and by that time they were both dependent on state benefits.

In 2006 the marriage finally 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 November 2006 she obtained an occupation order, at which point the husband left the home and went to live with his parents. In December 2006, he proposed that the house be sold and that most of the equity be allocated to the wife for the purchase of a 2-bedroom flat, leaving him with the balance of the proceeds of sale. This was rejected. In February 2007 the freezing injunction was varied and continued until the conclusion of the proceedings. A final hearing of the divorce financial proceedings was duly listed for October 2007, but then adjourned by the court.

Bankruptcy

In 2006/2007 the husband ran up large debts at banks and on credit cards, latterly in breach of the freezing order. He says that he squandered the money, amounting to over one-fifth of the family's means. The wife has suggested that he has other assets, perhaps representing unspent borrowings, but despite the normal process of discovery by questionnaire in the divorce proceedings, no evidence of this has been found. The creditors, who are 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 and a bankruptcy order was made without notice to the wife. In his statement of affairs the husband said he was on incapacity benefit and in the middle of divorce proceedings, although he did not mention the freezing order or the occupation order. He declared assets approaching £300,000, being the family home, by then valued at £279,000, and a share trading account containing £18,000. He had an occupational pension with a CETV of £57,000. His debts totalled £66,300. Accordingly, the available assets in his name amounted to some £230,000. He was clearly not balance-sheet insolvent and the question was whether he was commercially insolvent. By its decision, the court accepted that he was.

The consequence of the bankruptcy order was to vest the husband's estate in the trustee in bankruptcy, when appointed: s.306 Insolvency Act 1986. While the bankruptcy subsisted the divorce court was not able to make a transfer of property order in favour of the wife, and its powers were limited to making a lump sum order out of the residue of the estate.

In late February 2008 a trustee in bankruptcy was appointed at a creditors' meeting. They selected a partner in PWC, the world's second-largest accountancy firm.

In late March 2008 the wife became aware of the husband's bankruptcy by chance when her solicitor carried out a search of the property register, and on 3 April 2008 her solicitor wrote to the trustee's solicitor in these terms:

"We are instructed to make an immediate application to annul the bankruptcy order and subject to confirmation of the level of the debt it is our intention to do so within the next week. We put you on notice of this and to that extent we ask that no further costs be incurred in bankruptcy pending a decision by the courts as to the annulment."

Despite this letter, no application for annulment was made. Instead, in September 2008, the wife's solicitor sought an order from the divorce court requiring the trustee to disclose information and documents relating to the estate, which were duly produced. It was not until September 2009, 18 months after learning of the bankruptcy, that the wife, by then acting in person, issued her application for annulment. Her explanation for the delay is that she could not afford the costs of making the application to annul, modest though they are.

In April 2008, the trustee's solicitor had indicated that the amount required to discharge the bankruptcy was £117,000, so £50,000 more than the debt underlying the petition in December 2007.

The financial order on divorce

The district judge's hearing spanned two days in September and November 2008, at a time of global financial uncertainty. The husband was unrepresented and the wife was represented by counsel. She explicitly accepted that the home had to be sold, and was at the time co-operating with the marketing of the property, for which an offer of £270,000 had been received. By then the amount required to discharge the bankruptcy was some £132,000, having grown to twice the amount of the original debts in a year. The wife also had a debt to the Legal Services Commission for her publicly funded costs, which could have been postponed if the proceeds of the proceedings were used to rehouse herself and the child.

On 17 November 2008, in a reasoned judgment running to 16 pages of transcript, the district judge noted that this was not a long marriage and that the child's situation had first to be considered. He found that neither party had much of an earning capacity. He concluded that a clean break order was appropriate. He ordered that the wife was to receive a lump sum equal to the entire surplus after the bankruptcy debt and costs was cleared. She was also awarded the husband's remaining capital of £18,000. The husband had asked to keep this as "a crumb", but the judge considered that he was in effect the author of his own misfortune.

Referring to the bankruptcy, the district judge considered that the husband had unnecessarily made himself bankrupt when he could have kept his creditors at bay. However, he made no finding that the bankruptcy was tactical, in the sense of being motivated by a desire to defeat the wife's claims, whatever its effect might have been. He notionally attributed the debts and the costs of the trustee to the husband, and deliberately left him with nothing except his modest pension.

