Oliver Powell talks about Bankruptcy in Financial Remedy proceedings
22nd Nov 2024 | Blog
Bankruptcy in financial remedy proceedings: the basics
It is an unfortunate reality that serious financial difficulties often accompany relationship breakdown.
The interplay between financial remedy and bankruptcy proceedings can give rise to real complexity, both procedurally and substantively.
The ability to understand the interplay between the two is not helped by differences in terminology, rules and concepts.
This article seeks to shine a light on some of the important considerations when seeking to discern the relevance of bankruptcy proceedings to financial remedy proceedings and vice versa. As will become clear, even this apparently simple proposition gives rise to complications.
Is terminology really that important?
Yes. Bankruptcy proceedings have a language of their own. For example:
A creditor commences proceedings by presentation of a bankruptcy petition. This is distinct from a debtor acting themselves based on their asserted financial position, which is commenced by application to an adjudicator. Both actions have potential consequences for the non-insolvent spouse.
If a bankruptcy order is made, the debtor’s property automatically vests in a trustee in bankruptcy; the trustee’s job is then to manage and ultimately distribute the estate to relevant creditors.
Those creditors – to be able to receive assets – must have provable debts. ‘Proving’ for a debt is a technical term used for describing the process of submitting a claim in the bankruptcy.
Does the timing of the bankruptcy petition/application matter in the context of financial remedy considerations?
Yes, this can be vital.
Bankruptcy before orders for financial relief
Once the bankruptcy petition has been presented any disposition of property made by the bankrupt party after the petition will be void (Unless it was made with the consent of the court or is or was subsequently ratified by the court IA 1986, s284(1)): Insolvency Act 1986 (IA 1986), s284. This applies even if the disposition was made pursuant to an order in financial remedy proceedings.
There may also be implications for any transactions made up to 5 years before the petition if they are found to have been at an undervalue – if so found, the transaction may be set aside: IA 1986, s339.
Once a person becomes bankrupt, the trustee can apply to the court for an order for sale of, for example, the matrimonial home. The trustee stands in the position of a joint owner albeit they do so subject to the IA 1986 which dictates the duties of the court when considering such applications. The court is afforded some discretion in how they consider the application (IA 1986, ss 335A & 336). However, one year after the bankruptcy the court ‘shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations’. Examples of the court finding the circumstances ‘exceptional’ are rare, but not completely unheard of: Re Holliday [1981] Ch 405.
Bankruptcy after orders for financial relief
A property adjustment order cannot be made against a bankrupt spouse.
There is the potential for property adjustment orders to be subject to challenge by a trustee within five years of the making of that order based on it being a transaction at an undervalue. However, there is now good authority to ameliorate that risk on the basis that the release or compromise of a claim within financial remedy proceedings can amount to relevant consideration: Haines v Hill & Anor [2007] EWCA Civ 1284. Different considerations apply where the trustee attacks a property adjustment order before it comes into effect against the property in question Mountney v Treharne [2002] EWCA Civ 1174
A lump sum order is provable in the bankruptcy. Lump sum orders can survive the bankruptcy and may be enforced on discharge: IA 1986, s 281(5)(b).
In terms of periodical payments, following bankruptcy the income of the bankrupt can be sought by the trustee as part of the estate. An income payment order (IPO) can be made against the bankrupt, but the court must leave them with sufficient to meet the reasonable domestic needs of the bankrupt and their family. There is a risk that this will impinge on any periodical payments made before the bankruptcy.
What about fraudulent attempts to claim insolvency?
If a spouse applies themselves to an adjudicator in order to fraudulently defeat any financial claims, then the other party can apply to annul the bankruptcy on the basis that it should not have been made: IA1986, s282, see Paulin v Paulin [2009] 2 FLR 354.
Have there been any relevant recent cases I should know about?
The case of Audun Gudmundsson v. Hsiao-Mei Lin [2024] EWHC 1576 (Fam) is an interesting recent case because it demonstrates the complex interplay between financial remedy and bankruptcy proceedings. In short, H was made bankrupt six days before a final financial remedies order was made, which included a property adjustment order (transfer of H’s half share of the FMH to W). The property adjustment order had to be set aside because there was no interest to transfer to W because by the date of the final order the interest had vested in the trustee in bankruptcy.
W applied to annul the bankruptcy decision. That application was dismissed. However, W and the trustees were then in dispute about the extent of W’s beneficial interest in the FMH. She claimed 100%, the trustees said her interest was 50%. The court found in favour of the trustees but made a delayed order for sale (when the youngest child turned 18) finding that there were “exceptional circumstances” for doing so (under IA 1986, s 335(A)(3)) for a variety of reasons, including H’s conduct in not informing W or the court of the bankruptcy petition (which deprived W of receiving 100% of the FMH).
Conclusion
There is so much more to say about this complex and interesting subject. The above should not be taken as a definitive account of all the twists and turns in this area. However, it hopefully gives a sense for some of the relevant issues and potential pitfalls when approaching the interplay between these two often interrelated topics.
Oliver Powell
