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In the matter of Re Audun Mar Gudmundsson (a Bankrupt) [2024] EWHC 759 (Ch) exceptional circumstances delays the repossession of a bankrupt’s home by over 8 years. This is a case which perhaps shows the difficulty when the family court and the insolvency court collide.

The bankrupt’s ex-wife lives in the former matrimonial home with her two children aged 10 and 14.

The application was brought by the Trustees’ in Bankruptcy for possession of the matrimonial home (“the property”) by way of an order under Section 335A of the Insolvency Act 1986.

Exceptional Circumstances Delays Trustees’ Possession Of Bankrupt’s Home

Looks like the Trustees had to sit tight and wait over a year for the hearing of their application on 23 February 2024 which was dated 13 February 2023.

The ex-wife opposed the application on the basis the property had not vested in the bankruptcy estate under Section 306 of the Insolvency Act 1986. Alternatively, that there were exceptional circumstances and it would not be just and reasonable for an instant possession and sale by the Trustees.

Family Court Judgment Delay

A notable issue in the case was the family court had not handed down judgment in the divorce proceedings. Although completed hearing matters on 20 February 2019 with judgment anticipated on 6 March 2019, it did not happen for a further 12 months. That delay led to the bankruptcy order being made two weeks prior to the family court doing so. This was picked up as follows:

Between the presentation of the petition and the making of the bankruptcy order on 26 February 2020, the Bankrupt emailed the Family Court judge on five separate occasions, mainly to ask him to postpone the hand down. On none of those occasions did the Bankrupt inform the Family Court that a statutory demand followed by a bankruptcy petition had been served upon him. Had he made such disclosure, the judge may have elected to hand down the judgment much earlier with the consequential order being made before the bankruptcy order was made. This point is relied upon by Ms Lin as misconduct on the part of the Bankrupt and a special circumstance the Court ought to take into account in the exercise of its discretion under s. 335A IA 1986.

The Family Court judgment was eventually handed down at a hearing held on 4 March 2020. It was only at that hearing did the Bankrupt inform the Court and Ms Lin, for the first time, of the bankruptcy order made against him some two weeks earlier. The Court had decided that Ms Lin should be entitled to the transfer to her of the Bankrupt’s interest in the FMH. However, by then, this was to no avail, due to the automatic vesting in the Applicants of the Bankrupt’s interest in the FMH. In addition, she was awarded 80% of her costs. This costs award has not been paid and forms part of the amount she claims in the bankruptcy.

Vesting Of The Property Automatically

The proposition that the property did not vest in the bankruptcy estate was an argument the ex-wife did not succeed on. The reason is a curious feature of UK law when you are into the ambit of divorce. 

You can dispose of an interest in land under Section 53 of the Law Of Property Act 1925. If you tick the boxes fleshed out in subsection 1 such as agreement in writing then an interest in land can be disposed of. Of course, a highlight of UK law is its provision for exceptions to be taken into account. So one must not perhaps overlook the conspicuous caveat carved out in subsection 2 which echoes the similar position in subsection 5 of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 where the famous constructive trust sprouts yet again:

This section does not affect the creation or operation of resulting, implied or constructive trusts.

Although save for those present at the hearing on 23 February 2024 who will know for sure, it seems as if a material portion of the hearing’s time is likely (inferred from the judgment) to have been hoovered up considering the exchanges between the bankrupt and the ex-wife about their discussions as to what should happen to the property. This was relied upon by the ex-wife because certain of the WhatApp messages seemed to indicate the bankrupt intended to release his share of the property to the ex-wife. However, only one problem, whilst that might have been sufficient if two people are not married, it does not outflank the Court’s final say when they are indeed married.

In the case of Hudson v Hathway [2022] EWCA Civ 1648 a disposition arose but as the parties were not married. However, the case of Xydhias v Xydhias [1999] All ER 386 highlighted that divorce means an agreement needs to be approved by the judge to dispose of the interests:

It follows that unfortunately, there was no disposition as Ms Lin contends. The Bankrupt’s beneficial interest therefore vested in the Applicants by operation of law on the making of the bankruptcy order.

It seems obvious that had the family court handed judgment in March 2019 then the bankrupt’s interest would not have vested in his bankruptcy.

Exceptional Circumstances And The Statutory Demand

A whole section of the judgment is devoted to scrutiny of the bankrupt’s correspondence with the judge in the family court in which the decision was delayed until March 2020 because the bankrupt did not tell the judge about a statutory demand he had received. 

It seems the ex-wife was concerned the bankruptcy arose as a means to defeat her interest in the property:

Ms Lin submits that this was deliberate conduct by the Bankrupt. He must have known that the Family Court ought to be made aware of these matters (as shown by him raising them at the eventual hand down date) but he chose to stay silent beforehand. This ensured that the petition proceedings took its course to the significant detriment of herself and the children. The Bankrupt admits that this was his intention in an email that was referred to by Ms Reid-Roberts in her second witness statement. She stated as follows:

[9] “The First Respondent states that the bankruptcy was fabricated due to the Bankrupt’s mental illness at the time brought on by the stress of their divorce and his ongoing drug addiction to Class A drugs and/ or financial gain and/ or revenge. The First Respondent also refers to the email received by DLA Piper from the Bankrupt on 22 May 2023 in which he states ‘the reason for my bankruptcy was really to defeat my wife’s claim for the house in a moment of emotional stress and weakness by agreeing to a friend suing for a debt, I owed him. ….” (emphasis added)

This was denied by the bankrupt when cross-examined at a bankruptcy annulment hearing.