The broad effect of the order was that the wife would receive about 60% of the initial capital assets and the trustee the balance. The husband, who had brought almost all the assets to the marriage and had worked to support the family, ended up with nothing tangible, having had the use of about a quarter of the assets in one way or another.

Predicated on the sale of the property at £270,000, the wife would have received about £149,000 with which to rehouse. The district judge recognized that she would struggle to find a two-bedroom property.

Neither party lodged an appeal against the order at the time. Nor had the wife suggested at any stage that the proceedings be adjourned to allow her to seek the annulment of the bankruptcy.

Events after the financial order

Immediately after the hearing, the economy took a hand. The prospective purchasers dropped their offer from £270,000 to £250,000. At that point the wife, who firmly believed that the property was worth £300,000, withdrew instructions from her solicitor and stopped co-operating with the sale process. In December 2008, the trustee asked her to sign a notice relinquishing her home rights so that the sale could go through. He urged her to co-operate and warned of the serious consequences in terms of costs and dissipation of the estate. When this warning failed, he made an application to the bankruptcy court for an order for possession. This was adjourned from time to time, and on at least one occasion (March 2009) the registrar urged the wife to get legal advice, saying that the creditors would have to be paid.

By this stage it will have been apparent to everybody that the assets were haemorrhaging as a result of the ongoing dispute.

In May 2009, the wife made an application to the county court which was treated as an application to appeal out of time against the November 2008 order. She was directed to file an affidavit setting out her grounds of appeal and did so in documents filed in June and August 2009. Her arguments were that the order did not meet her needs and those of the child, whose welfare she believed should be paramount. The husband had deliberately declared himself bankrupt to defeat the child's right to a home. The trustee was unjustifiably reducing the price of the property. Her previous solicitors had not advised her properly. The bankruptcy order was not legal because of the freezing injunction.

The grant of permission to appeal out of time

The matter came before a recorder in August 2009. He gave permission to the wife to appeal out of time. He also granted permission to appeal, although this was not then required. He set the appeal down for hearing in December 2009.

I have read a transcript of the hearing before the recorder and of his judgment, the latter emerging after the end of the hearing before me. The decision to grant the wife permission to appeal out of time was animated by three matters:

(1) a belief that the husband had not informed the bankruptcy court of the financial proceedings in divorce -- this was simply incorrect;

(2) the fact that the husband had not declared the freezing injunction in his bankruptcy petition -- this was correct;

(3) a belief that the district judge was unaware of the freezing order when he made his financial order -- this was not correct, as it had in fact been the district judge himself who had continued the freezing order in February 2007.

The recorder said this in the course of the submissions:

"The way that the cart and horse are configured at the moment, the trustee in bankruptcy thinks that he can get all of his debts discharged in priority over what may or may not be [the wife's] matrimonial rights, whereas in fact if, with the benefit of new legal advice that she is going to have to get, she can intervene in the bankruptcy proceedings and undermine the orders that have been made, she may well get orders in the matrimonial proceedings that restrict what is available to the trustee in bankruptcy to enforce."...

"... I cannot possibly in these circumstances make an order that will give effect to the judgment of November 2008 because that would deprive [the wife] of the protected right she had as a result of the [freezing] injunction which would have taken precedence over the entitlement of the trustee in bankruptcy. Therefore, the order of November cannot stand and the only way I can get round that is by giving her permission to appeal and giving directions relating to that appeal."

It is apparent from the transcript as a whole that the recorder knew very little about what had taken place before the district judge, or indeed before the bankruptcy court.

If the recorder meant that the bankruptcy limited the options available to the divorce court, he was of course right, but this was not in itself a reason for granting permission to appeal out of time, when an application for annulment could have been made long before the decision under appeal. He instead contemplated the re-harnessing of the horse of divorce and the cart of bankruptcy without reference to the fact that the proceedings had been ongoing for two years at the time of the district judge's order, and almost three years by the time the matter came before him. His observation that the district judge's order "cannot stand" went beyond what needed to be said when considering whether to grant an application for permission to appeal out of time. Nor is it correct that "the freezing injunction would have taken precedence over the entitlement of the trustee in bankruptcy". The existence of a freezing order is not a bar to the presentation of a bankruptcy petition: Woodley v Woodley [1994] 1 WLR 1167. Although the husband initiated the process, the disposition of property takes effect by operation of s.306, which vests it in the trustee.

