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Financial Remedy & Divorce Update, November 2018

Sue Brookes Principal Associate and Rose-Marie Drury Senior Associate, for Mills & Reeve LLP analyse the news and case law relating to financial remedies and divorce during October 2018.

Sue Brookes, Principal Associate, and Rose-Marie Drury, Senior Associate, for Mills & Reeve LLP

As usual, this update is provided in two parts:

A. News

House of Lords EU Justice Sub-Committee responds to government's Brexit proposals

The EU Justice Sub-Committee has criticised the government for failing to alleviate concerns about family law post-Brexit. The Committee's letter of 16 October 2018 repeats warnings made in its March 2017 report: Brexit: justice for families, individuals, and businesses? that without adequate alternative arrangements to EU Regulations in place when the UK leaves the EU, there will be uncertainty for family law litigants and children. 

The letter explains the concerns of family law practitioners the Committee heard from earlier this year, and expresses surprise at the lack of advice to individuals in the government's technical notice Handling civil legal cases that involve EU countries if there's no Brexit deal. The technical notice encourages concerned individuals to seek legal advice, yet advice remains difficult to provide, given the continued lack of clarity on major issues.

One such issue is whether the UK will join the Lugano Convention in its own right after Brexit. The letter requests confirmation of the steps taken to secure participation in the Lugano Convention, and the contingency plan if participation is not secured before exit date.

The letter highlights practitioners' fears that the Hague Conventions do not adequately "fill the gaps" left by Brussels II Revised and the EU Maintenance Regulation. Issues include:

• the 1996 Hague Convention provides "substantially less clarity and protection" than Brussels II Revised. The latter "bolsters protection" for abducted children and makes it more straightforward for a parent to secure a child's return.

• divorce jurisdiction is not covered by any Hague Conventions, so we would have to create our own jurisdictional rules, which would lead to potential problems with recognition of UK divorces.

• the 2007 Hague Convention on the recovery of maintenance contains no general jurisdictional rules and no rules for assessing priority between competing jurisdictions.

The letter contains questions for the government and notes that the government is displaying "a worrying level of complacency" by assuming we can leave the EU without alternatives to EU legislation in place, when other international arrangements will inadequately fill the void left by EU legislation.

The International Recovery of Maintenance (Hague Convention on the International Recovery of Child Support and Other Forms of Family Maintenance 2007) (EU Exit) Regulations 2018

The MoJ has published the draft International Recovery of Maintenance (Hague Convention on the International Recovery of Child Support and Other Forms of Family Maintenance 2007) (EU Exit) Regulations 2018.  These regulations will only come into force if there is no Brexit deal, resulting in the EU Maintenance Regulation no longer applying between the UK and the EU27. 

Guide published for court staff on supporting media access

You can read the guide here

New Senior Family Liaison Judge
Mrs Justice Theis has been appointed for a four-year term. 

Civil partnerships to be opened up to mixed-sex couples
The Prime Minister has confirmed that legislation will be introduced to expand civil partnerships to heterosexual couples, following the Supreme Court decision earlier this year involving Charles Keidan and Rebecca Steinfeld. 

Family judge speaks to BBC about difficulties LiPs face
His Honour Judge Stephen Wildblood QC, the most senior family court judge at Bristol Civil Justice Centre, spoke as part of the BBC's Inside Out West investigation into the pressures on the family court system.  The judge's comments (which did not directly criticise the government) are seen as a further sign that judges would welcome changes to the scope of legal aid funding, which is currently under review. 

Application to discharge Unexpected wealth order dismissed
A wife's attempt to overturn an order requiring her to explain how she came to acquire UK property worth £22m has been dismissed. It is the first time that an unexplained wealth order ("UWO") made under s.362A(1) of the Proceeds of Crime Act 2002 ("POCA") had been used. The UWO puts the onus on the owner to show that any asset worth more than £50,000 was obtained legitimately. 

B. Case Law Update
MB v TB (Rev 2) [2018] EWHC 2035 (Fam)
W issued a divorce petition on 8 July 2016 at Bury St Edmunds. W's solicitors requested the petition be returned to them to effect service but in error the petition was sent to H by post.  On 16 August 2016 H issued a divorce petition at Munich Family Court. On 22 August 2016 H filed an acknowledgement of service indicating that the German court was first seized because of alleged failures to comply with Articles 16 and 19 of the Council Regulation (EC 2201/2003) and relevant articles of the EC Service Regulation (EC 1393/2007).

Williams J identified two principal issues:

1. Was the issue of the petition by W on 8 July an abuse of process on the basis that at the time she did not consider the marriage to have irretrievably broken down but was issuing a petition simply to secure the jurisdiction of the English court in the event a divorce was required?

