Divorce: fraud relating to bankruptcy and company transactions

In divorce and dissolution proceedings, financial settlements are crucial to ensuring a fair division of assets. However, some individuals attempt to evade their obligations by deliberately declaring personal bankruptcy. In some cases, bankruptcy occurs suspiciously close to divorce proceedings, raising concerns that a business owner or director may be using apparent financial failure as a tool to avoid financial responsibilities and a financial settlement.

We also discuss below other cases, where company directors attempt to evade their financial obligations.

Fraudulent bankruptcy

The courts have developed a firm stance on bankruptcy and financial relief with regards to such tactics, as demonstrated in Paulin v Paulin [2008] EWCA Civ 900.

The case law

Paulin v Paulin serves as a key example of how courts address attempts to manipulate bankruptcy laws in family disputes.

Mr. Paulin was declared bankrupt after his wife sought financial relief following their divorce. He argued that he had no assets to meet his obligations due to his personal insolvency. However, the Court of Appeal closely examined the circumstances of his bankruptcy and found that it was a deliberate strategy to defeat his former wife's claims.

The court ruled that his bankruptcy was made in bad faith and set it aside under section 339 of the Insolvency Act 1986, which allows the reversal of transactions designed to put assets beyond the reach of creditors, including former spouses.

The ruling in Paulin v Paulin serves as a warning to individuals considering bankruptcy as a way to escape financial settlements in divorce. It also illustrates that the courts have the power to intervene when insolvency appears to be strategically engineered rather than a genuine financial failure.

Moving resources to defeat claims

If one party in a divorce has control over the financial assets of a couple, it is important to be mindful of the risk of them transferring personal funds or high-value assets out of reach before declaring bankruptcy, such as by shifting them to offshore accounts or third-party ownership. If there is felt to be a risk, urgent legal advice is required and injunctions to freeze transactions may be required.

Courts take a firm stance against dishonest tactics and have the authority to set aside transactions designed to defeat a matrimonial claim generally, and also to set aside a fraudulent bankruptcy. 

Company transactions and policies designed to defeat matrimonial claims

If one or both parties in a divorce are business owners, there are several red flags that may indicate an attempt to avoid a fair settlement:

• transferring company assets to family or friends at undervalued prices before entering into liquidation
• any changes in the company’s dividend policy and/or accounting policy. There may have been a change to reduce salaries and/or dividends if financial remedy proceedings are on the horizon
• deliberately running down a business to reduce its value before financial settlements are finalised.

Seek urgent expert help

If such actions are suspected, urgent advice is required.

The court has the power to annul a bankruptcy and/or investigate financial transactions to determine whether it was legitimate or a strategy to evade obligations. If misconduct is proven, courts can reverse transactions, reinstate assets, and hold the individual accountable for hidden wealth.

Bankruptcy and divorce are complicated even when misconduct does not occur. For more information see here.

Our insolvency specialists also have relationships with insolvency practitioners who can provide bespoke and tailored advice on insolvency related issues and prior to a company entering an insolvent process.