Family Law Hub

Arif v Anwar [2013] EWHC 624 (Fam)

  • In a tweet: The role of the OS v DS hearing in a FR case involving bankruptcy

    Summary: The wife ("W") had filed her divorce petition in June 2011; only a few months later, her husband ("H"), an insolvency practitioner, was made bankrupt on his own petition following W's claim for financial relief (interestingly, Norris J's judgment notes "the bankruptcy may, or may not, have been tactical"). The bankruptcy had arisen because of the collapse of H's insolvency practice which had been conducted through a company known as "RMC1"and H was the sole shareholder. The unaudited accounts of RMC1 showed that it had assets of about £1.14million. However, H contended that, at the same time as W served her divorce petition, there had been a software accident which had led to the complete destruction of all of RMC1's primary records; this meant that the administrators did not know who owed money to RMC1 nor were they able to collect book debts or value the work in progress. In turn, this meant that H would not receive any distribution in respect of his substantial directors loan (approx. £200,000) and that the value of his interest in the business simply evaporated.  

    The only asset in the bankruptcy was therefore the former family home. Originally the sole registered proprietor, W had, in November 2003, executed a declaration of trust under which H was declared to be the sole beneficial owner. The former family home was valued in the bankruptcy proceedings at approximately £1.8million.  

    A very substantial claimant in the bankruptcy proceedings was S, H's son from a previous marriage. S asserted a beneficial interest in the former family home under a constructive trust which, he said, had arisen from him having invested monies in building work in the property. This was put by both H and S at 50% albeit H's account of how this alleged constructive trust arose differed in his Form E (monies invested by S) and his statement of affairs in the bankruptcy (S had a charge over the property). Additionally, S said he had paid various lenders to whom H had liabilities and had taken over those liabilities himself. H had also discharged a debt owed to Barclays Wealth in Jersey in the sum of £425,000, which was secured on another  property which was beneficially owned by S. A further creditor ("Declan"), whom H claimed to owe some £500,000 in repayment of an advance commission for work in respect of "a commercial deal which did not complete" was, on H's case, also someone who had to be repaid. 

    Quite clearly, H's bankruptcy put a spanner in the works of W's financial relief application. Unless there was a clear surplus of assets over liabilities in the bankruptcy, it was not possible for an award to be made in her favour (Hellyer v Hellyer [1996] 2 FLR 579). Accordingly, W sought to annul the bankruptcy order so that her financial claims could be taken into account alongside the claims of the creditors (Paulin v Paulin [2009] EWCA Civ 221). Her application was reported in Arif v Anwar [2012] EWCA Civ 986 where Patten LJ said: 

    "That said, judges and registrars sitting in bankruptcy need to be alive to the real possibility that husbands (or wives) may attempt to use the protection of a bankruptcy order as a shield against the claims of their spouses for ancillary relief. Where there is credible evidence of this, they should not be afraid to use the powers which they have to order full disclosure and to require the attendance and cross examination of witnesses where this is necessary in order properly and fairly to determine the annulment application. In such cases the more convenient course may well be to transfer the annulment application itself to be heard along side the ancillary relief application in the Family Division, where the evidence and issues are likely to be similar and costs can be saved by having a single hearing of both applications". 

    However, W's attempt to achieve that end was not successful; it was found that the Registrar had made a proper case management order for the determination of the annulment application to remain in the Chancery Division. W abandoned her application and the bankruptcy proceedings continued.  

    So, to establish that a surplus in assets existed, W now had to enlarge the estate (by challenging S's claim to an interest in the former family home) and to reduce the claims upon it (for example, by asserting that the loans from the banks were to some extent for the benefit of S). However, an effective examination of the claims made by S (or anyone else for that matter) in the bankruptcy could not be forced by W as she had no real standing in those proceedings. Norris J said of W's position: 

    "If there had been any question of H entering into a transaction at an undervalue with the intention of putting assets beyond the reach of W (which is not alleged in this case) then she would have had standing as "a victim" to apply to restore the position: Ram v Ram [2004] EWCA Civ 1452. But the fact that she has a claim for unpaid maintenance pending suit does not give her standing as a creditor because such a debt is not provable in the bankruptcy: Insolvency Rule 12.3(2)(a). Nor does her current claim for a lump sum payment give her standing as a contingent creditor: she is not a creditor at all within section 382 of the Insolvency Act 1986 until the ancillary relief order is made in her favour: Re Jones [2008] BPIR 1051, the reasoning in which is consistent with the decisions of the court of appeal in Glenister v Rowe [2000] (Ch) 76, Steele v Birmingham City Council [2005] EWCA Civ 1824 and Casson v Law Society [2009] EWHC 1043. " 

