Paulin v Paulin

The Court of Appeal considered (1) whether it was proper for a trial judge to reverse a reserved decision prior to sealing and (2) the legal principles governing annulment of a bankruptcy order made on the debtor’s own petition. The court summarised the applicable Barrell jurisdiction: a judge may reverse a decision before sealing but only in exceptional circumstances or for strong reasons, and must give proper reasons when doing so. On annulment, the decisive enquiry under ss.272 and 282 of the Insolvency Act 1986 is whether, on the date of the bankruptcy order, the debtor was able to pay his debts as they fell due (commercial insolvency), with limited flexibility to take into account assets realisable within a relatively short time. The court held that, although the judge’s decision to reopen his earlier judgment was procedurally flawed for want of adequate reasons, the ultimate substantive conclusion that the husband could have met his debts on the date of the bankruptcy order was open to the judge. The judge was also entitled to exercise his discretion to annul in the light of the husband’s motive in procuring the bankruptcy to defeat the wife’s claims and the wider circumstances of the case.

The wife applied to annul a bankruptcy order made on the husband’s own petition and sought ancillary relief in divorce proceedings, including a substantial lump sum. The husband had placed the substantial equity in a property into a company, Cativo Ltd, and shortly before presenting his own petition purported to transfer his share in that company and to manufacture indebtedness to defeat the wife’s freezing order and any capital award. The county court made the bankruptcy order on 26 July 2006; a fund representing Cativo’s equity in the property of £1,088,000 was later held to the order of the court. The High Court (Family Division) judge held a lengthy hearing, initially refused to annul the bankruptcy order and adjourned ancillary relief, then (after receiving a note from the wife’s lawyers) appointed a further hearing, reversed his earlier refusal and annulled the bankruptcy order, awarding the wife a lump sum.

Procedural posture: the husband appealed to the Court of Appeal against annulment and associated orders. The Court of Appeal summarised the procedural history including the judge’s first reserved judgment, the subsequent request for reconsideration and the second reserved judgment that annulled the bankruptcy order.

Issues:

• Whether the judge properly reversed his earlier reserved decision prior to sealing in accordance with the Barrell line of authority.
• The legal test and approach to annulment of a debtor’s petition bankruptcy order: the requirement under ss.272 and 282 of the Insolvency Act 1986 to consider whether the debtor was able to pay his debts when due (commercial insolvency), whether an abuse of process can found annulment and how evidential burdens operate (including the effect of a materially dishonest Statement of Affairs).

Reasoning and outcome: the court held that the judge had jurisdiction to reverse his decision prior to sealing but that his decision to revisit the issue was procedurally flawed because he did not identify exceptional or strong reasons or give adequate reasoning for reopening the matter. On the merits, however, the court accepted the judge’s second conclusion that on 26 July 2006 the husband could have paid his debts either by realising the equity in the property (if the husband had been honest and applied to vary the freezing order) or by bridging finance; the husband’s dishonest Statement of Affairs and the balance between assets and liabilities meant the evidential burden lay on him and he did not rebut it. The court therefore dismissed the appeal, upholding the annulment and the judge’s exercise of discretion in the circumstances.

The appeal is dismissed. The Court of Appeal held that the judge had jurisdiction to reverse a reserved decision before sealing but his decision to reopen the matter lacked adequate reasoning under the Barrell jurisprudence. On the substantive point the court held that, on the date of the bankruptcy order, the husband could have met his debts (commercial insolvency test under ss.272 and 282 Insolvency Act 1986) and that, taking into account the husband’s motive to defeat the wife and the overall circumstances, the judge was entitled to exercise his discretion to annul the bankruptcy order and to award ancillary relief.

Appeal from the High Court, Family Division (Deputy Judge Mr Richard Anelay QC), Principal Registry (Lower Court Nos FD0500977, FD05D05568). Permission to appeal was dealt with in this court ([2008] EWCA Civ 900). Hearing in the Court of Appeal 9 December 2008; judgment handed down 17 March 2009 ([2009] EWCA Civ 221).