Family Law Hub

McRoberts v McRoberts [2012] EWHC 2966 (Ch)

  • In a tweet: Lump sum orders are provable bankruptcy debts but discretion to discharge will be used with caution

    Summary: An application raising a "short but interesting point" on the court's jurisdiction under s.281(5) Insolvency Act 1986 to release a bankrupt from any bankruptcy debt arising under any order made in family proceedings. 

    A financial order in family proceedings had been made by consent by the wife ("W") and the husband ("H") on 1 April 2003. Amongst the provisions, was a direction that H pay to W a lump sum by way of instalments totalling  £450,000. All instalments were to have been paid by 31 March 2009 and payment of interest was also provided for. Finally, it was provided that if H failed to pay any instalment, the whole of the outstanding lump sum would become due. 

    In the event, H did not keep up the instalment payments. In March 2006, a bankruptcy petition was presented against him by one of his company's trade creditors who alleged non-payment of personal guarantees. H was declared bankrupt in September 2006. W entered a proof of debt in the sum of £244,966 which was the balance of the lump sum still owed to her. There was a large deficiency in H's bankruptcy meaning no distributions could be made to unsecured creditors. W received nothing in respect of her proof of debt and had not received anything since. By the time of the hearing, the sum outstanding had risen to about £350,000. H was discharged from his bankruptcy in September 2007 and was released from all provable bankruptcy debts. 

    Now, bankruptcy debts are defined as including any debt or liability to which the bankrupt is subject at the commencement of the bankruptcy. Prior to the introduction of the Insolvency Act 1986, a lump sum ordered in family proceedings was a bankruptcy debt provable in bankruptcy. Then, when the Insolvency Act 1986 was introduced, such orders were excluded from the categories of provable debt. However, this came to be a bit of a hardship to those spouses who were placed in a worse position than ordinary creditors. Eventually, the Insolvency Rules were amended in 2005 to provide that lump sum orders (and costs orders) made in family proceedings should be provable in bankruptcy. 

    As to the effect of the discharge of provable bankruptcy debts, s.281(5) Insolvency Act 1986 provides:

        "Discharge does not, except to such extent and on such conditions as the court may direct, release the bankrupt from any bankruptcy debt which –

        (a) consists in a liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages by virtue of Part 1 of the Consumer Protection Act 1987, being in either case damages n respect of personal injuries to any person, or  

        (b) arises under any order made in family proceedings or under a maintenance calculation made under the Child Support Act 1991."

    There was no dispute or doubt that the 2003 consent order was made in relevant "family proceedings". The ordinary or default position was that the lump sum order was a provable debt, it had not been released upon H's discharge from bankruptcy but the court had the jurisdiction and discretion to release it entirely or conditionally. H applied for the court to use its discretion to discharge him from the lump sum order. 

    H's position was that the consent order had been highly unusual that, whilst the relief granted to W was by way of maintenance, the order had been crafted as an order for a lump sum payable by instalments. He argued that, if the order was of such a character that it could be reviewed and modified under the matrimonial jurisdiction, then it could be reviewed and modified under the Chancery jurisdiction. Further, this review and modification could then give effect to what would be fair and just as between the parties now. 

    W submitted that the statutory provision for payment of a lump sum by instalments did not alter the essential characteristic of the obligation i.e. it was still payment of a lump sum and it was not maintenance. She also pointed out that the consent order provided for the whole of the lump sum to become due if H defaulted on the instalments; he had defaulted and it was now plainly a provision for a lump sum without any instalment option. A lump sum was not reviewable under Matrimonial Causes Act 1973 and, in any event, it would be unfair to review and vary the lump sum order since it was a quid pro quo for the transfer to H of the then valuable shares in his company. 

    Held: H's application was dismissed. 

    Acknowledging that the discretion conferred by s.281(5) Insolvency Act 1986 was unfettered, Mr Justice Hildyard cautioned that that discretion had to be exercised for the proper purposes for which it had been conferred. He was not at all convinced that the purpose for which it had been conferred was to review and vary an obligation according to what a matrimonial court would now think to be appropriate. Rather, he said, the discretion was to enable a discharge to be accomplished more completely where the continuance of the obligation served no purpose because it was so unlikely ever to be satisfied.

    The question was not whether the obligation would now be justified if it could be satisfied; it was whether, accepting that its imposition was justified, there was any real prospect of it being satisfied now or in the future and whether its release was necessary to enable or at least substantially assist the discharged bankrupt to re-establish himself. 

    Referring to the circumstances identified by Judge Pelling QC in Hayes v Hayes [2012] EWHC 1240 (Ch), Mr Justice Hildyard noted that seven years had elapsed since H's discharge from bankruptcy; however, he said that that nor the fact the consent order was almost ten years old weighed substantially in the balance. Whilst there was a risk that H might use the fact of the obligation to harass W, he felt that was unlikely to happen and he was reassured by the fact that there were significant controls available to protect H in the event that W sought or threatened bankruptcy proceedings for improper or oppressive purposes. Taking this all together, Mr Justice Hildyard held that the balance remained in favour of keeping the order in place and there was no sufficient reason to override the default provision. He said: 

    "The reality is that [H's] case came down to this: that under present circumstances, his own needs and those of his own family are greater than the needs of [W] (who is earning a reasonable amount) and that the "fair outcome" would be release of the debt.  That would simply be to treat section 281(5) as an adjunct or addition to the jurisdiction of the matrimonial courts. For the reasons I have already given I do not think that is what was intended nor do I consider it appropriate."

Case note, published: 05/12/2012

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Published: 05/12/2012

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