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Home > Articles > 2013 archive

Finance and Divorce April 2013 update

Anna Heenan, solicitor and David Salter, Joint Head of Family Law at Mills & Reeve LLP analyse the March financial remedies and divorce news and cases













Anna Heenan and David Salter both of Mills & Reeve LLP

As usual, this update is divided into two parts:

1. News in brief
2. Case law update

News in brief
This section of the update highlights some of the news items that will be of particular interest to practitioners who advise on divorce and financial remedy cases.

FPR amendments come into force on 1 April 2013
The Family Procedure (Amendments) Rules 2013, which come into force on 1 April 2013, will:

1. cross-reference to the CPR cost amendments which come into force on the same day; and

2. introduce a new procedure for permission to appeal in cases which are totally without merit.

For more information, click here 


Budget 2013
The changes include the following:

- In the context of inheritance tax, the cap on gifts to non-domiciled spouses will increase to £325,000 and be linked to the nil rate band from 6 April 2013;

- In relation to pensions, from 6 April 2014, the lifetime allowance will be reduced to £1.25m (there will be the opportunity to apply for fixed protection) and the annual allowance to £40,000. These changes were pre-announced in the Autumn statement;

-  A new statutory residence test will take effect from 6 April 2013. This has also been announced previously; and

- From autumn 2015, working families will receive up to £1,200 per child per year towards childcare costs. To be eligible, "all parents in the household must be working, not receiving tax credits or universal credit, and neither earning over £150,000 p.a."

For more information about the budget and other changes coming into effect this year, click here.


MPs to vote on civil partnerships for all
The Telegraph reports on proposed amendments to the Marriage (Same Sex Couples) Bill which would see civil partnerships open to heterosexual couples. MPs are due to vote on the amendments tabled by Tim Loughton, former Children's Minister, in April.

For the full story, click here


Family Justice Minister calls on mediators to promote out of court settlements
At the Family Mediation Council's annual conference on 14 March, Lord McNally commented:

"My message to you as practitioners and supervisors is simple – your time is now – you now have a once in a generation opportunity to raise the profile of your profession, as a single and united profession."

For the full story, click here.


New York court sets aside fraudulently induced pre-nup
Elizabeth Cioffi-Petrakis argued that her husband, Peter Petrakis, presented her with the agreement four days before her wedding, gave her an ultimatum and promised to destroy the document once they had children and put her name on the deed to the house.

An appellate court in New York set aside the "fraudulently induced" contract, a move which US commentators have described as "really rare".

For more information, click here


Presumption of Death Bill has third reading
The Bill, which is a Private Members' Bill, had its third reading on 5 March 2013. No amendments were made.

The Bill allows the missing person's spouse, civil partner, parent, child or sibling to apply for a declaration where a person is thought to have died, or has not been known to be alive, for a period of at least 7 years. Such a declaration is conclusive of the missing person's presumed death and the date and time of the death. A declaration is effective for all purposes, including the ending of a marriage or civil partnership to which the missing person is a party.

You can track the Bill's progress here.


Maintenance Pending Suit for legal costs replaced
S 22ZA Matrimonial Causes Act 1973, which overrules the case law on maintenance pending suit awards for legal costs and provides for new orders for the provision of legal services was brought into force from 1 April 2013 by The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No.7) Order 2013.

The return of "Litigants in Person"
Lord Dyson, the Master of the Rolls, has issued Practice Guidance 'Terminology for Litigants in Person' directing that the term 'Litigant in Person' should be used to describe people representing themselves. The term "Self Represented Litigant" should no longer be used.

For more information, click here.


Case law update
This section of the update considers, amongst other issues, applications under s 37 Matrimonial Causes Act 1973, pre-acquired wealth, post-separation endeavours and contributions.


AC v DC & Ors (Financial Remedy: Effect of s 7 Avoidance Order) (No 1) [2012] EWHC 2032 (Fam) Mostyn J 19 July 2012
This case considered whether an order under s 37(2) Matrimonial Causes Act 1973      (s 37 MCA) operated retrospectively for all purposes.

This judgment dealt with the wife's application to set aside a transfer of the husband's shareholding in D Holdings Limited (DH) to a corporate trustee in the Isle of Man. The full background to this matter is set out below in the summary of AC v DC (No 2). However, for the purposes of this judgment, the following dates are relevant:

- 15 May 1997: D Limited incorporated

- 4 June 2003: DH (the holding company) incorporated.

