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Finance & Divorce Update – May 2011

Joanna Grandfield, barrister with Mills & Reeve, analyses the latest key matrimonial finance cases.

Joanna Grandfield, Associate and Barrister, with Mills & Reeve LLP

The spring update deals with decisions from December 2010 until 31 March 2011.  Cases reported from 1 April onwards will be discussed in the summer update, to be published in August 2011.

Treatment of pre-acquired assets
Jones v Jones [2011] EWCA Civ 41
This decision of the Court of Appeal (Wilson, Arden LJJ and the President) formally overrules the approach adopted in GW v RW [2003] EWHC 611 which involved capitalising an earning capacity and treating it as non-matrimonial.  

The parties, who were married for 9 ½ years before separating in 2006, were both independently wealthy at the time that they met, the husband from making products for the oil and gas industry whilst the wife was from a wealthy family and benefited from the financial support of her mother.  The husband's business, which was worth £2m at the date of the marriage and had increased in value to £12m on separation, was finally sold in 2007 (during the financial remedy proceedings) for a net profit of £25m.  There were no children born to the parties, although the wife's child from an earlier relationship was treated as a child of the family.  The husband was 58 and the wife 44. 

At first instance, Charles J considered that a significant departure from equality was justified since the husband's business had been in existence for many years prior to the marriage.  The Judge undertook a series of calculations which led to a finding that 60% of the assets were non-matrimonial.  The wife was awarded a lump sum of £5m and £400,000 costs. 

The wife's appeal was allowed.  Giving the lead judgement, Wilson LJ considered that the key question to be [at paragraph 4]:

"When an asset of a spouse  -  in this case a husband – represents the proceeds of sale of a company which he brought into the marriage and built up during it, how is the attribution of part of the proceeds of the husband's ownership of it at the date of the marriage to be conducted for the purposes of the sharing principle and, in particular, does the exercise of attribution permit focus not only on the value of the company at the date of the marriage but also on the husband's personal capacity at that date to build it up in the future?"

In valuing the husband's business at the date of the marriage, the court had to take account of any latent potential or "springboard effect", as was shown by an offer to buy the company for £6 or £7m a year after the marriage.  The business was therefore attributed a value of £4m at the time of the marriage.  The court then included a figure representing passive economic growth during the marriage, calculated by reference to the increase in the FTSE Share Oil and Gas Producers Index.  Whilst the Court accepted that the calculation being undertaken was inherently arbitrary, all of the evidence suggested that a fair value of the company at that time was £9m. 

The Court also considered that the trial judge had erred in his approach in ascribing a capital value to the husband's earning capacity at the start of the marriage and then capitalising it before treating that asset as non-matrimonial. 

Therefore, since the business was worth £9m on marriage and sold for £25m net, £16m of the proceeds of sale could properly be considered to be matrimonial, and the wife's award was increased from £5.4m to £8m, being 50% of the matrimonial assets and 32% of the overall assets.

N v F [2011] EWHC 586 Fam (Mostyn J) 11 March 2011
This case deals with "the vexed question of how the court should, when exercising its powers to award ancillary relief reflect, if at all, the property that the husband brought to the marriage back in 1993" (para 1). In coming to an answer, the Judge followed the decision of the Court of Appeal in Jones v Jones (see above).

The parties, both American, married in 1993 when the husband had assets worth £2.116m (approx. £4.2m today) which had largely been built up from his remuneration since 1979 with a global investment bank.  It was agreed that the assets in the case now amounted to £9.714m.

The marriage broke down in 2009 and by the time of the hearing the husband was 58 and the wife 46.  The two children of the marriage were 15 and 8.  After 28 years in banking, during which his earnings were very good, for example totalling $1.7m gross in 2007, the husband had left the industry and started work as a teacher earning £52,000 p.a. gross.  Since 2007, the family had been running up a large deficit. 

The husband proposed that the wife should receive £4.17m, being 43% of the available assets.  The wife argued that there should be no departure from equality and, moreover, £4.857m was "barely enough to meet her reasonable needs". 

Following the approach of the Court of Appeal in Jones v Jones (see above), and emphasising that the approach to pre-acquired wealth is fact-specific and highly discretionary, Mostyn J set out the process to be followed in such cases as being as follows:

1 The court should first decide whether the existence of pre-marital property should be reflected at all. This depends on questions of duration and mingling. 

