Effects of an income payments agreement on a bankrupt debtor and their estranged spouse under the definition of 'family' in the insolvency legislation.
Summary
The High Court considered the definition of ‘family’ in section 385 of the Insolvency Act 1986 (IA 1986) and what effect an income payments agreement (IPA) would have on a bankrupt debtor and their family.
Background
Fowlds (F) was declared bankrupt on 22 March 2017. When considering an IPA under section 310A of the Insolvency Act 1986 (IA 1986), F submitted they were paying £1,250 per month in maintenance to their estranged spouse (W) who lived in Italy. As a result of no IPA being agreed, F’s trustees in bankruptcy (Bucknall) applied for an income payment order (IPO) pursuant to section 310 of IA 1986.
The judge decided that W did not fall under the definition of family in section 385(1) of IA 1986, and therefore the protection in section 310(2) did not apply. On 30 November 2018, the judge granted Bucknall an IPO against F to pay £1,250 per month commencing 01 March 2019.
F appealed arguing that the judge, when making the IPO, had not exercised discretion to take the spouse's position into account as a dependant even though they did not live with F.
The court's decision
Appeal dismissed.
The court explored the law. Section 310(1) of IA1986 stated:
"The court may make an order ('an income payments order') claiming for the bankrupt’s estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order."
Section 310(2) stated:
"The court shall not make an income payments order the effect of which would be to reduce the income of the bankrupt … below what appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family."
Section 385 stated:
‘(1) The following definitions have effect-
… “family”, in relation to a bankrupt, means the persons (if any) who are living with him and are dependent on him; …
(2) References in this Group of Parts to a person's affairs include his business, if any."
The court agreed that there was scope for discretion as the law used the word ‘may’ as opposed to ‘must’. It also accepted that the courts had originally been slow to explore their power to exercise discretion. However, it found that the judge did not have satisfactory information about the F’s and W’s financial position in order to exercise the discretion in W's favour.
F’s argument was not rejected because W did not live with F. When questioned, F was unable to provide evidence as to why W needed financial support. There were no arguments to suggest W relied on the support for domestic need or that not receiving payment would cause hardship.
In light of all this, the court confirmed the judge’s decision that W could not be described as family of F.
Comments
This case highlights that whilst there may be a statutory definition for a word or phrase, some courts will go beyond this and allow for further interpretation. Exercising such discretion will be beneficial for those with mitigating circumstances.
If a client is considering bankruptcy and sends money to non-resident family members, advisers will need to explore the reason behind the financial support. Clients should be advised that, should they wish to continue making these payments, they will need strong evidence to suggest payments are for reasonable domestic need.
However, it is important to note that although this case suggests in some situations support to non-resident family members could be acceptable, clients must be advised that the decision is discretionary. Ultimately, a court may decide that payments should be for the benefit of the bankruptcy estate.