Gardner Leader

Sting in the Tail

1 October 2007

STING IN THE TAIL – Bankruptcy & Divorce

Collette Bailey, Partner in the Family Team at Newbury based Gardner Leader Solicitors, has highlighted the need to be aware of the impact of future bankruptcy on divorce settlements.

The comments come as a landmark ruling at the High Court has turned on its head the suggestion that Bankruptcy Courts cannot overrule financial orders made by Family courts in divorce proceedings.

Collette Bailey explains, “Until recently there has been a general acceptance that financial orders made by Family Courts in divorce proceedings cannot be overturned by Bankruptcy Courts at a later date.

However, the recent high-profile case of Hill v Haines has turned that upside down”

She continued, “The husband and wife involved owned a property in joint names but subsequently divorced and the Family Court made an order requiring the husband to transfer his interest in the property to his former wife.”

Two years after the divorce proceedings were started, however, the husband became bankrupt.

Bailey explained “The argument before the High Court was whether the wife had given consideration i.e. something of value, under the provisions of the Insolvency Act 1986, by being involved in a contested hearing and the transfer was made pursuant to the court order.”

Under the Insolvency Act if a transaction is a gift or not of market value it can be later set aside by the Bankruptcy Court and the trustee in bankruptcy could recover the asset for the benefit of creditors.

Bailey continued “This is known as a transaction at an undervalue and there was argument in the Hill v Haines case, that this was a transaction at an undervalue”

Family Courts operate to ascertain a person’s income and assets on the evidence put before it and in many cases it decides how much of that income and assets should be made available to the other spouse and children.

This can be affected by any order that the Bankruptcy Court subsequently makes, which has the effect of diverting the bankrupt’s income and assets in or towards payment of creditors.

The Family Courts are concerned with the division of the cake and the portion is liable to be reduced by an order made by the Bankruptcy Court at a later date.

The court in this case decided that the lower court was wrong to conclude that the transfer of the property was protected from the claims of the trustee in bankruptcy, as it was a transfer at an undervalue and the trustee could recover the bankrupt’s share of the property from the wife.

The affect of the ruling in Hill v Haines is that many settlements are vulnerable if the spouse becomes bankrupt some time thereafter

Insolvency lawyers are of the view that all settlements and orders up to five years could be vulnerable to the claims of the Trustee in Bankruptcy.

Collette Bailey concluded “This will be of concern to many, as a spouse’s financial position could deteriorate considerably after a financial court order was made. This could make the former spouse very uneasy if the other spouse subsequently becomes bankrupt within the five- year period.”

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