- 2 December 2010: the husband transferred his shares to a corporate trustee in the Isle of Man in its capacity as the sole trustee of the D (Holdings) Limited Employee Benefit Trust.

- 7 December 2010: the corporate trustee appointed all the shares transferred by the husband to a sub-fund for the benefit of the husband, his wife and other members of his family.

- 8 December 2010: the corporate trustee retired as a trustee and appointed another Isle of Man company in its place. There was a question mark over the validity of this.

- 13 December 2010: the new trustee sold the shares to two other Isle of Man companies.

The rights of the husband and his family under the trust were extremely limited and Decree Absolute would mean that the wife ceased to be a beneficiary altogether. "On any view, W's claims for a financial remedy were seriously compromised by these steps. Her anxiety has been heightened by the news that negotiations are advanced to sell DH for £62m. She sought and obtained injunctive relief and launched the s 37 application which is before me."

The decision on the wife's application
Mostyn J quoted paragraphs 9-11 of his judgment in Kremen v Agrest and Fishman [2011]. That case dealt with s 23 Matrimonial and Family Proceedings Act 1984, which is in identical terms to s 37 MCA. In essence, the wife had to demonstrate:

- That the disposition was made by the husband with the intention of defeating the wife's claim for financial relief. It is presumed that this is the case and the husband had to show he did not have that intention. The motive does not have to be the "dominant" motive in the transaction. It can be a "subsidiary (but material)" motive.

- That the disposition had the consequence of defeating the wife's claim (i.e. preventing relief being granted, reducing the amount, or frustrating/impeding the enforcement of any order).

- That the court should exercise its discretion to set aside the disposition.

On the facts of this case, Mostyn J concluded that:

"i) The transaction in December 2010 manifestly had the effect of defeating W's claims for a financial remedy in that they either prevented relief from being granted or had the result that lesser relief would be granted.

ii) H has not demonstrated that he effected the transaction without the intention to defeat W's claims.

iii) It has not been shown that [the original corporate trustee] received the shares in good faith and for valuable consideration and without actual or constructive notice of W's potential claims.

iv) Therefore all of the factual criteria are satisfied.

v) It would be a fair and just exercise of my discretion to set aside the transaction for were I not to do the very vice that s37 is directed towards would be given full rein.

vi) There would be consequential orders under s37(3) to reverse certain subsequent dealings…"

The legal effect of the s 37 order
If the order operated to annul or avoid the transactions so that for all legal (and fiscal) purposes they were treated as never having happened then on a sale of DH any CGT liability would fall directly on the husband. However, if the order recognised the validity of the transactions and only operated to effect a later re-vesting of the shares in the husband then the CGT liability (which would be reduced) would fall on the Employee Benefit Trust and the Directors.

Mostyn J took the view orders under s 37 MCA operated to annul or avoid transactions for all legal (and fiscal) purposes ("My plain conclusion is that by reference to the literal words of the statute an order under s 37 operates retrospectively to void the transaction ab initio.") In construing the statute it was necessary to consider the purpose of the legislation, as well as the literal words. In engaging in this exercise, Mostyn J considered the evolution of s 37 and compared it with comparable devices in other statutes.

Mostyn J made clear that the fact that s 37 operated to avoid a transaction ab initio "does not mean that innocent third parties who have subsequently acquired the property in question in good faith will be prejudiced. Put another way, avoidance ab initio can co-exist with the preservation of subsequently completed transactions entered into in good faith… this is reflected in comparable situations in old cases concerning the effect of a decree of nullity of marriage, and also in the cases involving the equitable right of rescission."

The impact on HMRC
There was no public policy reason why HMRC should benefit from these transactions "which have for all other purposes been set aside, particularly when that benefit is at the cost of the family's assets."

HMRC had not had the opportunity to make submissions in this case. Whilst Mostyn J noted that his views would not bind HMRC, he considered that "they will surely, given the depth of learning which I have received, be influential."


AC v DC (No 2) [2012] EWHC 2420 (Fam) (Sir Hugh Bennett) 29 August 2012
This case considered the appropriate split of assets in circumstances of a pre-marital acquest, where the husband's life expectancy was limited and the most significant assets were shares in a company in which a sale looked likely in the near future.

Background
The parties married in August 1998, when the wife was 20 and the husband was 48. They had three children who, at the date of the hearing, were aged 14, 13 and 4. The husband also had a 33 year old child from a previous marriage.