In giving the green light to the wife's appeal, the recorder said this to counsel for the trustee:

"You are now aware that the whole obtaining of the order in the bankruptcy proceedings appears to have been in ignorance of material facts, and you are going to have to, I suspect, make the court aware of those facts, are you not?

Counsel: Your Honour, I suspect so.

The recorder: ... You will have to put [the wife] on notice of that to give her the opportunity to be represented or make representations in the reopened bankruptcy proceedings, and all of the documentation relating to all of this has got to cross-fertilize through into the ancillary relief proceedings, because clearly the ancillary relief proceedings were not conducted in full knowledge of everything that had transpired in the bankruptcy proceedings, all of which is going to take some time."

In the course of the recorder's judgment he speculated that both sets of proceedings may have proceeded on fundamental misapprehensions as to antecedent rights. It is difficult to see how that speculation could have led to permission to appeal out of time being granted when the essential material was so lacking. With respect to the recorder, it was, I think, unwise to allow an appeal to proceed without access to the judgment under appeal, or to any of the papers in the bankruptcy. Had he seen the district judge's judgment, he would have seen that, far from being in ignorance, the judge had full knowledge of what had transpired in the bankruptcy proceedings, not least because the trustee had twice been represented before him. He would also have seen that the judge had had a firm and practical grasp of the family's predicament.

In closing, while making an order that the costs be costs in the appeal, the recorder said this to the trustee's counsel:

"It is not your fault, but it is not her fault either. Someone is going to have to pay the costs of all of this. I suspect it will be the bankrupt estate, but we shall see. Cost in the case. [To the wife:] Get yourself a solicitor."

Given the very limited scale of the assets, the observation that "someone is going to have to pay the costs of all of this" begged a question that the recorder was bound to answer before granting permission to appeal eight months out of time in a case that was already long overdue for resolution.

The consequences have been far from what the recorder will have intended. In September 2009 the wife at last applied to the bankruptcy court for annulment. In November 2009 the bankruptcy court transferred that application to the county court, for hearing alongside the impending appeal, but that court declined the transfer on the basis that it did not have bankruptcy jurisdiction. In December 2009, immediately before the date set for the appeal, the wife instructed her second set of solicitors, who duly applied for an adjournment to allow them to obtain public funding. The judge granted the adjournment and gave directions, including one for a transcript of the district judge's judgment to be obtained, over a year after it was delivered.

In March 2010, the bankruptcy court effectively transferred the annulment application to the Family Division for hearing alongside the appeal, which it urged the wife to have transferred from the county court to this court.

In April 2010, the wife's solicitors finally lodged a notice of appeal in the county court. I will refer below to the grounds on which the appeal was being presented at that stage. The appeal was in due course transferred to this court and the two proceedings were at last joined together at a directions hearing before a deputy judge in June 2010.

The deputy judge gave directions for a two-day hearing on the first open date after 1 October 2010, but the order did not fix the hearing date as it should have done. As a result, a further three months passed before a hearing date was even fixed, and the matter did not come on for hearing before me until the end of March 2011. In the meantime, in August 2010, the wife withdrew instructions from her second firm of solicitors, and in the following month consulted Mr Bothwell. He then attended as her McKenzie Friend at a number of hearings in substantial proceedings in relation to the husband's contact with the child. That issue had also been so problematic that a Children's Guardian was appointed in 2008.

In August 2010, after the deputy judge's hearing, the trustee's solicitors wrote to the wife asking whether she was now seeking to challenge his costs and disbursements if an annulment order was granted. No reply was ever given.

Lastly, the wife's first solicitors have presented a claim to the trustee in respect of £18,000 of unpaid costs, which the trustee has accepted has increased the amount of the debts in the estate.

Costs and expenses

In the background to this sorry procedural history, the taximeter of professional costs has been running continuously. From an initial debt of £66,000 in December 2007, the overall amount required to clear the bankruptcy has risen to £260,000:

April 2008 117,000

November 2008 132,000

October 2009 203,000

March 2011 260,000

A breakdown of the last figure shows that the original debt has risen to £113,000, with professional fees and disbursements of various kinds amounting to over £86,600, and the state claiming £61,000:

Debts due to creditors 87,800

Statutory interest @ 8% 25,200

113,000

Trustee's fees 38,100

Legal fees and disbursements 46,700

Official Receiver's costs 1,800

86,600

VAT on fees 17,000

Secretary of State fee 44,000

61,000

Total 260,600

The Secretary of State's fee, known as the ad valorem fee, is payable as a result of Schedule 2 of the Insolvency Proceedings (Fees) Order 2004 and its annual subsequent amendments. This entitles the Secretary of State to levy a charge of approximately 17% on the value of the estate, as represented by sums paid into the Insolvency Services Account. It is said to be for the performance of general duties under the insolvency legislation in relation to the administration of the estate of each bankrupt, and thus represents an extraordinary contribution by this family to the running of the insolvency service. Mr Bothwell suggested that the Fees Order might for some reason be ultra vires the Insolvency Act, an argument that is not for consideration here.

The ad valorem fee would not be payable if the bankruptcy were annulled. However tempting that might seem as an argument in favour of annulment, the benefit would be offset by the fact that the husband's debts, which have been frozen at the favourable statutory rate of interest, would stand to be recalculated at commercial rates.

There is another practical consequence arising from the bankruptcy. Even after the sale of the home, any surplus that the wife might receive would not become available to her before six months at the very least, according to a letter written by the trustee in January 2009 in an attempt to assist her in obtaining local authority accommodation.

The issues

The issues for decision are:

(1) Should the bankruptcy be annulled?

(2) If so, should the annulment be conditional upon payment of the trustee's fees and expenses?

(3) Should the appeal against the district judge's order be allowed?

The parties' positions

The wife

Her position has been put in a number of different ways. As noted, in November 2008 she accepted that the property should be sold and the trustee paid. In August 2009, she made the arguments listed at paragraph 26 above. In her counsel's skeleton argument in June 2010, she requested that the property be transferred to her absolutely, but 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 almost all of the original debts himself. Her case was put in this way by counsel:

a. The district judge proceeded on the assumption that no challenge to the bankruptcy was possible.

b. Referring to Barder v Barder (Caluori intervening) [1987] 2 FLR 480 (HL), subsequent events had invalidated the basis on which the November 2008 order was made, namely the handing down in March 2009 of the Court of Appeal judgment in Paulin v Paulin (referred to below), and/or the wife's own annulment application in September 2009.

c. The district judge was plainly wrong to make no finding that the husband had hidden monies.

Now, in advancing the wife's case, Mr Bothwell presents a number of arguments that go beyond the notice of appeal, and which I will consider in the absence of objection from the other parties.

Fundamentally, he submits that the wife's home rights under s.33 Family Law Act 1996, and the orders that were made until further order under that Act in November 2006, put the family home permanently beyond the reach of the trustee in bankruptcy and of the creditors. He bases this bold proposition on s.336(2)(a) Insolvency Act 1986, which falls in the chapter of the Act which concerns the effect of bankruptcy on certain rights. It reads:

336(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 …

Mr Bothwell argues that by virtue of this provision the wife's rights are binding on the trustee in bankruptcy. The triple pre-existence of the divorce proceedings, the freezing order and the occupation order (expressed to last until further order) before the making of the bankruptcy order, meant that, in giving priority to the creditors and the trustee's fees, the district judge acted without jurisdiction. s.336 does not distinguish between proprietary and non-proprietary rights and must be read at face value. The trustee should have recognised this and should therefore have disclaimed the property as being "onerous property" under ss. 315 and 320.

He then submits that the trustee inappropriately achieved his goal of laying hands on the property within the divorce proceedings, when, if he wished to disturb the wife's rights, he should have applied to the bankruptcy court under s.336(4). He misled the divorce court by failing to mention s. 336 of the Act.

He further argues that the district judge, in prioritising the creditors and trustee, did not correctly apply s.25 Matrimonial Causes Act 1973, which amongst other things requires the court to have regard to all the circumstances of the case, first consideration being given to the welfare of the child. This also amounts to a breach of Article 8 of the European Convention on Human Rights. In contrast to the registered rights of the wife, the rights of the creditors were unsecured and they had lent at their own risk.