2. Following the issue of her petition did W subsequently fail to take the steps required to have service effected on H.

Having heard evidence from both parties Williams J considered that W was the more reliable of the two witnesses. He found that H's assertion he had not looked at the petition until after 16 August when it had been sent by email, WhatsApp, by personal service at his business premises and sent to his Mother's address when he was aware from conversations with W and WhatsApp messages she had initiated divorce proceedings in England was unlikely. He considered that H had received various documents and went to his lawyers to seek advice.

W's petition was not an abuse of process. The issue of the petition was motivated by a genuine desire to get divorced. W's evidence as to her dismay on learning H had another relationship was genuine. That it took her time to process her feelings came as no surprise. The delay between meeting her solicitors in May to July 2016 did not support a contention this was part of a warehousing operation. He found that W's references to what happened when the petition was issued as a disaster were easily understood in the context of W being dismayed at the possibility of H being given an opportunity to overtake her petition and her avoidance of confrontation with H.
On the second issue pursuant to the Court of Appeal's decision in Thum there could be no dispute that the English court was seized as of 8 July 2016 and English procedural law imposes no requirement as to time for service. Steps taken to serve which were not compliant with the FPR or EU Service Regulation did not constitute failure to take the steps required when there was no requirement to take any step beyond not acting in a way which amounts to an abuse of process. To find otherwise would give a premium to doing nothing rather than doing something to bring the proceedings to the attention of the respondent. English procedural law permitted the court to waive a defect in service where no injustice was caused.

H had notice that W had issued a divorce petition by 24 July at the latest when he received a PDF copy which Williams J concluded he had accessed.
On 26 July H was served with an original of the petition by W's German lawyer.

Williams J was satisfied that by the time H saw his German lawyer to instruct them to file a petition he had read the English petition. His Lordship considered that instructing his German lawyers to issue a petition and serve it through the Central Authority was a considered attempt by H to overtake W's petition and take advantage of the errors committed in relation to service.

The only requirement under English procedural law was to serve the petition which was validly effected in accordance with the EU Service Regulation and W had not failed to take the steps required to have service effected. It was clear H had been served and was fully aware of the English divorce proceedings.

Orenga de Gafforj v Orenga de Gafforj [2018] EWCA Civ 2070
W applied for a Hadkinson order preventing H from pursuing an appeal on the basis that he was in contempt of court for having failed to comply with orders for maintenance pending suit and a legal services payment order.

W had issued a divorce petition in England in 2016 and H issued his own petition in France, 6 weeks later. H applied for the English proceedings to be stayed on the basis that W had not been resident in England for a year at the date when the petition was issued. DJ Hudd had found that W had been resident, although not habitually resident, and rejected H's case. However, she granted H permission to appeal, and Baker J then granted permission for H to appeal to the Court of Appeal, which had been due to be heard a month after this judgment.

H had also been ordered to pay maintenance pending suit and W's costs of £8,695 in November 2017. H paid the maintenance up to April 2018 but did not pay the costs. W subsequently applied to increase the maintenance and for a legal services order and, in June 2018, H was ordered to pay increased maintenance and a lump sum of £80,099 in order to clear W's outstanding legal fees to her previous solicitors, who would then release her file to her new solicitors who were dealing with the appeal, and an ongoing sum of £12,000 per month to cover W's future legal costs.

H had not paid anything pursuant to the June order and the previous costs order remained outstanding. W therefore applied for a Hadkinson order in September 2018. H was ordered to file submissions in response to her application, but he ignored that order and he also failed to attend this hearing before the Court of Appeal as he had been ordered to do.

Peter Jackson LJ gave the lead judgment and allowed W's application. He confirmed the draconian effect of a Hadkinson order and the fact that it cannot be used as a means of enforcement by the back door.  He also set out the following conditions for an order being made:

1. The respondent must be in contempt.
2. The contempt must be deliberate and continuing.
3. As a result, there was an impediment to the course of justice.
4. There is no other realistic and effective remedy.
5. The order must be proportionate to the problem and go no further than necessary to remedy it.

A Hadkinson order is a flexible one with a range of possible sanctions. The form of the order will be tailored to the needs of the case. It is however important that the sanction is no stronger than it needs to be to remove the impediment to justice.

In this case, all of the essential criteria had been met. There was no other realistic remedy, as no process of enforcement could take place within the appeal timescale. Nothing less than the order sought had any chance of being effective.

