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Using insolvency to discharge financial order obligations: the blank canvas remains

Byron James, Barrister, 14 Gray's Inn Square explores the, as yet, unfettered and undefined discretion of the court to discharge a party from obligations under orders made in family proceedings following bankruptcy, following the recent Chancery Division case of Hayes v Hayes

Byron James, Barrister, 14 Gray's Inn Square 

The world is going bankrupt, and in turn everyone in it; not morally, as a rule, but financially, literally, legally.

Bankruptcy is a form of ostracism, casting people out from positions of responsibility and seizing the meagre remains of their possessions. Of course, for the most part, it only seriously affects those with something significant to lose and those with something significant to lose rarely go bankrupt; vultures arguing over who gets to suck the bones dry for the longest. If, like a giant game of Monopoly, the whole world is going to go bankrupt, save for the Bank which always finds new ways of taking money off you ('what? speeding?? another fine?? But I'm a top hat…!'), are we not going to have to find a new form of bankruptcy? A super-bankruptcy beyond the normal at present, perhaps some form of karmic retribution whereby the super-bankrupt come back in a future life as Redknapp's accountant or Lohan's personal assistant.

Family lawyers edge around the parameters of what is often perceived to be the complexities of the Insolvency Act 1986. There are some tricks and traps which everyone knows, from Haines v Hill to Avis v Turner, but as insolvency becomes more and more relevant to the concerns of private clients, so too will more scope arise for argument concerning, as yet, unexplored aspects of the 1986 Act.  One such provision is section 281(5) of the 1986 Act which confers discretion on the Court to release a discharged bankrupt from a debt arising from a family order:

Effect of discharge
(5)Discharge does not, except to such extent and on such conditions as the court may direct, release the bankrupt from any bankruptcy debt which—
(b) arises under any order made in family proceedings or under a maintenance calculation made under the Child Support Act 1991

The effect of going bankrupt is to allow the assets held by the bankrupt to be distributed amongst creditors by an appointed Trustee in Bankruptcy. Negotiations will be had between the Trustee in Bankruptcy and creditors and debts settled as far as is possible with, usually, X amount of pence accepted in the pound for the debts. Section 279(1) of the 1986 Act sets out that the bankrupt will be discharged automatically one year after the commencement of the bankruptcy and section 281(1), subject to certain specific exceptions, sets out that the bankrupt will be released from the bankruptcy debts upon discharge.  One of the exceptions is as above, sub-section 5, whereupon the bankrupt shall not be released from 'any order made In family proceedings' – 'except to such extent and on such conditions as the court may direct'.

This latter provision is not given any further definition in the statue and no specific guidance is given to the court as to how such discretion should be given effect. There is also, apart from using comparable principles (for example, arguing the burden is entirely upon the applicant to demonstrate that they should be released from an obligation, Re Schmacher (1907) 23 TLR 336), no specific guidance in the case law; that is, until the recent case of Hayes v Hayes [2012] EWHC (Ch)  Chancery Division (23.03.12) (unreported presently) per Judge Pelling QC.

In Hayes, the parties were formerly husband and wife whom had been through acrimonious divorce and financial remedy proceedings. A costs order had been made against the Husband, which remained unpaid. The wife sought to bring about the bankruptcy of the husband by way of petition, despite the fact that the 1986 Insolvency Rules did not at the time, allow a petition to be brought on such grounds. The petition was brought before rule 12.3 of the Insolvency Rules 1986 was amended by rule 44 of the Insolvency (Amendment) Rules 2005 to read:

'[the following are not provable] any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family or domestic proceedings or any obligation arising'

The purpose of the amendment to the provision being to make lump sum and costs orders made in family proceedings provable debts in the bankruptcy, with the intention of providing another form of enforcement to the former spouse. The husband did not oppose the petition and it was subsequently made; the change to the rules as above occurring shortly after the bankruptcy. The validity of the petition was later challenged by the husband by way of an application to annul the petition; but this was dismissed because it was held to be unfair to annul the bankruptcy where it would have been open to the wife to present a new petition under the new legislative regime. The husband therefore remained bankrupt and, a year later, was discharged from the bankruptcy. Thereafter, the Wife served (several) statutory demands on the husband following his discharge for the amount due under the costs order and interest accrued thereon.

