DIVORCE AND BANKRUPTCY
If you are contemplating divorce or separation, and if you are about to obtain a financial settlement as part of a divorce, particular care must be taken where there is a prospect that one of the spouses may become bankrupt. A series of high profile cases have highlighted the risk that such settlements are not safe from creditors. Even where a spouse has obtained the right to stay in the marital home until their children grow up or he or she remarries, this can be overridden to pay off the debts of a bankrupt partner’s debts.
On 5th December 2007 the Court of Appeal handed down its long awaited Judgment in the case of Haines v Hill (best known as Haines). The effect of the ruling is that the transfer of property from Mrs Haines’s former husband ordered to be made by the Court on divorce, should not be vulnerable to attack by his Trustees in Bankruptcy on behalf of her former husband’s creditors.
In divorce proceedings in December 2004 Mrs Haines was awarded the proceeds of sale of the matrimonial home jointly owned with her former husband. Her former husband was made bankrupt almost a year later. The Trustees in Bankruptcy asked the Court to order that the transfer be set aside to obtain the property for the benefit of his creditors.
The Trustees’ claim amounted to approximately £120,000. In an earlier decision in May this year the Trustees in Bankruptcy succeeded in the High Court but the Court of Appeal has now reversed that ruling.
Lord Justice Rixs giving the lead judgment said, “it would be unfortunate in the extreme” if the matrimonial settlement approved by a Family Court could be set aside for up to 5 years after because the husband was later made bankrupt. The Court appeared to limit the basis of attack to where there has been fraud, mistake or a misrepresentation.
Family lawyers welcome this decision as it provides some certainty that orders made on divorce (particularly those providing for a clean break) cannot be set aside years later. Insolvency lawyers and those acting for creditors, are disappointed in the outcome as it appears to give debtors the opportunity to use divorce as a means of shielding their assets from creditors. This has led to some debate within this firm.
This however is not the end of the story, as we understand the Trustees in Bankruptcy are seeking permission to appeal to the House of Lords. If you would like any information or advice in relation to this area please contact Conrad Adam in relation to family law issues or Jeremy Lederman in relation to insolvency issues.
Careful planning and informed legal advice are crucial to an understanding of the implications of transactions which take place following a financial settlement as part of a divorce or separation agreement. This is particularly true today when many families face the financial pressures of maintaining businesses with increasing overheads and tightened profit margins, or keeping their homes safe from mortgage repossession in the face of rising mortgage monthly payments following recent interest rate increases. Equally popular is the retention of an interest in a family home, otherwise transferred to the other spouse, until the children grow up, as a way of then achieving a fair share of the assets (which may be 50%).
When you consult a lawyer at Cumberland Ellis LLP, you have immediate access to our Private Client Group who can guide you to manage and protect your wealth.
