Thousands of divorcees risk seeing their assets plundered to meet their former spouses’ debts after a landmark ruling that they are no longer protected from his or her creditors when they split.

A High Court ruling released yesterday has closed the loophole protection that spouses enjoy over their share of assets ordered on divorce.

In future if a husband — or wife — goes bankrupt, their spouse will be exposed to creditors over assets won in a contested divorce. Bankruptcy trustees will be able to pursue the nonbankrupt spouse for up to five years. The ruling also applies retrospectively to divorce orders within the past five years.

The ruling by Judge Pelling, QC, sitting as a High Court judge, came last week in a case in which a couple, David and Wendy Pearl Haines, jointly owned a property called Strudges Farm near Stourport-on-Severn, Worcestershire. They were described by the original judge in the case as having been “extravagant in the acquisition of the house, horses and cars” and having lived “beyond their means”.

In 2003 the wife petitioned for divorce and in a court settlement her husband was ordered to transfer the house to her. She was not granted a lump sum because of the risk, the judge said, that the husband might become bankrupt in the near future. In March 2005 the husband petitioned to be declared bankrupt with total liabilities estimated at £132,000.

The bankruptcy trustees sought to set aside the divorce order at Birmingham County Court but their challenge failed. Yesterday’s decision was their appeal against that ruling.

The High Court ruling means that Mrs Haines could be forced to give back her husband’s share of the house, unless he has discharged his debts and they agree otherwise.

The legal argument focused on whether a court order in contested matrimonial proceedings could be defined as a “transaction” for the purposes of the terms of the Insolvency Act 1986 and whether a property adjustment order amounted to valuable consideration.

John Bangham, director at the accountancy firm KPMG, said: “This is an extremely important case. It will change the face of divorce settlements where the prospect of bankruptcy is a real likelihood.”

Lawyers predicted yesterday that trustees in bankruptcy would now start “rummaging through their files” to see whether there were assets in a divorce case that they could now proceed against. The decision is predicted to affect at least 20 per cent of the 120,000 people expected to file for bankruptcy this year.

Gareth Schofield, a partner and family law expert at Clarke Willmott, the firm that brought the test case, said: “This is a complete reversal from the widely accepted position that divorce settlements made by the matrimonial courts after a fully contested hearing are beyond reach in bankruptcy cases and cannot be overturned by a bankruptcy court. This decision will have a profound effect on the way clients are advised on settlement in divorce where bankruptcy is a potential issue.”

He added that it was “potentially bad news” for wives who had reached court-ordered divorce settlements that they had thought were watertight.

Some divorcing husbands might be tempted to use the threat of bankruptcy as a weapon, Mr Schofield said, particularly now that the stigma had been reduced because people could discharge bankruptcy after one year. But he said: “To be honest this already happens — and it is a double-edged threat because bankruptcy, while not regarded as it used to be, still carries disadvantages.”

Martin Askew, an insolvency partner in the firm, said: “If people try to readjust their assets between themselves so as to protect them against creditors, then bankruptcy trustees have always been able to go against them. The difference now is that, if they made that readjustment and it was then endorsed in a court order in contested divorce proceedings, they could frustrate their creditors. That is no longer the case.”

Splitting up

Between 2004 and 2005, divorces granted in the UK fell by 7 per cent to 155,052, from 167,138

This is 14 per cent lower than the highest number of divorces, which peaked in 1993 (180,018)

The number of divorces in England and Wales (141,750), Scotland (10,940) and Northern Ireland (2,362) fell in 2005 by 8 per cent, 3 per cent and 6 per cent respectively

Sources: ONS; General Register Office for Scotland; Northern Ireland Statistics and Research Agency; CAB

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