The husband was suffering from frontal lobe dementia, which had made him increasingly aggressive and uninhibited. In September 2011, the husband was convicted of a sexual offence with a child, although his mental condition resulted in an absolute discharge. The husband did not have capacity to conduct the matrimonial finance proceedings and Mr T was appointed as his litigation friend. Medical evidence suggested that the husband was likely to die prematurely.

The company
The most significant asset in this case was the husband's shareholding in D (Holdings) Ltd ("DH"). This company was the holding company of D Ltd, which the husband and Mr R had set up prior to the marriage. The shareholdings in DH were as follows:

- 86.4% - the husband (who had retired as a director by the time of this hearing)

- 12.4% - Mr R (the Managing Director)

- 3% - the directors of L Ltd (an Irish company wholly owned by DH)

In June 2012, DH's shareholders and B Ltd entered into Heads of Agreement providing that the entire issued share capital of DH was to be sold for £63m. This meant that, if the sale went through, the husband would receive gross sale proceeds of around £53.9m. However, there was a dispute as to what the net proceeds would be. The wife argued that the net proceeds would be £38.07m (and so the total assets of the husband and wife were £43m). The husband's position was that the net proceeds of sale would be £27.5m (and the total assets of the husband and wife £30.68m).

The side letters
In order to determine the size of the asset base, the judge conducted a thorough review of a series of financial transactions dating back to 2010 (including those reviewed by Mostyn J in AC v DC (No. 1) (see further above)). Of particular relevance to this judgment, was a series of transactions involving five "Side Letters" dated 16 November 2011. These Side Letters provided that if DH was sold between 16 November 2011 and 16 May 2013 an "additional payment" was to be made to the directors of DH (not including Mr R). The payments due under the Side Letters were as follows:

- a total of £7.8m if DH was sold before 16 May 2013;

- of which, £3.25m (5 x £650,000) was payable if DH was sold (the wife did not object to this); and

- a balance of £4.55m, regardless of what sale price was obtained for DH (the wife was unhappy about this element).

In AC v DC (No. 1), counsel for the directors argued that if the Side Letters were set aside the sale to B Limited might be at risk as the directors would have no incentive to sell DH. "Accordingly it seems to be have been agreed that, although Mostyn J. did set aside the  Side Letters under s.37, nevertheless, the directors would not be prevented from receiving £7.8m but that the wife in the hearing before me would be at liberty to contend that the balance of £4.55m should be "added back" to the husband's assets as reckless expenditure ...."

The judge accepted that the sum of £4.55m should be added back to the husband's assets. He cited paragraph 14 of Wilson LJ's judgment in Vaughan on the issue of add-back:

"Such was a rare legal error on the part of the district judge.  Miss Ward tells us that it was curious that he should refer to an absence of legal principles in that she and counsel for the husband had referred him to a recent example of such reattribution, namely Norris v Norris [2002] EWHC 2996 (Fam), [2003] 1 FLR 1142.  Although such was a decision at first instance, it is the last in a line of authority which stretches back to the decision of this court in Martin v Martin [1976] Fam 335 that, in the words of Cairns L.J. at 342H:

"a spouse cannot be allowed to fritter away the assets by extravagant living or reckless speculation and then to claim as great a share of what was left as he would have been entitled to if he had behaved reasonably."

The only obvious caveats are that a notional reattribution has to be conducted very cautiously, by reference only to clear evidence of dissipation (in which there is a wanton element) and that the fiction does not extend to treatment of the sums reattributed to a spouse as cash which he can deploy in meeting his needs, for example in the purchase of accommodation.  At all events the district judge's failure to despatch the issue by reference to the relevant legal principle, in my view, conferred upon the circuit judge an entitlement, at any rate in principle, to despatch it differently."

The judge considered "the time at which the Side Letters were negotiated, the way they came to light, and the subsequent explanations as to their rationale, are not without significance." The wife had originally issued a divorce petition in October 2011 (although she had withdrawn it) and her solicitors had given notice that she was likely to apply in England for an injunction in relation to the shares. The wife's application under s 37 MCA was heard in March 2012 and no mention was made of the Side Letters. Indeed, they were only disclosed in May 2012 when a copy of an opinion of Mr Giles Goodfellow QC, prepared on behalf of the husband, was sent to the wife's solicitors.

