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Insolvency Solicitors and Equity of Exoneration

Insolvency Solicitors and Equity of Exoneration

A Recent Court Decision – Our Insolvency Solicitors Comment on its Impact on Claims Brought by Trustees in Bankruptcy

This article by our insolvency solicitors looks at a recent Court of Appeal Decision and its impact on claims brought by Trustees in Bankruptcy. The decision, made in the case of Williams v Onyearu ([2017] EWCA Civ 268), provides a new insight for both bankrupts and Trustees in bankruptcy as to the factors the court will consider when considering Equity of Exoneration arguments.

The Law of Equity of Exoneration – An Overview

The principle of Equity of Exoneration applies where, prior to the making of the bankruptcy order, the bankrupt charges a jointly owned asset for their own personal benefit and advantage. This most commonly occurs when dealing with the family/matrimonial home.

For Example:

Mr and Mrs Smith jointly own their matrimonial home which has equity of £100,000. Mr Smith then takes out a second mortgage on the property for the sum of £50,000 to pay for his personal debts.

Unfortunately, Mr Smith incurs further debts and is made bankrupt meaning that his 50% share in the matrimonial home vest in his Trustee. The Trustee in Bankruptcy would therefore be entitled and required to realise Mr Smith’s notional 50% interest in the property in the sum of £50,000 for the benefit of the creditors.

However, Mrs Smith may argue that her husband has already taken his 50% share out of the property by virtue of the earlier £50,000 remortgage and that she is therefore entitled to 100% of the equity.

The above is a commonly used defence to possession and sale applications, brought by Trustees in Bankruptcy in respect of matrimonial property. Until Williams v Onyearu, there has been little judicial guidance from the higher courts.

The Factors the Courts Have Traditionally Looked at

The courts, faced with such arguments, have traditionally looked at the following factors when considering Equity of Exoneration arguments:

  • Whether husband and wife were financially independent from one another (e.g. whether they operated separate bank accounts);
  • Whether the non-bankrupt spouse has been exclusively maintaining the mortgage and other household expenses;
  • Whether the non-bankrupt spouse indirectly benefited from the bankrupt’s further borrowing (e.g. did the bankrupt invest the money into a business which improved the spouse’s lifestyle).

If (for example) the court decides that the bankrupt has had the exclusive benefit of the further borrowing then the general rule is that the bankrupt’s borrowing will be taken from their share of the equity in the property, with the following consequences:

  1. The Trustee in Bankruptcy will only be entitled to receive a much-reduced sum representing his interest in the property;
  2. The Bankrupt and his family will have to raise the lesser sum to buy out the Trustee’s interest in the property than would otherwise be the case.

The Finding in Williams v Onyearu

Williams v Onyearu was an appeal by Mr Onyearu’s trustee in bankruptcy from a High Court decision which held that the Equity of Exoneration applied in favour of Mrs Onyearu even though she had received an indirect benefit from her husband’s borrowing.

In his Judgement, Richards LJ made several remarks which are useful to understanding the operation of the Equity of Exoneration, as summarised below:

  1. Richards LJ clarified that the principle of Equity of Exoneration is not limited to cohabiting couples. It can arise in any case where there is jointly owned property and one party borrows against the whole of the equity.
  2. Where the conditions at (1.) above are met, it is to be inferred that Equity of Exoneration applies, unless rebutted by evidence.
  3. Equity of Exoneration can apply even where the non-bankrupt spouse has received an indirect benefit, although this may not be the case if the couple’s finances were intertwined.

Our Insolvency Solicitors Summarise

This finding appears to favour a non-bankrupt spouse who is seeking to safeguard the family home as it provides greater scope to argue that that Equity of Exoneration should apply. However, the finding will likely prove frustrating for Trustees as it may result in a greater number of possession and sale applications being defended.

Dealing with, and Defenses to, Possession Claims brought by Trustees in Bankruptcy

Quite separate from ‘equity of exoneration’ arguments there are a number of other tools available to the Bankrupt to reduce or eliminate the extent of the Trustee in bankruptcy’s Claims.

Our Insolvency Solicitors are well-used to dealing with such claims on behalf of both Trustees and the Bankrupt/His Family.  Contact us or call us on 0121 200 7040 for help and advice in this area. The initial discussion is FREE.

