How Does Bankruptcy Affect Financial Settlement In Divorce?

One of the bitterest and ultimately tragic divorce cases in UK history was the case of Young v Young, known the to press as the Brewster’s Millions case. Scot and Michelle Young separated in 2006, following 11 years of marriage. Mr Young was a property developer and telecommunications deal-maker. Ms Young claimed half Mr Young’s assets in the divorce, claiming he was worth “a few billion pounds at least”.

Mr Young vehemently denied he had any money. He claimed to have lost all his money in a “financial meltdown”, involving the collapse of a Moscow property deal.

During the divorce proceedings, Mr Young was jailed for six months for refusing to disclose his finances to the court and pay maintenance to his ex-wife. He eventually filed for bankruptcy.

In July 2016, Mr Young fell from the fourth floor of a luxury London flat and was impaled on the railings below. He died of horrific injuries.

But this is not the end of the story. Mrs Young still maintains Mr Young had around £400 million secretly stashed away, despite the fact that financial investigators who looked into Mr Young’s finances after his death have yet to find a single penny of that money[1]. However, International asset recovery specialist L. Burke Files, who is based in the US, told reporters he does not believe Mr Young lost the money. “He was very clever”[2].

Mrs Young is continuing her fight to receive a fair settlement.

This sad tale does raise the question, “how is a financial settlement made when one of the parties to the marriage is declared bankrupt”?

The effect of bankruptcy on divorce proceedings

It is not uncommon for bankruptcy and divorce proceedings to occur concurrently. Unfortunately, some parties do utilise personal and business insolvency processes to frustrate the financial settlement process. This raises the issue of whether the court has the power to set aside bankruptcy proceedings if they were commenced with the dominant intention of defeating any possible financial settlement. In addition, many recipients of financial orders made in their favour worry that bankruptcy may affect their payments.

One of the main consequences of bankruptcy of one spouse in divorce proceedings is the ability to deal with the family home. If the husband and wife hold the property as joint tenants, 50% will be transferred to the Trustee in Bankruptcy and hence fall outside the realm of any financial settlement in a divorce. However, this can be problematic if the financially weaker spouse or the main carer of the children (often one in the same person) is entitled to more than 50% of the property in a financial settlement.

The court’s power to set aside bankruptcy proceedings if they are being used to frustrate divorce proceedings.

If an unscrupulous party to a divorce allows themselves to fall into bankruptcy to avoid the consequences of a financial order, either the family or bankruptcy courts have the power to challenge the bankruptcy order and its overall effect.

The court’s power to annul a bankruptcy order derives from the Insolvency Act 1986, section 282 and is generally executed after the non-bankrupt spouse asserts that filing for bankruptcy was an ‘abuse of process’.

A bankruptcy order may be set aside where:

It is shown to the court’s satisfaction that on some of the grounds of the order, the order should not have been made; or
The court is satisfied that the expenses and debts of bankruptcy have been paid in accordance with the requirements contained in the Insolvency Rules 1986.
The most important factor to note is applications for a bankruptcy order to be set aside due to ‘abuse of process’ will only be successful if it can be shown that the order should not have been made on the grounds existing when the order was made. An example of this would be where the bankruptcy applicant was in fact solvent or the debts claimed were not, in fact, due or legitimate.

Before annulling the order, the court must be fully satisfied that all creditors have been paid and the spouse who declared bankruptcy has assets which exceed their liabilities.

The unwinding of financial orders and property adjustment orders should a party to divorce proceedings become bankrupt

In practice, a property adjustment order made prior to a petition for bankruptcy will bind the Trustee. He or she will, therefore, have to apply for a court order to have in unwound. The Court of Appeal in Hill v Haines [2008] 2 All ER 901, made clear that a Trustee’s challenge to a property adjustment order is only likely to be successful where there are findings of collusion between the parties, fraud or misrepresentation.

Following the decision in Hill v Haines, it is recommended a divorcing spouse should have any matrimonial settlement agreement endorsed by the court, in the form of a property adjustment order. This will ensure there is certainty concerning any challenges that may be made by a Trustee, should the other spouse petition for bankruptcy.

Rosie Bracher are specialist family law solicitors based in Barnstaple. If you require caring, confidential information about any issues raised in this blog, please phone us on 01271 314 904 to make an appointment.

[1] https://www.sundaypost.com/fp/in-business-he-was-meticulous-so-where-is-all-of-his-money-did-he-lose-it-well-i-dont-believe-he-did/

[2] Ibid