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Finance & Divorce April Update 2012

Joanna Grandfield, Associate (barrister), Anna Heenan, solicitor and David Salter, Joint Head of Family Law at Mills & Reeve LLP analyse the latest key financial remedies cases.

Joanna Grandfield, Anna Heenan and David Salter of Mills & Reeve LLP

News in brief

This section of the update highlights some of the news items that will be of particular interest to practitioners who advise on divorce and financial remedy cases.

Marriage Statistics
The Office of National Statistics shows a 3.7% increase in the number of provisional marriages in 2010 (these statistics are based on information recorded when marriages are registered as part of civil registration. The statistics are finalised when the majority of marriage returns have been received from register offices and the clergy):

Forced Marriage
Demos has published a report on ending forced marriage:

Divorce Reform
Sir Nicholas Wall backed the introduction of no fault divorce during his conference address at the Resolution conference. Click here for the News story and a link to the full text of the speech

Self-represented Litigants
Increasingly, family lawyers are dealing with cases where the other party is a self represented litigant.  This issue was highlighted in Lesley Pendlebury Cox's article "Litigants in Person: It doesn't have to be like this" (click here for the article)   Some of the issues arising in such cases have been addressed in The Law Society's new practice note. Click here for further details and for the link to the full text which includes specific advice for family law cases.

The rise of the SRL is echoed by The Observer reports that divorce reforms are leading to a two tier system with wealthier couples trying arbitration and the less wealthy resorting to DIY divorces:

Mediation Information and Assessment Meetings
A Resolution member survey suggests that MIAMS are not working:

Case law update
This Update deals with cases involving capitalisation of maintenance where a lump sum has been paid to discharge the mortgage, trusts of the family home, civil partnership dissolution, dealing with third party claims, shareholders' agreements, costs, piercing the corporate veil and property regimes and add backs.

Yates v Yates [2012] EWCA Civ 532
This case considered capitalisation of maintenance in circumstances where the wife had received a lump sum to discharge the mortgage, but had not done so.

A consent order provided for:

- the husband to pay a lump sum to the wife intended, in part, to discharge her mortgage; and
- the husband to make periodical payments to the wife for three years with no bar to extension.

The wife did not discharge the mortgage and invested the money in a bond that produced no income.

The wife successfully applied to extend the term of the periodical payments order to 15 years. The payments were capitalised by reference to her monthly income needs, including her mortgage payment.

The husband argued that the mortgage payments should have been excluded from the wife's budget. The Court of Appeal noted, obiter, the guidance in Fleming v Fleming [2003] EWCA Civ 1841 that term orders should only be extended exceptional circumstances. The court reduced the wife's budget by the amount of her mortgage payments and the revised total formed the basis for the Duxbury calculation. She could not look to the husband to meet her mortgage payments where she had elected to invest the sum in a bond that provided no income instead of discharging the mortgage.

Thompson v Hurst (unreported) 30 March 2012, CA
This case provides guidance on the parties' beneficial interests in a property bought in one party's sole name on the advice of their mortgage advisor.

H was a local authority tenant of the property. T moved in and they had two children. They intended to buy the property jointly but, because of T's financial position, they were advised they would not be able to secure a joint mortgage. H paid the mortgage and all outgoings. T contributed £100 a week for the children and outgoings. T was awarded a 10% share at first instance.

The Court of Appeal held that there was no scope for the legal presumption that the parties had intended to be joint tenants at law or in equity. In the circumstances, it could not be assumed that, even if the parties had bought the property in joint names, they would have agreed to be joint beneficial owners. There was an intention that T should have had a beneficial interest and there was no reason to depart from the judge's quantification of that interest.

Lawrence v Gallagher [2012] EWCA Civ 394 (Thorpe and Moses LJ and Ryder J) 29 March 2012
This is the first reported case dealing with the financial implications of the dissolution of a civil partnership.  Arguments that this was a "dual career" case were rejected.

L (47) was a city analyst and G (54) an actor. Including cohabitation, their relationship lasted 11 years and 7 months. The parties' assets totaled £4.175m, including a London flat (£2.4m) and Pine Cottage (£900,000).

L bought and refurbished the London flat prior to the relationship and redeemed the mortgage from his own resources during the relationship (although he subsequently remortgaged it). Pine Cottage was owned 62%:38% in favour of L according to a declaration of trust.

