High Court of Justice in Northern Ireland Chancery Division Decisions

Official Receiver for NI v. Kearney [1999] NICh 2; [1999] NIJB 24 (13th January, 1999)

GIRA2661 1994 No

IN THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND

CHANCERY DIVISION (BANKRUPTCY)

------

BETWEEN:

THE OFFICIAL RECEIVER FOR NORTHERN IRELAND

Applicant;

and

ROBERT KEARNEY, PATRICIA KEARNEY and

COLUMBA CHRISTOPHER EASTWOOD

Respondents.

------

GIRVAN J

JUDGMENT

INTRODUCTION

1. This matter comes before the court by way of an appeal from an order of Master Glass made on 29 June 1998. The matter came before the Master by way of an originating summons issued by the Official Receiver seeking an order for sale in lieu of partition of property known as 21 Bristow Park, Belfast ("the premises") and directing that the proceeds of sale be divided between the applicant and Patricia Kearney ("the wife") in equal shares or in such shares as the court might direct. Other relief was sought in relation to a holding of shares in Alliance & Leicester plc in respect of an allotment of shares but the Master's decision in respect of that issue was not challenged on appeal. Although Columba Christopher Eastwood, the third defendant, was a party named in the proceedings before the Master, there was no issue in relation to him in relation to the appeal.

2. The Official Receiver made the application in her capacity as trustee of the estate in bankruptcy of Robert Kearney ("the Bankrupt") who was adjudicated bankrupt on 12 May 1994 ("the date of adjudication") and as liquidator of two partnership businesses (Balmoral Body and Beauty Clinic and K & K Leisure) in respect of which a winding up order was made on 12 May 1994. There was a dispute as to whether the wife was a partner in the businesses but the Master concluded on the evidence that she was not a partner and that finding has not been challenged on appeal.

3. On the hearing of the appeal Mr Orr QC appeared on behalf of the wife and Mr Shaw appeared on behalf of the Official Receiver.

THE HISTORY IN RESPECT OF THE PREMISES

4. Under an assignment dated 1 July 1975 the bankrupt and the wife became the owners as joint tenants of the premises for the residue of the term of 9,000 years from 3 November 1944 subject to a small ground rent and subject to the terms and conditions contained in the ground lease of 3 November 1944. The property is subject to a mortgage in favour of Alliance & Leicester plc on foot of which approximately [sterling]100,000.00 is now due and owing.

5. When the premises were originally purchased they cost [sterling]24,000.00. Of that [sterling]10,000.00 was raised with the help of a Bradford & Bingley Building Society loan. In 1982 a further advance of [sterling]3,000.00 was obtained for home improvements. In 1990 the property was re-mortgaged to the Bradford & Bingley Building Society for [sterling]50,000.00 to assist in the funding of the business of Balmoral Body and Beauty Clinic. The former mortgage was paid off leaving some [sterling]37,000.00 for working capital. In 1991 the property was again re-mortgaged this time to Alliance & Leicester plc for [sterling]77,000.00 allowing the Bradford & Bingley Building Society mortgage to be paid off and providing some additional working capital.

6. As a result of litigation in this Division after the date of adjudication it was held that the mortgage in favour of Alliance & Leicester plc was well charged against the interests in the property of both the Bankrupt and the wife.

7. In addition to that mortgage which is secured against the interest of both the Bankrupt and the wife there are other orders charging land amounting to some [sterling]30,000.00 which bind the interest of the Bankrupt but not the wife.

8. From the date of the re-mortgaging of the Bradford & Bingley Building Society mortgage in 1990 until the Balmoral Body Business found itself in financial difficulties the Bankrupt made mortgage repayments with the help of contributions of [sterling]100.00 per month from the wife. Since the date of adjudication the wife has made all the payments in respect of the Alliance & Leicester plc debt. This apparently includes interest payments and payments of a capital nature reducing the principal sum.

THE WIFE'S INTEREST AND THE OFFICIAL RECEIVER'S RIGHTS

9. Under Article 309 of the Insolvency (Northern Ireland) Order 1989 so far as materially it is provided:-

"(3) Notwithstanding any provision of the Partition Act 1868 where a person and his spouse ... have a legal or equitable estate in a dwelling-house vested in them jointly ... and that person is adjudged bankrupt, in a suit for partition maintained by the trustee of the bankrupt's estate the High Court may make such order as it thinks fit.

(4) ... in a suit such as is mentioned in paragraph (3) the High Court shall make such order under paragraph (3) or Article 4 of the Order of 1984 as it thinks just and reasonable having regard to (a) the interests of the bankrupt's creditors; (b) the conduct of the spouse ... so far as contributing to the bankruptcy, (c) the needs and financial resources of the spouse ... (d) the needs of any children; and (e) all the circumstances of the case other than the needs of the bankrupt.

(5) Where such ... a suit is maintained after the expiration of one year from the first vesting ... of the bankrupt's estate in a trustee, the High Court shall assume, unless the circumstances of the case are exceptional that the interests of the bankrupt's creditors outweigh all other considerations."

