Emily Brand, partner in the family team at law firm Winckworth Sherwood, explains how the complex relationship between matrimonial and bankruptcy law is once again under the spotlight in the UK.

Emily Brand, partner in the family team at law firm Winckworth Sherwood, explains how the complex relationship between matrimonial and bankruptcy law is once again under the spotlight in the UK.

Poverty is devastating for families and no less so for those who have known great wealth.  It is often the straw that breaks the back of a marriage, as Michael Caine once so wisely commented, when speaking about the breakdown of his first marriage.  The inter-relationship between matrimonial law and bankruptcy law is complex and highly problematic as it is open to abuse by the unscrupulous.  Alarm bells start ringing for matrimonial lawyers if a spouse is adjudged bankrupt during or shortly after financial proceedings, as people have been known to declare themselves bankrupt as a means of defeating their spouse’s legitimate claims.  In the fallout, it can be difficult to distinguish between a genuine bankrupt and one who is acting out of spite.

Although bankruptcy can be a way of wiping the slate clean, where does it leave the non-bankrupt spouse, usually the wife?   

Current case law

In a case reported by the Daily Telegraph on 23 October, Mr McRoberts, a former company boss, is claiming that the balance of a lump sum payable in installments which was due to his former wife (and which he was ordered to pay before he was made bankrupt) should be written off. 

Before 2005, the spouse of a bankrupt was in a unique position in that, even if they were owed money by their ex they could not, unlike their ex’s other creditors, “prove” in their bankruptcy.  This meant that the debt would survive the bankruptcy and remain undischarged until paid.  The financially weaker spouse could thus sit back and hope that their ex would re-make their fortune and that they would finally receive the monies due.  In the interim, though, unlike other creditors, they would receive no payment or even part payment.  To counteract this unfairness, the Insolvency Rules were changed in 2005 to allow spouses to “prove” in the bankruptcy (but only if they had the benefit of a lump sum or costs order in their favour) with the consequence that they would have the chance of at least part payment if assets were recovered.   Exceptionally, though, in contrast to other creditors, a bankrupt is not released from a matrimonial debt on their discharge from bankruptcy.

Mrs McRoberts was registered as a creditor in her ex’s bankruptcy and, although he is now a discharged bankrupt, she is still pursuing him for the balance of the lump sum she is due of £349,000.  Mr McRoberts has asked the Court to rule that the matrimonial debt did not “survive” the discharge of his bankruptcy.   He argues that he faces bankruptcy again and that his former wife is better off now than him. 

The gavel is about to come down

Judgment is awaited but, in the High Court, Mr Justice Hillyard has already commented, “I don’t want to do anything that suggests that so long as you go into bankruptcy that is the gateway to avoiding the family court’s orders.  The default position is that, although the bankrupt gets a new start in life, he still has around his neck orders made in family proceedings for lump sums”.  

The Court does have the power, though, under the Insolvency Act 1986, to release the bankrupt spouse from a matrimonial debt to such an extent and on such conditions as the bankruptcy court may direct.  The decision in the case of Mr and Mrs McRoberts will be the first reported case determining the effect of this provision.

The Daily Telegraph is silent as to whether Mr McRoberts had already sought and failed to obtain a variation of the lump sum order in the family courts.  The family court can vary a lump sum order - as long as it is payable by instalments - not only by altering the amount of each instalment and the timing of the payment but also (but only in exceptional circumstances) by reducing or discharging the unpaid balance altogether.  The bar is high to succeed on such an application.  This provision can also potentially be avoided by careful drafting and, depending on the outcome of Mr and Mrs McRoberts’ case, this could be crucial.

This judgment is one for spouses and their matrimonial lawyers to watch out for: if Mr McRoberts succeeds, then he may well have opened another door for a recalcitrant spouse intent on wearing down his former partner into abandoning their legitimate claims.  Litigation is expensive – even more so when third parties, such as a trustee-in-bankruptcy, are involved.