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)
Strand, London, WC2A 2LL
B e f o r e :
|GRAZYNA MEKARSKA (Wife)||Applicant/Appellant|
|- and -|
|(1) MARTIN RUIZ (Husband)|
|(2) PATRICK BOYDEN (Trustee in Bankruptcy)||Respondents|
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
Crown Copyright ©
Mr Justice Peter Jackson:
Bankruptcy and notice to third parties
The facts of this case
Marriage and divorce
"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."
The financial order on divorce
Events after the financial order
The grant of permission to appeal out of time
(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 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."
"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."
"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."
Costs and expenses
April 2008 117,000
November 2008 132,000
October 2009 203,000
March 2011 260,000
Debts due to creditors 87,800
Statutory interest @ 8% 25,200
Trustee's fees 38,100
Legal fees and disbursements 46,700
Official Receiver's costs 1,800
VAT on fees 17,000
Secretary of State fee 44,000
(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
a. The district judge proceeded on the assumption that no challenge to the bankruptcy was possible.
b. Referring to Barder v Barder (Caluori intervening)  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.
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 …
Applications for annulment
(1) A debtor's petition may be presented to the court only on the grounds that the debtor is unable to pay his debts.
(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.
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)  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.
52. In Artman v Artman,  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."
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  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.
"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."
" ... 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:
" ... 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."
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.
"…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."
The annulment application
(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.
(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.
The fees and expenses of the trustee