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Finance & Divorce Update January 2015

Jessica Craigs, senior solicitor of Mills & Reeve LLP analyses the financial remedies and divorce news and cases from December 2014

Jessica Craigs, senior solicitor of Mills & Reeve LLP

This update is provided into two parts:
1 News in brief
2 Case law update

News update

Impact of divorce on British business
Resolution reports that one in ten people have had to leave jobs after a separation, or have a colleague who has done so. 16% have seen the workplace hit by sick leave following stress of break-up; 15% say separation or divorce had a negative impact on productivity.

The research shows that 9% of people in the UK have either had to leave their job as a result of their own separation, or have seen a colleague move on for the same reason.

For the full report click here

New powers announced to prevent sham marriages
Immigration and Security Minister, James Brokenshire has announced new powers to enable the Home Office to tackle sham marriages.

The reforms, which are part of the Immigration Act, will see the notice period in England and Wales for marriage and civil partnership extended from 15 days to 28 days.

British couples will have to give 28 days notice of their intention to marry or form a civil partnership but will not be subject to the referral and investigation scheme.

Legal challenge by Heterosexual couple for same sex civil partnerships
The Guardian reports that a couple have launched a legal challenge against the ban on members of the opposite sex entering into civil partnerships.

Their test case is believed to be the first attempt in the British courts to make partnerships available to heterosexual people. The 2004 Civil Partnership Act stipulates that only same-sex couples are eligible. The couple believe it is unfair to prevent them enjoying the status.

The couple's lawyers have now served notice of their intention to launch a judicial review on the local council, Kensington and Chelsea, as well as the secretary of state for culture, media and sport, Sajid Javid.

For the full article click here

Decline in legal representation – MOJ figures released
The Ministry of Justice released its quarterly statistics for activity within the family courts. The results show that the number of cases where both parties were represented has almost halved since the Legal Aid, Sentencing and Punishment of Offenders Act ("LAPSO") came into force in April 2013.
From July to September 2014, the number of cases where both parties were represented fell to 24%.  During the same period in 2012 (pre LAPSO) the proportion was 47%.

In its annual matrimonial survey, Grant Thornton reports that the removal of Legal Aid was the top concern.

A link to the statistics can be accessed here

Case law update

SS v NS (Spousal Maintenance) [2014] EWHC 4183 (Mr Justice Mostyn)
The wife was aged 39 and the husband aged 40.  Cohabitation commenced in 2002 and they married in March 2007.  They had three children: who were aged 11, 9 and 7 and who were all being privately educated.  The FMH was in South London.  The parties separated in May 2013 and the husband was in a new relationship.

The husband was a banker working for Bank A when the parties met.  In November 2010 he was diagnosed with cancer.  Whilst he was in remission he still suffered side effects which subjected him to tiredness.  In July 2014 he resigned from Bank A as he found the work too intense.  On 6 October 2014 he was employed by Bank B in a global managerial role. 

The wife had been the primary carer for the children since May 2003.  Since separation she obtained part time work at a gym earning approximately £5000 p.a.  She was also training to become a pilates instructor and she hoped to be able to generate her own income in the future.

The assets (liquid and illiquid) equated to approximately £3,290,368. The husband had a number of unvested shares which, on receipt, would be taxed as income.  Counsel for the wife included the unvested shares using their gross amount.  This was criticised.

Mostyn J concluded that the bonus element of the assets should be included in the asset schedule and capable of division.  He said at paragraph 12:

"In my judgment there would have to be special features present before money earned but which is "deferred in collection and conditional on performance" is excluded from the divisible pool".

Liquid capital was released to both parties to enable them to rehouse with the deferred shares being reserved to the husband to pay off the mortgage which the judge envisaged the husband would require.

Periodical payments
The quantum and duration of spousal maintenance were in dispute.  The husband's position was that the order should be £24,000 for 12 months decreasing to £18,000 per annum for a further four years; falling to £12,000 for 6 more years whereupon the order would be discharged and a s28(1A) bar imposed.

The wife's position was that the order should be £60,000 index linked for 27 years.  In addition, she should receive 30% of the full value of the husband's net bonus after various items were subtracted.