Oral evidence on the issue had demonstrated "confusion and vagueness". There was no contemporaneous documentation as to how the figure of £4.55m had been arrived at and the explanations given by Mr R were unconvincing. "Thus at the time, the excess [i.e. the £4.55m] must have been a figure plucked out of the air, probably by Mr R." For this reason, the judge was wary of "ex post facto attempts to validate the excess." Other documentation associated with the sale made clear that there was nothing the directors could have done to prevent the sale. Therefore, there was no commercial need to incentivise the directors.

After allowing deductions for professional fees, tax, the agreed payments to the directors of £3.25m and a premium the husband was likely to have to pay for warranty insurance, and various loans that would need to be repaid, the judge concluded that the net sale proceeds were likely to be £35,175,000.

The total assets
Following the analysis above, the total assets were found to be in the region of £38m, made up as follows:

£35,175,000   – sale proceeds of DH
£1,843,000   – former matrimonial home
£87,300   – wife's flat
£105,000   – wife's bank accounts
£614,007   – husband's bank accounts and repayment of a loan from Mr R
£175,000   – Investments
(£346,000)   – wife's liabilities and litigation loan
(£855,000)   – husband's liabilities
£200,000   – wife's pension
£750,000 - £925,000 – husband's pension

The pre-nuptial agreement
The parties had signed a pre-nuptial agreement, prepared by the husband's solicitors. The schedule to the agreement put the husband's assets at £5.54m, of which £4m was attributed to his shareholding in D Ltd. The wife's assets were said to be modest and not detailed. A recital to the agreement recorded that the parties had each received legal advice. The agreement provided that in the event of divorce or judicial separation neither party would apply to the court for financial provision exceeding £500,000 (adjusted for inflation).

The husband conceded that the wife should not be held to the agreement's terms. However, he argued that it reinforced the quantum of the husband's open proposals as it made clear that the husband had not intended to share his pre-acquired wealth. The judge approved this concession on the basis that the wife had never received legal advice and there would be intrinsic unfairness to hold the wife to an agreement entered into so long before Granatino v Radmacher [2010] UKSC 42.

The award
The judge found that by the time of cohabitation (which moved seamlessly into marriage) the husband's business of D Ltd was well-established. He noted that:

"The parties' relationship between 1996 and 2010 lasted 14 years. The wife looked after the children and cared for the home; the husband was the breadwinner, and a very successful one. I am satisfied that they were a deeply attached couple and what brought an end to this happy relationship was the husband's dementia manifesting itself by inappropriate behaviour. But for that development of dementia I am confident that they would still be together."

The parties' standard of living was found to be "high but not in the league of the super rich. This high standard of living was funded by D Ltd."

On the issue of the parties' contributions, the judge noted that up to an including 2010, the wife had made contributions as a homemaker and the husband as a breadwinner. The husband had brought his successful business into the relationship "enabling a comfortable living from the start."

Future contributions would be different. The husband's faculties had become less from 2010. His life expectancy was seriously curtailed and he had a serious disability. The wife had no earning capacity. She was effectively a single parent and would remain so until the children reached 18 (at which point she would be 48). She would have "the sole responsibility for them including having to deal with the emotional fall-out of the husband's premature death, following his illness, which must be distressing both for the husband and the wife. The wife's future contribution is a significant factor."

Both parties agreed that this was a "sharing" and not a "needs" case. However, counsel for the wife argued that the matrimonial assets should be split equally and that she should be entitled to a lump sum equivalent to 50% of the net sale proceeds of the husband's shares in DH. She also argued that there should be lump sum payments of £2m to each of the three children (to be held by her on bare trust to meet their maintenance needs). If the sale of DH fell through then 50% of the husband's shares should be transferred absolutely to the wife. Counsel for the husband argued for a departure from equality on the basis of the pre-marital acquest. If the sale of DH were to fall through then the wife's claims should be adjourned generally with liberty to restore.

This was found to be a "mingling" case as the parties lifestyles were "entirely dependant" by D Ltd and DH. Whilst it would be unfair not to exclude any element of the husband's pre-acquired wealth from the sharing principle, "[i]nto the balance, however, must go the length of the parties' relationship, the nature of the separation of the parties and the fact that the pre-cohabitation wealth of the husband was thereafter inextricably mingled."