2 If it does decide that reflection is fair and just, the court should then decide how much of the pre-marital property should be excluded. Should it be the actual historic sum? Or less, if there has been much mingling? Or more, to reflect a springboard and passive growth?

3 The remaining matrimonial property should then normally be divided equally.

4 The fairness of the award should then be tested by the overall percentage technique.

The Judge considered £1m to represent the husband's pre-marital wealth and excluded this from the pot to be shared.  The figure was arrived at since the monies had been well and truly mingled with matrimonial property but also because needs demanded that more could not be excluded.  Had the wife's needs not required recourse to the funds, more may well have been excluded.  A further sum of £240K was top sliced to provide a fund for the daughter's education.  The wife therefore received £4.237m or 44.7%.

Joinder of companies
Goldstone v Goldstone & Another [2011] EWCA Civ 39
In the first of two cases dealing with misbehaving husbands, this case confirms that, where companies are joined in proceedings for financial remedy, joinder and issues relating to it are part of family proceedings and therefore covered by the FPR rather than CPR.  Practitioners should note that this decision preceded the introduction of the new Family Procedure Rules and should consider it in this light.

During the marriage the husband placed £13m into an asset depository and subsequently made arrangements for a Lichtenstein-based trust company known as the Jeeves Group to take it over.  Shortly before the husband informed the wife that the marriage was at an end, his accountants created a schedule putting his wealth at £24m.  Notwithstanding that schedule, the schedule produced by the Husband for the purposes of matrimonial proceedings stated his assets to have a value of £10.5m and excluded those held with the Jeeves Group.  The litigation then focused on the wife's efforts to establish that the Jeeves Group was an alter ego of the husband.  An adjustment of property order was sought against a property owned by the Jeeves Group and proceedings were issued under s.37 MCA 1973 and under the Family Law Act 1996.

The Jeeves Group was joined as a party and directions as to the issues which needed to be determined in order to assess whether this was an alter ego of the husband were given.  An application to set aside the order joining the Group was dismissed. Jeeves Group appealed that order on the basis that issues of ownership and allegations of sham should be governed by the CPR and, if that was right, the joinder was invalid since the CPR procedure had not been followed.  The Group also alleged that the Judge had incorrectly found London rather than Lichtenstein to have forum conveniens.

The Court of Appeal held that Jeeves Group had been correctly joined, since these were family proceedings and the FPR applied.  Whilst the question of whether Jeeves was a sham company or alter ego of the husband must be approached as it would be in the Chancery Division, that was not the same as importing the CPR into family proceedings.   Since the family court would only make a financial award against either spouse, the issues relating to Jeeves Group went only to the nature of the order to be made against the husband. 

Practitioners should note that the case was heard under the old Family Procedure Rules.  The CPR continues not to apply under the new FPR.  However, the new FPR removes default to the RSC in areas where the FPR is silent.  The new FPR contemplates joinder being accomplished according to the broad discretionary case management powers contained in the overriding objective.  As Hughes LJ notes in his supporting judgement, "since the 2010 rules say nothing about the principles on which joinder of third parties (onshore or offshore) should be exercised it may be that the courts will have recourse by analogy to the principles contained in CPR 19.2 and 6.36 with its Practice Direction 6B.  The final resolution of that issue must however await a decision on the point".

Hadkinson orders
C v C (Appeal:  Hadkinson Order) [2010] EWHC 1656 (Fam),
This decision of Eleanor King J confirms that the inherent jurisdiction of the High Court can be invoked to impose a Hadkinson condition on a party seeking to appeal the decision of a district judge.  In the instant case, the wife had obtained freezing orders over several of the husband's assets which he subsequently breached.  The final order made in financial remedy proceedings provided for the husband to pay the wife a lump sum of £1.3m and maintenance for the wife and children totalling £82,000 p.a..  The husband provided only £200,000 "in lieu of maintenance" and sought to appeal the order.  Stressing the draconian nature of Hadkinson orders, which should therefore only be used sparingly, the court held that it was appropriate of the High Court to impose conditions on the husband pursuing an appeal in light of his wilful and repeated contempt. 

M v M [2010] EWHC 2817 Fam (King J) 19 October 2010
This is a further case J in which Eleanor King J made use of Hadkinson orders, this time in the context of the wife's application for interim periodical payments under Part III MFPA 1984.