A key issue highlighted by the Court was the failure of the bankrupt to notify the family about the service of the statutory demand. It was considered highly likely that had the family court known about the demand it would have handed down its judgment with increased speed.

However, it appears the Court was also alive to the matter that there could be real doubt as to the position of the main creditor of the bankruptcy estate:

Exceptional Circumstances Delays Trustees’ Possession Of Bankrupt’s Home by 8 years

There is therefore significant doubt as to the overall position of the principal creditor of the estate. The creditors of EFL have succeeded in obtaining judgment in their favour in their action against the insurers of Jirehouse. Whilst the proof of EFL has been accepted in full, it may be that the insurers may not submit a proof for the subrogated debt. There is, at the very least a significant possibility that the liabilities will be significantly less than appear on the latest progress report filed by its joint liquidators. EFL itself was the vehicle for the fraud. The arrangements it had with the Bankrupt have been described as opaque. Whilst the proof has been admitted by the Applicants, the possibility of it being reviewed or withdrawn for dividend purposes cannot be ruled out.

There has undoubtedly been a material effect upon Ms Lin and her two children as a result of the Bankrupt’s lack of candour. Under the property adjustment order, Ms Lin was entitled to the FMH, as the property adjustment order provided. She has now lost that opportunity altogether. It follows that the action of the Bankrupt has sabotaged the effect of an order that would otherwise have been made.

The Bankrupt also admitted taking steps designed to misled the court in relation to the forgery of the result of the drug test. He has described his motivation in this case. In my judgment, I find that the documents show he is perfectly capable of taking the steps he describes to sabotage the outcome of the Family Court proceedings and, on the balance of probabilities, that is what he sought to achieve.

I find that there was misconduct on the part of the Bankrupt in manner consistent with the way in which Ms Lin puts her case. This conduct and its consequences in my judgment clearly takes this case out of the ordinary. It is therefore an exceptional circumstance for the purpose of s.335A.

I point out that had the Bankrupt’s misconduct not taken place and the judgement concluded earlier, she would have been entitled to 100% of the equity. She is entirely blameless for any delay in the conclusion of the Family Court proceedings.

Medical Issues Which Were Exceptional

The ex-wife set out details of the effect of matters on her mental health and that of her son. 

Although the Trustees’ said the melancholy effects of bankruptcy are nothing unusual here the Court did not agree and said the circumstances were exceptional. 

Court Exceptional Circumstances Reasons For Delayed Possession

The Court summarised the exceptional circumstances as follows:

For the reasons stated, the misconduct of the Bankrupt coupled with the delay in the conclusion of the Family Court represent exceptional circumstances under the terms of s 335A IA 1986.

The position concerning creditor claims and the extent to which they will be submitted for proof is uncertain. The EFL liability particularly catches the eye. The proof has been adjudicated upon in accordance with the direction of Chief ICC Judge Briggs and admitted in full. However, recent developments may cast doubt on the amount for which it ought to rank for dividend. The creditors of EFL have the benefit of a judgment in their favour and in due course will receive a substantial payment from the professional indemnity insurers of Jirehouse. There is some doubt as to whether those insurers will submit a proof in the EFL liquidation. This may have a material effect in reducing the liabilities of the bankruptcy estate substantially. This, taken with the fact that there are still further assets that may be realised from the Applicants’ continuing investigations, may have a significant effect on the outcome of the bankruptcy.

Having considered all these factors, is it just and reasonable for me to make an immediate possession order as the Applicants contend? In the exercise of my discretion, I consider that it is not. This is one of those unusual cases where the equities lie with the family of the bankrupt and not with the creditors of his insolvent estate due to the exceptional circumstances I have set out. I do not believe that great hardship will be suffered by these creditors.

Subject to any submissions on the form of the order, I will grant the declaration that Ms Lin is entitled to 50% of the proceeds of sale after deducting the costs of sale. In selecting a date to which any sale of the FMH will be deferred, I will select a date which will take into account the educational needs of the children. Ms Lin’s daughter will be 18 on 20 February 2032. To ensure that her preparation for any school examinations will not be interrupted, any sale of the FMH will be deferred until after midnight on 31 July 2032.

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Author: Elliot Green
Last Updated: June 12, 2024

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Disclaimer: Exceptional Circumstances Delays Trustees’ Possession Of Bankrupt’s Home By Over 8 Years

This page Exceptional Circumstances Delays Trustees’ Possession Of Bankrupt’s Home By Over 8 Years is not legal advice and is not to be relied upon as such. This article Exceptional Circumstances Delays Trustees’ Possession Of Bankrupt’s Home By Over 8 Years is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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