W's application went marginally further than required as she was seeking an immediate payment of £165,561 to include the arrears of maintenance, the November costs order, the outstanding legal services order and the costs of her application. The Court of Appeal differentiated between the unpaid costs and maintenance on the one hand and the unpaid legal services order on the other. It is the unpaid legal services which directly impacted on the course of justice in this case. The Court of Appeal was not suggesting that there would never be any circumstances in which outstanding maintenance arrears could justify a Hadkinson order, in this case it only necessary to order as a condition of H pursuing his appeal that he paid the sums outstanding for the legal services payment and W's costs of this application. He was therefore ordered to pay. £140,000 in total by a specified date, after which H's appeal would be automatically dismissed and the stay on W's English petition would be lifted.

Rogan v Rogan [2018] EWHC 2512
W had applied to commit H to prison for significant non-payment and arrears of spousal maintenance. Mr Justice Holman had questioned whether she really wanted to pursue the summons because of the impact on the relationships between the parties and their two children and the likely damaging effect on H's business, but W had confirmed her belief that H would pay if a suspended order for his imprisonment were made.

Pursuant to the agreed financial remedy orders, H was to pay W a lump sum of £5million in two instalments with ongoing spousal maintenance of £8,000 until the second sum was received in full. H had not paid any of the second instalment and therefore owed over £2.1m including accrued interest. However, W was only pursuing a judgment summons application in relation to the arrears of maintenance. H had stopped paying the maintenance altogether in November 2017. H had therefore owed £56,000 when the judgment summons was issued in May 2018 (£88,000 by the date of the hearing), which was reduced to £55,000 or £87,000 because H had paid £1,000 in the week of the hearing.

H's evidence (which he had been warned he was under no obligation to give) that he did not have any regular periodic income and he was often dependent upon borrowing was accepted by the court. His long established business method was that he borrowed during the leaner periods and then paid off the borrowing and made significant profits when he concluded deals.
However, a capacity to borrow is itself a financial resource and, having that capacity, meant H had means to pay the sum due.  He had chosen to prioritise his other expenditure over his pre-existing obligations to W under the court orders.

Looking at W's evidence about H finances since November 2017, including the fact that he had spent £72,000 on two weddings for himself and his new wife, it was clear that H did have the means to pay the £55,000 which was the subject of W's judgment summons application. As H had refused or neglected to pay this sum and his refusal or neglect was deliberate and wilful, he was in contempt of court.

The case was subsequently adjourned and the parties agreed that the question of the sanction would be adjourned until March 2019 on terms agreed by H that he would pay all of the arrears and the current instalments as they call due, together with an agreed figure for the costs of W's application.

AP v ALP [2018] EWHC 2758 (Fam) (Mr Justice Moor) 2 February 2018
Finding that the pot of liquid assets totalled £14.9million, that the pot of Russian business assets totalled £5.7million and that H had not wilfully dissipated assets nor hidden assets, Mr Justice Moor awarded W £9.6million with H retaining £12.9million on the basis that Wells sharing of the Russian business assets was considered to be entirely inappropriate. H keeping the business assets would allow him to be provided with an income and a return of his capital in the long term.  His housing needs were also met plus he had monies to clear his significant debts (£2.8million).  W took all the non-Russian liquid assets plus received an indemnity in relation to French tax liabilities and £20,000 a year in child maintenance and a school fees/education costs order.

AS v Secretary of State for Work and Pensions (CSM) (Child support – variation / departure directions: diversion of income) [2018] UKUT 315 (AAC) 24 September 2018
The father ("F") owned a company.  The Upper Tribunal had already found that his dividends justified a variation of child maintenance as income not taken into account.  He now argued that, as he had transferred a 40% shareholding in his company to his second wife, only his 60% of the dividend income should be taken into account.  The First Tier Tribunal had found that there had been no share transfer, as no shareholding valuation had been undertaken and no stock transfer form produced.  F appealed. 

The Upper Tribunal allowed the appeal but did not set aside the decision.  Finding that F had produced clear evidence of the transfer, the Upper Tribunal distinguished between a sham and a device. 

A device is usually genuine, even if it is only intended to secure collateral advantage. Although the financial arrangements between F and his new wife may have been informal, and the transfer for no consideration and to avoid income tax and child maintenance liability, that did not mean the transfer was not genuine.

However, whether the transfer reduced F's child maintenance liability depended on whether it was a diversion of income justifying a variation (regulation 19(4), CS(V)R 2000).

Whether a diversion is unreasonable depends on a number of factors, including whether it was voluntary or forced by circumstances and the extent to which the reasons for it can be fairly regarded as being to reduce liability.
Here, the transfer was entirely voluntary. F's evidence was vague and contradictory. There had been adverse findings about F's truthfulness in court proceedings. By transferring the shares, F had unreasonably reduced his income to reduce his child maintenance liability.

The diversion of income ground produced the same liability as the FTT's decision, based on income not taken into account.