Jonathan James of Stowe Family Law writes a salutary reminder in this post about the perils of sustained delay, a complex and highly topical issue that has been brought into relief by recent changes to the way inflation is measured in relation to pensions.
Were the lawyers in the case he mentions blind to the dangers that bankruptcy might cause a divorce? The delay was caused by the solicitors on both sides trying to sort out the pension sharing annex: a form which accompanies a court order and permits the implementation of a pension sharing agreement. While the parties may agree a deal in principal, say an equal split of the pension, it is then up to the lawyers to agree exactly what that means in the annex. This process can take time. If bankruptcy is a possibility and no court order is in place the recipient may lose out.
In some cases though, the bankruptcy may not affect the bankrupt’s pension and the agreement can still be enforced after their discharge.
There will be lots of couples around the country who read this post and think, “Hey, that’s happening to me right now!” If it is, it is not necessarily the fault of the lawyers. Many court orders have been put on hold because the pension sharing annex cannot be completed. That is because in June and July, the Government announced that it was changing the measure of inflation used by state and statutory pensions from the Retail Prices Index to the Consumer Prices Index. However no new calculation factors are to be issued until October, meaning that at present it isn’t possible to obtain a relevant valuation for all state and public sector pensions. Furthermore, state sector schemes have stopped implementing pension sharing orders until then.
In the meantime, consideration could be given to deferring a pension share or offsetting until the implications in each specific case are assessed.
A renowned circuit Judge in the North of England used to make reference in semi-jocular fashion during family proceedings to what he called his BOGWIT order – the acronym (with a little licence) stands for B******* Get On With It! In practice, there are times when many family lawyers could really do with being made subject to one of these orders. A case in point has just been reported in the High Court, involving a divorce complicated further by bankruptcy.
The case – Warwick (Formerly Yarwood) v Trustee in Bankruptcy of Clive Graham Yarwood (2010) EWHC 2272) – is depressing. Mr Yarwood had a business that was in difficulties, with bankruptcy in the air. His marriage was also in trouble and divorce proceedings began in 2004, with negotiations about a financial settlement also commencing.
By 2006, Mr Yarwood’s solicitors were detailing his considerable financial difficulties to his wife’s legal team. After what can be best described as non-committal advice from her solicitors, Mrs Yarwood decided to accept a settlement that would have given her two significant benefits. One of these was a pension adjustment, which would have offered the two of them an equal income after retirement from Mr Yarwood’s pension fund (an expert would have to work out what percentage she would need to get for this to work). The second was that she would receive 75 per cent of the sale proceeds from their house, in place of the 50 per cent to which she was entitled as a joint owner. The 25 per cent extra would amount to more than £128,000. There were letters between solicitors about this, setting out the negotiations and noting agreement. Eventually, in September 2006, the solicitors agreed that there would be no need for a judge to decide what financial provision Mrs Yarwood should receive at a hearing; the solicitors simply needed to produce a draft order and a pension sharing annex, which would specify the amount of Mr Yarwood’s pension fund she would receive.
If bankruptcy is a threat – act quickly
Then things were left to drift. Perhaps the solicitors – especially Mrs Yarwood’s – could have done with a BOGWIT Order being served on them! There just did not seem to be any need to hurry. Everybody had agreed pretty much what was to happen, so where was the rush? The house had not actually sold yet and there did not seem to be any argument about the amount Mrs Yarwood was going to receive. However when bankruptcy is a real threat, action must be taken – and quickly.
It was 2007 before a buyer came along for the house and the exchange of contracts took place in March of that year. Unfortunately disaster struck between completion and exchange: Mr Yarwood had a bankruptcy petition presented against him. There was still no Court Order regarding his wife’s claim against him. The solicitors had not sorted it out yet and I suppose it was just seen as paperwork needing to be done. The conveyancing solicitors gave Mrs Yarwood her money, all 75 per cent of it, and presumably held on to the rest in case Mr Yarwood actually became bankrupt.
Eventually Mr Yarwood was adjudged bankrupt. That meant all his property instantly fell under the ownership of his trustee in bankruptcy, with bankruptcy taking effect from the time that the original petition was presented – before the house was actually sold and the money paid out. The trustee now challenged Mrs Yarwood’s extra 25 per cent. When the house was sold Mr Yarwood had been entitled to receive half of its value but had received only a quarter. The trustee now wanted the rest.
The agreement is not binding
Unsurprisingly, Mrs Yarwood argued that she was entitled to keep the extra 25 per cent. She said that a binding agreement had been reached the previous autumn and Mr Yarwood effectively held a quarter of the property in trust for her alone. She said that regardless of whether the money was received by Mr Yarwood or his trustee in bankruptcy, she was entitled to it. The Trustee disagreed. The first argument was that a binding agreement could not be made because contractual principles do not apply in divorce proceedings. Only a court has the power to finally determine who gets what.
At first instance the court agreed with this and Mrs Yarwood was ordered to return the extra cash. However, she appealed and the High Court decided that it was possible to reach a binding agreement, but that the Yarwoods had not actually done so. The reason for this was that it had not been decided at that stage, or indeed before the house was sold, exactly what percentage share of the pension fund Mrs Yarwood was getting. The High Court said that this was not some mere detail which could be decided at a later date – it was fundamental to the agreement. Because this had not been identified there was no binding agreement, and because there was no binding agreement Mr Yarwood could not be forced to pay over 25 per cent extra from the sale of the property. More so, if he could not, neither could his trustee.
If a pension expert had been instructed immediately, likely enough the correct percentage pension share could have been determined before Christmas 2006. This means that the pension sharing annex (which is not a complicated document) could have been completed and a consent order filed at court long before the bankruptcy petition was presented. It was decided some time ago that a court order, in most circumstances, will bind the trustee in bankruptcy and there is no reason to suppose that it would have been any different in these circumstances.
A sober warning
This case presents an awful and sober warning for family solicitors and perfectly describes the need for a BOGWIT order. It is so easy for a solicitor to relax once agreement has been reached and focus on the more difficult and contentious cases in their filing cabinet, thinking that an order can be made when they get around to it. This relaxed approach cost Mrs Yarwood a six-figure sum plus the cost of defending the trustee’s application in two different courts.
But could proper review systems have been put in place within Mrs Yarwood’s legal firm to avoid this situation? It is fundamental that each fee earner should have an understanding of the law – and if bankruptcy is even a minor possibility, every effort should be made to get a court order as quickly as possible. Every firm should have in place stringent file review systems; a process by which each file is regularly reviewed by someone competent to consider the law, the approach being adopted by the lawyer and client care matters until the file is finally closed. In our firm there are at least three failsafes to ensure that in the event that a file has come to a standstill (and it happens – a client can fail to give instructions as promptly as might be hoped for), it is resurrected and put back on track as quickly as possible.
I can only hope other firms are as careful, and that Mrs Yarwood’s horrendous experience is never repeated again. Perhaps all of us in the legal profession should remember this case and think of our own imaginary judge handing down BOGWIT orders every single day.
(Note: we are grateful to pension valuation specialists Bradshaw Dixon Moore Ltd for their insights.