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P v Q (Financial Remedies) [2022] EWFC B9

Decision of HHJ Hess in which he clarifies the principles to be applied in cases concerning loans to/from family members.

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Background

W (48) and H (45) met as students. The parties began cohabiting in 2005 and married in 2006. They had 2 children: T aged 11 and U aged 10.

They purchased a property in London in joint names in 2010 before moving to Germany in 2016, at which time the London property was rented out.

Also at this time, they set up an energy business: "XGmbH". This was very successful and in September 2019 was sold to a larger energy company: "Y Ltd".

Both parties acquired shares in Y Ltd and were employed by the company: H as CEO of German business (based in Germany) and W as Chief Product Officer (which required her to spend time in England and Germany).

Unfortunately, around the same time the company was sold, the marriage began to break down.

Initially the parties had a "nesting" type arrangement whereby the children stayed in the family home in Germany and the parties came and went. W then lost her job with Y Ltd and enrolled on an MSc course at LSE. As a result, H became the primary carer for the children in Germany while W was living at the former family home in London.

Assets

The total asset pot was c.£6m. Notable assets were the parties' respective shares in Y Ltd, the family home in London and H's pension.

There were a number of disputes relating to transactions between the parties and members of their own family.

(a) H's transfer to sister - H had given his sister £25,000. W originally said this should be added back into the schedule but having heard H's explanation she withdrew this assertion.

(b) H's transfer to father - W also said something similar was done by H in respect of his father and that he was holding money for H. W did not accept his explanation about this but the judge did.

(c) H's asserted repayment to mother - H's mother gave £150,000 to each of her 3 children in 2010. No documents were drawn up in relation to this, there was no evidence of tax planning and no demand was ever made for the sums. In June 2020, H repaid that sum to his mother without any demand from her and without any reference to W. H argued that this sum should not appear on the asset schedule as the money had now gone. W asserted this was a manipulative device to remove the sum from the schedule. The evidence before the court was that one of H's sisters had returned £30,000-£40,000 of the sums given to her. her. In evidence, H's mother said she would not pursue the debts by way of litigation and would simply rearrange her will to reflect any child who had not made a repayment had already received the benefit of that sum.

(d) W's asserted liability to father – In October 2004, W's father had given her €30,000 to study an MBA. There was a contemporaneous document describing the payment as an  'interest free loan" for which "a date for repayment has not been set" and the arrangement includes the term that " as long as the father does not demand any extraordinary urgent repayment, the daughter will repay the loan back at her own discretion." W made no mention of this liability until 12 January 2022 (it was not mentioned in her Form E and narrative statement). W's explanation for this was that she had forgotten about it until going through old documents and speaking to her father recently.

Gifts vs loans

The judge considered whether the advances should be considered gifts or loans. As a general principle, for the advance of money to be a gift there must be evidence of an intention to give - the animus donandi. In this case, neither party had been able to show this about transactions (c) and (d) and the judge concluded that the transactions were loans which could, in theory, be enforced.

Hard vs soft liabilities

The judge considered authorities dealing with hard vs soft debts, something he described as being an "elusive topic to nail down." [19(ix)]. The judge summarised the principles arising from the authorities as follows:

a) Once a judge has decided that a contractually binding obligation to a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard or soft obligation – the former automatically forming part of the computation, the latter involving an element of discretion.

b) There is not a hard or fast test as to when an obligation will be considered hard or soft and the authorities reveal a wide variety of circumstances which cause a particular obligation or loan to fall on one side or other of the line.

c) The analysis undertaken targets whether or not it is likely in reality that the obligation will be enforced.

d) There is not an exhaustive list of the factors that may make an obligation hard or soft.

e) Factors which on their own or in combination point towards the conclusion that an obligation is soft include: (1) the fact that it is an obligation to a finance company; (2) that the terms of the obligation have the feel of a normal commercial arrangement; (3) that the obligation arises out of a written agreement; (4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings; (5) that there has not been a delay in enforcing the obligation; and (6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.

f) Factors which may on their own or in combination point towards the conclusion that an obligation is soft include: (1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship; (2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement; (3) there has been no written demand for payment despite the due date having passed; (4) there has been a delay in enforcing the obligation; or (5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations.

g) It may be that there are some factors in a particular case which fall on one side of the line and other factors which fall on the other. It is for the judge to determine, looking at all of these factors and maybe other matters, the appropriate determinations to make in a particular case in the promotion of a fair outcome.

Conclusions on liabilities to family

The judge concluded W's debt to her father was "very much at the soft end of the scale" [19(xi)(a)]. It was very unlikely that she would ever be required to make a repayment, notwithstanding the contemporaneous document.

The debt owed by H to his mother fell into the same category. Both H and his mother were content to regard it as an advance on H's inheritance. The judge found that H made the repayment to his mother because he was concerned about W's sharing claim in respect of that sum.

The consequences of these conclusions were that W's debt to her father was not included in the asset schedule and H's repayment to his mother was re-credited to his side of the schedule.

Conclusions on division

Both parties had made offers that represented quite significant departures from equality in their own direction [38].

On the sharing principle, the judge stated: "As a starting point in the division of capital after a long marriage it is useful to observe that fairness and equality usually ride hand in hand and that (save when an asset can properly be regarded as non-matrimonial property) the court should be slow to go down the road of identifying and analysing and weighing different contributions made to the marriage." [27]

On either party's proposal, H's wealth would be heavily reliant on the share price of Y Ltd. The judge considered Wells v Wells [2002] EWCA Civ 476 and Martin v Martin [2018] EWCA Civ 2866. He noted that Y Ltd not readily tradable and could only be sold during a specific "liquidity event" – 3 of which having occurred since 2019) [41]. In the context of this case, the following factors were relevant:

(i) W's wealth was also (albeit to a slightly lesser extent than the husband) heavily reliant on the share price of Y Ltd and the lack of liquidity in sale prospects.

(ii)  It was H's deliberate choice not to seek a sale and equal division of the net sale proceeds of the London family home to ameliorate the problem he has (the judge raised this with H's counsel who confirmed H did not seek to put forward a proposal on the basis of the sale of the London home in the event the judge was not with him on his proposed departure from equality).

(iii) The judge formed the impression that H took an optimistic view of the future of Y Ltd.

(iv) A transfer of shares from W to H would trigger an immediate tax liability for W.

The judge therefore made an order as follows:

(i) Family home in London transferred to W, W committing to obtaining the release of H from the joint mortgage in the next 2 years, failing which the property should be sold and 100% of the proceeds paid to W.

(ii) H to take over the benefits and obligations of the German rental property, W transferring her interest in the deposit and H indemnifying W against any liabilities arising from the property.

(iii) W to transfer 20,000 of her shares in Y Ltd to H.

(iv) A 50% pension sharing order to W against H's pension.

(v) Clean break.

This created a capital division of 50.1% to W and 49.9% to H.

Case summary by Lucy Bennett , Barrister, 1GC

For full case, please see BAILII