Bankruptcy, Divorce and Changing Your Mind

Divorce|March 18th 2009

If you never change your mind, why have one?

How many Judges are brave enough to change their minds? How many would even take the time to consider they may have been wrong – and then publicly do something about it?

There is a lot of comment in today’s papers about the scandalous case of William Paulin, who tried to declare himself bankrupt – despite earning £100,000 a year and driving a Rolls-Royce Phantom – so that he could avoid making a divorce settlement with his estranged wife. Three Appeal Court judges have now rejected his appeal against another judge’s decision to annul the bankruptcy and allow his former wife to receive her due.

Bankruptcy is a complicated subject, especially when it relates to financial relief in divorce. But what interested me in this case, was one feature central to the hearing – the Judge who changed his mind!

Yesterday, Lord Justice Wilson in the Court of Appeal gave the judgment in the Paulin case. He set the scene thus: A tactic now occasionally adopted by a devious husband confronted with an application by his wife for financial relief… is to issue proceedings for a bankruptcy order to be made against himself… with the result that the divorce court suddenly becomes disabled from ordering him to make capital provision for the wife. The wife’s response to the tactic is often to apply in the bankruptcy proceedings for the order to be annulled …and the two applications are then determined together.

The truth – as many lawyers are aware – is that as the recession continues to bite, an increasing number of spouses are turning to dishonest tactics to try and defeat the other party’s claims.

Richard Anelay QC was originally sitting in this case, as a Deputy Judge of the High Court. Lord Justice Wilson said the Judge had given a first and long reserved judgment by which he explained why he had decided to refuse the wife’s application for the bankruptcy order against the husband to be annulled.

Before the judgment was sealed in a court order, the Judge was unusually persuaded by the wife’s barrister, to set a further hearing to consider virtually the same arguments again.  When that hearing took place, the Judge once again reserved his judgment – and changed his mind. When his second judgment was finally delivered, he set aside the bankruptcy order and awarded the wife a sum in the region of £1 million.

The husband, perhaps not surprisingly, appealed. He argued that the Judge could not change his mind, and was wrong to annul the bankruptcy order having earlier confirmed it.

The Court looked carefully at the circumstances in which it is permissible for the judge to change his mind before his judgment is sealed by a court order. This happens very rarely and I have never come across it before.

The accepted jurisprudence is that a Judge may amplify his reasons for a decision at any time until the order is sealed. If requested by the parties, a Judge is permitted to add to his decision so that the parties understand the basis on which it has been reached. He can do this up until the order is sealed. This will help the parties decide whether or not they will appeal. However, that is different from changing his decision.

The Court found that a Judge also has the right to change his decision, provided the order has not been sealed by the court. Jurisdiction to do so was established in a 19th century case called In Re Suffield and Watts (1888) 20 QBD693. This principle remained the general position until 1972, when the leading case of In Re Barrell Enterprises (1973)1WLR19 was heard. In that case, the court narrowed the circumstances in which it would be proper for the court to reverse its decision before an order is sealed. The Court found that the successful party ought save in the most exceptional circumstances be able to assume that the judgment is a valid and effective one.

The Court of Appeal therefore concluded applying the test of Barrell, that although the Judge in the Paulin case had jurisdiction to change his mind, he did not exercise his judicial discretion correctly and “engendered a legitimate grievance in the husband”.

[Sometimes in court a litigant is given hope that the case is going his way. I wonder what the husband’s legal team thought at that point. The very next paragraph of the judgment showed the way the wind was blowing!]

All was not lost for Mrs Paulin.  Lord Justice Wilson cited the case of Robinson-v-Fernsby, (2003) EWCA Civ 1820, in which the Court of Appeal had held that if a judge gives reasons why he is recalling his order or draft judgment …and his reasons are unpersuasive… that in itself…. does not require the court to interfere with the perfected order, unless it can be said that the judge’s final judgment is thereby or for some other reason shown to be wrong.

So even though there were no exceptional circumstances to warrant a change of mind, was Richard Anelay QC nevertheless right to annul the bankruptcy?

The Court of Appeal held that this was a difficult and complex case. Although the judge may have made errors in reaching his final decision, his second decision was correct in their Lordships’ opinion.

The test of insolvency is an inability to meet debts at a relevant date. The Court distinguished between ‘balance sheet insolvency’ where liabilities may exceed assets and ‘commercial insolvency’ i.e. an inability to meet debts at the relevant date. The latter is the relevant test. The onus was initially on the wife, to prove this to the Court to a high standard -and the Court found that the wife having proved he was not ‘balance sheet insolvent’ the evidential burden of proof of commercial insolvency then shifted to the husband.

The court was satisfied that taking into account his less than frank financial disclosure and at the date of presentation of his petition the husband was ‘balance sheet solvent’ he was able to pay his debts as they fell due and the Judge was correct to annul the bankruptcy petition.

Lord Justice Wilson went on to comment – continuing to apply the “belt and braces” approach – that he accepted the wife would be paid in preference to other creditors. He noted, however, that while a divorce court would try and balance the sum to be paid to the wife, on a basis that would leave the husband able to pay his debts, following Mullard v Mullard (1982) 3 FLR330, it is not the case that the husband’s creditors always take precedence over the wife. This is also worth noting by practitioners.

Their Lordships were clearly critical of what Richard Anelay QC had done but I believe this case was destined for the Court of Appeal in any event. However by changing his mind, the judge handed the wife the moral high ground and had sufficient courage to put his judgment right.

As Edward de Bono, a psychologist and writer famously once said: “If you never change your mind, why have one?”

Justice has been done. And English jurisprudence has been ingeniously served.

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  1. Cleo says:

    Please, can you PM me and tell me a bit more about this, I am really fan of your blog.

  2. Renee says:

    Thanks for the tips. Good points to be thinking about!

  3. Divorce: how to minimise costs in a recession | Marilyn Stowe Family Law and Divorce Blog says:

    […] Know what to do if your spouse goes bankrupt. […]

  4. Paul Moed says:

    Hello – I have often visited your website and found it very interesting and helpful.

    Can you please, if possible, tell me of any case law regarding seeking leave to appeal and/or appealing an order which has not (yet) been sealed?

    In effect, I am trying to maintain a position that because the order was not sealed (and I could not therefore appeal it – having indicated that I wished to appeal it) it was not ‘perfected’ and therefore was not an order with which I had to comply.

    Thank you

    Paul Moed

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