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Financial Remedy & Divorce Update, December 2018

Naomi Shelton, Associate, Mills & Reeve LLP considers the important news and case law relating to financial remedies and divorce which arose late last year (the other news and key judgments will be covered in a separate update).

Naomi Shelton, Associate, Mills & Reeve LLP


As usual, this update is divided into a News update and a Case Law Update:

A. News Update

Financial Remedies Pilot extended to eight more court centres
The President of the Family Division, Sir Andrew McFarlane, confirmed that the Financial Remedies Pilot (a new ticketing and allocation regime) is to be extended to the following courts: Nottingham, Birmingham, Liverpool, Sheffield, Leeds, Newcastle, the CFC, Newport and Swansea.

President's Guidance: Addition to Compendium of Standard Family Orders
With the agreement of the President, Mr Justice Mostyn promulgated 3 new orders, and an addition to an existing order, which have been added with immediate effect to the Compendium of Standard Orders. They relate to deprivation of liberty orders in respect of children who are the subject of care proceedings.

They will be placed in a new Chapter 23 and will include: Directions on issue and allocation; Directions on first hearing; and an Order on final hearing.

The addition is a new para 25A to the Financial Remedy Order No. 2.1, which gives the suggested words for where parties agree that the case or an issue within it should be referred to arbitration.

Law Society publishes guidance on what happens if there is a no-deal Brexit
The Law Society has previously announced that it is to publish a series of papers giving solicitors guidance on what will happen in the wake of a no-deal Brexit. The first in a series of papers focuses on, amongst other issues, what will happen in family law if a couple splits up and how data sharing should be approached.

One example given by the Law Society is the recognition that the Brussels II Regulation under which the EU courts automatically recognise judgments delivered in other EU states on matrimonial and parental responsibility will no longer apply to the UK once it leaves the EU.

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 Regulations, which come into force on exit day (29 March 2019 at 11pm), retain the directly effective rights and obligations derived from the Hague Convention in domestic law. This is in relation to both maintenance obligations and requests for maintenance that will lose the benefit of the Convention on the withdrawal of the UK from the EU.

Family Procedure (Amendment No 2) Rules 2018

These Rules came into force on 10 December 2018 and make amendments to Parts 1 and 5 (concerning the Welsh language), Part 7 (proceedings in another jurisdiction) and Part 30 (appeals in the High Court to be heard in public).

Two courts in Manchester and Brentford to pilot more flexible hours in family and civil cases

HMCTS has announced that early and late sittings will be piloted to give people more flexibility in fitting hearings around their lives. The pilots will run at the selected two courts for six months to see the benefits of extending the normal 10am – 4pm sitting day.

Lord Chief Justice's Report 2018

In his 2018 Report, the Lord Chief Justice highlights the workload and backlogs faced by the Family Court following an increased volume of public and private law cases.  Disposal times for care proceedings have exceeded 30 weeks in the second quarter of 2018 - the longest they have been since the introduction of the single family court in April 2014.

Home Office consultation on tackling forced marriage

The Home Office consultation seeking views on a possible mandatory reporting duty relating to cases of forced marriage and on how the current government guidance should be updated closes on 23 January 2019.

Plea for borderline removal of children cases to be diverted from court
A report by Isabelle Trowler, the Chief Social Worker for Children and Families, argues that families subject to 'thin, red line decisions', where the decision to remove a child from their parents should be diverted from the courts.

The President extensively quoted the report in his address to the Association of Children Lawyers Annual Conference.  He said that the report 'readily chimed' with his own developing thoughts that the area which could most fruitfully benefit from close consideration by him, as President, is that relating to the pre-proceedings period.

The report considered that the legal principle of 'no Order' should be more readily applied.

Administrative Court publishes 2018 edition of its judicial review guide
The 2018 edition highlights legislative and practice changes to the Administrative Court over the past 12 months.  It includes guidance on starting a claim, applying for permission for judicial review and case management.

Child Maintenance and Other Payments Act 2008 (Commencement No 16) Order 2018

This Order brings into force section 27 of the Child Maintenance and Other Payments Act 2008 which inserts sections 39B to 39G into the Child Support Act 1991. These allow the Secretary of State to apply to a court to disqualify a non-resident parent with child maintenance arrears for holding or obtaining a United Kingdom passport.