L's income was £200,000 per year. Until March 2010, when G obtained a leading role in the West End, L had paid him interim maintenance of £1,000 per month. G put his pension into drawdown in December 2008, receiving £5,000 in cash and monthly payments of £79.99.He also derived an income through bed and breakfast at Pine Cottage.

At first instance G was awarded £1.6m (42%)comprising Pine Cottage, a pension share of £200,000 (approximately 1/3 of L's pension), and a lump sum of £577,778.The judge also awarded G 45% of L's deferred shares when they came into payment.

On appeal, Thorpe LJ rejected L's argument that the London flat was not a partnership asset. He cited paragraph 22 of Lord Nicholls' judgment in Miller v Miller; McFarlane v McFarlane [2006] 1 FLR 1186 and observed that the matrimonial home was an exception to the usual categorization of matrimonial and non-matrimonial property. Similarly, this was not a "dual career" relationship. "[T]his couple clearly intermingled and combined their available income and capital to enjoy a high standard of living by their own design."

Thorpe LJ advised judges to consistently apply the s 25 criteria to the facts rather than "new approaches often expressed in newly minted phrases." The present case was "comparatively simple", but complicated by the parties' attempts to rely on judicial creations. It was self-evident that L should retain the London flat as it pre-dated the partnership and was necessary for his work. Likewise, G should retain Pine Cottage, which was his pride and joy. This lead to two equal considerations:

1. Whether fair sharing required a balancing payment to reflect the difference in value between the two properties; and
2. What funds were necessary for each of the parties to live comfortably in their homes.

L was self-sufficient with a substantial pension. G's position was far less secure. The need for a pension share was obvious and that aspect of the first instance award was upheld.

The disparity in the property values should be reflected and G was entitled to enjoy a comfortable standard of living without financial anxiety. The only basis for the judge's award of £577,778 was that it was the sum necessary to bring G award to £1.6m after the transfer of Pine Cottage and the pension share.

The value of the London flat had increased far more than Pine Cottage because of the rise in the London property market. The judge's award did not explain why a 55:45% asset division was fair in light of this and her approach was too theoretical. She should have assessed the appropriate lump sum on the basis that G would receive Pine Cottage and the pension share. This would have resulted in a much lower lump sum of £350,000 whether based on needs or sharing.

The judge had misunderstood the nature of L's bonus scheme. The deferred shares were not capital but income. There was no principled reason to award G 45% of this.

Fisher Meredith LLP v JH and PH (Financial Remedy: Appeal: Wasted Costs) [2012] EWHC 408 (Fam) (Mostyn J) 16 February 2012
This case considers who bears the responsibility for joining a third party to financial remedy proceedings .

Fisher Meredith LLP (FM), the wife's solicitors, appealed against a wasted costs order made against them in financial remedy proceedings.

The husband was allocated a third of the shares in the Company three years before he married the wife. In his s 25 affidavit, the husband said that he was purely nominee for his uncle and/or his uncle's brothers. This was the first time he had asserted he was not the legal and beneficial owner of the shares.

Shortly before the parties separated the husband transferred his shares to his uncle's wife (PH). On the wife's application for a s 37 injunction to reverse this transfer, PH was joined as a party. Nobody joined the uncle to the proceedings and he declined FM's invitation to intervene.

Two days before the final hearing the PH's solicitors disclosed 123 pages of heavily redacted documents. The wife's solicitors sought an adjournment. The husband and PH agreed, but claimed that FM should pay their costs because FM had been negligent in failing to join the beneficial owners of the shares to the proceedings.

Mostyn J cited paragraphs 35-37 of his judgment in TL v ML [2005] EWHC 2860 (Fam) and observed that, in those passages, he had not addressed the question of whose obligation it was to join third parties to proceedings. He drew a distinction between two types of case:

1. The claimant is saying that a property held in the name of a third party is the property of the respondent; and
2. The respondent says that the property to which he has legal title is beneficially owned by a third party (this was the type of case currently under consideration).