 

Personal Insolvency Case – Lock v Aylesbury Vale District Council

Personal Insolvency Case – Lock v Aylesbury Vale District Council

A New Defence to a Bankruptcy Petition? Our Insolvency Litigation Solicitors Comment

In this personal insolvency case – of Lock Versus Aylesbury Vale District Council – the High Court, on appeal, exercised its discretion to set aside a Bankruptcy Order on the basis that it would serve no useful purpose, or be of any benefit, to the creditor (Aylesbury Vale DC) as the debtor (Ms. Lock) did not have assets to satisfy the liability in bankruptcy. In this article, our insolvency litigation solicitors review and comment on the case, which appears to show a new defence to a bankruptcy petition. Click this link for full details of the case: Lock Vs Aylesbury Vale DC – Case Analysis.

Background to this Personal Insolvency Case

  • The local authority, Aylesbury Vale District Council, served a bankruptcy petition on the debtor, based on a statutory demand for unpaid council tax of £8,067.00. Evidence was served, addressing the council tax liability. The evidence of the debtor did not address her financial situation in detail, but made clear she was living in social housing and was dependent on her daughter for financial support.
  • The debtor prepared a skeleton argument having been ordered by the Court to do so. The skeleton contained an argument, among many, that a bankruptcy order would serve no purpose and be of no benefit to the local authority creditor as she had no assets to satisfy the liability. The County Court made a bankruptcy order. The debtor appealed that order to the High Court.
  • During the appeal hearing, the debtor referred to a bankruptcy checklist used by the respondent local authority. This had not been put in evidence before the district judge. It made clear that, prior to the presentation of the petition, the local authority had been aware that the debtor was unemployed, did not own a home or receive any benefits.
  • The report also stated that there were no obvious assets, but the debtor might have received funds from an inheritance. There were no documents to support this assertion and so the debtor argued that this possible inheritance would only be small, and in any case she had not received any funds (or was unlikely to receive any at all).

The Debtor’s Appeal was Upheld by the High Court

On appeal, it was found that there was no proper evidence establishing any present or prospective assets that could be realised, and nothing to indicate that an investigation of the bankrupt’s affairs would bring any further information to light. As a result the bankruptcy order was set aside pursuant to CPR, Rule 52.21(3) which states:

The appeal court will allow an appeal where the decision of the lower court was: (a) wrong; or (b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court.”

Final Comment by our Insolvency Litigation Solicitors – A New Route to Defend a Bankruptcy Petition?

The approach of His Honour Judge Hodge QC demonstrates there is a new (or at least, an underused) route to defend a bankruptcy petition.

Whilst this case turned on its own particular facts, creditors looking to bankrupt debtors need to recognise that the existence of an undisputed liability will not always be enough to get them home. The Bankruptcy Court will, in an appropriate case, as here, bare its teeth and refuse to make a Bankruptcy Order.

Here at Neil Davies & Partners, our insolvency litigation solicitors are well used to prosecuting and defending bankruptcy petitions. For a FREE, no obligation chat, please contact us or call the team on 0121 200 7040.

Misfeasance Claim Win by our Insolvency Litigation Solicitors

Misfeasance Claim Win by our Insolvency Litigation Solicitors

Success for Neil Davies and Partners in a heavily contested Misfeasance Claim Trial for our Liquidator Client against a Director Resulting in a £900,000 Plus Judgement

Summary of this Misfeasance Claim Case. This recent case outcome details how we, as corporate insolvency litigation specialists, succeeded in successfully pursuing a Misfeasance claim against a company Director.  As part of the £900,000 plus Judgement, our Liquidator client also obtained a declaration from the High Court that the Director’s home, which he had purchased  in the name of him and his wife, was an asset of Greenbuy Energy Limited (‘the Company’) and thus available to the Liquidator.

We often act for Liquidators who are looking to bring misfeasance claims against Directors. These claims are often complicated pieces of litigation involving complex financial transactions. This is a case that truly evidences our belief that we deliver ‘results through experience.’ 

The Details of the Liquidator’s Claim

We were instructed by the Liquidator of the Company to investigate and then pursue a claim against the Company’s Director for repayment of his overdrawn Director’s Loan Account (‘DLA’) as well as for Misfeasance, as a result of his moving money out of the Company to other companies he had control of and even to his own bank accounts, to put the same out of reach of the Company’s creditors.