For all purposes other than the purpose of making regulations the Order came into force on 14 December 2018.

Child Support (Miscellaneous Amendments) Regulations 2018

These Regulations amend child support regulations and came into force on 13 December 2018. Of particular note are Regulations 2, 3 and 4.

Regulation 2 inserts a new regulation 69A into the Child Support Maintenance (Calculation) Regulations 2012, which makes provision for specified assets to be calculated as having a weekly value which is taken into account in order to vary a maintenance calculation. This value, which can include virtual currencies, will be treated as additional income of the non-resident parent.

Regulation 3 amends the Child Support (Collection and Enforcement) Regulations 1992 and makes provision for the application of regular deduction orders and lump sum deduction orders to joint accounts.

Regulation 4 amends the Child Support (Management of Payments and Arrears) Regulations 2009 and Regulation 5 amends the Child Support (Collection and Enforcement) Regulations 1992.

B. Case Law Update

IX v IY [2018] EWHC 3053 (Fam) (Mr Justice Williams)
In financial remedy proceedings, Williams J considered the extent to which the value of the husband's (H's) shareholding in a private company derived from contributions that he made before and during the parties' relationship.  The judge was also required to consider whether the wife (W) should receive an overall award on a sharing or needs basis, with H submitting that there is a grey area where sharing or needs might both be appropriate approaches.

The couple met in 2006, cohabited from 2007, married in 2013 and separated in 2017.  Each of the parties had come to the marriage having had children in a previous relationship. 

H had a shareholding in a private company.  He argued that much of the current value of the company should be ring-fenced due to the fact that the 'heavy lifting' in building up the company pre-dated 2007 and the passive growth between 2007 and 2017 was not attributable to H's efforts during that time (meaning it should not be treated as part of the matrimonial acquest). 

The company's development spanned 16 years (from 2002 onwards). Part of its value was attributable to H's efforts before 2007 (or 2009 when the parties' pre-marital relationship was akin to marriage).  The company was therefore a mixed asset of non-matrimonial and matrimonial value, due to H's marital contributions that had become mingled with the non-matrimonial contributions relating to the pre-2007 value and the passive growth of that value.

Mr Justice Williams declined to order a single joint forensic accountancy expert report to establish the company's value in 2007, relying instead on H to disclose relevant documents, which he failed to do.  Williams J assessed historical balance sheets and concluded that H's original capital investment of £1.8 million was not an accurate reflection of the value of the company in 2007, or in 2009, due to significant latent value.

A straight-line valuation of £37.5 million over 16 years did not reflect the latent potential of the company. Alternatively, taking the sums invested by H in the company and applying the NASDAQ technology index from 2009 to 2018, produced only £12.672 million. Applying the NASDAQ index to a starting point of £5.2 million in 2007 resulted in £20.5 million.

Any arithmetical valuation resulted in significantly different outcomes depending on the starting points for dating and the valuation used. It was impossible to undertake a reliable valuation of the company's latent potential or to apply any sort of indexation to it for passive growth.

Instead, a non-formulaic approach was required. H's non-matrimonial portion, that predated the marriage, was a significant part.  However, the part developed during pre-marital cohabitation and the marriage was greater. Hence 40% (£15 million) was apportioned to H as a non-matrimonial asset and 60% (£22.5 million) as a matrimonial asset. Ultimately, the company matrimonial assets were divided 60% (£13.5 million) to H and 40% (c £9 million) to W to reflect H's unmatched financial contribution of £10 million brought into the marriage.

The final order that H pay W a lump sum of £9.31million, being the higher of (a) her needs, reasonably assessed, and (b) an equal share of what Williams J determined to the matrimonial assets (being around 24% of the parties' total assets), was stated to be fair.  Set against this, the judge noted that the combination of W's assessed capital and income needs was £8.94 million and that 'that sum is slightly below the award calculated on a sharing basis of £9.31 million and accepting that the authorities make clear that the award must be the greater of the sharing award needs-based award', quantification of the appropriate award is £9.31 million.