10. At the outset it is necessary to determine what legal and beneficial interest the wife has in the premises. The premises were vested in the Bankrupt and the wife as joint tenants. Where premises are held on a joint tenancy the adjudication of one joint tenant resulting in the vesting of the bankrupt's interest in the trustee in bankruptcy effects a severance (see Morgan v Marquis (1853) 9 Ex Ch 145). In the absence of evidence to rebut the presumption of equality in respect of the beneficial ownership of the premises the wife was entitled to a one half beneficial interest in the premises at the date of adjudication. Mr Orr initially faintly argued that the wife had effectually made contributions in excess of one half in respect of the acquisition cost of the premises but he did not seriously counter the proposition that the Official Receiver and the wife were beneficially entitled to equal shares in the premises, subject to the principles of equitable accounting when the proceeds of sale came to be distributed. In the light of the way in which the case was presented by Mr Orr and having regard to the circumstances and the matrimonial history I am satisfied that the Bankrupt and the wife immediately before the date of adjudication were equally entitled to the premises in equity.

In Re Citro [1990] 3 All ER 952, which was decided before the coming into force of the provisions of section 336 of the Insolvency Act 1986 (equivalent to Article 309 of the Northern Ireland Order) the English Court of Appeal considered the authorities relating to how the court should exercise its powers under section 30 of the Law of Property Act 1925 in respect of the sale of property jointly held by spouses one of whom goes bankrupt with debts to be discharged requiring a realisation of the bankrupt's interest in the premises. Although the decision in that case related to the exercise of powers under section 30 of the 1925 Act there is little doubt that the court concluded that the same approach would be adopted under section 336 of the 1986 Act (equivalent to Article 309 of the 1989 Order). Nourse LJ stated that he had no doubt that section 336(5) (equivalent to Article 309(5) in the Northern Ireland Order) applied the same test as that which had evolved in the previous bankruptcy decision. In Re Citro at 961 Nourse LJ summed up the position thus:-

"Where a spouse who has a beneficial interest in the matrimonial home has become bankrupt under debts which cannot be paid without the realisation of that interest, the voice of the creditors will usually prevail over the voice of the other spouse and a sale of the property ordered within a short period. The voice of the other spouse will only prevail in exceptional circumstances. No distinction is to be made between a case where the property is still being enjoyed as the matrimonial home and one where it is not".

11. An example of an exceptional case is Re Holliday (a bankrupt) [1980] 3 All ER 385 where the bankruptcy had been presented by the husband himself as a tactical move to avoid a transfer of property order in favour of his ex-wife at a time when no creditors were pressing and he was in a position in the course of a year or so out of a very good income to discharge whatever debts were due.

12. The inevitable distress which a wife would suffer as a result of loosing her home does not of itself make a case exceptional where it is "the melancholy consequence of debt and improvidence with which every civilised society has been familiar ..." (per Nourse LJ at 962).

13. In the circumstances of this case there is nothing exceptional to outweigh the interest of the creditors who have been kept out of their money for a considerable period of time. There is nothing in the family, domestic or financial circumstances of the wife which would make the case exceptional. The wife appears to be estranged from the Bankrupt and the children are now grown up and married. Accordingly, subject to any special directions which fall to be given in consequence of the principles of equitable accounting, the court must direct the sale of the premises and to that end it will be necessary for the wife to deliver up possession of the premises to the applicant for the purposes of such sale.

APPLICATION OF THE PRINCIPLES OF EQUITABLE ACCOUNTING

14. The principles of equitable accounting find their origin in the equitable principle that he who seeks equity must do equity. One aspect of equitable accounting is the principle that "where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owes to the fund." (see Re Rhodesia Goldfields Limited (1910) 1 Ch 239 at 245 per Swinfen Eady J.) A second aspect is that a party who discharges another's secured obligation wholly or in part is entitled to be repaid out of the security the amount of the sum or sums paid by him or her (see Pitt v Pitt (1823) Turn R 180 and Outram v Hyde (1875) 24 WR 268) though where the parties are spouses the discharge of mortgage instalments by whoever pays may not be intended to give rise to any right of subrogation to the party making the payments (see Bagnall J in Cowcher v Cowcher [1972] 1 All ER 943.) Another aspect of the principles of equitable accounting is that in a partition suit or an order for sale adjustments should be made between co-owners, the grounding principle being that neither party should be entitled to take the benefit of any increase in the value of the property without making an allowance for what was expended by the other to bring about that increased value (see Leigh v Dickeson (1884) 15 QBD 60 and Re Pavlou [1993] 1 WRL 1048.)

15. Once the Bankrupt was adjudicated and the joint tenancy severed, the wife continued to occupy the premises paying the mortgage instalments part of which discharged interest and part of which may have reduced the principal debt, thus being in the nature of a capital payment, thereby increasing the equity of redemption.