In case 1 there is a clear obligation on the claimant to join the third party at an early stage. In case 2, Stack v Dowden [2007] 1 FLR 1858 established the starting point is that if an asset is in one party's name then it belongs to him both legally and beneficially. In such cases "the duty to bring the claim of the non-legal third party before the court lies primarily and equally on the respondent to the application and on the non-legal owner, and not on the claimant."

This was not to say the Claimant could not take this step if she wished and whether she did so would depend on how her claim was phrased. Mostyn J gave two examples:

1. W and H have £500,000 and there is no dispute that they are joint beneficial owners (Pool A). There is also £500,000 in H's name which he says is owned by his uncle (Pool B). W does not need to join the uncle as if the court decides Pool B belongs to H then W could receive her full award from Pool A without needing to involve the uncle.

2. If Pool A was only £100,000 and Pool B was £900,000 then, assuming the same outcome, W can only collect £100,000 from Pool A and may need to deal with uncle's claim if she brought enforcement proceedings against Pool B. Therefore it may be better for W to involve the uncle from the outset, although she is not obliged to do so.

Here the wife was not under a duty to join the third party and therefore FM were not negligent.

F v F [2012] EWHC 438 (Fam) (Macur J) 5 March 2012
In this case, the judge considered and rescinded a shareholders' agreement between the parties.

The judge commented on the parties' failure to comply with the Pre-Action Protocol, the FPR 2010 or the spirit of Practice Direction 25A and said it was unsurprising that the FDR had been unsuccessful.

This was the husband's third marriage and there was a thirty-year age difference between the parties. The marriage lasted 18 years and the parties had three children. The husband also had four adult children from his first marriage. The husband founded Franklin Plc (the "Company") in 1971. This was the "origin and continuing mainstay of the family wealth." The wife became a non-executive director of the Company in 1996.

There were various trusts/settlements including:

1. The "irrevocable" HF Family Settlement created in 1996 for the benefit of his family of which the wife, and later her sister, was appointed a trustee.

a. Initially endowed with 30% of the issued Company shares;
b. In July 2001, the husband transferred a further 18% of the Company shares into the trust;
c. The husband's children from his first marriage were excluded as beneficiaries.

2. Peyton Place, the matrimonial home, was purchased in joint names in 1994 and then settled by both parties into the "irrevocable" Peyton Place settlement in 2003.  The beneficiaries included the parties, their children and their children's children. The parties had beneficial use and enjoyment of the property.

3. In October 1998, SCI Amandier was incorporated in France. The wife had 90% of the shares and the husband 10%. A property (L'Amandier) was purchased and renovated. In 2004, the husband transferred additional land to the SCI and transferred his shares to the parties children;

4. In July 2003, the parties and the 1996 family trustees drew up a share agreement (the "Share Agreement"). The Company shares were reclassified into A, B and C shares which were assigned as follows:

a. Wife: 52% A shares; 51% C shares
b. Husband: 52% B shares; 49% C shares
c. 1996 family trust: 48% A and B shares

The agreement prevented:

i. the sale or transfer of shares outside the existing shareholders or other trusts settled in similar terms to that in 1996;
ii. the wife's removal as a director;
iii. the making of gifts or payment, save earned remuneration, to the husband's elder children;
It also specified a salary to be paid into the parties' joint account each year.

5. In April 2008, a property was purchased in the wife's name in Chelsea for £2m. An additional £470,000 was spent on improvements. 48% of the property was settled in trust for the benefit of the husband and wife's children.

The husband also made a gift of shares worth £2.477m into the wife's name during negotiations concerning the Share Agreement and the Peyton Place Settlement and gifts of over £8m to his elder children.  The judge felt these demonstrated the husband's attitude to financial planning and his past generosity to the wife.

It was agreed that the 2003 settlements were post-nuptial settlements subject to variation by the court. There was an issue between the parties as to whether the Share Agreement was also a maintenance agreement under Matrimonial Causes Act 1973 s 34(2) which could be varied in accordance with Granatino v Radmacher [2010] UKSC 42.

The Share Agreement made no express provision for arrangements if the parties lived separately. The wife argued it survived divorce/separation and was a maintenance agreement as it was not expressly brought to an end and was "irrevocable" save by joint agreement. The husband argued that it could not survive separation as it referred to the parties' joint bank account.

