Filing for bankruptcy to circumvent his estranged partner’s relationship property claim saw the Court of Appeal annul the bankruptcy as an improper use of insolvency rules.
The bankrupt, named as H, was desperately short of cash at time of bankruptcy with his wealth tied up in an Auckland property then occupied by his former partner, named as M, and their child.
The court was told the two had been in a relationship for some 14 years.
When M and H separated in early 2020, the Family Court made an occupation order in favour of M, forcing H to leave their home, a property he inherited from his father, and to find alternative accommodation. Before applying for bankruptcy, H was living for a time at the Salvation Army’s Epsom Lodge in Auckland.
The two could not agree on terms for sale of the Auckland property or for division of the proceeds. A draft agreement covering their separation and division of relationship property was never signed by H.
He disputed various offers made by M to buy out his share of the house, claiming the price offered was too low.
By mid-2021, H was threatening to put the property up for auction, while at the same time seeking a reconciliation.
Within weeks, he filed for bankruptcy.
Short of cash, he could not pay his current debts which proved to total just under $34,000. This at a time when he owned property having a disputed value, but a value clearly in excess of $800,000. Lack of liquidity is grounds for bankruptcy.
The immediate effect of this bankruptcy was that ownership of his Auckland property, occupied by his estranged partner, passed to Insolvency Service.
M’s financial interest in the property was at law then limited to the lesser of $103,000 or half the property’s net equity; described as a ‘protected interest’ in the Insolvency Act. This amount has not been updated for twenty five years. It is intended to provide a nest egg for the spouse of a bankrupted partner from sale of their home when owned solely by the now bankrupt partner. This payment takes priority over claims by all unsecured creditors.
Insolvency Act rules trump Property (Relationship) Act rules.
M said insolvency rules were being used to defeat her claim to a 50/50 split from sale of the family home owned by H.
If the bankruptcy continued as normal, Insolvency Service would sell the house, pay M her $103,000 ‘protected sum,’ pay H’s sundry creditors and then hand over the balance to H.
The Court of Appeal ruled this was an instance of bankruptcy being used for an improper purpose. It was a tactic to reduce the amount paid to M, leaving a substantial balance for H enabling him to buy a replacement property.
H’s bankruptcy was annulled. At law, it is as if his bankruptcy never took place.
The court ruled H must pay Insolvency Service costs; $90,500 of which over half is its legal costs.
M v. H – Court of Appeal (19.06.24)
24.155