The husband had valued his shareholding at £4m for the purposes of the pre-marital agreement and this was taken to be the value of the husband's pre-acquired wealth. This figure was uplifted to £8m to reflect inflation. The judge concluded:

"I therefore propose to deduct £8m from the parties' net assets of £38m.  Half of £30m is £15m which comes out at just under 40% of £38m.  I consider that in all the circumstances of the case, that 40% is a fair and just share of all net assets of the parties.  I am satisfied that that will amply cover the wife's income needs, whether assessed as she would have them or reduced.  The value of the former matrimonial home must be included in the share of 40%.

I am also satisfied that such an award will not adversely impact upon the husband's needs.  He is likely to require highly skilled and therefore expensive nursing in the near future replacing the present system of carers.  But the husband will have ample means to live off to ensure that he receives the best nursing care for the rest of his limited life span..."

Lump sums for the children
The wife was arguing for a lump sum of £2m to be paid to each of the children on the basis that it was in their interests "to receive an accelerated interest now in the family wealth to protect those sums against the uncertainties of the current will arrangements and IHT." She did not base her argument on the maintenance, education or training needs of the children. The judge concluded that the wife had not shown any reason that these sums were needed for the wife's maintenance, education or training. These expenses could be met by periodical payments. Further, it was unlikely that the husband would survive the 7 years necessary to secure an IHT saving.

The husband was ordered to make periodical payments of £20,000 per annum for each of the children.

Transfer of shares to the wife if no sale of DH
The husband argued that if the sale did not materialise the lump sum should fall away and the wife's claims for financial remedies should be adjourned with liberty to restore. It was argued that if the husband's shares were transferred to her, there was a risk that DH would be torn apart. Finally, DH's articles of association prohibited the sale or transfer of shares unless or until the pre-emption rights had been exhausted.

The wife argued for a transfer of shares in DH by the husband to her in the event that the sale to B Ltd did not materialise. The husband might die at any time and, if he did, her only remedy would be a claim under the Inheritance (Provision for Family and Dependants) Act 1975, which would create more expense and uncertainty.

The judge concluded that:

"The problem with [counsel for the husband's] submissions is that to adjourn her application introduces uncertainty and risks further litigation, expense and delay.  Having seen the wife give evidence I think it improbable that a transfer of shares by the husband to the wife would lead to disruption in the running of DH.  As [counsel for the wife] said, it is in her interest that DH thrives in anticipation of a future sale.  If DH in the future sells for a figure less than that offered by B Ltd the wife will receive the value of the shares transferred to her, no more and no less.  That is the risk she takes.  There will be no top up.  As for the argument based on the Articles of Association and although DH are not a party to these proceedings, I do not see how [the provisions are] an absolute bar to the court exercising its statutory discretion under s.24 MCA 1973.  I can make the order against the husband and await the response of DH and the directors.  DH may decide to permit the husband to transfer the shares.  If so, all well and good.  If not, then the wife will have to consider her position, take advice and make any necessary applications."


Evans v Evans [2013] EWHC 506 (Fam) (Moylan J) 13 March 2013
This case, which had been highly contested, considered the appropriate split of assets where the value of a company would not be realised until some years after separation.

Background
The parties were US nationals. The husband was 48 and the wife was 47. They married in 1985 and had two children, aged 18 and 16. They had spent most of their married lives living in Pittsburgh, Pennsylvania but had moved to London in 2009.

The wife and younger child remained in the former matrimonial home in London. The husband, the elder child and the husband's new wife lived in rented accommodation in San Francisco, which was substantially funded by Confluence (a company set up by the husband and of which he was Chairman and CEO).

The case had been highly litigious. There had been a previous determination by Mostyn J. However, following delivery of his draft judgment, Mostyn J recused himself and the President of the Family Division had ordered a rehearing.

Confluence
When the parties married, the husband had substantial debts. In 1991, the husband and Mr Schiller set up Confluence. Shortly afterwards, the wife began training to be a lawyer. She used the government loans which she received to support the family until Confluence was able to pay a salary to the husband. After she qualified, the wife worked as a lawyer for a short period (including a brief stint as general counsel to Confluence). Mr Schiller left Confluence in 1996 and the husband and the company purchased his shareholding.

In 2006, the husband sold 65% of his interest in Confluence (53% of the issued share capital) to a venture capital fund (Polaris) for $40 million net. This was paid into Highmont Capital LP, an investment vehicle set up by the parties in their joint names. "It is apparent that their lifestyle changed dramatically as can be demonstrated by their purchase of an interest in, that conventional mark of substantial wealth, a private jet."

