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Ancillary Relief Update (July 2009)

Joanna Grandfield, barrister with Mills & Reeve, analyses the key ancillary relief cases from the past six months.

Picture of Joanna Grandfield

Joanna Grandfield, Barrister Mills & Reeve

The summer update deals with reported cases over the last six (rather than the usual three) months and is therefore something of a bumper edition.  Starting with a quartet of cases dealing with Barder events, I turn to those concerning pre-marital and post-nuptial agreements; the latest instalment in McFarlane; the approach to family businesses upon divorce; the effect of pre-acquired wealth on equal provision; and conclude with a couple of cases that deal with more practical points.

Barder events
In each of the four reported cases considered in the Summer Update, applications seeking to appeal and/or set aside the order on the basis of a change in the value of the assets and/or circumstances since the time of the order failed, the Court of Appeal in each decision referred back to the three categories set out in the judgment of Hale J in Cornick v Cornick [1994] 2 FLR 350.

Myerson v Myerson [2009] EWCA Civ 282
After a long marriage during which 3 children were born, the assets were £25m at the time of the compromise of the wife’s application for ancillary relief.  The consent order subsequently drawn up provided for the husband to retain 57% of the assets (to include the shareholding in the business of which he was Executive Chair), whilst the wife (who received cash and property) would retain 43%.  By the time of the appeal, the husband’s shares had plummeted in value from £2.99 to 27.5p per share.  The husband had paid the wife the first instalment of her lump sum of £7m and there remained a further £2.5m to be paid in a series of further instalments over the next 4 years. 

The husband argued that a combination of the fall in the value of shares in his AIM listed company and the collapse of global credit markets acted either separately or together to undermine the fundamental basis upon which the original order was agreed and approved and made it impossible for him to comply with its terms such that it should be set aside.

Dismissing the appeal, the Court of Appeal relied upon the criteria set down in the judgment of Hale J in Cornick, noting  that the “natural process of price fluctuation”, however dramatic, should not constitute a Barder event.  In his judgment, Thorpe LJ set out a number of other reasons which led him to this conclusion.  These were:

1. The order was agreed by, rather than imposed upon, the husband;

2. The husband’s agreement to a distribution of the assets that enabled him to retain his shareholding was indicative of his having adopted a speculative position.  The Court was not prepared to relieve him of the consequences of that speculation.

3. As an astute businessman, the husband would be able to enjoy the opportunities afforded by a Bear market; and

4. The husband’s ongoing application to vary the original order in relation to the outstanding instalments of the lump sum and timing of transfer of a property, if successful, could provide him with “more than token relief” (at [36]).

Judge v Judge [2008] EWCA Civ 1458
This case involves an appeal from the decision of Coleridge J (discussed in the Ancillary Relief Update (August 2008)) which refused the wife’s application to set aside an order made in ancillary relief proceedings in 2001 that had provided for a clean break on the basis of assets worth £15.6m after there had been a notional deduction of £14m on the basis of a joint liability that would probably crystallise at that amount but would possibly crystallise at either very much more or very much less.  The potential liability related to monies owed to a charity of which both parties were trustees that had lost money on a business venture which had been invested in at the husband’s direction, as well as monies owed to HMRC for invalid Gift Aid claims.  The wife received approximately 38% of the assets assuming they totalled £15.6m.  In fact, the husband managed to negotiate the liability down to only £600,000 whilst abandoning what he had asserted was a “moral obligation” to repay £6.8m to the charity during the main proceedings. 

The wife sought to persuade the Court of Appeal that the original order should be set aside on the basis of the husband’s unintentional but material non-disclosure and mistake.  The Court of Appeal refused that application, holding that the liability in 2001 was a “known un-known” about which the Judge had accepted there was a “vast” spectrum of eventual liability.  The wife had not seriously argued either the conditionality point or that her award should by calibrated by reference to the liability once it had crystallised.  She had sought a settlement based on assets with a firm value so as to benefit from certainty in terms of the award made.  She also benefited since she had succeeded in persuading the Judge to order the husband to indemnify her as against her liability as a joint trustee of the charity and even to provide security for that indemnity.  The fact that the husband no longer felt a moral obligation to repay the charity was not a new event which would invalidate a fundamental assumption upon which the original order had been made.  The Court noted that it was rare for a moral obligation to trump a legal obligation, and a moral obligation to repay funds to a charity would not do so.

