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Ancillary Relief and the Credit Crunch (Part 2)

In this second part of an article examining the impact of the current market volatility and economic environment on ancillary relief proceedings, Alexander Chandler, of 1 King's Bench Walk, considers capitalisation of periodical payments, debts and bankruptcy.

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Alexander Chandler, 1 King's Bench Walk

Ongoing periodical payments or capitalised maintenance?
Capitalising maintenance generally involves an appreciation of risk on both sides: the recipient gains security but loses out if the payer's financial situation dramatically improves; the payer loses a greater share of capital but looks forward to retaining a greater share of his future income and rebuilding his wealth from income and in some cases, future bonuses. Both parties realise the benefit of terminated their financial ties to the other.

In a recession, the balance of interest changes: the payer may be well advised to offer ongoing periodical payments rather than a capitalised sum, bearing in mind the general job insecurity, and, if he works in the City, the likelihood of widespread redundancies and the curtailment of the formerly rampant bonus culture. The potential problem for the payer is obvious: firstly, clean break orders are final in all but the most exceptional cases, and the grant of permission to appeal out of time due to a supervening event is only very rarely exercised (see Dixon v Marchant [2008] EWCA Civ 11; [2008] 1 FLR 655); secondly:

"[The] Duxbury  calculation is virtually risk free and ignores future contingencies, particularly ill health, redundancy, and lower income whether in employment or in retirement", L v L [2008] 1 FLR 142, para 77

Conversely, the recipient may consider that it all the more important that she achieves a capitalised sum rather than be exposed to the possibility of a downward variation to a nominal amount, and may be well advised to accept less than a 'full Duxbury'. Alternatively, the recipient may consider that during the term of the order, s 31(7B) MCA preserves her rights to capitalise at a later stage.

A Duxbury table, of course, is a 'tool and not a rule', and other methods of capitalisation are available which allow for a future reduction in the recipients needs. In Mills McCartney v McCartney [2008] EWHC 401 (Fam); [2008] 1 FLR 1508 (17.3.08), having found W's required £600k pa (as opposed to her own case of £3.25m pa), Bennett J awarded £14m by way of capitalised maintenance, half-way between a Duxbury figure of £17m and a Frick1  calculation of £11m, which assumed the introduction of capital at a later stage when the child of the family had attained majority.

Even where both parties seek a clean break, the court, as part of its quasi-inquisitorial function, may refuse to impose one. In H v H [2008] EWHC 935 (Fam), as well as in D v D and B Ltd [2007] EWHC 278 (Fam); [2007] 2 FLR 653, the main asset was the a restaurant which the husband had run for 33 years (the duration of the marriage was 15 years). The parties' respective experts estimated the value of the restaurant was £1.7m or £5.3m. W asserted that the assets were £7.6m and sought one-half, or £3.8m. Taking a lower estimate for the assets, H offered £1.7 (less £400k in respect of costs). Moylan J awarded £1.5m to W, representing 32% of the total assets but 67% of non-business wealth plus global maintenance at £80pa, thereby enabling H to continue operating the business.

Debt and creditors
The limits of the courts powers are increasingly apparent in a recession. In a case where the need to sell a property is urgent (e.g. where the mortgage is in arrears) the court lacks power to order an interim sale or to make an interim capital award: Wicks v Wicks [1998] 1 FLR 470.

The court is also unable to effectively deal with debt, save through the undertaking of the parties. The 'property' in a debt is held by the creditor, who is not generally a party to the proceedings: hence, the court cannot adjust indebtedness, just as it cannot transfer the burden of a mortgage. Similarly, unless a third party intervenes2 , the court cannot order a party to make payments to a third party such as a mortgagee or other creditor:

"There is no jurisdiction in the court to order one party to pay out of the proceeds of sale of the matrimonial home the debts of that party or of the other party to the marriage", Burton v Burton and Another [1986] 2 FLR 419, per Butler Sloss J at 422.

Where there is the possibility of an outside claim which might significantly reduce the assets, this should be taken into account. In exceptional cases, there may need to be a 'claw back' provision, e.g. where there is the possibility of a substantial HMRC demand3, or for the application to be adjourned where a creditor has issued civil proceedings that seriously impact on assets at stake:

"It cannot be right for the judge in ancillary relief proceedings to anticipate or to forecast the outcome of related proceedings in another division or within another justice system, when the risk of false assumption can be eliminated either by adjourning the ancillary relief application to await the outcome of the proceedings in the other division or by ensuring that both sets of proceedings are either allocated to the same judge or alternatively prepared and dispatched in tandem." Thorpe LJ, George v George [2004] 1 FLR 421 para. 14

A short primer on bankruptcy
Finally, as part of the general downturn, an increase in personal insolvency is all but inevitable, having already doubled from 2005 to 20074.

A creditor's petition may be presented (typically after a statutory demand) where the bankrupt is either: '…unable to pay or to have no reasonable prospect of being able pay' his debts5. Where the bankruptcy order is made after 1.4.05, unpaid lump sum and costs orders are provable6, but periodical payments orders etc. remain un-provable7.