In 2007, Confluence was incorporated in Delaware. There were just over 8 million preferred shares (all owned by Polaris) and just over 15 million common shares. The parties owned 34.7% of the common shares. In addition, the husband owned 120,562 warrants to purchase preferred shares.

In 2008, Confluence needed to re-finance its bank debt and the husband and wife lent the company a total of $6 million. 

Polaris had made clear in 2006 that it intended to realise its investment over 5 to 10 years. Despite the changes in the banking industry since 2006, the husband's evidence was that the intention or goal was to sell the company within the next 30 months. The judge took the view that "maintaining and developing the company and procuring its sale will continue to require a great deal of important work from the husband (and, indeed, anyone else involved in the company)."

The assets
In addition to the Confluence shares, the assets were found to be as follows (there were significant disagreements between the parties about some of the valuations):

Liquid assets (approximately £2.9m)

£1,100,000  - net sale proceeds of former matrimonial home
£690,000  - repayments of loan to Confluence due within the next two years
£1,000,000 - Highmont Capital (realisable element of investment)
£127,000 - remaining sale proceeds of the former home in Pittsburgh
£115,000 - other joint assets
(£105,000) - potential UK tax

Illiquid assets (just under £5.8m)

£970,000  - land in Turks and Caicos (expert evidence suggested a marketing period of 18 months – 2 years would be required)
£910,000 - house in Turks and Caicos (expert evidence suggested a marketing period of 18 months – 2 years would be required)
£3,006,000 - balance of the loan to Confluence
£450,000 - Highmont Capital (illiquid element of investment)
£125,000 - net assets in husband's sole name
£250,000 - net assets in wife's sole name

Income
Moylan J took the husband's net earned income, comprising his salary and bonus, to be £280,000 per year. If the Confluence loan was to be divided between the parties, then the husband would receive £110,000 net per year in loan interest. The husband also received other benefits, which reduced his living expenses. Moylan J noted that the husband was living with his current wife and that the husband's evidence on the contribution she had been making to their joint expenses was misleading. 
 
The wife's only income was the amount that she received from her capital resources. If the Confluence loan were to be divided equally, then the wife would also receive loan interest. It was noted that the wife had always hoped and anticipated that she would restart her career after the children left home. "The wife clearly has an earning capacity, but she is unlikely to be able to earn any significant income in the near future (within the next 2 years, at least)."

Financial needs
Although the husband's current housing needs were met, it was "clearly a reasonable aspiration" for the husband to want to purchase a home for £2.5 – 3m.

The wife argued that she needed £3.95m for a property in London. The husband argued that the wife would return to live in Pittsburgh, where she could purchase a property for $1.6m - $2.75m. If the wife were to remain in England then she could either rent for £70,000 - £90,000 per year or purchase a property at a cost of up to £2m. Moylan J felt it was difficult for the husband to sensibly advance a case that the wife should be re-housed in a property that cost less than he was seeking for himself. "The fact that this amount might go further in, say, Pittsburgh than San Francisco is in my judgment immaterial in this case. It is anticipated that, on the sale of Confluence, the parties will receive wealth which will enable them, in general terms, to live where they want." The judge considered that it would be reasonable for each party to purchase a property costing in the region of £3m.

In terms of income needs, Moylan J considered that the level at which the parties could meet these needs was limited by the resources that were likely to be available until the sale of Confluence.

Add-back
The wife argued that $1.5m should be added back to the parties' resources to reflect excessive expenditure by the husband. Moylan J commented:

"My initial response to this part of the wife's case was that it would depend on an analysis of what both parties had been spending.  It is not sufficient merely to point to certain aspects of the husband's expenditure or to note that he has spent more than permitted under Mostyn J's Orders.  The overall picture would need to be analysed, as it is clear that both parties' expenditure has, to a very large extent, been funded from capital given the level of the available income and the fixed costs on housing and the like." 

The judge considered Wilson LJ's judgment in Vaughan v Vaughan [2008] (see also the summary of AC v DC (No 2) above) and concluded that the husband's expenditure had been very high but there was no clear picture of the wife's spending. The wife's budget for her MPS application had been £800,000, suggesting that she had been spending at a significant rate. Thus "the wife has only partly established the evidential foundation for a notional reattribution. Both parties were spending at a prodigious rate (including on the costs of these proceedings) and, on the evidence, it is not possible to carry out a proper comparison fully to determine whether the husband's expenditure was wanton. I appreciate that certain element of his expenditure appear startling in their extravagance but this alone is not sufficient…."