The judge observed that under MCA s 34(2) "financial arrangements" meant "provisions governing the rights and liabilities towards one another when living separately." This only covered agreements made with the expressed or clearly implied purpose of governing the parties' financial affairs including in the event of separation. It did not cover those which would do so only if certain terms of the agreement were re-constituted.

The judge could not find any implicit purpose that it should endure separation. The three transactions that took place in 2003 were part of a comprehensive reorganization of the family's financial affairs and the process should be considered as a whole. The Peyton Place settlement provided for each party to have a life interest and right of residence in the property and so could not cover the separation of the parties. Whilst this analysis of the agreement did not rely on an examination of the parties' intentions at the time of making the agreement, the judge found the wife had not given any thought to its status on divorce/separation and the husband did not understand it to survive divorce.

The wife asked the judge to attach weight to the parts of the agreement that benefitted her and to vary those that did not. The Judge commented that "[f]air outcome in this case demands that it should stand in its entirety or fall altogether." The acrimony between the parties, which endangered the company and thereby the 1996 trust, made variation necessary.

The judge then considered several disputed issues of fact:

1. The valuation of the husband's pre-marital wealth an the extent to which it should be isolated from the marital property to be divided;
The husband's pre-marital wealth was significant and could not be ignored. The Company had been the central plank of the parties' finances throughout the marriage and the wife had not played any significant role in it.

2. The treatment of the husband's dispositions to his elder children;
These were not dispositions with the intention of defeating or reducing the wife's claim, nor did they found any "add-back" argument.

3. The valuation of the life interests in Peyton Place;
The wife had argued these should be reduced because Mrs N, who lived in the property, might be able to claim proprietary estoppel. No-one had obtained a witness statement from her and the single joint expert had not spoken to her. The wife had failed to discharge the burden of proof on this issue. It was very difficult to value the life interests here as there was no established methodology.

4. The valuation of the existing shareholdings in the Company;
The Company's value was taken to be £17.5m, of which £10m was treated as pre-marital wealth.

5. The valuation of the wife's maintenance needs.
The wife's budget was unrealistic and without foundation. Her needs were £300,000, which would reduce as the children got older. This meant a Duxbury fund was £4.974m.

The assets were to be divided as follows:

- The 1996 settlement was to be varied to provide for the net proceeds of sale to be divided two-thirds to the wife and one-third to the husband and reinvested in separate properties.
- The present trustees were to remain.
- The husband was to pay the wife a lump sum of £0.75m and transfer any remaining interest in the Chelsea property and L'Almandier to the wife.
- The share agreement was totally rescinded and so the wife's shares resurrected to the husband. It was for the board to decide whether the wife would remain a director.

Excluding pre-marital property this left the wife with 45% of the total marital assets or 36% of the total.

Grubb v Grubb [2012] EWCA Civ 398 (Thorpe and Gross LJJ and Ryder J) 1 March 2012
Thorpe LJ warns of the dangers of litigation!

The husband challenged Moylan J's summary assessment of the wife's costs following his judgment at first instance. The Court of Appeal had given permission to appeal and the parties were ordered to file Form H's, other statement of costs and detailed bills of each party's costs.

The parties agreed the wife's fees, but the husband nevertheless requested the documents to check the wife had not been overcharged. This was not part of the compromise. Thorpe LJ declined to order this. The documents would be of no financial use to the husband as he was now bound to pay the costs. There was no indication that the wife was unhappy with the level of her costs. Thorpe LJ commented:

"I have every sympathy with Mr Grubb. To be involved in ancillary relief litigation is a dire prospect for any husband or wife. The level of costs that are charged nowadays in London by specialist solicitors and barristers seems to many, both within and without the profession, to have reached very high levels; certainly unacceptably high levels in comparison with other major capitals in which ancillary relief claims are litigated, admittedly under different systems of justice."

Prest v Prest & Others [2012] EWCA Civ 325 (Thorpe and Rimer and Patten LJJ) 16 February 2012
The husband and a number of companies, which had been joined as interveners because they all seemed to be trading vehicles for the husband, sought permission to appeal.

Permission was granted on several different grounds, the most significant of which concerned piercing the corporate veil. Thorpe J commented, "There is a real point of substance which this court must decide, and that is which of the two streams of first instance authority we should validate on the perennial question in ancillary relief proceedings, when and in what circumstances does the judge pierce the corporate veil?" 