The Registrar at first instance was asked by the husband to be released from the family related debt upon the basis that section 281(5) of the 1986 Act gave the court the requisite discretion to do so. The Registrar considered there were several points of dispute in relation to the specific operation of 281(5) including the consequences of the release from the relevant debt, the significance of the time elapsed since the debt was incurred and the significance of the husband's impecuniosity.

When the matter later came before Judge Pelling QC on appeal, he agreed with the Registrar's assertion regarding the lack of authority concerning the court's discretion to order a release from a debt under section 281(5). As a result of this lack of statutory guidance and lack of authority specifically on point, it was held that the court had an unfettered discretion to discharge debts under this provision. Judge Pelling QC did however stress the 'default position' that family orders had to survive the discharge of a bankrupt and remain subject to an order of the court requiring the discharge of the debt; bankruptcy procedure should not be used as a mechanism under which obligations conferred by family orders were avoided, there is a distinction between family and commercial liabilities.

The consequence of discharging the debt, in accordance with the wishes of the husband, would make the debt forever unenforceable. It could not be redeemed even if the husband's circumstances changed dramatically, this even if his income and/or capital positions were to increase significantly. The total debar on future enforcement of the family order could therefore become disproportionately harsh as the beneficiary to the original order would forevermore be prevented from taking advantage of such a change in circumstances: a change in circumstances argument would be put forward by the bankrupt party which would guillotine any future change in circumstance argument. There must therefore be an extremely high threshold for the bankrupt to overcome in relation to his ability to ever again be in receipt of sufficient funds; given that most bankrupts, at the point of discharge, will be very poorly off, something exceptionally must be required beyond the impecuniosity expected of a bankrupt.   Therefore, in the present case, it was held as wrong to hold the question of the (limited) extent of the husband's present earning capacity as a 'springboard' to discharging the debt. Judge Pelling QC did not however rule out there being 'some future time' when a lack of ability to pay, for example by way of earning capacity, could lead to discharge.

The Registrar's decision to hold it not being appropriate to discharge the debt was therefore upheld. 

A reported case in which a debt has been discharged under this provision of the 1986 Act remains, presently, at large, although it is fair to assume it is only a matter of time before one does succeed. Judge Pelling QC appeared to be hinting to as much with reference to a 'future time' when the husband's lack of ability to pay, by earning capacity in this case, could provide an appropriate basis for an application. The specifics of when this future time would be and what precisely would need to be demonstrated by the husband were not expanded upon, the blank canvas therefore remains. 

The recognition in the judgment of Judge Pelling QC of the importance of maintaining obligations under family orders, the 'default position, will be reassuring to beneficiaries under such orders trying to reclaim monies owed to them. However, it will only be when the exact parameters are defined of how one breaks clear of the 'default position' when one will be really able to state how preferentially family orders are to be treated in the Chancery Division. The fact remains that any provision within a financial order will be balanced against others, a lump sum will usually be due in consideration for something else, a transfer of shares in a company or for an interest in a property; if one half of the transaction takes place, without the other, and the other is then later set aside in the Chancery Division, does that not have the effect of rendering the entire deal unfair? If a wife is to transfer shares in the 'family ' limited company for a lump sum, and the lump sum is never paid and, later on, the obligation to pay is discharged under the 1986 Act, upon what basis does the husband retain the shares in the company? Clearly, in such situations, one is dealing with a bankrupt who has gone beyond pleading just impecuniosity to be released from the obligation, someone unlikely to be holding onto anything of real value, but the fact remains that this provision gives the Chancery Division the power to effectively render a financial order unfair many years afterwards. To what extent will this be part of the Chancery Division's consideration when the time comes?

This little known provision is something worth keeping in the legal back pocket; it is certainly something which one should advise clients of the existence of and, in case of a client who is going/has been bankrupt and who is still being pursued for such a debt, something worth exploring: do they have the potential to break clear of the default position of maintaining obligations under family orders? There is a blank canvas, let's get creative…