Walkden v Walkden [2009] EWCA Civ 627
The parties separated in 2005.  A separation agreement was entered into which provided the wife with 5% of the value of the husband’s shareholding in the company of which he was managing director in the event of a future sale.  A subsequent variation to that agreement the following year provided for the wife to receive £81,000 instead of 5% of the value of the shareholding on sale. 

An attempt was made to embody the terms of the separation agreement into a court order in 2006, when the husband filed a petition for divorce.  The wife declined to agree to the consent order and issued a claim for ancillary relief.  The husband valued his substantial shareholding at £216,000 gross (£129,000 net) in Form E.  The purchase of further shares by the husband at a slightly higher valuation was not disclosed, nor was an approach to purchase the business from a third party, which was not pursued, in 2006. 

Early in 2007 the ancillary relief proceedings were compromised and the consent order finally approved in April that year.  Months later, the potential purchaser who had been interested in the business in 2006 resurfaced and approached the company in June, eventually purchasing it for £3.7m six months later, in October 2007.  The husband received £1.8m gross (£1.6m net).  As a result, the wife had received 18% of the total assets as augmented by the sale of the business, rather than the 42% she had agreed to. The wife successfully applied to a circuit judge for the consent order to be set aside on the basis of a Barder event.

The Court of Appeal upheld the husband’s appeal.  The variations to the separation agreement were indicative of the wife’s implicit acknowledgement of the uncertainty surrounding the amount the husband would realise on a future sale of the business.  The revision to that agreement so as to provide for the wife to receive a specified sum demonstrated her preference for certainty as to the amount she would receive.  In addition, the negotiations that led to compromise included reference by the wife’s solicitors to advice that had been sought from a forensic accountant which suggested that “the value of the husband’s shares is significantly greater than £130,000” and that the husband “clearly intends to rely upon the sale of his business interests at a later date”.  As a result, it could not be said that a future sale was unforeseen and the wife would be held to the terms of the order. 

Horne v Horne [2009] EWCA Civ 487
An order made in November 2007 provided for the husband to retain the family business and the wife transfer her interest in it to him.  The wife was to retain the final matrimonial home and receive a lump sum of £180,000, payable by instalments and therefore, of course, variable. 

The husband’s business had made a loss in 2004, 2005 and 2006 and was continuing to do so by the time of the first instance decision, although (and not withstanding the District Judge’s concerns as to whether this was possible) the husband was still attempting to turn things around.  The decline in the economy compounded the problems faced by the business such that the husband found himself unable to pay the lump sum instalments due to the wife.  The wife applied to enforce the order, whilst the husband initially applied to vary the order (although not the total amount due) before subsequently appealing its terms and seeking to reduce the total lump sum due.  There followed some procedural irregularities in relation to how the county court dealt with the appeal (for which see the judgment)  In any event, the circuit judge found that the change in the husband’s circumstances amounted to a Barder event and allowed the appeal.  The wife appealed. 

Giving the lead judgment, Thorpe LJ held that both the dramatic fall in property prices and the failure of the husband to turn around the business were foreseeable at the time that the order was made and did not amount to a Barder event.  The husband should have applied to vary the order insofar as it related to the lump sum by instalments under s31(7) MCA 1973.  The Judge considered the inter-relationship between s31(7) and the principles set out in Barder, and noted that the test under s31(7) was less stringent, and that applications under that section are afforded more latitude since the statute requires the court to have regard to all the circumstances of the case. 