Further, "I must consider whether I should effect a notional reattribution.  Is it required in order to achieve an outcome which is fair?  Given that the assets in this case, to which I would be making a notional reattribution, are estimated, including the Confluence shares, in the region of £40 million, I do not consider that the reattribution of approximately $425,000, or even, say, $700,000, is justified.  It is no more than about 1/2% of the total wealth which, if reattributed, would give the wife an extra 0.5/1%.  This degree of adjustment, in this case, is not necessary in order for a fair result to be achieved.  Even if I had concluded that a greater level of extravagance had been established, I would have been likely to come to the same conclusion."

Special contribution
The husband argued that he had made a special contribution through Confluence. The wife referred to the financial contribution she had made at the start of the marriage in helping the husband to pay off his substantial debts and in supporting the family through her earned income and student loans. Further, she had introduced the husband to Mr Schiller. She and the husband had also lent $6m to Confluence. Whilst her role as corporate counsel for Confluence had been unsuccessful, the wife said that she had continued to act as "an informal adviser and sounding board to the husband" in relation to the business. Much of this was agreed by the husband.

Moylan J noted that, following the share sale to Polaris, the husband had told the wife that he was going to put his remaining shares in Confluence into Highmont Capital (their joint investment vehicle), which would have meant that parties owned the shareholding equally. He had not done so because he had never got around to doing it. During a hearing in March 2012, the husband had agreed that sharing the shares in this way would have been fair. However, at the hearing before Moylan J he had changed his position, commenting that "[w]e are in a different country with different rules" and "I have learned that there are different ways of looking at what contribution means."

Moylan J considered the cases of Lambert v Lambert [2003] Fam 103, Miller; McFarlane [2006], Charman v Charman (No 4) [2007] and K v L [2012]. The question was, "[ha]s there been in the present case such a disparity in the parties' respective contributions during the marriage, in that the husband has made a contribution of a wholly exceptional nature, such that fairness requires that his contribution should result in his receiving a greater share of the marital wealth?

The answer to this question should not depend on any detailed analysis of contributions.  It requires a striking evidential foundation which so clearly stands out that the question almost answers itself... 

Given the husband's own evidence, I find it very hard to see how the case merits the conclusion that he has made a special contribution… the husband specifically accepted in his oral evidence that he considered an equal division of the value of the Confluence shares would have been fair up until the end of the marriage.  If the parties themselves consider that an equal division as at the end of the marriage would be fair, it must surely be difficult for the court to conclude that there has been such a disparity in their respective contributions that it would be 'inequitable to disregard it' ...

For the avoidance of doubt, I am satisfied that in this case there is not such a disparity in the parties' respective contributions that the husband's contribution during the marriage justifies his receiving a greater share of the marital wealth.  Both parties made very considerable contributions.  In addition, if it were necessary for me to determine, the wife's specific contributions to the business would serve to dispatch the husband's case that his contribution was exceptional."

Post-separation endeavour
It was clear that the Confluence shares would not be realised until some years after the end of the marriage. The husband would continue to work in the business. Whilst the wife would be caring for one of the children of the family, she would not be making any marital contributions.

Counsel for the husband argued that this should result in a departure from equality in the husband's favour. Counsel for the wife argued that the wife was entitled to 50% of the shares as at the end of the marriage. "It would be unfair if this percentage was not awarded to her as the husband is using or trading with the wife's interest in Confluence which is, accordingly, at risk and because the husband continues to receive an employment package… it is no different to the shares being held in a public company such as Shell. If there is to be any adjustment, it should not be a percentage adjustment but should be based on any increase in value due to work undertaken outside the marriage."
Moylan J felt that the answer to this question involved considering what was meant by "matrimonial property" and then considering the application of the sharing principle. He considered Miller; McFarlane and Charman v Charman (No 4) on the meaning of matrimonial property and concluded that:

"The Confluence shares have been generated during the marriage.  However, their economic value cannot be realised until some years after the end of the marriage.  In so far as their realised value reflects, as it inevitably will, what has occurred since the end of the marriage, that value will in part be the product of the husband's endeavours not the parties' joint endeavours.  It matters not, in my view, whether that value is greater or lower than or even the same as the value as at the end of the marriage.  It will still, in part, not be 'the financial product of the parties' common endeavour' nor property "generated during the marriage".  Accordingly, the value realised from the shares will, in part, not be marital property.