In Re Pavlou [1993] 1 WLR 1046 the husband and wife had purchased the matrimonial home in 1973 for [sterling]12,500.00 with the assistance of a mortgage of [sterling]9,500.00. The house was held in joint names. The husband left his wife in January 1983. The wife remained in occupation paying the mortgage instalments as they fell due. She petitioned for divorce and was granted a decree in July 1986. In March 1987 the husband was adjudicated bankrupt. The court held that for the purposes of equitable accounting the guiding principle was that an allowance should be made for expenditure by one of the co-owners which resulted in an increased value of the property held by them at the time of the partition suit or order for sale. The court held that the wife was entitled to credit for one half of the increase in the value of the home, if any, realised as a result of her expenditure before and after the bankruptcy order on repairs and improvements or half her actual expenditure if less. The court also held that she was entitled to credit for one half of the increase in the value of the equity of redemption resulting from the capital element of the mortgage payments. In respect of the interest element of the mortgage payments and the wife's sole occupation of the home after the husband had left, in the absence of agreement between the parties there would have to be an inquiry whether an occupation rent should be set off against the mortgage interest payments and accounts and inquiries would be ordered accordingly.

16. In the present case once the adjudication of bankruptcy took effect thereby vesting the Bankrupt's interest in the Official Receiver the parties were at arms length, with the wife thereafter being entitled to be credited with one half of the interest payments she made to the mortgagee and with one half of the capital repayments made by her which reduced the principal debt and thereby enhanced the equity of redemption. There was some debate during the submissions whether the wife was entitled to any increase in the capital value of the premises after the date of adjudication it being contended that by remaining in possession of the premises and paying the mortgage outgoings the wife had enabled the capital value of the premises to increase.

17. I do not consider that the principles of equitable accounting lead to that result nor is that the way in which Millett J in Re Pavlou decided the case. The increase or decrease in the property value of the house during the period from the date of adjudication to date is the consequence of market forces. Giving the wife credit for one half of the interest and one half of the capital repayments represents a fair and equitable result provided that the wife is also entitled to a return of interest on the capital repayments from the date of payment until the final distribution of the proceeds of sale.

18. In relation to the crediting of the wife in respect of the one half of the interest payment it is to be noted that the wife had the benefit of the use and occupation of the premises from the date of adjudication. The Official Receiver is strictly entitled to set off a fair occupation rent against the one half of interest payments to which the wife is otherwise entitled. In many cases the court has simply set off the interest element against the occupation rent but this is not a rule of law. In Re Gorman (a bankrupt) [1990] 1 WLR 616 at 626 Vinelott J pointed out that:-

"It is a rule of convenience and more readily applies between husband and wife or cohabitees than between the spouse and trustee in bankruptcy of the other co-owner."

In Re Pavlou Millett J held that if the trustee in bankruptcy insisted on strict accounts being taken then he was entitled to do so unless it could be seen in advance that the amounts were likely to be so similar that the taking of the two accounts would be a waste of time and the costs would outweigh any possible advantage to be gained thereby. In such cases the court might impose its own solution of directing the interest element to be set off against the use and occupation without any further inquiry.

As in Re Pavlou there is no evidence in the present case that assists the court in the calculation of a fair occupation rent or what might be recoverable by way of interest payments. In the circumstances it will be necessary to direct an account unless the parties can reach an agreement on this aspect of the matter.

19. In the result I direct that the premises be sold with the applicant to have carriage of sale and I direct that the second defendant deliver up possession of the premises to enable such a sale to be effected within three months. I further direct that subject to the accounting exercise referred to below, the wife should be entitled to receive out of the net proceeds of sale after deduction of the costs of these proceedings and the costs of the sale one half of the net proceeds. Her share should be credited and the Official Receiver's share debited with -(a) one half of the interest payments made by her to Alliance & Leicester plc since the date of adjudication;

(b) one half of capital repayments made to the Alliance & Leicester plc since the date of adjudication.

20. As previously indicated the latter figure should bear interest (which I fix at judgment rate) from the date of payment up until the final distribution of the proceeds of sale.

21. The Official Receiver shall be entitled to set off against such sum as may be found due in respect of one half of the interest payments a sum representing a fair and reasonable rent for the use and occupation of the premises during the period from the date of adjudication to the date upon which the second defendant delivers up possession of the premises.

22. In the absence of agreement between the parties in relation to the figures within a period of four weeks then it will be necessary to direct the taking of appropriate accounts and inquiries to calculate the aforesaid sums.

23. The sale of the premises need not be delayed until completion of the accounts, the net proceeds of sale to be held on joint deposit in the names of the parties' solicitors until completion of the accounts whereupon the balance may be distributed in accordance with the conclusions in those accounts and inquiries. In view of the expense involved in such an accounting process it would clearly be in the interests of the parties to reach agreement on figures avoiding the necessity of taking the matter further through the court. IN THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND

CHANCERY DIVISION (BANKRUPTCY)

------

BETWEEN:

THE OFFICIAL RECEIVER FOR NORTHERN IRELAND

Applicant;

and

ROBERT KEARNEY, PATRICIA KEARNEY and

COLUMBA CHRISTOPHER EASTWOOD

Respondents.

------

J U D G M E N T

of

GIRVAN J

------