Mr Justice Williams provided comment on both of the parties' as witnesses, stating that neither were 'very satisfactory witnesses' and 'neither them truly tried to tell the truth the whole truth and nothing but the truth, but to mould it, suppress it, gild it as they thought would best suit the presentation of the case'.  As such, in approaching all factual matters the judge indicated that he had had "to piece together" what he could "from their evidence which might be reliable and build a picture from that, from contemporaneous evidence, from common sense and from making what seem to me to be reasonable deductions or inferences having seen the parties give evidence."

C v C [2018] EWHC 3186 (Fam) (Mrs Justice Roberts)
In this case Mrs Justice Roberts applied the legal principle confirmed in Waggott v Waggott [2018] EWCA Civ 727 (that future earning capacity is not a matrimonial asset to which the sharing principle applies) to income acquired post-separation.  Relying on Waggott, the husband (H) was able to successfully preserve his post-separation earnings. 

The couple, who were both in their forties, had been married for ten years.  There were two young children.  H, who worked in an investment bank, received at least £3million a year in remuneration made up of salary, bonuses and deferred compensation.  Of the total asset pot of £26.3million, he argued that £6.5million was non-matrimonial as it was income awarded post-separation. 

Roberts J agreed with H.  Applying Waggott, Roberts J held that 'an earning capacity in terms of its present and future potential to generate income, the product of which may well be savings, investments or any tangible accretion to future capital wealth' does not represent matrimonial property subject to the sharing principle. Her Ladyship highlighted the tension between the sharing principle and the statutory steer towards a clean break, if the former were to be applied to post-separation income.  She did not accept W's submission that her provision of childcare post-separation gave rise to an entitlement to H's post-separation earnings; although this did not mean that the parties' contributions were irrelevant to the assessment of needs and fairness of outcome.

The remaining pot was divided equally, leaving W with £10million a sum which had been broadly in line with H's open proposals. This met her needs and was fair.  W retained the family home, with H discharging the mortgage and paying her a lump sum of £1.87million.  H is also to pay child maintenance for each child at the rate of £25,000 a year plus education costs to the end of the secondary education. 

Hart v Hart [2018] EWHC 2966 (Fam) (HHJ Wildblood QC)
This judgment, of a sentencing hearing following a successful committal application by the Wife (W) against the Third and Fourth respondents, serves as a reminder that the family courts are increasingly willing to impose custodial sentences on respondents who repeatedly breach orders, including those who are not principal parties to the proceedings.

In the ongoing Hart litigation, where W continues to seek enforcement of an order requiring H transfer his shares in a company to her, H's sister (who had been joined as a party in the enforcement proceedings because she is the sole director of the company) has been sentenced to three months in prison (to serve half in custody) for breaching various orders to provide documents and information. 

NN v AS and others [2018] EWHC 2973 (Fam) (Mrs Justice Roberts)
This High Court judgment outlines some principles which are relevant in considering an application for financial relief under Part III Matrimonial and Family Proceedings Act 1984.  In particular, it highlighted that Part III was not to be used to "top up" a foreign divorce settlement, simply to bring it into line with what the English court would have ordered. 

The parties were Egyptian nationals who had divorced in Egypt.  Under the Egyptian agreement, H had agreed to pay W a lump sum of EGP 5 million (then worth about £215,000) and to maintain the financial status quo.  H agreed that W should occupy a property in London (owned jointly by H with his sisters) with their son while she remained his primary carer.  He also agreed to pay the mortgage and child maintenance of £5,000 per month.  W however, claimed that she had been in a distressed state when she had entered into the agreement and had not fully understood it.  Although she had some assets of her own, she had incurred £400,000 in legal costs and now sought additional provision of £3.8million.  She alleged that H was the legal and beneficial owner of three properties in London (including the one she was living in) as well as a yacht.  H accepted that he had a one-third interest in two of the properties, which he claimed to own in equal shares with his sisters. He denied having any beneficial interest in the third property or the yacht. Although his name appeared on their title documents, he claimed to hold the entire beneficial interest in both for his father.

Mrs Justice Roberts found that W had failed to establish on the balance of probabilities that the transactions relating to the properties or the yacht were shams or otherwise fraudulent and the ownership position was, in fact, as claimed by H.  H's property interests therefore amounted to only £340,000.  Her Ladyship was also not satisfied that the Egyptian agreement was unfair.  It had met W's needs at the time, there was no evidence that W had not been an active and able participant in the discussions and she had taken legal advice. 