This fact alone does not lead inevitably to the conclusion that the wealth, including the realised value of the shares, should not be divided equally between the parties.  The sharing principle applies to all the parties' property: Charman v Charman (No 4) at para [66].  However, as was also said in Charman, again at para [66]: 'to the extent that their property is non-matrimonial, there is likely to be better reason for departure from equality'."

The judge did not feel able to adopt the approach taken in Jones v Jones [2011] 1 FLR 1723 and N v F (Financial Orders: Pre-Acquired Wealth) [2011] 2 FLR 533 and give no weight to the husband's post-separation endeavours:

"In my judgment, the present case is different and some departure from an equal division is justified because of this factor as part of the discretionary exercise.  The company is not static.  As referred to above, I am satisfied that maintaining and developing the company and procuring its sale will continue to require a great deal of important work.  I am, accordingly, satisfied that the value in due course realised on the sale of Confluence will reflect, in part, the husband's post-separation endeavours…"

The award
In light of the above, "a fair outcome is an award that, following the realisation of the Confluence shares, gives the husband 55% of the capital wealth and the wife 45%."

There was no justification for dividing the other assets anything other than equally. However, the way in which that division was effected needed to take into account the parties' current needs. A notional equal division of all assets except the Confluence shares would provide the parties with £4.35m each. However, only £2.9m was liquid. The husband's current housing needs were met. Therefore, the wife was awarded £2.4m of the liquid resources. This would be insufficient to enable the wife to immediately purchase a property at "what would otherwise be a reasonable level, but I do not consider it fair to give the wife all the liquid assets."

The illiquid assets would then be divided such that each party received a total of £4.35m. The Confluence shares were to be divided so that the wife received 44% of the shares (and warrants). Although there was uncertainty about the value of Confluence, to resort to accounting after the company was sold would create uncertainty.

The husband was ordered to pay maintenance of £140,000 per annum to the wife. An immediate clean break would not allow the wife to meet her income needs as her only income would be the interest on the Confluence loan (which would reduce as repayments were made). The figure of £140,000 was ordered on the basis that maintenance was likely to be tax deductible by the husband and not taxable by the wife. In the event that this was not the case, the award would be reduced to £100,000.

Costs
At previous hearings, costs orders had been made against the husband. The husband argued that, because the parties' costs had been deducted before the sharing exercise had been carried out, he was effectively paying the wife's costs twice. This argument was rejected: "The effect of the deduction of both parties' respective costs before division is costs neutral. They will, in theory, each have paid half of the other's costs. This is on the assumption that there is not issue as to the level of one party's costs as against the other's, which there is not in this case. Accordingly the orders for costs will have the intended effect if they are implemented after the assets have been shared between the parties."

Both parties had claimed the costs at this hearing. Following the order of Mostyn J, the husband had suggested that he would be willing to implement Mostyn J's judgment and that if the matter proceeded to a retrial his position was "likely to harden". The wife's response was that this was not an open offer to settle (as it referred to Mostyn J's judgment) and that all offers of settlement should be made in open correspondence. The husband subsequently withdrew the offer.

Moylan J noted that his judgment differed significantly from the open positions of each party. The husband's arguments about special contribution had been rejected, although he had succeeded in relation to post-matrimonial endeavours. The wife's argument for add-back had been rejected. He noted that:

"Extensive arguments have been made as to whether the wife or the husband has done 'better' under my judgment than they had done under Mostyn J's draft judgment.  However, neither party chose to litigate before me on that ground nor to make open offers based on the terms of the latter.  They chose to litigate on the basis of their respective open positions and the issues they advanced before me.  Indeed, it appears to me that, apart from the brief period between May and July 2012, they both chose to litigate as though the previous hearing and draft judgment had not taken place at all."

The judge noted the provisions of FPR, rule 28.3 on costs and that "…both parties had a continuing obligation to seek to resolve the case by agreement. Under the rules this is achieved and demonstrably achieved by the making of open offers. If a party wants to demonstrate to the court that they have sought to resolve the case in an appropriate manner, the mechanism which the rules provides in respect of financial remedy proceedings is the open offer. This is why the rules provide that it is only 'open' offers which are admissible."

It was arguable that the husband's proposal was an open offer but, in any event, it was withdrawn. Therefore, even if the husband was regarded as having made open offers, the brief period for which they were open did not have any significant impact on the proceedings. Both parties had failed to comply with the overriding objective (they had not litigated proportionately) and "there is no sufficient discriminating feature to justify one paying the other's costs…"