At paragraph 46 of the judgment, Mostyn J concludes the following about spousal maintenance:

a)  spousal maintenance is properly made where the evidence shows that choices made during the marriage have generated hard future needs on the part of the claimant.  (In this case the duration of the marriage and the children were pivotal factors.)

b)  An award should only be made by reference to needs save in exceptional cases where it can be said that the sharing or compensation principle applies.

c)  Where the needs in question are not casually connected to the marriage, the award should generally be aimed at alleviating significant hardship.

d)  In every case the court must consider a termination of spousal maintenance with a transition to independence as soon as it is just and reasonable.  A term should be considered unless the payee would be unable to adjust without undue hardship to the ending of payments.  A degree of (not undue) hardship in making the transition to independence is acceptable.

e)  If the choice between an extendable term and a joint lives order is finely balanced the statutory steer should militate in favour of the former.

f)  The marital standard of living is relevant to the quantum of spousal maintenance but is not decisive.  That standard should be carefully weighed against the desired objective of eventual independence.

g)  The essential task of the judge is not merely to examine the individual items in the claimant's budget but also to stand back and to look at the global total and to ask if it represents a fair proportion of the respondent's available income that should go to the support of the claimant.

h)  Where the respondent's income comprises a base salary and a discretionary bonus the claimant's award may be equivalently partitioned, with needs of strict necessity being met from the base salary and additional, discretionary, items being met from the bonus on a capped percentage basis.

i)  There is no criterion of exceptionality on an application to extend a term order.  On such an application an examination should be made of whether the implicit premise of the original order of the ability of the payee to achieve independence had been impossible to achieve and if so, why.

j)  On an application to discharge a joint lives order an examination should be made of the original assumption that it was just too difficult to predict eventual independence.

k)  If the choice between extendable and non-extendable term is finely balanced the decision should normally be in favour of the economically weaker party. 

In this case, the wife was awarded £30,000 per annum, index linked to the RPI.  This equated to 36.4% of the residue.  In addition, she received a capped percentage (20%) of the husband's future bonuses.
The judge made the bonus share non-extendable but the base spousal maintenance an extendable term which expired when the youngest child reached 18. 

Child maintenance
Child maintenance was topped up to £7,500 per annum, per child (£22,500 in total).  In addition, school fees were ordered to be met out of income.

Net Effect of the order
From the liquid pool of assets, the wife received a greater percentage.  The illiquid assets were divided as to 52.7% to the wife and 47.3% to the husband.  The pensions were shared equally.  The husband was ordered to pay school fees and spousal maintenance on an extendable term basis.

Chandok v Chandok [2014] EWCA Civ 1597
Wife's appeal against a financial remedy order as to the evaluation of the needs of the wife and the children.

The wife in the case appealed an order made by Michael Horowitz QC sitting as a Deputy Circuit Judge.  The order provided the wife retain the equity in the FMH of £106,000 which represented the only asset of the marriage that remained.  The husband retained his NHS pensions but was solely responsible for the parties' indebtedness to the tune of £900,000.  Periodical payments were ordered in favour of the wife to a total of £3,000 per calendar month divided as to £1,000 to the wife and the balance to the children (aged 11, 9 and 7).

No school fees order was made nor any order as to costs.  As part of that decision the judge decided that a costs order made at an interim hearing by a District Judge against the husband should not be enforced so that the overall financial redistribution was not prejudiced.

The appeal was granted permission on two bases:  (a) the evaluation of the needs of the wife and the children and (b) as to the remittal of the interim costs order.   (The second issue was not pursued).

The essence of the appeal was that the wife neither opened nor subsequently in closing made any real attempt to identify her needs and those of the children.   Her annual budget was 'difficult to analyse' and s25 statement 'devoid of merit or detail' as to her needs.  The judge at first instance was left with the husband's income and the parties' earning capacities with which to make any redistribution that might make provision for need.

The case before the Court of Appeal was materially different from that presented to the lower court.  The wife asserted that the judge should have found that the husband's parents would continue to provide him with financial support and consequently, the periodical payments to the wife should have been £6,000 per calendar month.

Criticism of this approach was levelled at the wife.  The husband's parents were party to the proceedings and the case should have been put to them.  Second, there should not be a presumption that the donor will provide for a donee, just as there is no presumption that a fiduciary will provide for a beneficiary. 

