Reid-Roberts & Anor v Mei-Lin & Anor (Re Audun Mar Gudmundsson (a Bankrupt) [2024] EWHC 759 (Ch) was an unusual case resulting in an unusual application of the exceptional circumstances rule in the context of an application by the joint trustees in bankruptcy of Audun Mar Gudmundson for declarations as to the beneficial ownership of his and his ex-wife’s former matrimonial home and orders under s 335A Insolvency Act 1986 for possession and sale.
The application was resisted by the first respondent, Hsiao Mei-Lin, the bankrupt’s former spouse, who was in occupation of the property with the two children of the marriage aged 10 and 14 and two lodgers. She opposed it on two main grounds. First, she contended that the second respondent’s (the bankrupt’s) beneficial interest in the property had not in fact vested in the applicants as trustees in bankruptcy: her case was that, before the bankruptcy order had been made, and in the context of her and the bankrupt’s separation after the breakdown of their marriage, the bankrupt had made a written disposition of his interest in the property to her sufficient to satisfy the requirements of s 53(1) Law of Property Act 1925 in return for her agreeing to take responsibility for looking after their children. She relied on the Court of Appeal decision in Hudson v Hathway. Her second ground of opposition was that there were other reasons (exceptional circumstances) why it would not be just and reasonable within the meaning of s 335A IA 1986 to make the immediate orders that were sought. These included the following:
(a) The bankruptcy order had been made on 26 February 2020, seven days before the Family Court made a property adjustment order under the Matrimonial Causes Act 1973 under the terms of which the second respondent was to transfer his interest in the former matrimonial home to her. That order had followed a hearing that had concluded almost a year earlier, on 20 February 2019. Ms Lin contended that the delay in handing down judgment was largely attributable to the conduct of the bankrupt, who, had asked the judge to delay handing down while concealing from him (and her) that a statutory demand had been served on him on 18 November 2019, a bankruptcy petition presented on 22 December 2019 and a bankruptcy order made. Failure to disclose those facts was deliberate, the intention being to frustrate the effect of the property adjustment order applied for.
(b) Ms Lin’s older child had been diagnosed with ADHD; both children, and Ms Lin herself, had suffered psychological trauma as a result of the bankrupt’s abusive and violent behaviour during the marriage. The children now needed the stability of a family home and were settled in local schools. They would suffer if they were now forced to move.
(c) The assets in the bankruptcy were unclear due to what the Family Court had described as the “complex and deliberately opaque structures” used by the bankrupt husband.
(d) There were issues with the claims of certain creditors in the bankruptcy which were similarly opaque.
(e) It was unclear how much would be realised from the bankrupt’s assets, and therefore how much would be needed to settle the bankruptcy debts and liabilities.
In those circumstances, it was not just and reasonable to make an immediate order for possession and sale.
Deputy ICC Judge Frith dismissed the first line of defence. Although s 36(2) Law of Property Act 1925 expressly preserved the right of one joint tenant to release his/her interest in property to the other joint tenant, and a release by one to the other needed no particular form of words, and although in this case, as in Hudson v Hathway, there had been an exchange of messages capable of being relied on as having been “signed” for the purposes of s 53(1)(c), in the instant case, the parties had been engaged in divorce proceedings. The effect of the judgment in Xydhias v Xydhias was that, whilst parties to matrimonial proceedings could engage in negotiations to resolve issues in relation to a property adjustment order, any agreement reached had to be approved by the court before an effective order could be made. Thus, in this case, there had been no effective disposition. The bankrupt’s beneficial interest had therefore vested in the applicants by operation of law on the making of the bankruptcy order in the usual way.
The second respondent did, however, prevail on the exceptional circumstances point. This was a case in which the application was made over a year after the first vesting of the estate, so the court was obliged to give priority to the interests of creditors save in exceptional circumstances (s 335A(3) IA 1986). The applicants relied on the presumption in favour of creditors’ interests, submitting that there was nothing unusual in the case: it could not be distinguished from those described in the leading authority, Re Citro.
The deputy judge did not agree. He found that the bankrupt had misconducted himself in relation to the Family Court: had Ms Lin been aware of that, she could have sought an expedited handing down to protect her position, and “[w]hilst it is difficult to consider with certainty the outcome of such an application, it is completely foreseeable that the handing down of the judgment would have been accelerated by the judge and the property adjustment order made.” Deputy judge Frith asked, rhetorically, “[I]s it just and reasonable for me to make an immediate possession order as the Applicants contend?” His answer was: “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.”
He went on to say that he would make a declaration that Ms Lin was entitled to 50% of the proceeds of sale of the former matrimonial home after deducting the costs of sale; and in fixing a date for sale, he would select a date which would take into account the educational needs of the children. Ms Lin’s daughter would be 18 on 20 February 2032; to ensure that her preparation for any school examinations would not be interrupted, sale of the former matrimonial home would be deferred until after midnight on 31 July 2032.
Re Citro is often cited by trustees as a counter to an “exceptional circumstances” defence to an application for possession and sale of the matrimonial home of a bankrupt. The Court of Appeal famously remarked that the need of the family to move home and school and the like was no more than one of “the melancholy consequences of debt and improvidence with which every civilised society has been familiar.” Where exceptional circumstances have been found, they have hitherto generally related to the health or disability of an occupier of the property (not being the bankrupt). Whilst similar factors appear to have been relied on in this case, it would seem from the judgment that it was the conduct of the bankrupt husband that was the centre of judicial focus. That may be unusual, but it is very much in line with authority: as Lawrence Collins J noted in Dean v Stout, “the categories of exceptional circumstances are not to be categorised or defined.”