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ANCILLARY RELIEF/BANKRUPTCY: Paulin v Paulin [2009] EWCA Civ 221

Date:25 MAR 2009

(Court of Appeal; Longmore, Wilson and Lawrence Collins LJJ; 17 March 2009)

A tactic now occasionally adopted by a devious husband confronted with an application by his wife for financial relief ancillary to divorce proceedings was to issue proceedings for a bankruptcy order to be made against himself. Following the making of such an order, and upon the appointment or other emergence of a trustee in bankruptcy, all the husband's assets then vested in the trustee, with the result that the divorce court suddenly became disabled from ordering the husband to make capital provision for the wife. The wife's response to this tactic was often to apply in the bankruptcy proceedings for the bankruptcy order to be annulled; and a convenient practice had arisen for the bankruptcy proceedings thereupon to be transferred to the court conducting the divorce proceedings so that the same judge could, at the same time, determine the wife's application for annulment of the bankruptcy order, and thus her ancillary relief application. In this case the husband had purported to transfer his principle asset, his company, to a third party, in breach of a freezing order, and had then manufactured a debt payable by the company at least equal to the size of its equity in the matrimonial property. After two judgment creditors served statutory demands, for a little less than £100,000 in total, the husband petitioned for his own bankruptcy. There was evidence that at the time of the bankruptcy petition the husband in fact held assets of over £1 million. The judge hearing both the bankruptcy and ancillary relief applications, having reserved judgment for 6 weeks, at first dismissed the application for annulment and adjourned the financial relief hearing. However, before the order was drawn the wife's counsel persuaded the judge to allow a further hearing, following which the judge changed his mind and annulled the bankruptcy, ordering the husband to pay a substantial lump sum to wife in ancillary relief proceedings. The husband appealed, arguing that it had not been proper for the judge to reverse his decision on the central question, and that the judge had erred in annulling the bankruptcy in any event.

The rule in In re Barrell Enterprises [1973] 1 WLR 19 had survived changes to the Civil Procedure Rules, which changed the date from which time began to run for the filing of an appellant's notice for an appeal from the High Court to the Court of Appeal, and a judge still had jurisdiction to reverse his decision until his order was perfected; however, this was a jurisdiction to be exercised only in the 'most exceptional circumstances'. In this case the judge's decision to exercise his jurisdiction had been flawed, in that it had not even purported to be exercised in accordance with the relevant legal principles, indeed had not been reasoned at all. Far from obviating an appeal, which was the stated reason for the decision, the reversal decision had made an appeal inevitable. However, the bankruptcy order should nonetheless be annulled. Since the Court of Appeal decision in Hill v Haines there was very little risk that the judge's ultimate award to the wife would be set aside as a transaction at an undervalue in any subsequent bankruptcy proceedings. Although, in an application for annulment of a bankruptcy order, the onus of proof lay on the applicant, once the applicant had established that there was no balance sheet insolvency, the evidential onus reverted to the debtor to establish commercial insolvency. A person made bankrupt on his own petition who was shown to have made a substantially dishonest statement of affairs and, on the date of presentation, to have held assets substantially exceeding his liabilities would find it hard to resist annulment on basis that he was nevertheless unable to pay his debts. The husband's statement of affairs had been substantially dishonest, and he had in reality held assets substantially exceeding his liabilities at the date of the petition. The husband's motive in procuring the bankruptcy order, namely to defeat the wife's claims, and also the effect on the wife of refusing to annul the order, were two factors that strongly militated in favour of exercising the discretion so as to annul it. However, except in extreme cases, if a debtor was unable to pay his debts on the date of his petition, presentation of the petition was not an abuse of process; accordingly, the existence of abuse of process as an alternative ground for annulment was more apparent than real.