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Matrimonial Proceedings - Insolvency Considerations

Date: 17/02/2020 Type: Articles Topic: International | Finances | Author: Chris Pocock QC, 1KBW & Kristina Kicks, KPMG

Insolvency proceedings

Insolvency proceedings are a potential option for clients to consider in situations where there are unpaid debts, judgments and orders and/or concerns over the dissipation of assets.

It is recognised that insolvency can seem a nuclear option for enforcement but insolvency proceedings can be an effective strategy to maximise recoveries where a client has an outstanding award.

Bankruptcy proceedings

One spouse may bring bankruptcy proceedings against the other where there is a provable debt. In the matrimonial context, ‘provable debt’ includes lump sum and costs orders made in family proceedings (Rule 14.2 of the Insolvency (England and Wales) Rules 2016).

The role of the trustee in bankruptcy is to realise assets for the benefit of creditors (including the creditor spouse) and make a distribution from the bankruptcy estate.

Insolvency powers

The trustee in bankruptcy has a duty to investigate the bankrupt’s affairs and has wide powers, including:

  • Gathering information and records from the bankrupt, advisers and accountants
  • Collating banking information and statements
  • Interviewing the bankrupt and other persons involved in the bankrupt’s affairs
  • Securing recognition of the bankruptcy overseas

The trustee also has powers to bring legal proceedings to challenge transactions and restore the position to what it would have been if a transaction had not taken place, for example transactions at undervalue and preferences.

Further, a claim under s423 of the Insolvency Act 1986  (IA1986) – transactions defrauding creditors – is available to the victim of the transaction as well as the trustee in bankruptcy. The trustee will have the benefit of the wide insolvency powers.

When should insolvency be considered?

Insolvency proceedings must not be used simply as a weapon against the other spouse when there is no net debt in the creditor spouse’s favour, or when “ordinary” enforcement options are clearly available (Ella v Ella [2008] EWHC 3258 (Ch)), but can be beneficial in matrimonial proceedings where despite all efforts, the debtor spouse will not comply with lump sum and costs orders.

The trustee may uncover assets or take control of complex structures, for example replacing trustees and taking control of trusts.

A further consideration for bankruptcy as a method of enforcement is that the trustee’s costs are deducted from the bankrupt’s estate before distribution to creditors and any residue is paid out to the enforcing spouse. The quantum and basis of the trustee’s costs are approved by creditors and the trustee will regularly report to creditors on the issues and potential assets in the bankruptcy estate. Both the payment of the costs and the trustee’s ability to make a distribution to creditors from the bankruptcy estate will be dependent on the quantum of asset realisations.

However, a client should not (otherwise) be in a worse position by pursuing insolvency proceedings if, in any event, payment of an award is not being made and is unlikely to be made in the future without rigorous steps being taken. The insolvency route enables the opportunity to identify undisclosed assets and maximise recoveries.

Moreover, whilst a bankruptcy order is usually discharged after one year (s279  IA1986)), in matrimonial cases this discharge will release the bankrupt from debts arising out of family proceedings only if the court so directs (s181(5) IA1986). Hayes v Hayes (2012) EWHC 1240 (Ch) confirmed that the default position is that debts arising from family proceedings will survive the discharge.

Some other insolvency issues in Matrimonial Proceedings

Divorcing a bankrupt spouse

The court’s options for making financial orders against a bankrupt spouse are limited, since upon bankruptcy the bankrupt’s assets vest in the trustee in bankruptcy (s306 IA1986). The family court can therefore no longer make a property adjustment order under s24 of the Matrimonial Causes Act 1973 (MCA1973). Pension rights do not vest in the trustee (Welfare Reform and Pensions Act 1999 s11), so pension sharing orders remain an option but once the pension is in drawdown the income is vulnerable to an income payments order (although a bankrupt cannot be forced by the trustee to drawdown his pension (Horton v Henry [2016] EWCA Civ 989)).

That said:

  • The bankrupt’s interest in the family home (which on bankruptcy vests in the trustee), automatically re-vests in the bankrupt after three years unless the trustee takes steps to retain the interest (s283A IA1986 and Enterprise Act 2002 s261(6)).
  • Lump sum orders can usually be made, payable out of the residue of the bankrupt’s estate, as can periodical payments orders (Re G [1996] 2 FLR 171; Hellyer v Hellyer [1996] 2 FLR 579), although the latter would be subject to any income payments order made in the bankruptcy proceedings (s310 IA1986) (and see Albert v Albert [1996] BPIR 233).

Bankruptcy during financial remedy proceedings

If bankruptcy and financial remedy proceedings are concurrent, both courts have jurisdiction to stay the family proceedings while the bankruptcy petition is pending (s285(1) IA86 and s285(2) IA86).

Any disposition by the bankrupt between the issue of the petition and the vesting of his assets in the trustee is void unless made with the consent of the bankruptcy court or later ratified by it. This would include a property adjustment order, and Treharne v Forrester [2003] EWHC 2784 (Ch) suggests (although the family court was unaware of the bankruptcy proceedings) that the bankruptcy court would be unlikely to ratify such an order.

Bankruptcy as a shield

Because of the restrictions upon the family court’s powers brought about by the vesting of all a spouse’s assets in the trustee, spouses have occasionally used bankruptcy to attempt to protect themselves against financial orders in family proceedings. For a debtor can himself issue the bankruptcy petition (s272 IA1986).

However, if a spouse makes himself or herself bankrupt in an attempt to defeat a family finance order, the other spouse may apply to annul the bankruptcy under s282 IA1986 on the basis that, on grounds existing at the time the order was made, the order ought not to have been made, e.g. in Paulin v Paulin [2009] EWCA Civ 221, where the husband had exaggerated debts and was in fact solvent at the time of his (own) bankruptcy petition.

Authored by Chris Pocock QC, 1BW and Kristina Kicks, KPMG LLP (UK)

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