    Within the bankrupcty proceedings, the court noted that the trustee in bankruptcy would need to obtain possession of the former family home, and that would in turn entail an examination of the extent of S's interest in the property. The trustee would also have to admit debts to proof, and this would involve an examination of the claims of S and of Declan. Essentially the same issues fall for consideration in the Family Division. 

    Within the financial remedy proceedings, Eleanor King J, following the procedure adopted in OS v DS [2004] for preliminary oral discovery hearings, had made a direction for a preliminary hearing "to determine the consequences on [H]'s financial resources of  (a) The effect of transactions between [H] and [S] on (i) the beneficial ownership of [the FMH] and (ii) the extent of any personal debts between [W] and [H] and [S] and (b) The effect the transactions between [Declan] and [H] either personally or through their businesses, on the extent of any debts between [Declan] and [H]". 

    That OS v DS hearing came before Norris J. At that hearing: 

    • H applied for W's application for an OS v DS hearing to be adjourned generally, pending an examination in the Chancery Division into the size of the bankruptcy estate and the claims upon it.  Effectively, H was looking to adjourn W's financial relief application in its entirety and he grounded his request on his case that it was now pretty much clear that there would be no surplus assets to meet W's claims. He also contended that it would be wrong to first subject to him to a private examination in the Family Division if the trustees in bankruptcy were planning to take proceedings against him.  
    • S also applied for the OS v DS hearing not to proceed on the grounds that it was procedurally unfair. He argued that his third party interest (in either the former family home or the repayment of debts on H's behalf) should not be determined in the Family Division where the trustees in bankruptcy would not be present and where we would not be able to set out a properly pleaded case.  

    Held: 

    Norris J indicated in his judgment that he was of the impression that both H and S wished to avoid the court's scrutiny of their affairs and that there was a case for further enquiry; however, this was not the same as the "roving" enquiry which W was seeking. He summarised W's case as being one of sham dealings between H and S and that whatever S now held in reality belonged to H. Norris J found that it would be disproportionate to order an enquiry into every dealing between H and S. He did though make specific directions in relation to two preliminary issues:  

    • S's beneficial interest in the former family home - was S on 6 October 2011 (a) the beneficial owner of a 50% share in the former family home; or (b) was he entitled to some other (and if so what) interest in it; or (c) was he a creditor of H in respect or all or some of the alleged payments made by him to H for works on the property?  and
    • S's alleged repayments of H's debts - 

    (1) had S repaid the following sums borrowed by H and W:

    (i) £245,000 borrowed from Barclays Wealth; 

    (ii) £390,000 borrowed from Woolwich BS and £155,000  borrowed from Barclays Wealth; and

    (iii) £174,250 transferred to a Capital Account  for S's benefit from the Barclays Wealth facility? 

    (2) whether any such repayments by S in respect of (iii) above (and if so, which) were made out of funds not derived from the accumulated or accruing rental income of  the property known as Charles Lane?; 

    (3) what was the source of the funds used to repay (iii) above and what was the nature of S's interest in those funds?; and 

    (4) what drawings were made on the Barclays Wealth account between 29 May 2009 and 6 October 2011 and which of them were not for the benefit of S? 

    Norris J did not consider it necessary to formulate a preliminary issue in relation to the sums due to "Declan". He commented that this issue would be a matter for the trustees in bankruptcy.  

    Norris J ordered that H and S be jointly and severally liable for 20% of W's costs in connection with the OS v DS application and the remaining 80% be W's costs in the financial relief application. He held that the disclosure exercise had been necessitated by the failure of H to provide adequate financial information, but his order should reflect that there was a possibility that the whole process would result in no surplus from the bankruptcy estate.

Case note, published: 12/04/2013

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Items referring to this

  • Judgment dealing with beneficial interest in the former matrimonial home where the wife was the registered owner but which the husband, who had made himself bankrupt, claimed was only on a bare trust in his favour. Case note, 17/03/2015, members only

Published: 12/04/2013

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