Till debts do us part: marital breakdowns, bankruptcies, and beneficial ownership

Summary

In DDR v BDR (Financial Remedies, Beneficial Ownership and Insolvency) [2024] EWFC 278 the High Court (Family Division) was tasked with tackling the issue of how to resolve questions of beneficial ownership between divorcing spouses. The issue was of particular importance as one spouse was a bankrupt so there were competing claims to his assets.

Background

The case concerned a divorcing couple, where the husband had been declared bankrupt following the couple's separation, and his trustee in bankruptcy issued applications for the sale and vacant possession of the family home.

The Court was primarily concerned with the question of how to apportion the proceeds of the sale of the former family home. Although it was registered in the husband's sole name, the wife contended that she had a 50% beneficial interest in the property. At issue, therefore, was whether the trustee in bankruptcy could recover all of the proceeds from the sale of the house, or whether part was due to the wife. To answer this question, it was necessary to apply the rules of equity and determine whether a constructive trust had arisen, rather than relying solely on the Matrimonial Causes Act 1973 ("MCA"), as is usually possible in cases of divorcing spouses.

The wife made several arguments to support her position that she had an equitable interest in the property. These included, first, that from the time of their marriage, the wife had contributed regularly to the mortgage repayments (often in excess of half the monthly payment). Second, shortly after the marriage, the husband had re-mortgaged the property, at which point the wife's name was added to the mortgage deeds such that she was jointly and severally liable for the mortgage repayments.

Judgment

The judge divided the issues into two stages – first, whether a constructive trust had arisen, and if so, in what shares and second, how financial remedies under the MCA should be applied.

When considering whether the wife had an equitable interest in the property, the judge relied on the well-established principles that the burden of proof fell upon the wife to demonstrate that there was a common intention of shared ownership of the property, upon which she relied to her detriment.

The judge found that common intention to own the property on a joint basis could be inferred from the parties' actions. The judge found that the transfer of the mortgage (ie the debt) into the parties' joint names, and the wife's substantial contributions in respect of the mortgage repayments were particularly compelling evidence of this common intention. It was also held that these actions were to the wife's detriment.

On this basis, the judge determined that the wife had established a beneficial interest in the property. When tackling the contingent issue of quantification, the judge assessed this interest at 50%, reasoning that the parties had been jointly and severally liable for the mortgage for the majority of the marriage, and relying on a document produced in evidence in which the husband had demanded that the wife pay a 'half share' of the mortgage.

With this established, the judge then determined how the proceeds of the sale of the property should be applied. He took a discretionary approach in applying the factors in section 25 of the MCA, noting that the overarching objective was a fair outcome.

It was determined that the husband's 50% share should be received by his trustee in bankruptcy (though it was noted that this would not discharge all the debts owed to his creditors).

In relation to the wife's 50% share, the judge assessed how much money would be required to rehouse the wife (with whom the children of the couple lived) and awarded her this much; the surplus (which was modest) was to be divided equally between the parties.

Comments

This case serves as a reminder that courts will sometimes be required to look beyond the MCA in order to determine how to allocate assets between divorcing spouses. When establishing whether a beneficial interest exists, courts will apply the laws of trusts strictly; however, the quantification of such interests forms part of a broad weighing exercise to be carried out by the judge. The discretionary aspect to the remedy awarded should be remembered – it may lead to an outcome unexpected by the parties.

Whilst the facts in this case were perhaps unusual, they should alert trustees in bankruptcy who act for an individual undergoing a divorce process and/or spouses in divorce proceedings of the risk that some of the assets which are purportedly part of the bankrupt's/ spouse's estate may be the subject of a constructive trust, and therefore out of the trustee's/ spouse's reach.