A debtor's petition may be presented '…only on the grounds that the debtor is unable to pay his debts'8, i.e.

'…Inability to pay one's debts, at least in the context of insolvency, has historically long been construed as an inability to pay one's debts at the time that they are due. I have no doubt that this is the proper interpretation of the phrase in s 272 of the Act. One of the justifications for this interpretation, quite apart from the sanctity of contract, is to avoid just the sort of prevarication that potentially derives from an excess of assets over liabilities, but a lack of liquidity. The counterpart to this approach to solvency is that even if one's liabilities exceed one's assets on a balance sheet basis, it does not follow that a person is insolvent, albeit that it is all the more likely to result in the state of the individual's relations with his bankers constituting the ultimate test of solvency.' David Oliver QC, Re Coney (A Bankrupt) 1998 BPIR 333 at 335

A bankrupt's estate9 will vest in the trustee on his appointment, although a bankrupt's income will only vest if income payments order obtained by trustee10. Absent exceptional circumstances, the interests of the creditors of a bankrupt spouse will usually prevail over the bankrupt's family, whereby an application by the trustee to sell the family home with vacant possession is typically deferred by no more than one year11:

"…it is not uncommon for a wife with young children to be faced with eviction in circumstances where the realisation of her beneficial interest will not produce enough to buy a comparable home in the same neighbourhood, or indeed elsewhere; and, if she has to move elsewhere, there may be problems over schooling and so forth. Such circumstances, while engendering a natural sympathy in all who hear of them, cannot be described as exceptional. They are the melancholy consequences of debt and improvidence with which every civilised society has been familiar", Nourse LJ, Re Citro [1991] 1 FLR 71 at 7912

Where a party has petitioned for bankruptcy against himself, the other spouse may apply to annul the order and dismiss the petition e.g. where the bankruptcy petition was a sham13. However, if the statutory test is met, "…the debtor is unable to pay his debts"14, the fact that he was motivated to frustrate his wife's claims was neither here nor there: Whig v Whig [2008] 1 FLR 453; Re Dianoor Jewels Ltd [2001] BPIR 23415 .

Where a spouse is made bankrupt after an ancillary relief order, the relevant date any transfer of property etc. is the date that the order is effective (i.e. date of decree absolute) as opposed to the date of the conveyance: Mountenay v Treharne [2002] 2 FLR 930. Hence, unless order was the product of collusion between the spouses designed to adversely affect creditors, or there is some other vitiating factor, the  transaction will not be set aside any transaction as being at an undervalue: Hill v Haines [2007] EWCA Civ 1284, [2008] 1 FLR 1192.

Conclusion
To adopt an expression from the American election, the credit crunch/ recession is a 'game changer' for ancillary relief. Whereas the court will still be concerned with needs, and primarily the needs of any minor children, it is increasingly important to fairly share risk-laden and copper-bottomed assets where asset values are so volatile. In more modest asset cases, the need to stretch resources to meet the parties' housing needs will likely govern the courts approach in many cases: M v B (Ancillary Proceedings: Lump Sum) [1998] 1 FLR 53.

Achieving a clean break may no longer be advisable in circumstances where there is such doubt over employment prospects and the performance of private companies, or where parties can no longer look to generous bonuses to rebuild their capital base. At the other end of the economic scale, the spectre of negative equity has returned and the problem how the burden of debt can be accommodated.

Finally, by contrast to the past decade, when the values of properties and other assets generally increased during the litigation, most cases will now see the matrimonial pot reducing during the course of an application, due to the continued fall in houses prices and the economy in recession. With legal costs unlikely to be recovered in any but the most unusual cases16, the value of an early settlement in ancillary relief, a peace dividend, has never been higher. 

NOTES
1 F v F (Ancillary Relief: Substantial Assets) [1995] 2 FLR 45
2 see Tebbutt v Haynes [1981] 2 All ER 238
3 i.e. the 'reverse contingent lump sum' at first instance in Charman – a phrase that appears only in the CA judgment: Charman v Charman (No 4) [2007] EWCA Civ 503; [2007] 1 FLR 1246, para. 4
4 26,776 in 2005 and 52,678 in 2007: http://www.justice.gov.uk/docs/insolvency-bulletin-q2-2008.pdf
5 Insolvency Act s 267(2)
6 Insolvency (Amendment) Rules 2005/527, r 3(1)
7 As to the position with respect to an IVA, see IA s 257; Re Bradley-Hole (A Bankrupt) [1995] 2 FLR 838
8 IA s 272(1)
9 Exceptions set out at Insolvency Act s 283
10 Insolvency Act s 310
11 Although by operation of s 283A, s313A (introduced by the Enterprise Act 2002) the trustees powers to realise the family home at a later date have been subscribed;
12 For example of an exceptional case where the court delayed for longer than one year, due to wife suffering cancer – see Judd v Brown [1998] 2 FLR 360
13 E.g. see Couvaras v Wolf [2002] 2 FLR 107
14 Insolvency Act 1986, s 272(1)
15 The first stage of the Mubarak saga
16 See FPR r 2.71

Part 1 of this article is available via this link: Ancillary Relief and the Credit Crunch (Part 1)