Family Law Hub

Arif v Zar and Another [2012] EWCA Civ 986

  • (Thorpe LJ, Rimer LJ and Patten LJ) 18 July 2012

    In a tweet: A useful look at annulling bankruptcy and joining annulment proceedings to FR proceedings

    Summary: Here, a husband ("H"), who was also embroiled in divorce and associated financial proceedings, had declared himself bankrupt on his own petition in October 2011. Ironically, he had previously been an insolvency practitioner. H's evidence was that his company, Rifsons (which subsequently had an administration order made against it in January 2012) was in financial difficulties thanks to the company's previous director having failed to account to the company for money received by him from clients for work done. H said that, as a result of cashflow problems, he had been unable to draw any remuneration from the company and had become reliant on sums from third parties to meet his financial commitments. In particular, H said he had obtained a £500,000 overdraft from Barclays Bank which was secured over a property in St John's Wood which was owned by H's son.

    As at the date of the bankruptcy order, H said that he had debts totalling somewhere in the region of £110,000 and those were immediately repayable; on top of this was the overdraft (of which £434,000 had been drawn down on) plus arrears of MPS. Following H's bankruptcy, further statutory demands totalling £50,000 also came to light.

    H's wife ("W") applied for H's bankruptcy to be annulled. She alleged that many of H's debts were in fact shams. Of course, it was clear that unless H's bankruptcy was annulled, W's application for financial relief was going to be severely prejudiced. She contended that the creditors were in fact H's friends and family members who had fabricated the liabilities in order to facilitate his bankruptcy. She alleged that H's genuine debts were considerably less than he had disclosed and could in fact be paid from his assets with a considerable surplus left over.

    In January 2012, at a directions hearing in the financial remedy proceedings, Mostyn J had made an order inviting the registrar dealing with the bankruptcy to transfer the annulment application to the Family Division so that it could be heard with the financial remedy application. W also issued her own application for the transfer of the annulment proceedings to the Family Division.

    However, in March 2012, the registrar, not convinced that joining the two sets of proceedings was the correct way forward, dismissed W's application and sent the annulment application to be determined by a judge in the Chancery Division. An order to that effect was made.

    A few days later, the case came back before Mostyn J in the financial remedy proceedings. Of his own motion, Mostyn J varied the registrar's order so as to transfer the annulment application to the Family Division with a direction that it be heard with W's application for financial relief. Mostyn J had clearly been sympathetic to W's plight - if the annulment proceedings were heard in the Chancery Division, they would be heard on a summary basis and without the cross-examination of witnesses. W had argued that, as a result, she would be at a considerable disadvantage because she had no way of testing the veracity of H's evidence. She said that taking this route would "open the floodgates . . to husbands who consider that they can circumvent the court's powers in ancillary relief proceedings by obtaining an order of bankruptcy".

    He therefore made an order under r.3.1(7) Civil Procedure Rules 1998 and transferred the annulment application to the Family Division and varied the directions for the hearing to include various disclosure requirements and the joining of H's son to the proceedings. He said:

    "By virtue of Rule 3.1, CPR 3.1(7) it is stated that a power of the court under the rules to make an order includes a power to vary or revoke the order. It is true that I am not hearing an appeal from Registrar Derrett and Mr Le Grice has cautioned me not to in a disguised way to exercise appeal powers in the absence of a notice of appeal having been issued; even if it is the case I think that Registrar Derrett was plainly wrong. However, the variation and revocation power is unbounded and it is open for me to exercise them if I think it is appropriate, having regard to the further material which is before me which does not appear to have been fully argued before Registrar Derrett and particularly and in relation to the failure to cite what I regard as the authority of key importance namely Edgerton v Edgerton."

    Both H and his trustees in bankruptcy appealed for permission to appeal the order of Mostyn J.

    Held: Both H and his trustees in bankruptcy were given permission to appeal and their appeals were allowed.

    The issue before the appeal judges was not whether the annulment application should be heard by the Chancery Division or the Family Division. The issue was whether Mr Justice Mostyn had had jurisdiction to make the order he had made, and, if such jurisdiction did exist, whether he had properly exercised his powers.

    Lord Justice Patten gave the leading judgment. He acknowledged that the success of W's annulment application depended upon whether she could show that H was able to pay the debts which had fallen due as at the date of the bankruptcy order or had at least a real prospect of being able to do so within a reasonable period of time. That involved an examination not only of what debts had actually become due and payable at the relevant date but also of what assets and other sources of finance were then available to H which might have enabled them to be paid. W's allegation that significant liabilities were in fact shams and were therefore non-existent would only allow her to succeed if, on the unchallenged material, she could show that H was not only balance-sheet solvent but that he was also commercially solvent in the sense that he could find a means of raising the money to pay his current debts.

    Of course, Lord Justice Patten noted, registrars dealing with bankruptcy had to be alive to the very real possibility that husbands or wives could try to use the protection of a bankruptcy order to shield themselves against financial remedy claims made against them. To this end, registrars did have the powers necessary to order full disclosure and require the attendance and cross examination of witnesses where necessary. Whether this was the right course of action in any particular case would depend upon the facts and would be a matter of discretion for the registrar or the Chancery judge who was asked to make a transfer order.

    Returning to the main issue, Lord Justice Patten set out a useful and concise summary of some of the main jurisdictional points concerning bankruptcy. He observed that, although the power to transfer proceedings between the divisions of the High Court under r.30.5 Civil Procedure Rules 1998 was general, the power of a High Court judge of another division to transfer proceedings involving an estate in bankruptcy into that division of his own motion were limited under r.7.15(3) Insolvency Rules 1986 to proceedings brought to enforce a claim by or against the insolvent estate. An annulment application did not fall within this rule. Therefore, Lord Justice Patten concluded, any application to transfer an annulment application should be made to the registrar in bankruptcy or to a judge in the Chancery Division.

    What then of Mostyn J's purported exercise of powers contained in r.3.1(7) Civil Procedure Rules 1998? Lord Justice Patten disagreed with Mostyn J's assertion that the powers contained within that rule were "unbounded". In fact, far from being unbounded, Patten LJ said that the power of the court to vary or revoke one of its own orders was ordinarily limited to cases where there had been a material change of circumstance since the order had been made or the original order could be shown to have been based on misstated facts or material non-disclosure. In all other cases, the finality of the order had to be respected and the proper way of challenging the order was by way of appeal.

    As W could not demonstrate a change of circumstance or material non-disclosure, she should have appealed the order. It had not been open to Mr Justice Mostyn to transfer the annulment proceedings as he had done and such actions were very likely to have led to confusion and unfairness, particularly to H and the trustees in bankruptcy who had been entitled to rely upon the order made until and unless it was set aside or appealed.

Case note, published: 20/07/2012

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Items referring to this

  • Judgment, 22/03/2013, free
  • Judgment from the President concerning whether it was open for a wife to apply to set aside an order for reasons of non-disclosure or whether she was required to appeal as per FPR PD30A. He concludes that the relevant part of PD30A is ultra vires so the wife can proceed without court permission. Judgment, 17/04/2015, free
  • Judgment on the applicant wife's claim for ancillary relief where the net assets amounted to around £1.3m. The husband's conduct was described as 'truly abysmal' by Mr Justice Mostyn and included threats to kill and menacing conduct in court. Mr Justice Mostyn made a costs order against the husband and sent the emails sent by the husband to the court to the police to let them decide if threats contained in them amounted to criminal offences. Judgment, 30/10/2015, free

Published: 20/07/2012

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