The parties, who were both in their mid-forties, were Russian nationals.  Married in Moscow in 1991, the marriage (including pre-marriage cohabitation) lasted 20 years during which two children were born, now aged 16 and 12.  Both parties had been married before and had adult children from those relationships.  Whilst the family only moved permanently to the UK in August 2005, their connection with England went back to 1998 when the wife's daughter was first sent to school here.   The matrimonial home was worth an estimated £4m and the husband's wealth was estimated as being in the region of £150m. 

Following separation in 2008 when the wife and children moved out of the family home, the husband's very limited financial support essentially consisted of meeting school fees and providing the children with pocket money. The wife was reliant on the generosity of friends for financial support.  The husband then moved out of the family home (which now stands empty since he refuses to allow the wife to move back and  is the subject of separate proceedings), and into another property in north London and purchased a boutique hotel in the West Country for £2.35m. 

Considering the wife's application for interim periodical payments, the Judge found that the husband had "engaged with the litigation on only the most superficial level" [para 13].  His disclosure (consequent to an earlier freezing order) was limited, whilst no affidavit of means had been filed in these proceedings and the husband had failed to explain their absence.  The court had no idea of the extent of the husband's wealth other than to note that he had spent £15.5m on property in London since 2005, a further £1m on refurbishment and none of the properties were let or income producing whilst the children were at an expensive boarding school. 

The husband argued that no interim periodical payments order should be made whilst the wife submitted that, applying Hadkinson, the husband should be barred from making any further representations in her application for interim periodical payments.   As to the level of interim periodical payments, the wife sought £577,969 p.a.  The Judge emphatically applied Hadkinson, criticising the husband as well as the "system" for "the lack of teeth that a court has in effecting the enforcement of its orders" (para 28).  In particular, the husband was criticised for the "flagrant waste of family money" being spent on the wife's rent (paid by friends at a cost of £12,000 pcm) given the family home could be occupied as well as the standing charges that were continuing to be met on that property.  In addition, the Judge ordered that the husband pay interim periodical payments of £460,000 p.a. (of which £150,000 was specifically for rent) and £10,000 pcm towards the wife's legal fees. 

Part III Matrimonial and Family Proceedings Act 1984 – foreign proceedings and English pensions
Schofield v Schofield [2011] EWCA Civ 174
This decision of the Court of Appeal involved an appeal by the wife against an order dismissing her application for leave to apply for financial relief following a divorce in Germany under Part III Matrimonial and Family Proceedings Act 1984.

The husband and wife, who were British and German respectively, married in Germany when the husband had been serving in the British army.  Both before and during the marriage, the husband served in the Royal Electrical and Mechanical Engineers, thereby accruing a British Army pension.  The parties divorced in Germany in May 2007 and the assets totalling £87,000 were divided equally.  The German court had no jurisdiction to deal with the British Army pension.  Therefore, the wife sought leave to apply for an English pension sharing order under MFPA 1984.  That application was refused (as was permission to appeal) by Mostyn J, who held:

1 Applying the approach in CG v IF (inter-relationship: Part III Matrimonial and Family Proceedings Act 1984 and Lugano Convention) [2010] All ER 9D) 25 (Jun), "a solid/substantial ground will be shown where the court can confidently say that the probability is greater than or equal to 50% that the Applicant will achieve a substantive order were the matter to be tried".  The wife had failed to show that the probability of her achieving a substantive order was greater than 50%; and

2 The army pension was an irrelevance given the "paltry level of income" it would provide.

Allowing the wife's appeal, Thorpe LJ held:

1 Use of the probability assessment in CG v IF was plainly wrong.  It was an unnecessary gloss on the need to establish a "solid" or "substantial" ground as identified in Agbaje v Agbaje (2010) UKSC 13, (2010) 1 AC 628

2 Even if the gloss were permissible and helpful, the appeal would be allowed on the facts as Mostyn J's view of the pension sum being "paltry" was plainly unsustainable.  In light of the wife's modest earnings and the other available assets, the pension funds were very significant.
The court emphasised that it was important that there be judicial collaboration in situations where divorce and financial proceedings take place in one jurisdiction but pension funds were rooted and funded in another, so as to ensure an application would not be deprived of pension rights.  In the instant case, Germany had sought collaboration and called on England to determine the question of pension equalisation and the judge, in dismissing the wife's application for leave, had acted against that principle.

