Bankruptcy: A "shield" against financial claims on divorce?

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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.