To have and to hold - if you can find it

It is said that Scot Young’s business empire “imploded” in March 2006 on the back of one disastrous Russian property deal. Six months later he separated from his wife Michelle. Divorce proceedings were issued in 2007 and on 9 April 2010, with the financial proceedings relating to the divorce still unresolved, Mr Young was made bankrupt.

Michelle Young did not believe that he had lost his entire fortune and neither did the family court. Mr Justice Moor made that clear in awarding Mrs Young a lump sum of £20m as her financial settlement. However, he also made it clear that he realised determining what sum was due and her actually receiving that sum were two separate matters.

His role was limited to deciding the amount of her settlement and, while his was the final judgment in a matter that had already been before the court on sixty-five occasions over the course of six and a half years, it was really the end of a chapter in a saga set to rate on the Jarndyce scale.

As suspected, as at the beginning of September, Mrs Young has received none of her settlement, let alone her legal costs or the ever-accruing interest. And yet she appears undeterred, claiming renewed hope (as quoted in the Daily Mail’s article of 29 June 2014) that she now has “the best legal brains in the country working to bring this case to a conclusion through the insolvency courts”.

So how will the bankruptcy and insolvency court assist when the £6.4m she has spent through the divorce courts failed to find the fortune she believes Mr Young has hidden?

Bankruptcy threat

It is not unusual in a divorce case for an entrepreneurial spouse to be threatened with bankruptcy as leverage in negotiation. It is in few cases, however, that a bankruptcy is deliberately orchestrated rather than an inevitability as it has consequences not only in terms of the party’s reputation in business, but also because their ability to raise finance and act as a company director are compromised. Living off the generosity of friends, as Mr Young is allegedly doing, is not an option available to many.

An orchestrated bankruptcy could be seen as tactical for various reasons. Firstly it makes for high-stakes litigation in that the other spouse needs to think carefully before investing substantial legal costs over money that, at first glance does not seem to exist, and secondly, the court’s power to make orders against an undischarged bankrupt are limited. Property adjustment orders allowing, for example, the family home to be transferred from one spouse to the other, cannot be made against a spouse who is an undischarged bankrupt, although in the right circumstances, a non-bankrupt spouse may choose to negotiate with the trustee in bankruptcy to secure their home.

There will also be situations, however, when a bankruptcy petition is issued before a party finalises the dissolution of their marriage (including the making and implementing of a final financial order), then the effectiveness of those proceedings is likely to be such that it would be better to wait until the bankruptcy has been discharged before issuing the divorce. When bankruptcy occurs midway through the financial proceedings, the spouse of the bankrupt has no choice but to obtain what order they can, and then consider how to enforce the same. Michelle Young was left with a lump-sum order to enforce.

Prison sentence

The family court has all the same enforcement methods at its disposal as the civil court to enforce the payment of a lump sum order. If, like Michelle Young, you do not know what assets a judgment debtor has or where to find those assets, issuing an application for an oral examination as to the judgment debtor’s means is usually the first place to start. The incentive is for the debtor to co-operate, as failure to attend will eventually lead to committal to prison.

A judgment summons would similarly lead to a period of imprisonment if it was found that at any stage since the judgment debt arose, the debtor was in a position to pay it. Scot Young has already been imprisoned once for failure to disclose documentation. These two methods of enforcement, intended to be draconian, are therefore likely to be dismissed by Mrs Young. Prison did not work on the first occasion, why would
it work now?

In addition, a judgment summons would require it to be proved to a criminal standard of proof that Mr Young had the funds available to him and was choosing to breach the order for payment. The family court finds to a civil standard of proof and, if six and a half years of investigations cannot pinpoint the location of funds, it follows that proving their existence beyond all reasonable doubt is highly unlikely.

If Mrs Young could prove that there was a surplus of funds in the estate, she would have undoubtedly applied to annul the bankruptcy and pursue enforcement of her order using other conventional enforcement powers, such as garnishee and charging orders.

Neither a garnishee nor a charging order would be of assistance to her at present because not only can no asset of sufficient substance be located, but until the bankruptcy is annulled, any property worth charging or any account meriting a garnishee order is vested in the trustee in bankruptcy. So isn’t it a nonsense to make an order against an undischarged bankrupt to begin with? This is where, on the case as presented to the court, the Young battle was extreme.

Mrs Young based her case on Mr Young having assets worth “many hundreds of millions of pounds”, and Mr Young based his case on being insolvent with liabilities of £28m. Whatever the true nature of his financial affairs, Mr Young was made bankrupt after the commencement of divorce proceedings and his bankruptcy had not been discharged at the time of the making of the final financial order on divorce.

