Ram v Ram & Ors

Under section 423(2) of the Insolvency Act 1986, an order must both restore the position that would have existed without the impugned transaction and protect its victims. The power cannot be used to give one victim a better position than that restoration permits. Property which would otherwise have formed part of a bankrupt’s estate should therefore vest in the trustee, even though a matrimonial creditor can prove only against any surplus.

The exclusion of family-proceedings obligations from proof in bankruptcy may be anomalous, but it cannot be corrected through a creative use of section 423. The Convention did not require a different result. The statutory bankruptcy scheme pursued the general interest and the refusal to divert the recovered asset to matrimonial proceedings was not discriminatory.

The husband had transferred his quarter share in the family home to his father and brothers before his bankruptcy. On applications by the wife and the trustee in bankruptcy, HH Judge Norris QC found that the transfer was at an undervalue and intended to put assets beyond creditors’ reach. He set it aside under section 423 of the Insolvency Act 1986 and vested the share in the trustee.

The wife appealed. She contended that the share should instead revest in the husband so that the Family Division could distribute it between her and the bankruptcy creditors in light of her ancillary-relief order. She also relied on Article 1 of the First Protocol and Article 14 of the European Convention on Human Rights. The central issue was whether section 423 permitted a recovered asset to be taken outside the bankruptcy estate to protect a matrimonial claimant.

1. Appeal dismissed. The court upheld the order vesting the recovered quarter share in the trustee in bankruptcy.

2. Section 423(2) of the Insolvency Act 1986 has cumulative purposes. An order must, so far as practicable, restore the position that would have existed without the transaction and protect the interests of all victims. The court applied the explanation in Chohan v Saggar [1994] 1 BCLC 706. Protection of victims does not permit the court to prefer one victim over others or to reward her litigation efforts.

3. Had the husband retained the share, it would have formed part of his bankruptcy estate and devolved upon the trustee. Vesting it in the trustee therefore restored the proper position. The wife was protected to the extent that the recovered asset could produce a surplus after bankruptcy administration. Revesting the asset in the husband for use in matrimonial proceedings would instead give her a better position than she would otherwise have held.

4. Rule 12.3(2)(a) of the Insolvency Rules 1986 made an obligation arising under an order in family proceedings non-provable in the bankruptcy. The court accepted that this result had repeatedly been criticised and was suitable for legislative reconsideration. It nevertheless held that the anomaly could not justify using section 423 to alter the statutory bankruptcy regime.

5. The Article 1 argument failed. At the time of the order under appeal, the wife’s anticipated financial award was at most an expectation; but, in any event, the bankruptcy scheme was a lawful control of property in the general interest. Applying James v United Kingdom (1986) 8 EHRR 123, the court held that the legislation could not be treated as manifestly without reasonable foundation.

6. Article 14 did not assist the wife. Even assuming that her contingent matrimonial interest fell within the Convention’s ambit, the relevant distinction arose from the gender-neutral legal status of a person entitled, or potentially entitled, under a family-proceedings order. The judge’s order restored the pre-transaction position and did not discriminate against her. The wider question whether the bankruptcy rules themselves might be discriminatory was not decided.

• Court of Appeal (Civil Division) — dismissed the wife’s appeal and affirmed the order vesting the recovered share in the trustee: [2004] EWCA Civ 1452.

• Chancery Division, Birmingham District Registry — HH Judge Norris QC found that the transfer was at an undervalue intended to defeat creditors and, under section 423 of the Insolvency Act 1986, ordered the husband’s quarter share to vest in the trustee in bankruptcy.