COVID-19 – The financial implications of insolvency on financial settlements

As the impact of the Coronavirus continues to affect our everyday lives, family law partner Simon Donald, looks at how it may impact parties who may already be facing financial difficulties.

Over the coming months the economic repercussions of the government’s lockdown could have far reaching consequences for individuals and business owners already struggling to manage their personal finances..  The prospect of a sudden and catastrophic loss of income may be the economic ‘last straw’ with insolvency and bankruptcy being a very real possibility. 

When a party in divorce proceedings is made bankrupt, either by their own choice or by a creditor, all their assets will pass to (or ‘vest in’) the trustee in bankruptcy.  This means while they are subject to a bankruptcy, the  bankrupt party will have no assets in their control to fund the payment of, for example, a lump sum order.

The court may still order a lump sum to be paid by the bankrupt party, as that payment is a “proveable debt”, although the parties and the court will face the difficult question of assessing the realistic prospect of any lump sum that is order being paid in full. 

If a party has been made bankrupt, this does not prevent the court from making a spousal maintenance order, so long as there is sufficient income available to meet the payments. There may be an issue for the court in balancing the needs of the family and the need to make payments to any creditors.  Orders or agreements made in bankruptcy proceedings to pay creditors from the bankrupt party’s income will take priority over any maintenance orders made by the family court.

The first question that needs to be urgently answered is whether a party is genuinely bankrupt.  There may be the possibility that the threat of bankruptcy is being used to frustrate any divorce proceedings, or the prospects of reaching a financial settlement, or ultimately as an attempt to prevent the family court from making any orders. 

It is possible to ask the court to annul a bankruptcy, but there will always be the risk that it will be upheld if a person can prove they were insolvent at the time of the bankruptcy.

Timing is therefore key if there is the risk of insolvency and bankruptcy.  Swift action needs to be taken to investigate the true financial picture, with a view to issuing any necessary applications to the family court for financial orders.

If a financial order has already been made by the family court then bankruptcy will inevitably impact on the implementation of that order.  If a paying party is made bankrupt in the five years after a financial order has been made, a trustee in bankruptcy may feel it necessary to review the settlement and ask to set aside an order transferring ownership of a property to a bankrupt’s former spouse.  

To achieve this the trustee in bankruptcy will need to prove that the transfer was aimed at putting assets out of reach of any creditors.  The trustee may well face an uphill struggle in convincing the family court that this should happen.  Since the decision in Haines v Hill & Anor [2007] EWCA Civ 128 it has been established that an order transferring a property to one spouse in return for them not pursuing a maintenance claim should not be set aside. 

If there is the threat of bankruptcy where the court has already made an order transferring a property to one party, it is vitally important that completion of the transfer takes place as quickly as possible. This may ultimately require a further application to the family court to expedite the transfer, especially if one party is proving uncooperative in addressing the immediate financial concerns that arise from bankruptcy.

Even if the transfer of the property has not yet completed by the time a party has been made bankrupt, dependent on there being a final financial order and so long as Decree Absolute has been granted, then the transfer may remain unaffected.

If an order has been made for a lump sum to be paid from the net proceeds of a sale of a property, and the payment has not yet been made, then bankruptcy will not override a party’s financial interest in that property, or their share in the net proceeds of sale due to them under the lump sum order.

The overriding concern in many cases is that bankruptcy will lead to the loss of the family home as this is frequently the only asset available.  If a trustee in bankruptcy believes it is necessary to sell the family home, then steps can still be taken to delay a sale to make sure the housing needs of a party living in the property, and the needs of any children, are met in the short term.

However, this may only be a temporary reprieve.  After a year has passed since the date of a bankruptcy order, the court must often accept that the need to pay the creditors will outweigh the need to meet the  housing needs of either party, even if there are children living at the property.  This can only be avoided in exceptional circumstances.

During these challenging circumstances, our family lawyers are continuing to support our clients in finding efficient and practical solutions in difficult financial situations.   This includes alternative ways to reach a negotiated settlement such as through collaborative law, mediation or arbitration without having to go to Court.  

 If you would like to talk to a member of the family team, please contact Simon Donald  on