The recently reported
case of McRoberts saw the Court consider the issue of what to do with a debt
arising from an Order in family proceedings when the payer (in this case the husband) had been made
bankrupt.
The Order was made by
agreement on the parties’ divorce in 2003 and provided for the husband to pay
to the wife £450,000 by instalments. The wife received about £211,000 of that
but the husband then defaulted and was declared bankrupt in September 2006.
The wife entered a proof of
debt in the bankruptcy for £244,966 (which represented the balance owed to her
plus interest) but there was no money available to the creditors of
the husband and the wife, therefore, was not paid anything.
The husband was discharged
from his bankruptcy in September 2007 and then in 2012 the husband applied to
the Court for him to be released from the debt still owed to his wife.
It is fair to say that quite
a bit rested on the judgement of this case as, had the husband succeeded, it
may well have opened the gates for others to try and avoid paying money due under family Court orders to their ex-spouses by way of
bankruptcy.
The default position, which
was accepted by both parties, is that orders made in family proceedings or
under a maintenance calculation made under the Child Support Act 1991 are not
discharged by bankruptcy. There is however discretion for the Court to provide
release from such debts.
This discretion has been the
subject of only limited case law but it is clear that is a discretion that is unlimited.
So….how will the Court decide
when to use its discretion and release applicants from such debts.
Answer....The Court will try to balance
any prejudice to the Respondent in having the debt released if there might be a
chance of some or all of it being met and any prejudice to the Applicant in
building a new life and financial future for himself and his dependents if the
debt were to remain.
It is the Applicant that has
the burden of proof – i.e. it is the Applicant who must satisfy the Court that
there will be prejudice to him and that, as such, the debt should be released.
Mr McRoberts -
1. suggested that
the initial order of the family courts was in fact an obligation to pay
maintenance to the wife (worded as an order for a lump sum in instalments) and
that it should be viewed by the Court as a maintenance obligation or at the
very least a lump sum payable by instalments, both of which can be varied under matrimonial legislation.
2. argued that the
variation should and could be done by the Court hearing the current application under
their discretionary powers
3. suggested that as
the order was in fact maintenance, disguised as a lump sum by instalments, the
arrears of maintenance over 12 months old could not be enforced by the wife
without the Court’s express permission
4. suggested that
the length of time that had passed with the wife not seeking to enforce the
order against the husband leant towards the debt being released
5. and finally…..
suggested that if the debt was released at this stage, it would not prejudice
the wife because in the event that the husband had significant capital or
income in the future, the wife could apply in the family courts for
financial provision because the “Clean Break” (you’ll remember that from an
earlier post!) that the order had provided for had no effect until the terms of the initial order had been met and they had not.
Mrs McRoberts -
1. pointed out that
the Matrimonial Causes Act (under which many family financial matters are
determined) provided specifically for lump sum orders by instalment independent of
any suggestion that those types of orders are “maintenance orders”
2. pointed to the
order itself, which said that the entire lump sum was to become payable on
default of any instalment. As the husband had defaulted in payments, the debt
was clearly now all due as a lump sum and, as such, could not be varied under
matrimonial legislation
3. and finally….
pointed out that ,in the event that the
debt was released, whilst the wife could apply in the future for financial
provision such an application would only be judged on her needs at the time and
would not reflect her interest in the previous marital property - which of course the award of £450,000 in the initial order did.
The court felt that the initial order was for a lump sum and that, as such, the order could not be varied.
In any event, the Court was
clear that what the Insolvency Act did not allow the Court to do in these
circumstances was to review the merits or fairness of the initial order or
debt. That was so even where the circumstances of the case or
parties have changed so that a review of the initial order might be
appropriate.
In the McRoberts case this
was relevant as the wife had been successful following the divorce and was at
the time of judgement in a more secure financial position than the husband.
The husband did not set out
the details of any future enterprise or business that would be affected if the
debt remained and no special reason why the debt remaining would prevent him
moving forward.
Lessons –
Be aware that a change in
circumstances leading to bankruptcy will not clear debts or obligations under
previous family court orders.
Be aware that even where
the debt remaining seems “unfair” in the circumstances, the
Court will not use Insolvency legislation to vary or review the debt.
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