As to the trustee's fees, Mr Bothwell argues that within days of appointment the trustee was aware of the wife's home rights and the freezing order as result of a search of the property title. All the costs since March 2008 have been unnecessary and should not be recovered. Serious questions arise for the trustee, who should have realised the strength of the wife's position, and should accordingly have restrained his activities. Instead, Mr Bothwell charges the trustee (in persuading the divorce court to make its order instead of applying to the bankruptcy court) with keeping this particular bankruptcy well away from the eyes of the judges in the bankruptcy court and Chancery Division. In so doing, the trustee has fallen foul of the rule in ex parte James (Re Condon, ex p. James) (1874) 9 Ch App 609. This provides that a trustee who holds money which in equity belongs to someone else (in that case money paid under a mistake of law) should pay it to the person really entitled to it. The modern conditions for the rule are set out in In re Clark (A Bankrupt), ex parte The Trustee v Texaco Ltd. 1975 1 WLR 559.

In the result, Mr Bothwell says that the trustee has misconducted himself in failing to appreciate, or indeed concealing, the wife's statutory protection, and that a wasted costs order against the trustee and his advisers should be made.

The respondents

The husband opposes an annulment, stating that he was genuinely unable to service his debts at the time that he made himself bankrupt and that his creditors should be paid. He now accepts that bankruptcy was not the most efficient way of dealing with his debts, but at the time it was a genuine attempt to regularise his affairs. He had no idea that the process would lead to such levels of expense. He also resists the wife's appeal, stating that she had rejected a sufficient amount to purchase an alternative property in 2006, and that by her intransigence she too bears substantial responsibility for subsequent events. He himself has been left with virtually nothing; had he had proper legal advice, he might have acted more wisely, but as a result he would have incurred legal costs.

The trustee in bankruptcy plays no part in the wife's appeal. He is formally neutral in relation to the annulment application, beyond observing that in 2007 the husband was in fact unable to pay his debts as they fell due. In the event that the bankruptcy is annulled, he submits that it should be conditional upon the payment of his professional fees, and of the legal fees and other expenses that he is obliged to pay.

The law

Applications for annulment

Section 272(1) of the Insolvency Act 1986 reads:

(1) A debtor's petition may be presented to the court only on the grounds that the debtor is unable to pay his debts.

Section 282(1) of the Insolvency Act 1986 reads:

(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, or

(b) that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured for to the satisfaction of the court.

In Paulin v Paulin [2009] EWCA Civ 221, [2009] 2 FLR 354, the Court of Appeal considered the interrelationship between family law and bankruptcy law in a case brought under subsection 282(1)(a). A husband, who had been subject to a prior freezing order, had made himself bankrupt in the midst of divorce proceedings. The wife's application to annul was ultimately granted by the judge on the basis that the husband had deliberately painted a false picture of his financial circumstances and that he had in fact been able to pay his debts. The Court of Appeal upheld that conclusion.

Giving the judgment of the court, Wilson LJ surveyed the legislation set out above:

40. A reading of the above two subsections together yields the uncontroversial conclusion that a court may annul a bankruptcy order if it concludes that, on the date of that order, the bankrupt was able to pay his debts. But, even if it so concludes, the word "may" confers upon the court a discretion whether to annul the order.

41. It is well-established that the enquiry into whether on the relevant date the bankrupt was able to pay his debts is an enquiry not into whether his liabilities exceeded his assets ("balance sheet insolvency") but into whether he could meet his liabilities when they were due ("commercial insolvency"). Often quoted in this context are the words of Mr David Oliver QC, sitting as a deputy judge of the High Court, Chancery Division, in Re Coney (A Bankrupt) [1998] BPIR 333, at 335 G – H, as follows:

"Inability to pay one's debts, at least in the context of insolvency, has historically long been construed as an inability to pay one's debts at the time that they are due … The counterpart to this approach to solvency is that even if one's liabilities exceed one's assets on a balance sheet basis, it does not follow that a person is insolvent, albeit that it is all the more likely to result in the state of the individual's relations with his bankers constituting the ultimate test of solvency."

Mr Oliver added, however, at 336 C – D:

"… it would not normally be right … to annul a bankruptcy order unless at least it is shown that as at the date of the order the debtor was in fact able to pay his debts, or had some tangible and immediate prospect of being so able which has since been fulfilled or would so have been but for the order itself. It is with regard to a 'tangible and immediate prospect' that the assets and liabilities of a debtor and their nature will usually be of relevance."

So the enquiry into whether the ability to pay existed on the date of the order is conducted with a limited degree of flexibility – apt to the commercial world.

