Can you protect your assets when your spouse goes bankrupt?

Muckle LLP has successfully defended a claim by a trustee in bankruptcy of a deceased bankrupt (the Bankrupt) (Trustee). The Trustee was seeking a declaration from the Court for 50% of the beneficial interest in our client’s home (Property). 

Laura Keegan, senior associate and Sarah Farish, associate solicitor, both in our banking and restructuring team, were the key defence lawyers on the case. 

In this article, Sarah Farish summarises the case, explains how the outcome was decided, and discusses the complicated procedures surrounding bankruptcy, particularly when joint property is concerned.

Case summary

Muckle LLP acted for the estranged wife (C) of a deceased Bankrupt (B). This was the second time that B had been made bankrupt. 

We successfully defended the claim on the basis that the entirety of the beneficial interest in the Property belonged to C following the purchase from the first bankruptcy estate.

What happens to an individual’s assets when they are made bankrupt?

To understand how the case came to be, we need to consider the impact of bankruptcy on assets.

When a bankruptcy order is made against a person, an insolvency practitioner is appointed as their trustee in bankruptcy. The bankrupt’s estate (Estate) automatically passes to the trustee once they are appointed. 

The Estate comprises all property in which the bankrupt had a beneficial interest as of the date of the bankruptcy order (save for limited carve-outs to cover the bankrupt’s basic domestic or employment needs). 

The role of the trustee in bankruptcy is to realise the value of the Estate and distribute the assets for the benefit of the bankrupt’s creditors. This includes the value of any equity in any real property owned by the bankrupt at the date of the bankruptcy order. 

Why was the second Bankruptcy Estate’s interest in the Property disputed?

B and C were married and purchased a property (Property) and registered at the Land Registry as joint tenants. A bankruptcy order was made against B in 2011. 

The bankruptcy order severed the legal joint tenancy; although the legal interest was held in joint names, the beneficial interest (i.e., the right to any equity in the property) was split between the bankruptcy estate and C. 

At the time of the first bankruptcy, there was no equity in the Property. As C was the joint owner of the Property, B’s trustee of the first bankruptcy offered to transfer B’s beneficial interest to C for a nominal sum, which C accepted. 

C’s parents paid the money on her behalf but no deed or other transfer documents were signed due to the low value involved, as is common practice.

The first bankruptcy estate’s restrictions registered against the Property at the Land Registry were removed and the transfer was recorded in the trustee’s final report to creditors. 

Following C’s purchase of B’s interest from the first estate, B and C separated but did not divorce or formalise their separation legally.

B vacated the family home but did not secure a permanent residence elsewhere. C was declared bankrupt in 2016 but the Property was allowed to revest (remain in C’s possession) under section 283A Insolvency Act 1986.

B was declared bankrupt for a second time in 2020 but died shortly thereafter. At all times, the property remained registered at the Land Registry in joint names.   

The trustee of B’s second bankruptcy argued that it retained a 50% interest in the Property on the basis that C had not purchased B’s interest in the Property from the first estate as: 

• There was no deed of transfer or other agreement recording the transfer of the beneficial interest from the first bankruptcy estate to C; and
• C had not made payment to the first bankruptcy estate for that interest.

The Court found that C did purchase B’s interest in the Property from the first bankruptcy estate and noted that the trustee’s final report to creditors evidenced the same. 

The report to creditors itself, which it was conceded is a signed and dated document from the trustee in bankruptcy, would be sufficient record in writing under s 53(1)(a) Law of Property Act 1925. 

The trustee’s application was therefore dismissed with a costs award in C’s favour.

Protecting your interests

This case highlights the complicated statutory procedures which take effect when an individual is made bankrupt. 

The trustee in bankruptcy’s primary role is to realise the assets of the bankrupt, and that case demonstrates that trustees can take an aggressive approach to asserting that particular assets form part of the Estate. 

This can be particularly challenging when the bankrupt held a dwelling house jointly with other individuals, as the trustee’s aim of realising the value of the property is likely to be incompatible with the individual’s desire to keep, and remain at, the property.

It is, however, the trustee in bankruptcy’s duty to realise the assets for the benefit of the bankrupt’s creditors. Communicating with the trustee in bankruptcy early is essential. 

Taking legal advice as to your position and having a solicitor with expertise assist in liaising with the trustee can lead to a much quicker solution for all parties involved.  

If you are facing a challenge to your interest in property following a bankruptcy order and would like to speak to a member of our team, contact Laura Keegan at [email protected] or 0191 211 7970.