This prevented the judge from making property adjustment orders against Mr Young (as assets owned at the time of the bankruptcy had vested in his trustees) leaving the court with the power to make a lump sum order against him. This therefore required the court to determine, based on the enormous divergence in the parties’ evidence, what Mr Young’s true asset position was.

After 20 days in court, Mr Justice Moor found, to the civil standard of proof, that Mr Young’s assets were in fact worth £40m, meaning both parties were wildly inaccurate in stating their cases. On the judge’s findings, Mr Young was clearly not bankrupt. Determining Mrs Young was entitled to half the family wealth was the least laboured part of the judicial exercise. She was found to be entitled to 50 per cent.

Inescapable debt

The judge’s findings and his weariness as to the practical outcome of his findings stemmed in part from the fact that his order did nothing to undermine the fact that Mr Young was an undischarged bankrupt. As considered above, looking to enforce a lump-sum order against an undischarged bankrupt would be a herculean task and the judge took care to explain: “This debt will exist for all time. The husband will never be free of it.”

The intention was undoubtedly to drive home to the entrepreneurial Mr Young the true horror that unless payment was made, whatever his future plans or intentions, he would always be looking over his shoulder, always at risk of being caught out and never able to put the divorce behind him and seek to rekindle his business and financial affairs, unless of course, he paid up.

The law will not allow Mr Young to hide behind his bankruptcy. Section 281(5)(b) of the Insolvency Act 1986 falls short of releasing a bankrupt from debts made in financial remedy proceedings
on divorce. The whole slate will not
be wiped clean when his bankruptcy
is discharged.

So far though, the horror the judge wished to impress appears to have had little impact; it was reported that Mr Young flew first class to Bali over the 2013 Christmas period. If a fortune exists and Mrs Young’s own exhaustively gathered intelligence has failed to find it, one can see how he might be confident that the trustees in bankruptcy, the other interested parties, would do no better.

Trustees in bankruptcy

Trustees in bankruptcy have one advantage over a spouse in divorce proceedings in that a bankrupt cannot rely on legal privilege where the trustee in bankruptcy is concerned. Practitioners need to ensure for this very reason that negotiated settlements reached by parties ahead of an impending bankruptcy are not thinly veiled attempts to deprive the trustee of assets that should properly fall into the bankrupt’s estate.

A typical example would be the party to the marriage who was soon to be bankrupt, transferring the family home to their spouse for the benefit of preserving what equity there was for the benefit of their children.

The trustee is entitled to access all the bankrupt’s papers. As relatively standard practice this would include reviewing their divorce lawyer’s files if the divorce took place within the three years before bankruptcy. It is quite possible that Mr Young’s trustees may have information that, in combination with the information amassed by Mrs Young, could assist the search for the ‘lost fortune’.

The trustees’ powers to commit Mr Young to prison for failure to provide any documentation sought would presumably hold no more threat than the sentence he served for failing to produce paperwork during the divorce. The lack of litigation privilege therefore seems the only real additional benefit bankruptcy litigation can provide. Does this mean we have a family court system needing reform, as Mrs Young suggests?

Tangible proof

The conclusion has to be that neither the divorce court nor the bankruptcy court can make orders to secure money unless property or funds can be satisfactorily identified. Whether in the bankruptcy courts or in the family courts, Mrs Young’s success depends on establishing that assets exist.

The family court has the power to fine parties to proceedings who disobey orders relating to disclosure requirements. It also has the power to imprison parties who disobey such orders. The court has the power to freeze assets worldwide and issue search orders. It is difficult to see what more imaginative powers the court could be given. Higher fines, in this particular case, would seem a nonsense, the power to impose a significantly longer prison sentence may be more persuasive or possibly the indefinite confiscation of a passport.

As at the beginning of September, however, it has not been proved to a criminal standard of proof that Mr Young does indeed have such assets and this must impact on any court considering restricting his liberty.

Mr Justice Moor indicated in his judgment: “This case has been as complicated a financial remedies case as has been dealt with before these courts.” It is not representative of the vast majority of cases between divorcing couples and is unlikely to contribute significantly to the development of case law or policy. It will, however, continue to be that in limited circumstances, the inability of an alleged bankrupt to rely on legal privilege may assist in discovering assets that could lead to the annulment of the bankruptcy and the effective enforcement of lump-sum payments
on divorce.

Lottie Tyler is a solicitor in the family and private client team at Weightmans