The appeal was dismissed.

H v H [2014] EWCA Civ 1523 (Lord Justice Moore-Bick, Lord Justice Kitchin and Lord Justice Ryder)
On 8 October 2014 permission to appeal was given in respect of a financial remedy decision made by Coleridge J on 18 March 2014.  The judge had ordered a lump sum payment of £400,000 to be paid by the husband upon the termination of the joint lives periodical payments order.  The appeal centred around whether the judge had erred in his calculation of the lump sum by applying a rate of return on investments of 3.75% net when the wife said that it should have been 3.75% gross.

The parties married in 1983.  The husband was aged 54 and the wife 55 at the date of the hearing.  The parties separated in August 2004 after 21 years of marriage. Decree Absolute was pronounced in August 2005.  The husband remarried in May 2006 and has two young children from his subsequent marriage.

The parties are both qualified accountants.  The wife took redundancy as a finance direction of a retail organisation at the same time she had their first son. 

In 2005, an order was made that the husband pay periodical payments of £90,000 on a joint lives basis.  As to capital, the wife received £1.37m and the husband £1.2m.

Following the decision in Miller v Miller; McFarlane v McFarlane the wife applied for a variation.  She relied on the principle of compensation.  A compromise was reached and on 20 June 2007, Mrs Justice Baron ordered that the periodical payments be increased to £150,000 per year.

On 5 November 2012 the husband made an application to terminate the periodical payment as he was nearing retirement.  Coleridge J made new orders to take effect on the husband's retirement with the consequence that the quantification of any terminating payment to her from the husband was the subject of oral submissions rather than written submissions.

The wife was prepared to capitalise her periodical payments.  Her capital fund of £1m would produce an annual income of £28,000 assuming a rate of return on that fund of 3.75% gross.  Her income shortfall would therefore be £122,000 which would require a Duxbury fund of £2.6m.

The wife, in her appeal, submitted that if the judge had applied a rate of return of 3.75% gross to the capital fund, that the rate of return would have produced a lump sum of £746,000 not £400,000. She did not seek this sum unless she was unsuccessful in her argument about compensation.  This limb of the appeal focused on whether the judge had failed to have proper regard to the compensation principle in quantifying her needs and, in particular, whether she should have to downsize to release funds to generate income.  She argued that this damaged the compensation element of her existing award

By contrast, the husband submitted that Coleridge J was entitled to apply the rate of return that he did (ie 3.75% net).  

The Court of Appeal judges had to decide whether there had been an error in applying the 3.75% net rate rather than the 3.75% gross rate which appeared to be accepted throughout the final submissions.  At paragraph 28 Lord Justice Ryder comments:

"…the judge applied 3.75% net to the wife's capital funds but used the Duxbury formula, which incorporates a rate of return at 3.75% gross when calculating the lump sum that the husband would have to provide.  Although the exercises being performed are different, without reasoning his conclusion that 3.75% net was appropriate for one part of his calculations, the inconsistency demonstrated is fatal."

As far as the interest rate was concerned, the Court of Appeal were clear that there was no 'industry standard' but that the figure of 3.75% gross was the one discussed and considered during the hearing.  It was not open to the judge to, effectively, pick out a figure of 3.75% net out of thin air.

The second limb of the wife's appeal was whether the wife's claim for compensation had been properly addressed. 

Lord Justice Ryder provides a helpful commentary of the background of compensation claims whilst hinting at his own view of the principle.  He concludes that in this case, the wife was not adequately provided for in terms of overall capital division when cross-checked against the principle of compensation.  The expectation that she would downsize was, in his words 'arguably discriminatory'.

Consequently, the wife was given permission to appeal and the matter is to be re-heard by a different judge of the Family Court.

AM v SS [2014] EWHC 865 (Mr Justice Coleridge)
The husband asserted that his assets amount to only a few hundred thousand pounds, including a flat in Maida Vale worth about £1m (equity of about half of this) and a reasonable salary of about £100k per annum. 