Wilson LJ then suggested that while the burden of establishing that the application for annulment should succeed normally rests on the applicant, the onus is reversed in a case where a debtor's assets exceeded his liabilities, and where he is shown to have petitioned for his own bankruptcy on the basis of a substantially dishonest statement of affairs and to have had assets substantially exceeding his liabilities. In such circumstances, the burden falls on him to prove that he was nevertheless unable to pay his debts within a timeframe which his creditors would have tolerated, and he will find it hard to resist annulment.

Then, referring to the exercise of discretion, he continued:

52. In Artman v Artman, [1996] BPIR 511, Robert Walker J said, at 514B:

"The statute does not lay down any particular matters to be taken into account in the exercise of the court's discretion, but the likely effect of any annulment order on the applicant, on the bankrupt where he is not the applicant, and on the bankrupt's other creditors must, it seems to me, be among the most important matters to be taken into account. So must any element of abuse of process in the obtaining … of the bankruptcy order."

Lastly, Wilson LJ referred to the balance between the interests of creditors and of debtors' wives and children:

53. Of course the consideration to which I have just referred does not obviate the need for the court to weigh the interest of the husband's genuine creditors, particularly of the two judgment creditors, in the exercise of its discretion. It has been the contention of [counsel for the husband] that the judge's ultimate annulment order enabled the wife to "steal a march" on the judgment creditors. As it happens, the wife seems to have issued her proceedings against the husband long before they did. Indeed, although I accept that in proceedings for ancillary relief a court will strive to quantify its award to a wife upon a basis which will enable the husband to meet all his liabilities as well, of course, as to maintain himself, it by no means follows, particularly where money is in short supply, that, whether in the context of capital or in that of income provision, the interests of the husband's other creditors always take precedence over those of the wife: see for example the decision of this court in Mullard v Mullard [1982] 3 FLR 330, per Balcombe J (as he then was), at 332H. In the same way it does not always follow that the husband's trustee in bankruptcy can force a realisation of the husband's interest in the home in which the wife and children are residing pursuant to s. 335A of the Act of 1986. In the present case the existence of the creditors, who seem to have been owed sums totalling apparently less than the value of the house near Perpignan ultimately awarded to the husband, was certainly not a trump card precluding annulment; and in my view survey of the wider circumstances plainly generates a conclusion that the judge's ultimate approach to the exercise of his discretion was correct.

Authorities in the pure bankruptcy field naturally suggest that a critical factor in exercising the discretion in favour of annulment is whether the debtor would be able to meet his liabilities: see for example Owo-Sampson v Barclays Bank & Boyden [2003] EWCA Civ 714.

Trustees' costs

Under Rule 6.138 of the Insolvency Rules 1986 (as amended), the trustee is entitled to receive remuneration for his services. This can be fixed on a percentage basis, or on the basis of time properly spent, or as a fixed fee. In the present case the creditors agreed that the trustee and his staff would be paid on the basis of time spent. This basis is of course the most open-ended in terms of its potential impact on debtors and third parties. I refer below to the issue of the court's control over the scale of trustee's fees.

In Mellor v Mellor [1992] 1 WLR it was held that a receiver appointed by the court had a right to be remunerated for services actually rendered. Mr Michael Hart QC said this:

"The idea that the court may subsequently deprive a receiver of his right to remuneration on the sole ground that the court with hindsight comes to the conclusion that the receivership which it had ordered had better not have been ordered at all, has only to be stated in those terms for its injustice to be apparent. I say nothing as to whether application might not properly be made for disallowance of remuneration on proof that the receiver, through negligence or artless discharge of his office, has actually caused damage to the assets whose safety it was the purpose of his appointment to procure. That is not alleged here."

Likewise, in Butterworth v Souter [2000] BPIR 582, Neuberger J, whose decision has since been followed, noted that, on the face of it, it cannot be envisaged that the trustee will work for nothing, and normally when a bankruptcy order has been properly made, subject to questions of reasonableness and subject to special facts, the trustee will be paid out of the estate. On an annulment, the court has an unfettered jurisdiction to decide who, if anybody, should pay the trustee's costs. The answer is likely to be different depending upon whether the annulment is under subsection (a) or subsection (b).

In Thornhill v Atherton [2004] EWCA 1858, [2005] BPIR 437, the issue was whether a trustee should have his costs and disbursements amounting to some £130,000 in a case where a husband was declared bankrupt as a result of shady dealings between his wife and a third party. He succeeded in obtaining the annulment of the bankruptcy order on terms that the trustee should have his costs and disbursements. He appealed on the basis that he had been an innocent victim of the bankruptcy process. He accepted that the trustee should have his costs, but that they should be paid by the guilty parties.

