Marilyn Stowe Blog

The cost of bankruptcy in family proceedings, by Danielle Day

Marilyn writes: Sometimes in divorce, a desperate spouse chooses to claim bankruptcy. This might be a genuine claim, when the debts are piled too high and there is no hope for any other possible outcome. Alternatively it might be a cynical manoeuvre, a ploy. It could be a last ditch attempt to avoid paying what the other spouse is properly due under a court order in the divorce, or even what is owed in child support. Whatever the reasoning, bankruptcy usually increases the anger and the bitterness that can be involved in a divorce.

Nowadays, going bankrupt is not the social and financial nightmare it once was. Most bankrupts face no social approbation, nor many unpleasant financial consequences. Bankrupts will usually be discharged from bankruptcy after one year, after which time they will continue to live their lives more or less as before.

Does bankruptcy make a difference to a divorce settlement or a child support calculation?

In law, even if the paying party does go bankrupt, the obligations to the other spouse or partner will survive. Therefore, once out of bankruptcy, the whole process might turn out to have been a waste of time.

The sting in the tail is that this is not always the end of the story.  A savvy and former bankrupt may have one last ace to play. Notwithstanding the remains of the order, it is still possible to apply to the court to be released from the debt. Many throw themself at the mercy of the court in this way. They then get on with their life – free from the obligations that others in different situations face and fulfil.

What will a court do if faced with such an application?

A recent case in the Chancery Court, Hayes v Hayes [2012] Ch. D gives us a flavour of what might happen in these circumstances. I must say I’m pleased with the outcome.

Here Danielle Day, a trainee solicitor at Stowe Family Law, further explains the case…

The recent case of Hayes v Hayes concerned a bankrupt husband who sought to be released from a debt that had arisen from a costs order made in family proceedings. The relevant statute in bankruptcy cases is the Insolvency Act 1986.

Mr and Mrs Hayes had been through divorce and ancillary relief proceedings. A costs order had been made against the husband, which remained unpaid. The wife subsequently petitioned for the husband’s bankruptcy.

Mrs Hayes petitioned for bankruptcy under rule 12.3 of the Insolvency Act, which expressly excludes a petition in circumstances where there has been an obligation to pay a lump sum or costs order in family proceedings.  Despite this, the husband did not oppose the petition and it was successful.

As it happens, rule 12.3 of the Insolvency Act was amended shortly afterwards by the Insolvency (Amendment) Rules 2005 at rule 44, which permits a petition in such circumstances.

The husband later tried to annul the application on the grounds that costs orders in family proceedings were excluded under rule 12.3. However, his application to annul was dismissed as rule 44 had recently come into force and the wife would have been entitled to place a fresh and valid petition under the new rule.

After 12 months had passed from the date of the husband’s bankruptcy, he was discharged from it in accordance with Section 279 (1) of the Insolvency Act.  This meant that he was automatically released from his debts and free from the restrictions of bankruptcy.

However certain debts are not automatically released when a bankrupt is discharged. These include any orders made in family proceedings –  and as you may recall, a costs order had been made against the husband. The wife went on to serve several statutory demands because the costs order remained unpaid. However the husband asked the registrar to release him from the debt under Section 281 (5) of the Insolvency Act, which states:

Discharge does not, except to such extent and on such conditions as the court may direct, release the bankrupt from any bankruptcy debt which -

(a) consists in a liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages by virtue of Part I of the Consumer Protection Act 1987, being in either case damages in respect of personal injuries to any person, or

(b) arises under any order made in family proceedings or under a maintenance calculation made under the Child Support Act 1991

This provides the court with the discretion to discharge liability arising from a family proceedings order.

The registrar in Hayes v Hayes considered the consequences of Section 281 (5) – noting that there was a lack of authority concerning the level of court discretion under it. The registrar therefore rejected the husband’s application to be released from the debt.

The husband appealed…

The appeal was heard by Mr Mark Pelling QC, who agreed with the registrar that there was a lack of authority under  . As a result, the judge ruled that the court had an unfettered discretion to discharge debts arising from a family proceedings order under the Insolvency Act.

Interestingly, Mr Mark Pelling QC also noted that the general default provision was that family orders were to survive the discharge of bankruptcy. He claimed that this would ensure that individuals could not avoid these types of liabilities when involved, or having been involved, in the bankruptcy process.

The judge considered the consequences of allowing the husband to be released from the costs order. Since the order would be forever unenforceable, he went on to state that excluding future enforceability would create disproportionality between the husband and the wife. If for example there happened to be a future change of circumstances, i.e. the financial position of the husband significantly increased, the wife would be prevented from taking advantage of this.

Mr Mark Pelling QC also added that while earning capacity could be an argument put forward by the husband in his application to be released from the debt, present earning capability should not be used as a springboard to discharge what he owed. The judge did not rule out that there might be a time where it could be appropriate to discharge the husband’s debt. In However he was not satisfied that the husband would never be in a position to pay back his debts. The decision of the registrar was therefore upheld.

To date there has been no reported cases where the court has granted a discharge of a family proceedings order.

The judge in Hayes v Hayes did not rule out the possibility of such an order being capable of being discharged in the future. However, neither did he expand on what would need to be demonstrated to show a lack of future earning capacity to justify departing from the default position.

The position therefore remains unclear. Parties involved in divorce and financial proceedings need to be made aware of section 281 (5) of the Insolvency Act and the possibility that the court could grant a discharge from a family proceedings order in the case of bankruptcy.

In my opinion, Mr Mark Pelling QC made the correct decision in dismissing the husband’s application for a discharge from the costs order. Divorce and financial proceedings can be extremely lengthy and costly to both parties, and people are usually relieved when the process is over and they can move on with their lives. With this in mind, to have part of an order discharged under the Insolvency Act after months or even years of litigation would seem extremely unfair – especially since a discharge would render the debt forever unenforceable.

While there is uncertainty with this particular section of the Insolvency Act in family proceedings orders, spouses should feel comforted that there has been not one case in which the default provision has been departed from. Only time will tell what will be required before a court will do so.

Danielle Day read Law at Bradford University and went on to complete her Legal Practice Certificate at the College of Law in York, where she gained a Distinction.Danielle joined the firm as a trainee in October 2011, and looks forward to specialising in ancillary relief matters.