Statement of Law:

When a bankruptcy order is made any property held by the bankrupt vests in the trustee.

Some recent case law on the topic:

In Ram v Ram No 2 [2004] EWCA Civ 1684 it was held that any share in the property that the husband had owned at the date of his bankruptcy had vested in the trustee in bankruptcy. The husband therefore had no entitlement to any of his estate until there was a surplus, if any. Under the Insolvency Act 1986 s.306(1), a bankrupt did not retain a beneficial interest that he held at the time of the bankruptcy order, nor did that interest revert back to him upon discharge.

Mc Gladdery v Mc Gladdery 1999 2 FLR 1102

“…Notwithstanding the statement to the contrary in Rayden and Jackson on Divorce and Family Matters, it was not possible to make a property adjustment order against a bankrupt former spouse, because the property of the bankrupt vested in the trustee in bankruptcy, and such an order could not be made against the trustee…”

Treharne and Sand v Forrester [2004] 1 FLR 1173

The wife issued divorce proceedings. 19 months later bankruptcy proceedings were commenced against the husband for unpaid tax. A Family Division Judge directed a transfer of the husband's share in the matrimonial home to the wife 'forthwith upon final decree'. The decree was made absolute. A further order was made in the Family Division for the transfer of further assets to the wife and for the previous transfer to be executed. The bankruptcy order against the husband was made the next day. The wife's application for further assets was heard in the Family Division, at which date the bankruptcy order became known to her. Two trustees in bankruptcy were appointed who applied to set aside the property transfer orders on the ground that bankruptcy proceedings were already in existence before the court orders were made and therefore they were dispositions of property made by a person adjudged bankrupt, and thus rendered void by s. 284 of the Insolvency Act 1986.

Held – In the Chancery Division… the dispositions made by the Family Court orders in the wife's favour were void under s. 284 of the 1986 Act as this rendered void any disposition of a person adjudged bankrupt from the day of presentation of the bankruptcy petition until vesting of the estate, unless that is the disposition is ratified by the bankruptcy court.

However that does not necessarily mean that all is lost!!

Mountney v Treharne [2002] 2 FLR 930

Following a contested ancillary relief hearing the district judge ordered the husband to transfer his interest in the FMH, which was in his sole name, to the wife forthwith. In the event of the husband's failure to do so within 14 days, the relevant documents were to be signed by the district judge. After the decree had been made absolute and before the expiry of the 14-day period had passed and before transfer documents had been signed by either the husband or the district judge, a bankruptcy order was made against the husband on his own petition with a deficit of about £195,000 in his estate.

The wife argued that the property was subject to a constructive trust in her favour which was binding on the trustee in bankruptcy. Both the district judge and the circuit judge held that the property vested in the trustee in bankruptcy.

Held - allowing the appeal - A property adjustment order ordering a husband to transfer his interest in the matrimonial home to the wife had the effect of conferring on her an equitable interest in the home at the moment when the order took effect (ie on Decree Absolute) and the trustee in bankruptcy took subject to the wife's interest under the order and the wife was entitled to enforce the order against the trustee. There was therefore no need, and no justification, for imposing a constructive trust on the trustee.

Byford v Butler [2004] 1 FLR 56

Here the husband and wife purchased the FMH in 1986 and took out an endowment mortgage in 1989. The husband was declared bankrupt in 1991. He and the wife remained in the property until his death in 2000. The wife acquired her late husband's interest in the endowment policy from the Official Receiver who appointed the respondent as trustee. She continued to live in the matrimonial home and paid all the mortgage payments. In July 2002, the trustee issued an application for a declaration that he was beneficially entitled to half the equity in the property which by then had increased dramatically. The judge held that:-

(a) the wife was entitled to a credit for the improvements she had made to the property;

(b) she was entitled to a credit for the mortgage interest payments;

(c) the trustee was entitled to a set-off for an occupation rent from the wife.

The result was that there was an equity in the property of £86,254 to be divided equally; the wife was entitled to a credit of £5,000 for her improvements and mortgage repayments leaving a sum of £38,127 for the trustee; but the trustee was entitled to a set-off for an occupation rent which would be treated as extinguishing the credit to which she was entitled. The wife appealed on the ground that the charging of the occupation rent meant that the trustee was seeking to take the benefit of the increase in the property's value without meeting his share of the costs of that increase.

Held the appeal was dismissed. The trustee was entitled to a set-off for occupation rent. The principles of equitable accounting applied equally to beneficial tenancies in common and beneficial joint tenancies. The guiding principle was that neither party could take the benefit of an increase in the value of the property without making an allowance for what had been expended by the other in order to obtain it. What the court was endeavouring to do was broad justice or equity as between co-owners. The fact that there had not been an ouster or forcible exclusion was not conclusive. The trustee could not reside in the property nor could he derive any financial enjoyment from the property while the bankrupt’s spouse resided in it, and the bankrupt spouse’s creditors could derive no benefit from it until he exercised his remedies.