By contrast, the wife's position was that the husband's assets were the tip of the entire family's assets.  She stated that the husband's father had wealth in the billions and that he could reasonably be expected and predicted, given his past generosity, to make capital available to meet a reasonable claim by the wife.  In short, the judge was asked to make an order against the husband that the father would meet.

The wife was seeking a lump sum of £3m and global income of £10,000 per month plus funds for a nanny and full time maid.  By the end of the hearing she had moderated her claim to a capital sum of £2m.

The husband proposed that he made the Maida Vale flat available whilst the child was a minor after which time it should be sold.

A preliminary issue over ownership of various properties had already been decided in March 2014.  Coleridge J found that the husband had no interest in any of the three English properties which belonged either to the husband's father or his sister. 

The marriage was short; just shy of two years.  Contested divorce proceedings commenced in 2009.  An order for maintenance pending suit was made in 2011 and the husband had paid maintenance at the rate of £5,500 per month which he said was unaffordable.

Mr Justice Coleridge dissected the parties' assets and, once the three properties had been removed from the balance sheet concluded that the available assets were little more than £33,000.  In addition, there was equity of approximately £512,000 in the Maida Vale flat.  The parties had considerable debts which mainly constituted legal fees.

The husband stressed that the case did not involve a discretionary trust but instead one wealthy parent who wholly owned the external resources and who had no legal obligation towards his adult son.

However, the husband had conceded that he had unfettered access to two nice properties in London and Cairo and a guaranteed income stream.

The wife invited the court to look at the reality both more generally and more closely.  The husband's father had been generous to his family and paid school fees for his grandchildren.  Coleridge J accepted that there was a "tacit acceptance" that the father would indeed pay, if push came to shove.

Findings and conclusions:

a)  The husband's father was hugely wealthy but it should not be assumed that a lavish order should be made in the wife's favour on this basis.

b)  The husband's father had helped the son financially in the past and the son lived entirely free of charge in two properties.  It was assumed this arrangement would continue.

c)  Could the court assume conclude the husband's father would come to the aid of his son and 'backfill' this case?

d)  Taking into account the past payment and oral evidence, Coleridge J was satisfied that the husband's father would help out but only to the minimum necessary to relieve him from visible financial hardship.

e)  What was the proper level of housing for the wife?  The judge concluded she needed a home for herself and her daughter in Central London worth in the region of £1m.

f)  The Maida Vale property was to be transferred to the wife with the aim of it being transferred mortgage free either immediately or in the near future.

g)  To reflect the length of the marriage and the contributions each party made, 2/3rds of the equity in the property was transferred to the wife with the remaining 1/3 to the wife for use for her life and ultimately to her daughter.

h)  The Maida Vale property was encumbered with a mortgage of £416,000 and secure legal fees of £150,000

i)  The husband was ordered to redeem both these charges by way of a lump sum or sums. 

j)  The judge thought it reasonable to expect the husband's father to redeem the charges against the Maida Vale property but if not, the son could redeem these in time.

k)  The transfer of the Maida Vale property was to take place within three months; no figure was therefore included for rent within the periodical payments award.

l)  Periodical payments were ordered at £4,000 per calendar month.

m)  If the wife has moved into the Maida Vale property but the mortgage had not been discharged, the husband would have to pay the monthly mortgage repayments by way of additional pps.

n)  Periodical payments (of £4,000) were split 50/50 between wife and the daughter.  The daughter's periodical payments to continue until the end of tertiary education.

Cooper-Hohn v Hohn [2014] EWHC 4122 (Fam)
The judgment of Mrs Justice Roberts was helpfully broken down into 11 subsections - dealing with each issue in turn.  These were summarised as follows:

A. Introduction (paragraphs 1 – 6)

B. Headline issues (paragraph 7)

C. Background (paragraphs 8 – 84)

D. Computation (paragraphs 85 – 146)

E. Law in relation to post-separation accrual (paragraphs 147 – 197)

F. Tax (paragraphs 198 – 227)

G. Findings in relation to the known tax risks (paragraphs 228 – 242)

H. Consideration of the individual tax risks in respect of which the husband seeks an indemnity from the wife (paragraphs 243 – 248)

I. Conclusions in relation to computation (paragraphs 249 – 251)

J. Special contribution (paragraphs 252 – 294)

K. Quantum of the wife's award (paragraphs 295 – 310)

The parties had been married for 17 years.  At the time of trial the husband was aged 48 and the wife, aged 49.  The husband had Jamaican domicile and the wife was an American national although she had lived in the UK since 1998. The parties met in 1994 whilst both studying at Harvard University. They had four children: a daughter, born in 1999 and triplets born in 2002.  The wife had worked and was the children's primary carer.