Pre-marital and post-nuptial agreements
MacLeod v MacLeod [2008] UKPC 64

This decision of the Privy Council has been widely reported and concerns the enforceability of a separation agreement.  The parties, who were American but had lived in the Isle of Man for all but one year of their 22 year marriage, had 5 sons.  This was a second marriage for both, although the husband was both older and wealthier than the wife.

The parties executed a pre-marital agreement and married the same day in Florida, after both had received separate legal advice and the husband had disclosed wealth of $10.3m.  The terms of the agreement were reviewed twice during the marriage (thereby making it a post-nuptial agreement).  The first review took place during a difficult period in the marriage and was not in issue. The second review took place in 2002, when it was possible if not probable that separation would follow.  By then the husband’s assets were said to be £13.81m whilst the wife’s were £184,000 and the terms were amended slightly in the wife’s favour.  The amended terms (which the wife signed up to notwithstanding the legal advice she had received), provided both for arrangements during the marriage and what would occur were they to separate in the future.  Each would retain their pre-existing wealth and all marital assets held in their own name.  Jointly owned property would be divided equally.  The husband would pay the wife a lump sum of £250,000 for her to invest, £25,000 p.a. exclusive of all household spending, degree-related expenses, an allowance for her grandmother and for the husband to transfer his half interest in a jointly owned cottage to the wife (he would remain in the matrimonial (quite literally) castle).  The agreement also provided for each party to meet the expenses of the children when they were with them whilst  the husband would meet their educational expenses.  It was not intended that the agreement would make full provision for the children.  The husband implemented the terms of the agreement.  The marriage finally broke down 13 months later.

The wife sought to resile from the agreement, whilst the husband asked the court to uphold it save that he accepted that there should be further provision for the children.  In this respect, he proposed that the wife should receive an extra £750,000 by way of housing fund to be held on trust until the youngest son completed full-time education.  The wife wanted these monies to be paid to her outright.

At first instance, the courts in the Isle of Man varied the agreement and provided a further sum to the wife, which was referred to as “housing entitlement” but which did not require it all to be used as a housing fund.  On appeal, the court held that the agreement made insufficient provision for the children, and that the terms should be determined by the court. 

The husband appealed to the Privy Council seeking a ruling on how the housing entitlement was to be paid – on trust or to the wife absolutely.  The wife argued that the entire agreement was unenforceable and therefore variable.  The husband contended that this was a valid agreement that the court could only alter under  certain conditions and in certain ways.

The Privy Council held that the parties had executed a post-nuptial agreement that was a maintenance agreement which, according to statute (the equivalent provision in this jurisdiction being s34 MCA 1973), would be varied only if either the circumstances have changed or inadequate provision was made for the children.  The court considered Edgar v Edgar [1980] 1 WLR 1410, which established that such agreements should not be displaced save where not to do so would result in a clear injustice warranting the intervention of the courts.  In this case, the inequality of bargaining power which is almost inherent in such agreements had not been exploited by the husband in a way unfair to the wife which had induced her to act to her disadvantage.  Whilst circumstances had changed in that the parties had now separated, this was within contemplation at the time that the agreement was revised.

The Board held that there was nothing to prevent a married couple from setting out the financial arrangements which would govern their life together by executing a deed, or to prevent them from entering into a separation agreement.  It was time for the rule that agreements providing for future separation were contrary to public policy to disappear, given that the reasoning behind the rule had disappeared long ago.  Sections 34 to 35 MCA 1973 could apply to such agreements in the same way as they did to other agreements, and there was nothing to limit application of s34 (which applies to “any agreement in writing made at any time between the parties to a marriage”) to people who were already separated or on the point of separation.

Radmacher v Granatino [2009] EWCA Civ 649
This case is the appeal of the first instance decision reported as NG v KR (pre-nuptial contract) [2008] EWHC 1532 (see Ancillary Relief Update (December 2008)). The Court of Appeal, whilst acknowledging that pre-marital agreements are, as a matter of public policy, unenforceable, held that in the right circumstances they will be given such weight in the balancing exercise so as to be the decisive factor in determining an application for ancillary relief.

