The recent court decision in McRoberts v McRoberts [2012] EWHC 2966 (Ch), which concerned a married couple whose divorce ultimately led to the husband’s bankruptcy,  serves as a useful reminder that the legal jurisdictions which deal with insolvency and with the breakdown of personal relationships are often in conflict with one another.

At the expiry of one year, the husband hoped to obtain discharge from all his bankruptcy debts and to move on with his life. The wife had received no dividend through the bankruptcy at all despite having been the recipient of a £450,000 “lump sum order” against the husband after the divorce. The relevant provisions of the Insolvency Act excluded the wife’s order from the automatic consequences of bankruptcy discharge and the onus was therefore on the husband to apply to the court having jurisdiction over his bankruptcy (rather than the court which determined the matrimonial proceedings) to be released from the continuing obligation to pay the £450,000. He did so apply, but on the facts his application failed.

At first glance, especially to those with an insolvency background, the fact that a bankruptcy court should exercise its discretion not to wipe the slate clean for a bankrupt may appear to run contrary to the very purpose of having a bankruptcy regime, but in reality this is just one instance where two very significant and public policy objectives have to be weighed carefully in the balance and assessed on their own particular facts, sometimes with less predictable results. On the one hand, the wife had a legitimate interest in not releasing an obligation which in fact had some realistic prospect of being paid in the future; on the other, the husband wished to build a viable financial future for himself and his dependents. These balancing acts are not unusual in our experience, and indeed if anything are arising more frequently.

In these difficult times, it is not unusual for clients to seek our advice on potential bankruptcy.  Sadly, this advice is sometimes required at the same time as a divorce or other relationship breakdown.

There is great complexity in these situations, caused in part by a long history of tension between what are essentially two separate courts applying different laws.  For example, on the one hand, the divorce court is required to provide for a fair result between a husband and wife, having regard to all their resources.  On the other hand, in a valid bankruptcy, the court and its proper officer (the trustee in bankruptcy or Official Receiver) have chiefly to concern themselves with the interests of creditors.  The non bankrupt spouse, assuming that no orders have already been made in the divorce, would have no real choice other than to wait until the bankrupt has been discharged, then survey the much altered landscape to see what, if any, action might be appropriate at that time.

Timing becomes hugely important.  If bankruptcy of one spouse is an issue, the other spouse may wish to rush to the divorce court to have orders made as soon as possible.  Properly made orders for property transfer, lump sums and maintenance all survive the subsequent bankruptcy of the “paying” spouse (although an income payments order for the benefit of creditors takes priority over a maintenance payment to a spouse).

There can, however, be real issues where the bankruptcy petition has already been filed (but no order made)  and the divorce court is attempting to deal with other issues at the same time. The bankruptcy court has power to hold up proceedings in the divorce court against the property or person of the potentially bankrupt spouse, whilst the bankruptcy petition remains pending. The divorce court also has an independent power to hold up divorce proceedings if a bankruptcy petition has been presented. That said, it would not always be right for the divorce court to exercise it, since to do so might deprive the other spouse of the opportunity, for example, to seek emergency maintenance payments pending the outcome of the bankruptcy, or even to ask the court to cancel (appeal / rescind or annul) the bankruptcy order.

In a true bankruptcy situation, the default position is to get in before the divorce court becomes involved.  In addition to being a lawful and appropriate remedy for personal insolvency, there could be good strategic reasons for doing do in the context of divorce.  Equally, it may be that the potentially bankrupt spouse wishes to ensure that lawful provision for an estranged spouse and children is approved by the divorce court in advance of any bankruptcy.  If there is delay, with the result that provision is made only after a bankruptcy petition has been presented, the divorce order bay be rendered void by the bankruptcy court if it does not accept that the divorce order reflected the proper value of the bankrupt’s estate, having regard to the interests of creditors.

At Paris Smith LLP we are fortunate to have not only a large Family Department but also an Insolvency and Recovery Group. Between the two disciplines lies a very substantial cross-over and we are as like to deal with a situation where, for example, a spouse going through a divorce needs to deal with joint interests in a potentially insolvent businesses as where a spouse or co-owner needs assistance in protecting their position with regard to certain assets having regard to the possible bankruptcy of themselves or another party. Often, unpicking the competing interests will require the assistance of a qualified insolvency practitioner accountant who can, for example, protect the parties with advice on the options for any relevant insolvent business, on an asset realisation strategy which may be acceptable to relevant lenders, or on an estimated outcome comparison having regard to the likely costs of administering any relevant bankruptcy. We are well placed to provide that teamworking assistance swiftly and seamlessly.

For more information on this topic, please contact Huw Miles (Family) or Mike Pavitt (Insolvency)