Part III Matrimonial and Family Proceedings Act 1984
Golubovich v Golubovich [2011] CA (Thorpe LJ, Etherton LJ, Baron LJ) 29 March 2011 
This case is the husband's appeal against an order requiring him to pay a lump sum of over £2m to his Wife following an 18-month marriage.   Both from extremely wealthy Russian families, it had been alleged that the couple spent over £2million between them during their 18 month marriage during which a daughter was born.  The couple married in 2007 (when W was 24 years old and H was 23 years old) and lived in a property in Kensington owned by the husband's mother.  The husband is a high-flying financier whilst the wife is a fashion student.  After the relationship broke down in 2009, a forum race was decided in the husband's favour and divorce proceedings concluded in Russia.  The wife immediately converted her claims brought under MCA 1973 into an application under Part III Matrimonial and Family Proceedings Act 1984.  The husband unsuccessfully applied for an adjournment in those proceedings and failed to give full and frank disclosure of his financial circumstances.  Taking into account the consequent perfunctory disclosure and rejecting the husband's oral evidence, Moylan J concluded that, although he could not pinpoint the source of his present and future funds, the husband could confidently meet the wife's needs and made an order that the wife be provided with accommodation in London and £2.485m for her maintenance.

The husband appealed, arguing that:

1 The Judge had incorrectly applied s.16 MFPA 1984;

2 the refused adjournment was unfair as respondents to Part III applications usually have 28 days to respond - here H had had only 24 hours.  If he had had more time, he could have given better disclosure; and

3 The Judge had failed to identify where the large sum would come from and failed to distinguish between H's assets and funds from his parents.

The appeal was dismissed, the Court holding that:

1 given the Court of Appeal's recognition of the Russian decree that same morning, the Judge had had no alternative than to grant permission to the wife to bring proceedings under Part III MFPA 1984;

2 the decision to refuse the adjournment had been a sensible and pragmatic case management decision given that an earlier application by the wife for financial relief had been postponed for some months.  Moreover, the husband had already repeatedly failed to engage responsibly in the London proceedings; and

3 although the Judge had not specifically stated how he had reached his conclusion on the husband's ability pay, the decision was made within the ambit of his discretion.

Barder events
Eric Keith Richardson v Fraser Richardson (Executor of Harriet Ann Richardson, Deceased) [2011] EWCA Civ 79
This case is included as a further example of the difficulties inherent in relying on Barder v Caluori (1988) AC 20 HL as a reason for re-opening a final order.

In the instant case, the husband and wife were partners in a property and hotel business.  Prior to the divorce, proceedings were issued for substantial damages after a child fell from the window of one of the business properties.  The wife subsequently issued a claim for financial remedy.  During the matrimonial proceedings no mention was made of the potential liability under the civil claim.  The matrimonial assets were found to have a net value of £11m, and the wife was awarded two properties and a lump sum payable by instalments, providing her with 47.5% of the assets.  A final order was made on 25 September 2009. The wife died on 4 November 2009.

Following the wife's death, the husband became aware for the first time that the insurer had avoided the policy and applied to the court seeking to vary the order made in matrimonial proceedings on the basis that the death of the wife and the avoidance of the insurance policy constituted Barder events.  The husband also argued that the order had been vitiated by a common mistake of fact since the insurance cover was limited to an amount less than the damages that would be payable  if the claim was successful and also because the insurer had avoided the policy.

The Court of Appeal applied Barder and held that the husband was not entitled to re-open the order because of the death of the wife.  The wife's contribution over the years earned her an equal share of the assets, and both the calculation of that share and obligation to pay the amount awarded was not referable to either her needs or her future expectation of life.  Further, the husband could not reply upon limits to the insurance cover as either vitiating the order on the ground of mistake or as a Barder event.  The limit of the indemnity had been there all along and its belated discovery was not a new event.

However, the revelation that the insurer had avoided the policy, which was discovered only after the order was made, was something of which the husband had no knowledge and of which due diligence on his part could not have uncovered any earlier.  As such, the husband was entitled to rely on it as vitiating event, which was a mistake rather than a Barder event, and which entitled him to relief.  That said, the division of the assets was not disturbed.  Rather, the order was varied to the extent that the husband should pay the lump sum less any sum, not exceeding £1m, as represented 50% of the aggregate of any damages that might be ordered and costs incurred in defending the civil action, thereby providing for the wife's estate to meet the costs of one half of any claim.