The wife was a German national from a very wealthy family.  Her present income was in the region of £2.7m p.a.  The husband, a French national who had been a City banker with earnings peaking at £300,000 gross in 2001, was by the time of the hearing studying for a doctorate at Oxford University.  The parties met in 1997 in London when the wife was 28 and the husband 26 and earning £50,000 gross p.a.  The parties became engaged in 1998 and agreed to enter into a pre-marital agreement.  At first instance, Baron J declined to hold the husband to the terms of the agreement.  The wife appealed.

Each of the three judges in the Court of Appeal took the opportunity to comment on the current state of the law in this area, which is currently under review by the Law Commission.  Thorpe LJ highlighted the fact that the law in this area in England and Wales is increasingly out of step with the majority of countries of the European Union and that it was increasingly unrealistic not to recognise the rights of adults to enter into agreements governing their “future financial relationships”.   Rix and Wilson LJJ also considered the need to balance the “public interest in a fair and just exercise of the court’s discretion” and the need to ensure there are safeguards in place to protect those who may enter into an agreement without a clear understanding of the possible consequences of their doing so.

The Court considered that the Judge at first instance had failed to give sufficient weight to a number of factors, including that such agreements are standard practice in France and Germany; that the husband was very able and was well-established in the financial word and had had ample opportunity to take independent legal advice (although he had chosen not to do so); the husband knew the wife was from a very wealthy family; and that the husband had chosen not to initiate negotiations.  Since the parties were in their late twenties when they entered into the agreement, it could be assumed that they had expected to start a family and the birth of two children did not impact on the validity of the agreement.  As a result, the agreement was a circumstance of the case which should be given “decisive weight” in the discretionary exercise.  Provision for the husband should be in accordance with that envisaged by the agreement.  The further provision was made by reference to meeting the husband’s needs as a parent.  Provision of a property in London was made on the basis that his right to occupy would terminate when child care duties ceased, whilst a maintenance payment was referred back to the High Court so as to be reformulated to reflect that it was to be restricted to cover only expenses as a home-maker for the children.

McFarlane v McFarlane (No. 2) [2009] EWHC 891 (Fam)
This is the next instalment in the case which went to the House of Lords in Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, [2006] 1 FLR 24.  In short, the House of Lords had provided for the wife (who had given up a potentially highly remunerative career as a City solicitor in order to care for the children) to receive £250,000 p.a. based on the husband’s then income of £750,000 p.a..  School fees and £20,000 p.a. for each of the three children was payable in addition.  The husband’s ongoing success as a partner in Deloittes resulted in an increase in his income to in excess of £1m p.a.. The wife applied for an upwards variation of her maintenance, whilst the husband, who had since remarried and had a child, sought a clean break.  By the time of the hearing, the wife was retraining as a trademark agent with anticipated earnings of £60,000 p.a. in the medium term, rising to £90,000 by retirement on the basis of a 4-day week.  The parties’ net assets were broadly similar. 

Charles J, who heard the application, noted that the House of Lords had found this to be (at [7])

“….a paradigm case for an award of compensation in respect of the significant future economic disparity sustained by the wife, arising from the way the parties conducted their marriage.”

As a result, compensation was a theme which featured strongly in the Judge’s reasoning in the present proceedings.  The reasoning behind the original award and the principle upon which it had been based should inform the court and be a “magnetic or determinative factor” on the variation application.  In circumstances where the wife was to receive a compensatory element to her award, fairness dictated that it should be considered on the variation application as well as at first instance. 