After leaving Harvard, the husband initially worked in consulting and then as a manager of a hedge fund owned by Perry Capital.  By 2002 the husband had accumulated wealth of about US$100 million.  With the wife's agreement, he decided to leave employment in order to set up and manage his own independent investment fund called the Children's Investment Fund (the "TCI Fund"). As a result of the husband's business acumen the assets accrued and available for distribution were between US$1.35 billion and $US1.6 billion.
Whilst working at Perry Capital, the husband had started a foundation called the C H Foundation, which over time evolved into a main UK Foundation and a US counterpart. The UK Foundation came to be worth some US$4.5 billion by the date of trial, and the US foundation some US$140 million. It was accepted that the court had no jurisdiction in terms of dividing the funds belonging to these two foundations, which were properly constituted as charitable funds governed by an independent board of trustees. The wife had, until very recently, been President and CEO of the UK Foundation.

The parties separated in April 2012 and an application for (what was then) ancillary relief was made by the wife.  Unusually, it was agreed that neither party should file a Form E and instead the husband would provide bespoke voluntary disclosure.  This was approved by the Court.

At paragraph 7, Mrs Justice Roberts outlined the headline issues:

"i. What is the extent of the assets available for distribution as between the husband and the wife (the computation issue)?

ii. To what extent do those assets fall to be considered as part of the marital acquest or, alternatively, to what extent have they been generated (or added to) in the period between separation and the date of trial (the marital acquest or post-separation accrual issue)?

iii. What percentage of the overall available wealth should each party receive at the end of the marriage?  In particular, is a departure from equality justified on the facts by either or both of (i) post-separation accrual and/or (ii) special contribution on the part of the husband (the distribution issue)?

iv. In either event, should there be a Wells sharing of any or each of the various categories of assets, to include any goodwill value which I find to exist in the TCI entities over and above the value of the assets they currently hold?"

The assets were broadly as follows: 

• three properties – these were situated in London, Jamaica and Connecticut (United States), the combined value of which was just under US$27 million.

• cash deposits in the husband's name of approximately $US524,270.

• Three pension plans (again in the husband's name) which had a combined value of just over US$93.4 million. The majority of the value was maintained in an offshore plan in respect of which there would be tax implications if he chose to bring funds onshore whilst resident in the UK (the agreed tax 'risk' being approximately £29 million).

• The husband's personal assets in the TCI Fund were agreed to be worth just under $1.2 billion. Seven corporate entities which made up the group "management entities" were valued by the husband at $111 million, being the underlying value of the assets held without any allowance for goodwill on a sale.  At paragraphs 111 to 124, Roberts J held that she would not attribute any present or future value to the TCI management entities above and beyond their underlying assets, as she was satisfied that investors would not wish to stay in the fund in the event of the husband leaving.  She therefore did not agree with the wife's claim to factor in a Wells sharing of the hypothetical goodwill value, but did consider that the income the fund would generate for the husband in the future was relevant in terms of the consideration of the fairness of the wife's award.

• The husband further maintained personal investments in three property owning entities worth $26.5 million.

At paragraph 249, the judge concluded that: "The combined total of just under US$1.5 billion (or £870 million) is necessarily crude to some extent since it includes a number of different types of assets, including the pension funds in respect of which I have made no allowance in respect of tax for reasons I have already explained." 

Post separation accrual (paragraphs 147 – 197)

Roberts J was asked to address the issue of post-separation accrual.  At the time of the parties' separation in March 2012, the marital assets were in the region of US$700 million to US$750 million and their value had increased significantly post-separation - 93%, on the husband's figures.

She reviewed in detail, the case law in this area citing Cowan v Cowan [2001], Rossi v Rossi [2007], H v H [2007] and Jones v Jones [2011]. The wife argued that little account should be given to post-separation accrual because, following the principles identified in Cowan v Cowan, it had been achieved by the husband using the wife's undivided share of the matrimonial assets.

