People get divorced for all sorts of reasons. What if the main reason for a divorce is to put assets beyond the reach of creditors? A quick divorce giving assets to the soon-to-be-ex spouse, followed by a declaration of bankruptcy can look incredibly suspicious, but if there’s a Court order granting the divorce and division of assets what can be done about it?

Transfer at an undervalue

A claim for financial relief in divorce proceedings is made under Part II of the Matrimonial Causes Act 1973 (“the MCA”). Such a claim can constitute consideration within the meaning of s.339 of the Insolvency Act 1986 (“IA”).

On the basis that a divorce necessarily involves people who were, until the decree absolute, married, they would be classed as associates under s 435 IA.

The ability to challenge an order in divorce proceedings on the grounds that it constitutes a transaction at an undervalue under s.339 IA therefore applies where the order is sealed less than five years before a bankruptcy petition. It is the order of the family court itself which constitutes the transaction which would need to be considered.

Such a challenge would need to be based on the idea that the order was a transaction in which the bankrupt received consideration which was worth significantly less than the value of the consideration they provided.

A careful analysis of the value of the consideration provided by each party will be necessary: not only are claims under the MCA given up, but the value of the assets should be checked, the value of liabilities considered, as well as the more ephemeral aspects of a divorce, such as the value to each party of a clean break settlement.

Is there a need to show collusion between the parties to the divorce?

Whether the abandonment of a claim for financial relief in a divorce will be classed as adequate consideration for assets received will depend on the value of the assets and liabilities being divided and on whether there are vitiating factors which include, according to the case of Hill v Haines [2008] Ch 412, collusion, fraud, concealment, mistake or misrepresentation.

The family court in Sands (as trustee in bankruptcy of Mr Tarlochan Singh) v Singh and others [2016] EWHC 636 (CH) confirmed that there were circumstances in which an order of the family Court could be set aside by a trustee in bankruptcy, but confirmed the position in Hill v Haines that there must be some vitiating factors present.

The Judge in Sands v Singh outlined a paradigm case in which an order could be set aside as one involving collusion between the spouses and said that the Court was likely to be slow to set aside an order in the absence of collusion, but also outlined circumstances in which collusion might not be necessary:

Suppose, for example, that a husband, knowing that he was about to be served with a statutory demand and preferring his assets to benefit his wife and children than his creditors, dishonestly concealed his debts and overstated his assets so that the Court made an order in favour of the wife and children which it could never have approved had it known the true facts…If the husband were subsequently adjudged bankrupt, it might be possible for his trustee in bankruptcy to have the order set aside even though the wife had genuinely believed the husband to be as wealthy as he represented.”

As such, whilst collusion was not required, some degree of fraud or concealment was necessary. This is important, as collusion could be extremely difficult to prove.

Duty of full and frank disclosure

Even where the parties to a divorce agree a division of the financial aspect of their separation, there is certain information which must be provided to the Family Court and which, in the usual course of divorce proceedings, the Court must consider to ensure the division is fair and neither party is left without a sufficient share of the assets.

The parties have an obligation of full and frank disclosure to the court to provide an accurate record of their assets and liabilities. The issue between divorcing parties usually relates to undisclosed or concealed assets, meaning one party accepts less than the amount to which they would otherwise be entitled. However, it is also possible, as envisaged in Sands v Singh that liabilities might be concealed from the Court (the Court therefore being misled and the financial position of the parties misrepresented) in order to persuade the Court to sanction a transfer of a larger proportion of assets to a receiving party, and therefore to allow those assets to remain within the family in the event of the bankruptcy of the paying party.

Further, the Court of Appeal decisions of Robinson v Robinson [1982] 1 WLR 786 and the House of Lords in Livesey (formerly Jenkins) v Jenkins [1985] 1 AC 424 confirm that a breach of the obligation of full and frank disclosure renders a consent order in divorce proceedings invalid and capable of being set aside. This will be the case where the order which was made was substantially different to an order which the Court would have made had full disclosure been given.

Where the failure relates, for example, to high value liabilities owed to third parties the question to be considered would be whether a judge would have made an order in the same terms had the true position, or anything like the true position in respect of liabilities, been disclosed.

The effect of the Order being set aside

Under s.339 of the Act an order could be sought restoring the position to what it would have been had an order of the family Court not been made. A similar position would be reached if it was found that there had been a breach of the duty of full and frank disclosure. Either case would involve assets being transferred back to the bankrupt and vesting in the trustee, therefore being used to pay creditors other than a spouse.

The impact of this in circumstances in which the liabilities outweigh the assets could be disastrous for a spouse, leaving little to nothing for financial maintenance or settlement.