Bankruptcy! Can the Family Court handle it?

Family Law has a tendency to spread its tentacles into other practice areas and bankruptcy is no exception, not least because financial difficulties are often cited as a contributing factor to the breakdown of the relationship but also because the sudden need to support two households can cause cash flow problems.

When a relationship breaks down there can be a lot of mistrust and resentment between the spouses and so it is no wonder that, in the context of financial remedy proceedings, an application for bankruptcy can be viewed as a spiteful attempt to ensure that the money goes to anyone except the ex.  Further suspicion could be aroused when the bankruptcy petition is made by the bankrupt themselves and the creditors are also members of the bankrupt’s family.  This was the scenario in Arif v Zar where the wife, unsurprisingly, made an application for the husband’s bankruptcy petition to be annulled on the grounds that his debts were shams and that he was not balance sheet insolvent as he claimed.  The Family Court cannot look at assets that are not owned by the spouse when making a financial remedy order, so if her application failed then, unless she could demonstrate a significant surplus of assets over liabilities, her claim for a financial remedy would be severely prejudiced.

The recent judgement of the Court of Appeal in Arif v Zar did not look at the details of the husband’s financial position, nor did it consider the merits of the wife’s application for the bankruptcy order to be annulled.  In fact, it only dealt with the limited procedural question of whether Mostyn J had acted within his jurisdiction when he transfered the annulment hearing to the Family Division as he had done at a case management hearing in the family proceedings. The original bankruptcy registrar, Registrar Derrett, had considered the issue of the annulment to be one which required swift resolution and so had timetabled a summary hearing in the Chancery Division.  Mostyn J had considered that it was more appropriate for the matter to be dealt with in the Family Division together with the financial remedy hearing (avoiding multiplicity of hearings) and so had transferred the proceedings under CPR 3.1(7).  In the family proceedings the husband (and the wife of course) would have been subject to a higher level of disclosure and could have been subjected to cross examination which would not have been the case at the summary hearing because Registrar Derrett had not ordered it.  The Court of Appeal held Mostyn J did not have the powers to make such a decision as there had been no material change of circumstances since Registrar Derrett’s decision and any appeal would have to be made in the appropriate court.

So was Mostyn J a little too keen to take this matter out of the hands of the Chancery Division, and in doing so overstepped his judicial limits?  Or was Registrar Derrett reluctant to let a matter involving the Insolvency Act 1986 go to the Family Division.  After all, the circumstances where the Insolvency Act 1986 and the Matrimonial Causes Act 1973 clash are not uncommon and judicial confusion as to where best to resolve such issues is to be avoided. It is perhaps no wonder then that the Court of Appeal took this opportunity to give some useful guidance as to how bankruptcy registrars should deal with annulment applications that arise in conjunction with matrimonial proceedings.  In his judgement, Lord Justice Patten said (at paragraph 21):

• Registrars should be “alive to the real possibility that a spouse may attempt to use the protection of a bankruptcy order as a shield” in financial remedy proceedings; and 
• Where there is credible evidence of such an attempt then Registrars should not be afraid to use their powers to:
• order full disclosure;
• order witness attendance and cross examination; and
• consider whether a transfer of proceedings to the Family Division would be the most appropriate way to determine the issues and save costs.

In conclusion, he said that the court will have to “balance the need to secure justice for the spouse against the need to ensure that all issues in the bankruptcy proceedings are resolved at a minimum cost to the creditors”.  So the Family Division can look at matters involving the Insolvency Act 1986 but the discretion to transfer lies with the registrar in bankruptcy or the Chancery Division judge.  If there is any dispute as to how that discretion was exercised then an appeal should be lodged against the decision before proceedings could be transferred. Something that family practitioners, and judges, should be aware of when dealing with such cases.