Thu 11 Apr 2019

Gratuitous alienations: adequate consideration and family law

The two main defences to a gratuitous alienation claim are that adequate consideration was made for the transfer or that the debtor was solvent immediately following the transfer.  

Both feature in Sheriff Weir QC’s recent decision in The Accountant in Bankruptcy v Leigh Reid or Urquhart [2019] SC EDIN 23.  However, it is Sheriff Weir QC’s comments on the interaction between family law principles on divorce or separation and the test for adequate consideration that are of particular interest.

The pursuer was the trustee in sequestration of the defender’s estranged husband.  The defender and the debtor had separated in October 2007 and entered into a separation agreement in February 2008.  The debtor was sequestrated in December 2010.  The defender and the debtor owned a residential property together.  It was sold and the separation agreement provided for the entire net free proceeds of the sale to go to the defender.  The pursuer argued that the receipt by the defender of the entire net free proceeds of sale amounted to a gratuitous alienation in terms of section 34 of the Bankruptcy (Scotland) act 1985.  The defender had two lines of defence.  Firstly, that the debtor had received adequate consideration and, second, that immediately following the transfer, the debtor’s assets were greater than his liabilities.  The pursuer took the defender to debate arguing that the defender’s averments about adequate consideration, even if proved, did not amount to a relevant defence.

The defender’s adequate consideration argument had a number of limbs.  First, it was averred that having regard to the principles contained within the Family Law (Scotland) Act 1985, it was just and equitable for the defender to retain the full net proceeds of sale of the matrimonial home.  The defender was to bear the sole burden for the care, wellbeing and upkeep of the defender and debtor’s children.  The second limb was that the separation agreement had provided for the defender and debtor waiving their rights to spousal aliment and to each other’s pension entitlement.  That had a value that ought to be considered when assessing if adequate consideration had been made.  The third limb was that the defender’s father had advanced a sum, repayable on demand to assist with the purchase of the residential property.  It was agreed between the defender and the debtor that the defender would take on the responsibility of repaying her father and would procure a discharge of any liability that the defender had in respect of that debt.  While Sheriff Weir QC expressed concerns that proving her case may be challenging for the defender, the second and third limbs of the defence survived debate and were permitted to proof. 

The first limb did not survive debate.  Sheriff Weir QC removed from probation the references to the Family Law (Scotland) Act 1985 and any consideration of a just and equitable test.  He took the view that the test for adequate consideration in section 34 of the Bankruptcy (Scotland) Act 1985 did not include a just and equitable test.  The defender could not defend the trustee’s claim on the basis that it was fair in the circumstances of her marriage and separation that she receive a larger share of the net free proceeds of sale than her spouse.  While retention of the whole net free proceeds of sale of the matrimonial home may be justified in terms of family law tests, it did not mean that retention of the whole net free proceeds of sale was justified in terms of personal insolvency law tests.  It was confusing and inappropriate to conflate the two statutory regimes.  The defender had to focus her defence on insolvency law matters only.  That required a strict assessment of what the debtor had received as consideration for his share of the net proceeds of sale.  The consideration had to be something of material or patrimonial value that could be vindicated in a legal process.  That did not include an argument that unequal sharing was just and equitable.

Where there is unequal sharing as part of a separation or divorce can anything be done to protect the spouse benefiting from the unequal share from a gratuitous alienation claim in the future?  The short answer is that relying on family law justifications for unequal sharing, such as a loss of earning capacity in order to care for children, will be difficult.  The pleadings in this case in relation to the Family Law (Scotland) Act 1985 were sparse and did not attempt to put a value in money or money's worth on the defender bearing the sole burden for the care and upkeep of the children.  It may be that an approach that seeks to quantify in money or money's worth the value of claim in terms of section 9(1)(b) of the Family Law (Scotland) Act 1985 would have a greater chance of success.  However, such an approach would need to be mindful of the usual test for adequate consideration in insolvency law:  that consideration is something of material or patrimonial value that can be vindicated in a legal process such as a defence to a claim. 

Where unequal sharing in a separation or divorce is likely, a better approach would be to avoid the question of adequate consideration altogether and to seek assurances that the other party is solvent and will not be put in a position where his or her liabilities exceed his or her assets by the unequal sharing of matrimonial property.  The solvency defence to a gratuitous alienation claim would avoid the more challenging assessment of adequate consideration.  However, assurances about solvency, for example in the form of a certificate of solvency from an accountant, are no panacea.  The recipient of the alienation will need to have detailed information about the debtor's finances in order to demonstrate that the debtor's assets exceeded his or her liabilities following the transfer. 

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