The judge noted that the law required her to value the assets as they stood at the date of trial and held:

"[183] Thus what I have to decide is whether and to what extent the new work and new investments created by the husband in the period after the parties separated falls to be considered in the character of matrimonial property in which the wife should be entitled to a share or whether some or all of it falls at a point too distant from the essential character of the matrimonial partnership to qualify."

She held that a fair outcome in the case had to reflect some departure from equality of division in order to acknowledge the contributions made by the husband in the two or more years since separation.  Whilst she would value the assets at the time of trial, it would not be fair to treat the wealth creation after the breakdown of the marriage as simply part of the marital acquest in which the wife was entitled to an equal share.

Certain specific earnings, set out at paragraph 188, clearly fell outside the ambit of the marital acquest. However, the question of the extent to which the underlying value of the units representing the husband's shares in the TCI Fund could be segregated into component elements representing marital acquest and post-separation accrual posed a challenge.  There had been an increase of approximately US$512.7 million since the parties' separation and the date of the final hearing. At paragraph 192 Roberts J held that it was "both unrealistic and overly simplistic to take that figure as being the 'bright line' between what falls into the marital acquest on one side of the line and what falls into the post-separation accrual on the other. … The more difficult issue is how far the 'tail piece' of the marriage should be reflected in the final reckoning."

At paragraph 195, the judge summarised her approach to post-separation accruals "…[I]t is not my intention that this wife should receive no share of the assets which fall outside the marital acquest in this case. She will receive a share and that share and that share will form part and parcel of the overall award which I will make on the basis of fairness to both parties. There is no question of her entitlement to any element of post-separation accrual being triggered by a 'needs' argument but I take the view that, notwithstanding the exponential increase in the growth of the Fund post-separation, its genesis as a matrimonial asset is a factor of considerable significance. That factor must, in my view, find its reflection in the overall quantum of the financial award she will receive at the conclusion of these proceedings. It goes to the heart of what I consider to be fair in the overall context of the case."

Special Contribution (paragraphs 252 – 294)
The husband sought a departure from equality on the basis of his special contribution to the matrimonial assets.

Roberts J held that the wife had made a "full" contribution to the marriage and noted that for a period she was caring for 4 children under the age of 5 whilst also in employment. The question for her to determine, however, was whether the husband had made "some further contribution, over and above that made by the wife, and unmatched by her in terms of their joint endeavours within the partnership which was their marriage" (paragraph 278).

At paragraph 282, she identified the following fact-specific questions that required answers:

"i. Can it properly be said that [the husband] is the generating force behind the fortune rather than the product itself?

ii. Does the scale of the wealth depend upon his innovative vision as well as on his ability to develop those visions?

iii. Has he generated truly vast wealth such that his business success can properly be viewed as exceptional?

iv. Does he have a special skill and effort which is special to him and which survives as a material consideration despite the partnership or pooling aspect of the marriage?

v. Would it, in all the circumstances, be inequitable for me to disregard that contribution?"

Roberts J answered all of the above questions in the affirmative. She then set out the extent to which she took into account the special contribution of the husband at paragraphs [288] to [294]. She noted that she had to be conscious that the wife's financial position would crystallise as a result of the award but the husband would, on the basis of the returns he had proved he was able to generate through his investment fund (on his evidence in the region of 24%) within a relatively short period earn back any sums he had to pay the wife.

Roberts J concluded that the wife's award should be US$530 million, which on current exchange rates converted to £330 million. The sum reflected 36% of the global resources.  She commented that the award was made with a 'cross check to fairness' rather than adopting a strict formulaic approach.

Roberts J held that of the wife's award, 40% of the total cash element of it (US$197.3 million) should be held in a designated escrow account, in order that an indemnity could be given against various possible future tax liabilities which might be charged in relation to the years from 2008/9 to 2014/15. The wife would be liable for a 36% share in such liabilities. Neither party would be able to deal with the escrow account until the earlier of (a) 6 April 2017 or (b) the later of (i) a determination that the husband continued to be non-domiciled in the UK and (ii) 6 April 2015.