This argument was rejected by the Court of Appeal. Lloyd J said this:

"[38] ... as often happens, the annulment jurisdiction arises at a very early stage of the bankruptcy proceedings before anything very much has been run up in the way of the trustee's costs. One thing that is unusual about this case, certainly by no means the only thing, is the fact that the annulment application comes before the court effectively 4 years down the line."

Referring to the argument of the bankrupt that he was the innocent party and that the bankruptcy should be unconditionally discharged:

"[43] ... it is entirely irrelevant to the position of the trustee in bankruptcy whose costs have been properly incurred ... That would leave the trustee without any security. It seems to me it would put him in a wholly invidious position which would be a wrong exercise of the court's discretion to invoke in the circumstances of this case, particularly when there is fault, maybe, as I say, not personal fault of Mr Atherton but fault of him or his advisers, which has led to the situation in which there are such large trustee's costs, so that the liability of the person ordered to pay and the question of security for that payment is a very real point."

The judge noted that Mr Atherton may have had a remedy against his solicitors.

The facts of Thornhill v Atherton bear more than a passing resemblance to the circumstances in the present case, although they are not identical.

A somewhat similar recent decision is that of the Chancellor in London Borough of Redbridge v Mustafa [2010] EWHC 1105 (Ch), [2010] BPIR 893. The debtor had been made bankrupt as a result of unpaid council tax for which she was probably not in fact liable. However, she had not followed normal procedures to regularise the position and then ignored advice to take immediate steps to have the bankruptcy annulled. Her application was not made until some 18 months later and the district judge, in annulling the bankruptcy, ordered the petitioning creditor, the local authority, to pay the trustee's costs and expenses of some £23,000 on the basis that it had been unreasonable to take bankruptcy proceedings in respect of such a small debt. On appeal, the Chancellor overturned that order and the debtor was ordered to pay the trustee's costs. The bankruptcy order was properly made at the time and there was no obligation on the creditor to obtain its annulment. The costs had been incurred as a result of the debtor's failure to organise her affairs and to avail herself of her remedies at the time.

Lastly, for a case in which a bankruptcy was annulled without making provision for the trustees' costs of about £30,000, see Ella v Ella [2008] EWHC 3258 (Ch), [2009] BPIR 441. It was held that the proceedings were an abuse of the bankruptcy process and that the trustees were not blameless, being in effect an alter ego for the husband.

From these authorities, I draw the conclusion that a trustee will be entitled to reasonable remuneration for work properly carried out during the period of his appointment, and that the question of disallowing fees will only arise where he has acted improperly in some way.

The cases of Thornhill v Atherton and Mustafa also underscore the crucial importance of making an early annulment application.

Appeals

As this is an appeal from a district judge, Rule 8.1(3)(a) Family Proceedings Rules 1991 (now Rule 30.12 Family Procedure Rules 2010) provides that it is limited to a review of the decision unless this court considers that in the circumstances of the case it would be in the interests of justice to hold a rehearing. No party has suggested that this hearing is other than a review, or that oral evidence should be given.

This court will allow the appeal if the decision appealed is wrong, or unjust because of serious procedural or other irregularity. A decision will be wrong if it is shown to be wrong in law; or to have taken into account an irrelevant factor or failed to take into account a relevant one to the extent that the result is plainly wrong.

The court only takes account of events subsequent to the judgment if the Barder criteria are met. These are that:

a. New events have occurred since the making of the order, invalidating the basis on which it was made; and that

b. The new events have occurred within a relatively short time of the order having been made (usually only a few months); and that

c. The application has been made reasonably promptly in the circumstances of the case; and that

d. Third parties' interests should not be prejudiced, where acquired in good faith and for valuable consideration.

Normal price fluctuations do not amount to Barder events. In Cornick v Cornick [1994] 2 FLR 530, Hale J explained that what is required is that:

"…something unforeseen and unforeseeable has happened since the date of the hearing which has altered the value of the assets so dramatically as to bring about a substantial change in the balance of the assets brought about by the order…However, the circumstances in which this can happen are very few and far between. The case-law, taken as a whole, does not suggest that the natural processes of price fluctuation, whether in houses, shares or any other property, however dramatic, fall within this principle."

