Paulin v Paulin & Anor

A bankruptcy order made on a debtor’s own petition may be annulled where, at the date of the order, the debtor could pay debts as they fell due. The inquiry concerns commercial rather than balance-sheet insolvency and allows for assets capable of realisation, mortgage or pledge within a relatively short time.

The applicant bears the legal burden of proof. Where assets substantially exceed liabilities, the debtor may bear an evidential burden to explain an asserted lack of liquidity. Dishonest financial disclosure may support adverse inferences.

A judge may reverse a decision before the order is sealed, but should do so only in exceptional circumstances or for strong reasons. An improper reconsideration does not itself require an otherwise correct final order to be set aside.

The husband petitioned for his own bankruptcy while his wife’s claims for financial relief following divorce remained pending. Although his statement of affairs disclosed few assets, the deputy judge found that he beneficially controlled substantial property through a company and had acted dishonestly to place assets beyond the wife’s reach.

After a joint hearing of the matrimonial and bankruptcy proceedings, the deputy judge initially refused to annul the bankruptcy order. Before an order was sealed, he agreed to rehear the issue and subsequently annulled the bankruptcy, allowing him to award the wife a substantial lump sum.

The husband appealed. The questions were whether the deputy judge had properly reversed his first decision and whether the husband had been able to pay his debts when the bankruptcy order was made, so that annulment was available under the Insolvency Act 1986.

1. Appeal dismissed unanimously. Wilson LJ delivered the judgment, with which Lawrence Collins and Longmore LJJ agreed.

2. A judge retains jurisdiction to reverse a decision until the resulting order is perfected by sealing. The jurisdiction is governed by In re Barrell Enterprises [1973] 1 WLR 19. Reversal should occur only in exceptional circumstances or for strong reasons. The deputy judge’s decision to reconsider his reserved and delivered judgment was flawed because he identified neither exceptional circumstances nor strong reasons and gave no adequate reasons for reopening the central issue.

3. That procedural impropriety did not itself require the final order to be set aside. The operative question on appeal was whether the deputy judge’s final judgment was wrong.

4. Read together, sections 272(1) and 282(1)(a) of the Insolvency Act 1986 permit annulment where the debtor could pay debts when the bankruptcy order was made. Ability to pay means commercial solvency: the capacity to meet liabilities as they fall due. It does not mean that assets merely exceed liabilities. The inquiry nevertheless includes money obtainable within a relatively short time through the sale, mortgage or pledge of assets.

5. The applicant for annulment bears the legal burden on the ordinary civil standard. There is no enhanced or sliding civil standard reflecting the seriousness of dishonesty allegations. Where the applicant proves that assets exceeded liabilities, the evidential burden may shift to the debtor to explain why the debts could not be paid. Substantially dishonest disclosure may also justify adverse inferences against the debtor.

6. The husband had substantial beneficial interests whose value far exceeded his debts. Had he disclosed the position honestly, the family court would probably have relaxed its freezing injunction sufficiently to permit a sale and payment of the genuine commercial debts. He therefore had the capacity to pay his debts within an acceptable period.

7. Annulment was a proper exercise of discretion. The husband’s purpose of defeating the wife’s claims and the serious prejudice which continued bankruptcy would cause her strongly favoured annulment. Genuine creditors’ interests remained relevant but did not automatically prevail over those of the wife.

1. Court of Appeal (Civil Division): The husband’s appeal was dismissed. The court upheld the annulment of the bankruptcy order and the consequential lump-sum order.

2. Court of Appeal permission stage: Permission to appeal was granted in [2008] EWCA Civ 900, including permission to challenge the deputy judge’s reversal of his initial decision.

3. High Court, Family Division: Mr Richard Anelay QC, sitting as a deputy judge, initially refused annulment. Before sealing an order, he reconsidered the issue and on 23 May 2008 annulled the bankruptcy order and made a substantial lump-sum order in the wife’s favour.