Insolvency issues can bring a whole new level of complexity to family proceedings. Kate Macdonald and Russell-Cooke's restructuring and insolvency expert outline their top 10 tips and potential pitfalls for family lawyers to consider when insolvency becomes a relevant consideration:
Timing
Timing can be crucial. As soon as the Trustee in Bankruptcy (TiB) is appointed (which happens upon the bankruptcy order being made) the bankrupt’s assets will vest in them which can have a significant impact on the outcome in financial remedy proceedings where a couple are separated/in the process of separating. The bankrupt will no longer have control over their assets as they will be effectively owned by the TiB. Be alive to the possibility of bankruptcy issues as soon as you are instructed, act quickly where appropriate, and seek specialist advice from the outset where necessary.
Role and powers of the Trustee in Bankruptcy
A TiB has wide powers of investigation and the civil courts can and do have the power to set aside Family Court orders made after a bankruptcy petition is issued. However it is very difficult for a TiB to challenge a financial remedy order made before the bankruptcy petition has been filed in the absence of fraud, collusion or concealment – Hill v Haines [2008] Ch 412. This brings us back to the importance of timing: speed can be of the essence in terms of obtaining the best result for your client.
Wide definition of “property”
Under the Insolvency Act 1986 (“IA 1986”) “property” includes money, goods, things in action, land, and every description of property wherever situated. It also includes obligations and every description of interest, whether present or future, or vested or contingent, arising out of, or incidental to, property.
Some property however is excluded from the bankrupt’s estate and not available to the TiB. This includes income (although a TiB can apply for surplus income to be paid into the bankruptcy estate via an income payments order (IPO)), or where it is necessary to satisfy a basic domestic need of the bankrupt (or their family), or is required for the bankrupt’s employment or business (such as household equipment, motor vehicles, and tools of trade).
Pension entitlements are usually (but not always) excluded from the bankrupt’s estate. Horton v Henry [2016] EWCA Civ 989 held that whilst pensions that were in payment could be susceptible to being claimed by the TiB under an IPO, a TiB could not require a bankrupt to elect to exercise pension rights.
Priority of payments and excluded debts
Certain family orders (namely lump sum orders and costs orders) are provable debts in bankruptcy. This means claims for the debt can be lodged with the TiB and if there are funds available with which to make a distribution at the end of the bankruptcy, those claims may result in a payment.
However there is an order of priority in which bankruptcy creditors are paid (after the TiB’s costs and expenses): secured creditors are paid first, then preferential creditors, and finally unsecured creditors. Any entitlement that a spouse has pursuant to a financial remedy order will usually be an unsecured debt which may mean that any monies due to them under the financial remedies order will not be paid in full, or at all, once other categories of creditors have taken their share.
But all is not lost: some debts are ‘excluded debts’, meaning that, unlike other bankruptcy debts, the bankrupt remains liable for those debts despite the bankruptcy. Such debts include money owed pursuant to a Family Court order (including maintenance and lump sum orders). This means the bankrupt can still be pursued (most likely after they are discharged from bankruptcy) for those debts.
Void dispositions
Any disposition of property made by the bankrupt between presentation of bankruptcy petition and a bankruptcy order being made is void (except to the extent it is/was made with the consent of the court, or is/was subsequently ratified by the court).
This will be a relevant consideration when calculating the matrimonial pot. It is also worth bearing in mind that any declarations of trust entered into by the bankrupt, or Family Court orders made, during this period will not be effective and can be challenged by a TiB.
Challenging transactions
Even if a transaction is not void, be alive to the potential for an application to set it aside by a TiB. Transactions entered into by the bankrupt up to 5 years before the bankruptcy petition can be reviewed and challenged where they are believed to be a transaction at an undervalue, or a preference.
In addition, s.423 Insolvency Act 1986, which covers transactions defrauding creditors has no specific ‘’look-back period’’ meaning transactions that took place many years before the bankruptcy can be reviewed and challenged.
Impact upon co-owners of property
Consider the impact or consequences of bankruptcy when acting for the co-owner of a property. Any joint tenancy is severed, with the bankrupt’s legal interest held on trust for the co-owners and their beneficial interest vesting in the TiB.
There is likely to be a window of opportunity for the co-owner to engage and negotiate with the TiB in relation to realising the bankrupts interest in the property either by buying them out or agreeing a voluntary sale on the open market.
The TiB can make an application to the court for possession and sale, and where this is made more than 12 months after the bankruptcy order, the interests of the creditors will outweigh all other considerations unless exceptional circumstances exist.
Therefore even if the property is the family home, it is likely a possession & sale order will be made. In the case of the sole or principal residence of the bankrupt, or their spouse or former spouse, if no application is made before the third anniversary of the bankruptcy order the ‘use or lose it’ rule may come to the aid of your client, as the bankrupt’s interest will automatically re-vest in the bankrupt at that point.
Far-reaching consequences of bankruptcy
Bankruptcy can have personal, professional and criminal consequences. It is important to consider how it might impact upon matters such as employment opportunities and income capacity, as well as the ability to obtain credit, and to address these where appropriate within any financial remedy proceedings.
Variation
Bankruptcy may be a ground for a variation application in respect of periodical payments on the basis that there has been a change in circumstances, bearing in mind that the TiB can seek an order for the bankrupt’s surplus income to be paid into the bankrupt’s estate.
Privilege
A TiB has wide-ranging powers to compel the production of information from parties, including their spouse. They may also make requests of a bankrupt’s legal advisors to deliver up copies of their files, which could include the files held by any family practitioners they instructed. Although requests may be made of a spouse’s solicitors, it would be less likely that they would have to deliver up their files as a TiB would not ordinarily be entitled to those files and privilege would apply.
However given the wide powers of a TiB, it would be wise to seek professional advice whenever a request is made by a TiB to ensure that you and your clients comply with any applicable professional obligations as well as their statutory duties to cooperate with a TiB.
Our insolvency lawyers work closely with our family law experts to ensure that every situation is covered. Please contact our insolvency and family law teams.