Decision

The annulment application

The wife plainly has a sufficient interest to make her application.

The first question is whether on any grounds existing at the time the order was made, the order ought not to have been made. In answering this, I reach the following conclusions:

(1) The husband was in fact unable to pay his debts as they became due, and at the time the order was made it cannot be said that there was a tangible and immediate prospect of his being able to do so. Certainly, some or all of his debts might have been paid once the divorce was concluded at some time in the foreseeable future, but the information presented to the bankruptcy court did not make it inappropriate for it to have made the order when it did. This is not to say that it could not have adjourned the application for the wife to be heard, or that if she had made an immediate application for annulment accompanied by agreement that the house should be sold without delay, the court might not have suspended or annulled the order under s.282(1)(b), but this is not what happened.

(2) I do not find evidence that the husband's motivation for petitioning was to frustrate the wife's legitimate claims, although his actions were bound to impact on the wife. It is more likely that he was motivated by a belated wish to put his affairs in order. Although his breach of the freezing order was reprehensible, he was entitled to consider that he too had some interest in the family assets, and if anything the bankruptcy put an end to their dissipation. He did not anticipate the far-reaching consequences of his petition. The situation is different to the Paulin case, in which the husband had manufactured a debt in an attempt to defeat the wife's claims. Here, the husband accurately declared his assets. The bankruptcy was unnecessary, but it was not tactical. It has led to a scale of expense that was beyond normal powers of foresight. I do not consider that the onus shifts to the husband to show why the order should not be annulled, but if I am wrong, I find that he has discharged it.

(3) I next consider Mr Bothwell's main argument. He did not shrink from saying that s.336(2)(a) provides the wife, and all others in her position, with a position of cast-iron impregnability against any attack on the family home by creditors. He says that the statutory provision is there for all to see and that the consequence of an unconditional annulment would be a salutary lesson to unsecured creditors and to the trustee and others in his position.

That argument was not advanced by counsel acting for the wife at the district judge's hearing, or by counsel settling the notice of appeal. Nor is there any record of the submission having been made in any reported case since the Insolvency Act came into effect in the closing days of 1986. The novelty of an argument does not disqualify it, but it does put one on the alert as to its validity.

I am sure that s.336(2)(a) does not have the effect for which Mr Bothwell contends. The intention behind the subsection is to ensure that, where a wife's home rights are concerned, a trustee in bankruptcy is in no better short-term position than a husband had 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 under s.335A or s.336(2)(b). The existence of such rights does not make the property onerous. Nor does the section give a person in the position of the wife the right to remain in the property in perpetuity regardless of anyone else's interests, indeed such an interpretation would bring about absurd results.

I therefore reject the principal argument now deployed on behalf of the wife. As a matter of law the threshold for annulment has not been crossed, and I must therefore refuse the wife's application.

The next question would only arise if I had reached a different conclusion on the previous issue. The court would then have to consider whether to annul the order in all the circumstances that now exist. Had this question arisen, I would have taken into account these circumstances:

(1) When he presented his petition for bankruptcy, the husband undoubtedly sowed the seeds of the present difficulties, but he is not exclusively responsible for the resulting briar patch. The wife also bears a share of responsibility. She was slow to come to the realisation that the property would in fairness have to be sold on divorce, and swift to depart from that realisation after the financial order was made. In doing so, she has made a bad situation worse, the only benefit to her and the child being that they have had some years' further occupancy of the property.

(2) The effect of an immediate unconditional annulment would be that the property would revert to the husband's ownership and become available for orders within the divorce proceedings. The trustee's fees and expenses would be unsecured. The creditors would recover nothing unless provision was made for payment of the husband's debts within the divorce proceedings. If the creditors were not paid and the entire assets allocated to the wife in an attempt to rehouse her and the child, the husband would be faced with the prospect of a fresh petition, this time by his creditors and/or the trustee.

(3) The effect of conditional annulment on the husband and wife would be to leave assets with a value of +/- £160,000 available for distribution after the trustee's fees and expenses were met, but before any provision for debts. The ad valorem fee would be saved. Even so, the amount remaining would be wholly insufficient to rehouse the wife and child and pay the husband's debts. If the creditors were paid (without recalculating interest) there is no more than £50,000 left, and the legal aid charge would bite.