Turning to Part III claims more generally, Roberts J reiterated that an English order following a foreign order was the exception rather than the norm.  Whilst the court was entitled to make an award, in the absence of hardship or injustice, it was not the MFPA's function to allow a "top-up" of the provision made in a foreign divorce simply to bring it into line with what might be ordered in the English courts. Further, the court could not exercise its discretion under Part III simply because the costs of an unmeritorious Part III application had depleted an applicant's resources and given rise to a potential situation of need. 

Whilst W had established a sufficient connection with England to justify the making of an order and the child's needs required an order, Roberts J made plain that the court would not accede to W's proposals because, simply, there was no evidence that H had the assets which she claimed he did.  The order was therefore confined to the terms of the Egyptian agreement, with W's occupation of the property being extended until the child was 18 or finished secondary education. 

LM v KD [2018] EWHC 3057 (Fam) (Mr Justice Baker)
In this case, there were two appeals against orders by judges refusing to stay separate but connected (i) Schedule 1 Children Act 1989 proceedings and (ii) ToLATA proceedings in different English courts between the husband (H) and wife (W).  

In overview, the couple was involved in various ongoing related matrimonial proceedings in England and in Italy.  The English court determined that it had jurisdiction in proceedings seeking an order for sale of the matrimonial home in London, and in separate proceedings involving parental responsibility matters.  However, the English court concluded that it was not appropriate to stay those proceedings pending the resolution of the associated Italian proceedings.

The couple who were both Italian, separated in 2016.  Their daughter, aged eight, lived in London with the W. H issued separation proceedings in Italy in March 2016.  W applied in England in August 2016 for a child arrangements order and subsequently a ToLATA order for the sale of the former family home in London.  H claimed that the declaration of trust on the TR1 form, which stated that the beneficial interest was to be held as joint tenants, had been executed by mistake. The English court refused the husband's application for a stay of the ToLATA proceedings pending the resolution of additional proceedings he had issued in Italy in October 2016 for declaratory relief in respect of an inheritance received from his uncle, which he claimed to have used to buy the London property. H had conceded that the ToLATA claim was within the exclusive jurisdiction of the English courts, but the court also decided that a stay was not appropriate because, in the absence of financial proceedings in the jurisdiction, the property issue should be resolved promptly, and delay was a technical advantage to H.  H unsuccessfully appealed.

The rights in the London property had arisen out of the express declaration of trust in the TR1 and not from the matrimonial relationship.  As a result, jurisdiction lay with the English court (Article 24(1) Brussels I Recast).  Due to the related Italian proceedings, the English court did have a discretionary power to stay the proceedings but H had not asked for a stay on this ground.  In fact, he had already conceded that a claim in respect of the former family home lay within the jurisdiction of the English court.  The decision not to stay the English proceedings also did not contravene the principle of avoiding the risk of concurrent proceedings in two jurisdictions; rather there were valid arguments for avoiding further delay in circumstances where delay was likely to give H a technical advantage. 

VW v BH [2018] EWFC B68 (HHJ Roberts) 5 November 2018
This case provides a rather exceptional defended divorce. 

In 2017, the husband (H) admitted to the wife (W) that he had been having an affair with her best friend for the previous 22 years.  Although that affair had now ended, H told W that he was in a new extra-marital relationship with another woman.  W promptly issued divorce proceedings, relying on H's adultery.  Although H admitted the adultery, he cross-petitioned on the basis of W's unreasonable behaviour.  H said that W had been aware of adultery for at least ten years and therefore she could not rely upon it.  There was a three-day contested divorce trial which involved ten witnesses. 

It was a case that puzzled HHJ Roberts.  Not only was it not clear why H was so determined that the divorce had to be on his terms given that he had accepted that the marriage was over, neither was it clear why he and his former mistress squarely blamed the wife for the 'destruction of their family lives'.  The judge found H to be a 'deeply dishonest man' who had 'minimal respect for women' and that his former mistress 'would say whatever she thinks would assist [the husband] in this case' and was 'not an honest witness nor an honest person'.

Finding there was overwhelming evidence that H had been committing adultery for over twenty years and that W had not known about this until he had admitted it in 2017 and that the allegations of behaviour raised by H were untrue, H's petition was dismissed and a decree nisi pronounced on the basis of W's petition.