Bankruptcy & Financial Remedy Proceedings

Where a party is made bankrupt in the course of financial remedy proceedings, prior to a final order being made, and the only significant asset is a jointly-owned property, will the non-bankrupt spouse have any entitlement to the proceeds of sale?

It is not uncommon for financial remedy proceedings and bankruptcy proceedings to be on-going at the same time, sometimes with the specific intention of the bankrupt party to frustrate financial remedy proceedings.

Section 306 of the Insolvency Act 1986 provides:

(1) The bankrupt’s estate shall vest in the trustee [in bankruptcy] immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.

(2) Where any property which is, or is to be, comprised in the bankrupt’s estate vests in the trustee (whether under this section or under any other provision of this Part), it shall so vest without any conveyance, assignment or transfer.

Therefore, once a bankruptcy order is made, the trustee acquires the interest of the person made bankrupt. If the property is owned by the parties as joint tenants, the starting point, subject to challenge, is that the trustee is entitled to 50% of the equity in the property and, as such, they can apply under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 for an order for possession and the sale of the property. Where the parties own property as tenants in common, only the bankrupt party’s share — whatever that is — will vest in the trustee.

The ‘three-year rule’

Additional considerations apply where the property in question is the home of the bankrupt party, the non-bankrupt party or of both parties. Section 283A of the Insolvency Act gives the trustee three years to take the necessary steps to realise or secure the bankrupt’s interest in the bankrupt’s home, failing which, that interest will cease to be part of the bankruptcy estate and will automatically re-vest in the bankrupt. This provision is commonly known as the ‘three-year rule’, and that rule only applies to property comprised in the bankrupt’s estate that consists of an interest in a dwelling house which at the date of the bankruptcy order was the sole or principal residence of the bankrupt, the bankrupt’s spouse/civil partner, or their former spouse/former civil partner.

The impact of a bankruptcy order on financial remedy proceedings

In terms of the financial remedy proceedings, once a bankruptcy petition is presented or a bankruptcy order made, the bankrupt party’s interest in the property vests in the trustee in bankruptcy.

As a result, if this is done prior to the making of a final order, the Court no longer has the power to make any property adjustment order. If the spouse of the bankrupt party wishes to challenge the bankruptcy order on the basis that the petition was filed in order to defeat the divorce proceedings, this can be done under section 282 of the Insolvency Act, which states that:

“(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.”

However, subject to any challenge, the joint owner of the property would be entitled to their equitable interest in the property. While there are ways to challenge this, the family Courts do not have the power to make a property adjustment order, and so would not be able to award the non-bankrupt party any of the bankrupt party’s interest in the property, as this would have vested in the trustee in bankruptcy.

The non-bankrupt party will, however, retain their own equitable interest and would receive their percentage interest of the proceeds of sale to reflect this.