Analysis
Mr and Mrs C lived together with their family in the property that they had bought and owned jointly. Mr C went bankrupt for the first time in 1996. Mr C’s trustee in bankruptcy sold his half share of the property to Mrs C for £8,000 in 1998 and thereafter Mrs C owned the full beneficial interest in the property, subject to the original mortgage. In 2002 the property was remortgaged. The funds derived paid for the repayment of the original mortgage, the costs of remortgaging, £2,000 was used to pay off a personal debt of Mrs C and the remainder was used to renovate the property. Mr and Mrs C were both liable to repay the second mortgage. In practice, Mr C paid his earnings into Mrs C’s bank account, which was the account from which the original mortgage and subsequently the second mortgage was repaid.
Mr C was made bankrupt for a second time in 2004. The same trustee in bankruptcy was again appointed. The trustee made a claim that half the moneys borrowed under the remortgage of the property had been transferred to Mrs C at an undervalue and made a claim for payment from Mrs C under s339(3)(a) of the Insolvency Act 1986 (ie a transaction for no consideration). The trustee made a late amendment at trial to rely also on s339(3)(c) (ie a transaction at an undervalue) and this was not objected to by Mr or Mrs C.
At first instance, District Judge Henry found that the arrangement that constituted the remortgaging of the property and its renovation was not one made without consideration because Mr C benefited from the improvements, in that he and his family had a comfortable home. The trustee appealed. Mr and Mrs C were permitted to rely on additional grounds in support of District Judge Henry’s decision, namely that the transfer met Mr C’s common-law and statutory duties to maintain Mrs C, and that Mr C was never entitled to the mortgage advance as it was paid to Mrs C and was therefore solely her property at all times. Mr and Mrs C argued that the amount of any quantum claimed from Mrs C should be reduced by the amount used to repay the original mortgagee and the costs of obtaining the mortgage. The trustee urged the court to decide the question of quantum; by contrast, Mr and Mrs C argued that if this was in doubt then the appeal should be simply dismissed because it was disproportionate to remit the matter to the county court.
Held (dismissing the appeal)
- (1) That Mr C had given up a valuable right by way of the arrangement because he was entitled to half the advance made on the second mortgage. He had not obtained consideration through the discharge of his statutory or common law duties to maintain Mrs C because Mrs C had never claimed that he was not maintaining her and he paid his earnings into her bank account from which she maintained herself and the family. There was no consideration from the fact that Mr C was entitled to remain living at the property because this was an agreement extrinsic to the transaction. Mr C did obtain consideration however from the agreement to use the funds derived from the remortgage of the property to improve it and he benefited because his home and that of his family was renovated and made more comfortable. Therefore s339(3)(a) did not apply.
- (2) Section 339(3)(c) did apply. The consideration provided to Mr C in relation to the transaction was worth significantly less than consideration given for it, because at the date of the transaction Mr C had no contractual right to stay in the property and therefore the value to Mr C at the date of the transaction was negligible.
- (3) However, no order should be made under s339(c). First, the costs of the original mortgage had to be taken into account, and also the costs of obtaining the mortgage. That left a maximum claim by the trustee of approximately £15,000. If Mr and Mrs C had not agreed to use the moneys raised by the remortgage for renovating the property, Mrs C would not have agreed to borrow the moneys, which is what was done. This had to be taken into account by the court in exercising its discretion under s339(2). Furthermore, Mrs C used the moneys in good faith to renovate the property and changed her position in so doing. There was no evidence that the improvements increased the value of the property by a similar amount to their cost. Mrs C had also been solely liable to repay the amount outstanding on the mortgage since Mr C’s second bankruptcy.
- (4) It would be disproportionate to remit the matter to a county court to ascertain the level of benefit to Mrs C from the improvements and to do so would include expert evidence, which was not envisaged at the time when the original amendment was made for the trustee to bring a claim under s339(3)(c). Therefore, the appeal was dismissed.
Continue reading "Claridge, Re The Trustee In Bankruptcy of [2011] EWHC 2047 (Ch)"