Mekarska v Ruiz

Annulment of Bankruptcy Order – Bankruptcy Notice to Spouse – Co-existence of Bankruptcy and Financial Remedy Proceedings – Overwhelming Desirability of Co-Operation Between Spouses

Grazyna Mekarska  (Wife) v  (1) Martin Ruiz (Husband) (2) Patrick Boyden (Trustee in Bankruptcy)

[2011] EWHC 913 (Fam)

Peter Jackson J

Facts

H was 51 and W 40. They married in 2001 and had a son the same year. The parties were both on state benefits when the marriage broke down in 2006. In October 2006 W obtained a freezing order over H’s assets and in November 2006 obtained an occupation order. In December 2006 H proposed that the FMH be sold and that most of the equity be allocated to W for the purchase of a two bedroom flat; leaving him with the balance of the proceeds of sale. This offer was rejected. Financial remedy proceedings were due to be heard in October 2007, but were adjourned.

In 2006/2007 H ran up large debts at banks and on credit cards; latterly in breach of the freezing order. H accepted that he squandered the money, amounting to 1/5^th of the family’s means. The debts were all unsecured.  In December 2007 being unable to make the repayments, H petitioned for his own bankruptcy and an order was made, without notice being given to W. At the time of the bankruptcy order H’s capital assets consisted of the FMH owned in his sole name with a value of £279,000 and a share trading account containing £18,000. Against these assets H had liabilities of £66,000. The available assets in his name amounted to some £230,000. H was clearly not balance sheet insolvent; although the court accepted his commercial insolvency in that he was unable to pay his debts as they fell due. A consequence of the bankruptcy order was to vest H’s assets in the trustee in bankruptcy. No property adjustment order was now possible in the financial remedy proceedings; although the court had power to make a lump sum order over the residue of H’s assets after the debts had been repaid. In February 2008 a partner from PWC was elected as trustee in bankruptcy. In March 2008 W became aware of H’s bankruptcy by chance when her solicitor carried out a search of the property register. It was not until September 2009, 18 months after discovery of the bankruptcy, that W applied for its annulment.

The financial remedy hearing concluded in November 2008, at a time of global financial uncertainty and some 10 months before W applied to annul the bankruptcy order. W accepted that the FMH had to be sold and was at that time co-operating in its marketing. By then the amount required to discharge the bankruptcy was some £132,000. W also had a debt to the Legal Services Commission for her legal costs; which could have been postponed. The District Judge ordered that W should receive a lump sum equal to the entire surplus after the bankruptcy debts and costs were cleared from the net proceeds of sale of the FMH. W also received H’s remaining capital of £18,000.  On a predicted sale of the property at £270,000 W would have received £149,000 to re-house. The DJ recognized that she would struggle to find a two bedroom property. Neither party lodged an appeal. Nor did W suggest that the proceedings should be adjourned to allow her to seek the annulment of the bankruptcy. Immediately after the final hearing the economy took a hand. The prospective purchasers of the FMH dropped their offer from £270,000 - £250,000. W at that time then withdrew her co-operation with the sale process. The trustee subsequently made an application for possession; which was adjourned from time to time. In May 2009 W applied for permission to appeal out of time against the November 2008 order. Her application for permission to appeal was granted at a hearing in August 2009 and the appeal set down for hearing in December 2009. Due to a number of delays and interim applications the hearing of the appeal and W’s application to annul the bankruptcy only came on before the learned judge in March 2011. Astonishingly, from an initial debt of £66,000 due to interest on the debts and professional and other costs of the bankruptcy, the sum required to discharge the bankruptcy was now a staggering £260,000. The issues before the learned judge were (1) should the bankruptcy be annulled, if so (2) should the annulment be conditional upon payment of the trustee’s fees and expenses and (3) should the appeal against the DJ’s order be allowed?

Held

W’s application for an annulment was rejected. Relying on Paulin v Paulin [2009] 2 FLR 354 H was found to have been unable to pay his debts as and when they fell due. The bankruptcy order was therefore properly made at the time. The appeal in the financial remedy proceedings was also dismissed. The District Judge did give first consideration to the child’s position. He took H’s behaviour into account by way of an ‘add-back’ of the lost amounts against his entitlement. The bankruptcy was not illegal, despite the freezing injunction. The district judge did not proceed on the assumption that no challenge to the bankruptcy was possible. Given the fact that the assets were already wafer-thin and the debts a reality the district judge couldn’t be criticised for failing to adjourn the proceedings on his own initiative to allow W to make an application to annul; especially since W was not at the time challenging the bankruptcy order. The reduction in the price offered by proposed purchasers of the FMH was not a Barder event.

Comment

At the time of writing, with stock markets across the world in meltdown and with a second credit crunch a real possibility, a financial remedies case with a bankruptcy aspect seemed apposite. Perhaps the greatest value of this case is as a stark and memorable warning as to the potentially disastrous consequences that may befall divorcing couples who chose to litigate in the shadow of insolvency. As the learned judge noted in this case, on the break down of the marriage in 2006 the parties ‘might and with good sense and co-operation have just about stretched their modest means to meet their overall housing needs’. Instead at the conclusion of the proceedings the liabilities were now such that they virtually extinguished the assets and the only asset of note; the FMH was lost and the parties wiped out financially. Co-operation perhaps aided by mediation/collaboration must be the order of the day when faced with marriage breakdown and insolvency.

This case is also of wider legal interest on the procedure to be adopted on a debtor’s petition in the bankruptcy courts. Applications to annul or suspend bankruptcy orders should be made as soon as possible before the costs of bankruptcy eat into, or as in this case, eat up the family assets.  In order to assist this process the learned judge proposed that where divorce proceedings are apparent the bankruptcy court should consider on a debtor’s petition whether to adjourn for a short time to allow notice to be given to a spouse who may be affected. They may be in a good position to say whether the debtor spouse is in fact insolvent or, if he is, to make proposals for debts to be cleared without the need for bankruptcy. Furthermore even if an adjournment is not thought appropriate, the bankruptcy order should at least be served on the spouse so that they are immediately aware of what is going on.

First published in The Review