The Judge noted that the requirement in Fleming for there to be exceptional circumstances to extend a term order for maintenance was no longer good law.  Charles J considered both parties’ asserted income needs in detail, and concluded that the husband had surplus income of £440,000.  The Judge then considered how this was to be applied until retirement (planned for 2015), at which point there would be a strong argument for there to be a clean break provided that this could be achieved fairly.  A percentage of the surplus of the husband’s income on a sliding scale would be paid to the wife each year until 2015.  Detailed consideration was given and calculations made as to what the wife would have at that stage, but the Judge was insufficiently confident to order a non-extendable term at this stage.  That said, the Judge made it clear that the provision being made for the wife was such that there was a real prospect that an extension or variation of his order would not be necessary.  The Judge also gave guidance as to the sort of circumstances in which he envisaged any future application for variation or extension succeeding.  If the wife was able to build up sufficient assets to provide her with an income of £150,000 p.a. for life, this would be a strong pointer in favour of terminating periodical payments.  Were the wife to have built up sufficient resources to derive an income of between £120,000 and £150,000 p.a. by 2015, that would be a strong pointer in favour of no extension, whilst if it provided less than £120,000 the reasons for this would need to be considered.

Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam)
This is an important development for cases involving family businesses.  The decision of Munby J considers in detail the circumstances when the court should and should not treat company assets as being owned by a party to the marriage.

The wife issued divorce and ancillary relief proceedings following the break down of a 5½ year marriage.  The husband was resident in Saudi Arabia and took no part in the proceedings.  The wife’s home in England and a second property were owned by the husband’s family company, the shares in which were owned by the husband (30%) and his children by another (it being a bigamous marriage) wife.  The wife sought to have them treated as being owned by the husband.  The company then issued possession proceedings to evict the wife in the chancery division.  Those proceedings were consolidated with the ongoing ancillary relief application. 

The Judge noted that the starting point in considering whether or not to pierce the corporate veil is found in the statement of principle in Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, which provides that this should be done only “where special circumstances exist indicating that it is a mere façade concealing the true facts.  The court held that there was no magic in the word façade, which was used in the sense of ‘an outward appearance or front especially a deceptive one’”.  The court was not prepared to pierce the corporate veil and treat the properties as being owned by the husband, since the wife had failed to establish the necessary degree of control over the company.  Even had she been able to do so, absent an attempt by the husband to use the company to protect himself from the effects of some personal wrongdoing, control alone was insufficient to enable the veil to be pieced.  As a result, the company remained in tact, although the company was not permitted to evict the wife, who was to receive £7M including a transfer of the husband’s loan account, without notice. For more detailed analysis of the case, practitioners are referred to The Corporate Veil Intact: Ancillary relief and businesses after Hashem v Shayif by Caroline McNally.

C v C [2009] 1 FLR 8
This decision of Munby J provided for a departure from equality after a 17 year marriage involving assets of over £22m to reflect the fact that the husband was an established businessman at the time of the marriage.  That pre-existing wealth justified a departure such that the wife received 40% of the pension fund and 40% of the remaining assets. 

By the time of the final hearing the husband was 63 and the wife 50.  They married in 1988 having met 4 years previously.  By then the husband was 40, had been in the property business for over 10 years and had set up two companies which, by the time that the parties met and more so by the date of the marriage, were well established and successful, with a substantial asset base.  To the irritation/frustration of the Judge significant time and energy was spent examining the financial position in the years between 1984 and 1988.  In lamenting an approach that focused on the identification of property as non-matrimonial or matrimonial or adopted a formulaic analysis, the Judge took the view that a flexible approach was required based on the s25 MCA 1973 factors and needs and sharing.  After a long marriage it would be foolish to expect or require parties to produce a detailed account of the state of their finances at the start of the marriage;  this is not what the House of Lords had intended in Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, nor was it the correct approach to adopt.  The court took a broad assessment of the position rather than a precise view, and concluded that the husband had significant resources in the relevant period and as a result there should be a departure from equality. 

