bankruptcy: a "shield" against financial claims on
divorce?
The recent case of
Arif v Zar (18 July 2012) highlights the inherent tension
between a debtor's duty to pay his creditors and his obligation
under divorce law to make financial provision for his spouse.
The husband, described by the
Daily Mail and
Accountancy Age as a "multi-millionaire accountant" (he was
also an insolvency practitioner), declared himself bankrupt after
his wife filed for divorce. This meant that the husband's
assets were effectively held for the benefit of creditors; so
defeating his wife's claim for financial provision, known as
"ancillary relief".
The wife consequently applied to have the
bankruptcy annulled pursuant to section
282(1)(a) Insolvency Act 1986 on the basis that the order ought
not to have been made because her husband was not in fact
insolvent. She alleged that many of the debts to family and
friends, which supposedly showed that he was insolvent, were
fictitious. In doing so she relied on the (understandable)
policy that whilst the interests of genuine creditors take
precedence over those of a spouse, the courts will be vigilant to
identify "sham" bankruptcies. In this respect it is
obviously important that the different courts that normally deal
with bankruptcy and family matters have a consistent approach.
In
Arif v Zar the wife, who was waiting for her application
for ancillary relief to be heard by the Family Court, made an
initial application to the Bankruptcy Court for the bankruptcy
order to be annulled. As evidence about the allegedly
fictitious debts would also need to be considered in the family
proceedings, the family judge invited the Bankruptcy Court to
transfer the annulment application to the Family Court and this was
supported by the wife who issued a formal application asking for
the matter to be transferred. Despite this, the bankruptcy
registrar (i.e. the junior judge who deals with routine matters)
decided (without at this point having to decide whether the
bankruptcy should in fact be annulled) that in this case the
Bankruptcy Court was the proper place to decide whether the
bankruptcy should be annulled. She felt that an early hearing
of this issue by the Bankruptcy Court in the next 4-6 weeks (much
sooner than the date when the matter could be heard by the Family
Court) was the correct course of action, not least because this
would allow the husband's trustee in bankruptcy to get on with his
work sooner rather than later.
Whilst in an exceptional case it is open to
the Bankruptcy Court to transfer insolvency applications to other
non-specialist courts, this would only be appropriate where there
would be a significant reduction in cost by combining the
insolvency application with closely related proceedings in other
court and/or it would otherwise enable the court to properly and
fairly determine the insolvency application. In the present
case, whilst the bankruptcy registrar thought that there was no
reason why the Bankruptcy Court should not deal with the annulment
application, at the next hearing before the Family Court the (more
senior) judge took a different view and decided that it was open to
him to reverse the bankruptcy registrar's decision so that the
question of annulment would be dealt with by the Family Court.
The husband's trustee in bankruptcy, not
wanting to wait until the Family Court considered the issue,
appealed to the Court of Appeal and it is fair to say that the
Court of Appeal were keen to put down a marker that parties must
respect the decision of the Bankruptcy Court. Accordingly, if
any of the parties had not been happy with the registrar's decision
to deal with the annulment application in the Bankruptcy Court,
they should have appealed that decision rather than asking the
Family Court judge to decide the issue afresh on the basis that he
had the power to revoke the order of the Bankruptcy
Registrar. The Court of Appeal held that the Family Court
judge did not have a power to revoke an order of the Bankruptcy
Court in these circumstances.
Apart from the narrow point that a judge from
another court cannot revoke the order of a judge of the Bankruptcy
Court, what are the wider implications of this decision? If
nothing else the case underlines the fact that judges are, in the
words of Lord Justice Patten, “alive to the real possibility that
husbands (or wives) may attempt to use the protection of a
bankruptcy order as a shield against the claims of their spouses
for ancillary relief”. In such cases, it seems that the
Bankruptcy Court will not be easily persuaded that the divorce is
so difficult or complex that the Family Court should be asked to
consider the question of whether or not the bankruptcy regime has
in fact been abused.
We would like to acknowledge the
contribution of Lydia Hutchinson who is the co-author of this
briefing.
