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Thursday, Nov 11, 2004

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Only crumbs from the husband's table after all creditors have left

D. Murali

LORD Justice Potter, Lord Justice Buxton and Lord Justice Carnwath of the Supreme Court of Judicature, Court of Appeal (Civil Division), London, decided an interesting case on November 5. Cited Ram vs Ram, it had Gita Ram as the appellant, and her husband Baskinder Ram as the respondent, along with his brothers Solinder and Monder. A trustee in bankruptcy too was a respondent, because Baskinder was already subject to a bankruptcy order made on September 17, 1998.

"The principal creditors in the bankruptcy were four," mentions the judgment. "Barclays Bank in respect of an overdraft in the sum of 15,500, HM Customs and Excise in the sum of 10,000, the Inland Revenue in the sum of 1,01,834 and a firm of accountants which was owed some 2,900." Baskinder had properties, at an estimated value of 6,75,000, as Gita claimed, while it stood at 5,00,000, as per the trustee in bankruptcy's valuation of `available pool of assets'.

Be that as it may, in 2002, Gita had petitioned for divorce and a maintenance order had been made in her favour in May 2003.

Another order of the court, in March 2004, was for ancillary relief to Gita, and it included transfer to her of the matrimonial home that Baskinder owned and shared with her, lumpsum payment of 1,50,000, matrimonial costs of 66,000, and so on. In the current case, Gita's lawyer Peter Duckworth submitted that what was due to her added up to 4,20,000 plus interest.

At the core of the case was a tricky issue: treatment of matrimonial orders in insolvency code. For Duckworth, it was "the uneasy relationship between bankruptcy and matrimonial proceedings" that lay as the central theme of the appeal. The question, therefore, was: "Whether the claims of creditors should be allowed to prevail, both procedurally and substantively, over those of a wife, or whether she should be at least `level-pegging'," as Duckworth summarised. He, therefore, invited the court to look at "creative solutions" to achieve a fair result.

However, the court found such `ambitions' facing two immediate obstacles in the Insolvency Rules, 1986, of the UK. One, "all claims by creditors are provable as debts against... the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages." And two, among things `not provable' in bankruptcy, is this: "Any obligation arising under an order made in family proceedings."

In bankruptcy, a debt is proved when the trustee admits it. The bitter truth, as per the above provisions, is something that most wives may not like to hear: "Wife's claim in the matrimonial proceedings, is not a `provable debt' for the purposes of the bankruptcy." So, what happens to these claims? They survive even after `discharge' that releases the bankrupt from all his other bankruptcy debts.

The judges conceded, "For obvious reasons, however, the right to pursue the discharged bankrupt in an uncertain future may prove much less valuable in practice than a right to prove against known assets in the bankruptcy." Which was what Gita was pursuing in the court.

A similar situation was discussed in a 1996 case. There, the husband's trustee had 385,000; after deducting the trustee's expenses and remuneration, he was to distribute the money between the husband's creditors "but excluding the wife". The judge had commented: "This would mean there would be a substantial surplus available to be returned to the husband. No doubt the wife could take steps to intercept the surplus. Even so, the result would be that the unsecured creditors would be paid in full, save for the wife. She would not receive the whole of the lumpsum ordered by the judge. Indeed, far from even sharing equally with the husband's other creditors, she would rank behind them all. She would receive the crumbs from the husband's table left unconsumed by his other creditors." Ah well, that's the way the cookie crumbles. Crumbs.

Nor was the judge too happy. He had noted in his verdict: "I feel bound to say that the exclusion of an obligation to pay a lumpsum arising under an order in family proceedings from proof as a debt in bankruptcy is a matter which would bear re-examination as a matter of urgency."

The current judgment observes, matter-of-factly: "Unfortunately, `urgency' in this field is a relative concept." Consultations for changes to insolvency law are in progress, said the court. "Present law is anomalous and ripe for reform," it added. ". It is striking, however, that over the decade since the problem was first highlighted judicially, there has been no suggestion that it could be overcome by `creative solutions'."

Duckworth forcefully argued Gita's case, and sought remedy under Human Rights Convention, on grounds of `fair balance' and `discrimination'. But the court was unimpressed and said, "It is wholly unclear to us how it could affect the wife's priority as against the other creditors." In the end, the `wider question' that remained unanswered was whether bankruptcy rules are discriminatory against matrimonial creditors.

"It is an issue that is far from straightforward," commented the court, repeating the hope that a review should soon come "and appropriate amending legislation be put in place". But that is "of no assistance to the appellant, whose appeal must be dismissed," reads the verdict.

What does the Indian law say? "It is different here," says K. Ramadasan, advocate, Singhania & Co, Chennai. "Claim of the wife who has been awarded divorce compensation by a court, even as bankruptcy proceedings are on against her husband, has to be met, because personal law is independent of other laws." No crumbs, therefore, but a hearty full-course meal for wives who are a-leaving, assuming there is something on the table.

However, creditors who come later to scrape hard to get but little may grudge that an easy way to stay out of reach of hounding lenders could lie in divorce-fixing too.

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