Divorce, settlement and bankruptcy – beware of an offer that seems too good to be true

What should you do if the spouse you are divorcing is facing bankruptcy?  Can you take their offers at face value?

Many of the conflicts that arise during the financial proceedings that often accompany a divorce are related to one or both parties attempting to downplay or minimise the value of assets, so as to shift the balance of any settlement or order in their favour. When it comes to property, for example, some parties attempt to get the lowest valuation they can from an estate agent, so as to try to minimise the amount they would have to pay their spouse in the event the property is sold.

Unfortunately, these tactics are relatively common in the world of divorce law and directly contravene the duty that both parties have to provide full and frank disclosure of their financial positions to the Court.

Having said that, why would anybody try to over-estimate their financial position and give their soon-to-be-ex-spouse more money than they would otherwise have to? Newey J explores just such a scenario in the case of Sands v Singh and others [2016] EWHC 636 (CH):-

“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.”

From the perspective of the wife in the above scenario, who may or may not know about the husband’s debts, the deal offered would look incredibly appealing – the husband is giving up his share of the assets without a fight.

However, such a deal is deceiving in a number of ways. First, as above, the husband is still failing to adhere to his duty of full and frank disclosure, in that he should disclose an accurate picture of his position, including debts. If such a deal was formalised as a Consent Order, it could be rendered invalid and could be entirely set aside because of this breach of duty.

Second, if the husband’s plan ‘works’ and he proceeds to be declared bankrupt, the deal between the parties is capable of being set aside by the husband’s trustee in bankruptcy anyway. If the trustee considers the deal done between the divorcing parties to be the equivalent of the husband giving away assets at an undervalue, then they could apply for any order made to be set aside. If the application is successful, then any assets would be clawed back and the husband’s position restored to prior to the order being made.

Finally, as alluded to above, it is not necessary for the Court to rule that both parties colluded in, or were even aware of, the attempted deception for an Order to be set aside in this way. As Newey J goes on to state in Sands v Singh:-

“…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 and had been innocent of any complicity.”

This comment marks a development from the previous case of Haines v Hill & Anor [2007] EWCA Civ 1284, which previously required at least one of several vitiating factors (including fraud, concealment, mistake, misrepresentation, or collusion) to be present for a Financial Remedy Order to be set aside.

As a result, it is now clearer than ever that adhering to the duty of full and frank disclosure as part of financial remedy proceedings is absolutely paramount to ensuring that whatever deal is crystallised, whether by consent or otherwise, remains final. Failing to do so, whether to minimise or maximise the assets, jeopardises the entire process and can lead to negative outcomes for everyone involved.

So, if the deal your spouse is offering you seems too good to be true, it could be exactly that.

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