The Liquidator also (successfully) claimed that the Director’s family home had been purchased with Company money and was rightfully an asset of the Company.

The Company went into Administration on 7 July 2015 with debts of over £3.2m. The Company’s Creditors were particularly aggrieved about the sudden demise of the Company.

What Did Our Misfeasance Lawyers do?

We worked with specialist Counsel to settle a High Court Application and evidence in support (‘the Application’) claiming about £1m against the Director and his wife, seeking Orders that:

  1. The Director’s property (which was in the name of the Director and his wife) was held on Trust for the Liquidator as an asset of the Company. The equity in this property was estimated at £90,000 – £100,000;
  2. The Director repay to the Company his overdrawn DLA in the sum of around £200,000;
  3. The Director was guilty of Misfeasance under section 212(1) of the Insolvency Act 1986 for making various payments out of the Company valued at £450,000.

What is Misfeasance?

‘Section 212 of the 1986 Insolvency Act: Summary remedy against delinquent directors, liquidators, etc.

  • This section applies if in the course of the winding up of a company it appears that a person who:
  • is or has been an officer of the company, has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.’
  1. The Director pay interest on 2 and 3 above valued at around £20,000;
  2. That the Director and his wife pay the Liquidator’s Legal Costs.

Our Litigation Action was Defended

The Director and his wife defended the Application with the help of their Insolvency Litigation Solicitors. They opposed every part of the Application.  Part way through the litigation, their Solicitors came off record and they began acting in person. That continued until Trial in early 2018.

Failure by the Director to Disclose Bank Accounts

The Director was ordered to provide full and frank disclosure. The Liquidator had identified a bank account that the Director had not disclosed into which it appeared that up to £0.5m of Company money had been transferred.

The Director denied the existence of this bank account.  We were required to apply for and obtain a Court Order to resolve that matter. The account was later traced by the diligent work of the Liquidator and that was instrumental in the case outcome.

Failure by the Director to Disclose Tax Returns

The hidden bank account was just one issue we faced. The Director also failed to disclose his tax returns despite the Court ordering him to do so. This required us to make an application for specific disclosure of documents (made) and, when that was not complied with, an application for an ‘Unless’ Order (made). This was an Order that was again ultimately breached by the Director although this did not stop the Trial from going ahead.

Despite taking nearly 2 years from the date of issue (for the reasons set out above) the matter was eventually listed for Trial in February 2018. The Director and his wife represented themselves.

The Outcome of this Insolvency and Misfeasance Claim Trial

The Liquidator succeeded on all aspects of her Application. Mr Edward Pepperall QC, sitting as a Deputy High Court Judge, held that:

  1. The property was indeed held on Trust for our Liquidator client with our client having a right to possess and sell the same within three months;
  2. The Director was liable to repay the Company the sum of £196,333.35 in respect of his overdrawn DLA;
  3. The Director was liable in Misfeasance and ordered to repay the Company £450,000;
  4. The Director was ordered to pay £20,771.20 in interest;
  5. The Director and his wife were ordered to pay the Liquidator’s legal costs estimated at over £160,000 with an immediate £50,000 interim payment.

Commentary by our Misfeasance Claims Lawyers

The High Court’s decision represents a significant win for the Liquidator.

Neil Davies, NDP Director, who led the NDP team and who acted for the successful Liquidator in this case said:

“This case shows that Directors who ignore Insolvency Act and Companies Act requirements and who wrongly apply company funds can expect to be successfully challenged by office holders, on behalf of Creditors.

The Director and his former Partner could and should have settled these claims at the beginning, without the need for litigation.  They did not do so and will now have to face the costs consequences of not having done so.

Our Liquidator client worked extremely hard to get the evidence together  to get this legalaction off the ground and to enable it to be pursued on behalf of the general body of aggrieved creditors in this case.”

The Judgement

A copy of the Judge can be accessed by clicking this link….Greenbuy Energy Ltd [2018] Judgement

This case study shows how our Insolvency Litigation and Misfeasance Claim Specialists worked with the Liquidator to get the desired outcome. Click here to see some testimonials for our work in this area and contact us or call us on 0121 200 7040 for help and advice in this area.

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