Bokor-Ingram v Bokor-Ingram [2009] EWCA Civ 412
This decision of the Court of Appeal (Thorpe, Sedley and Wall LJJ) sets out their Lordships “tentative conclusions” to an appeal of the decision of Charles J in I v I [2008] EWHC 1167 (Fam) (see Ancillary Relief Update (May 2008)). During the hearing before Charles J, the wife achieved something of a pyrrhic victory in persuading the Judge that the husband had breached his duty of full and frank disclosure in failing to disclose the advanced state of negotiations for a new job at the FDR after which her claims for ancillary relief had been compromised, since the non-disclosure would not have substantially altered the order that the court would otherwise have made.  The wife appealed that decision.  Whilst the proceedings settled before the matter reached the Court of Appeal, mindful of the reported decision, the Court of Appeal put forward their “tentative conclusions” and reiterated the duty upon the husband to be clear as well as full and frank.  In addition, s25(2)(a) MCA 1973 requires the court to have regard to future financial resources which either party may [emphasis added] have now or in the foreseeable future.  As such, the contract of employment was relevant before it had been signed since that disclosure was essential to enable the court to assess the husband’s future prospects.  

Practical points
Myerson v Myerson [2008] EWCA Civ 1376, [2009] 1 FLR 826
In the first of two appeals, the husband sought to exclude Baron J, who had presided over the FDR at which agreement was reached and approved the consent order which was subsequently drawn up.  Following the drastic change in the husband’s financial circumstances and the downturn in the global economy, applications were made to vary the order, for permission to appeal out of time and to recuse Baron J from dealing with any further hearings.  Baron J refused the latter application, relying on her decision in G v G [2007] 1 FLR 237.  The husband appealed.  Giving the lead judgment, Thorpe LJ considered FPR 1991 r 2.61E(2), which provides:

The district judge or judge hearing the FDR appointment must have no further involvement with the application, other than to conduct any further FDR appointment or to make a consent order or a further directions order.

The Rule should be strictly interpreted.  A judge presiding over an FDR cannot deal with any subsequent applications, since she had been privy to without prejudice material.  Thorpe LJ commented at [30]:

“With all due respect to Baron J, who has the greatest experience in this field, I cannot accept her fundamental premise that once agreement is reached the without prejudice material is no longer relevant and that the judge is therefore in a similar position to the trial judge.  To me the dissimilarity is clear.  The one has been exposed to confidential material and the other has not.  Whether in the individual case the judge has or has not any recollection of the confidential material is not the point.  The rule provides a limitation on the function of the FDR judge that is not fact dependant.”

If the agreement was incomplete or peripheral issues remained, these needed to be dealt with by a different judge.  Their Lordships did ask by way of a rhetorical question whether the Rule would prevent parties agreeing that an FDR judge could deal further with a case, but did not deal with that eventuality further.

White v Withers & Anor [2008] EWHC 2821 (QB)
The defendant solicitors acted for the wife of the claimant in matrimonial proceedings during which the wife had intercepted the husband’s mail and retained both originals and copies of various documents, which were then disclosed within the matrimonial proceedings as Hildebrand documents in the usual way. 

The claimant brought proceedings against the defendant solicitors for breach of confidence and privacy and misuse of private information, arguing that the defendant had encouraged the wife to intercept his mail.  The defendant applied to strike out the husband’s application.  The document in question was a contract from P&O.  The claimant alleged that he did not know that the contract had arrived and that when he asked the wife about it she returned it to him after having faxed a copy to the defendant solicitors.  The court held that when the wife informed the defendant solicitors about the contract they asked for a copy of it as it was potentially relevant to the ancillary relief proceedings, but recommended that the original be left for the claimant husband. 

The case is included in brief to remind practitioners of the following:

1. Instructing a client to intercept their spouse’s mail would be a professional impropriety.

2. Hildebrand recognises that documents left lying around can be copied and used in proceedings.  However, it is not right to take and retain an original, particularly when its existence is concealed from the intended recipient.

3. Mere receipt and retention of documents by solicitors does not amount to the misuse of private information.

4. For there to be a civil remedy, the claimant as owner should have demanded its return from the defendant solicitors and that request refused.  Here, the defendant never saw the original.