Permission was also granted in respect of the husband's argument that Nigerian customary law regulated his shares in his main trading company. He was allowed to adduce the judgment of the Nigerian court on this issue, which had been delivered since the first instance judgment.

Finally, permission was given to challenge the form of order used by the judge, which made the lump sum order at the same time as a transfer of property order. Case law prohibits this if the sole purpose of the transfer of property order is to ensure implementation of the lump sum order.

Permission to appeal was conditional upon:

1. the husband paying the wife's historic and assessed costs;
2. the husband and companies securing the wife's appeal costs; and
3. the husband continuing to make the payments set out in a previous order.

GS v L [2011] EWHC 1759 (King J)
The parties married in 1999. The wife was 41 and the husband 43. They had two children aged 9 and 10. The husband was a banker. The wife a homemaker who was highly educated and had worked before the children were born. The total assets were around £4m and included a London flat (purchased in 1999 and worth £1.135m now) a property in Madrid (£1.419m) and the husband's pension (£384k)

In 2002, after relocating to Spain, the parties purchased the Madrid property and signed two documents:

1. The equivalent of a declaration of interest where the property is held as tenants in common, which provided that the wife held 16.88% and the remainder was held equally between the parties; and

2. A document providing that all future assets would be held under a matrimonial property regime known as "Sociedad de Gananciales."

In 2006 the husband was made redundant and the wife returned to work. Both parties sought legal advice about divorce, the husband from English and Spanish lawyers.

The husband found work in England in 2009.The rest of the family followed later that year when the tenant of their London flat gave notice. The children were intended to start at English prep schools in September 2010.

The husband sought Spanish advice about issuing a protective divorce petition in Spain. The wife petitioned in England in November 2009 and the husband failed to file an acknowledgment of service. The wife also brought proceedings for leave to remove the children to Spain. The husband did not tell the wife he had met with Spanish employers and negotiations on this issue continued after he had agreed his contract. The whole family relocated to Spain in 2010.

The wife sought an equal division of assets plus an additional sum equating to ten year's spousal maintenance/a joint lives maintenance order to reflect the uncertainty in the Spanish job market. The husband sought to ring-fence £1.49m on the basis of the community of property agreement, or, failing that pre-acquired wealth.

At the start of the hearing the husband argued the child and spousal maintenance should be determined in accordance with Spanish law (which he conceded during the hearing would be unfair) and he accused the wife of forum-shopping. The wife accused him of running up costs because of his misguided approach to litigation and sought an 'addback'.

King J found that the wife was not a forum shopper. Although the marriage was in difficulty at the time of the move to England, both parties regarded it as continuing. It made sense to relocate when the London flat was free and both children were starting school in September. The husband had done all he could to forum shop by seeking advice from two sets of English solicitors, considering a protective petition and failing to file an acknowledgment of service.

King J considered Radmacher and commented that neither party had considered or discussed divorce at the date of the agreement: the primary motivation was to give the wife financial protection if the husband died. Further, there was no common understanding between the parties about what it was intended to achieve. The wife sought financial security and would not have conceded the London flat was anything other than matrimonial property. The husband sought to exclude his pre-acquired assets.

As the Spanish legal experts were unclear about the impact of the unusual agreement, neither party could have a full appreciation of what it meant under Spanish law. The only intention that could be inferred was that both parties intended, subject to the 16.88% interest in the Madrid property, that all assets acquired after the agreement would be shared equally.

The assets, with the exception of the husband's pension, were required to meet the parties' needs. The pension was accrued entirely before the marriage and was excluded in its entirety.  The wife was awarded £600,000, representing maintenance of £31,000 per annum for 5 years. Whilst she would seek work her role as the children's primary carer, lack of recent work experience and the Spanish economy would make this difficult.  A longer term of maintenance was inappropriate in view of the acrimony between the parties. The remaining assets were divided equally.

On the issue of costs the wife sought:

1. Exclusion of costs from the asset schedule – she had paid more towards hers and so would effectively be contributing to the husband's.
This was rejected. It would effectively treat costs as an addback requiring detailed consideration of the husband's spending.

2. An addback relating to the husband's overspending.
King J considered the criteria in Vaughan v Vaughan [2008] 1 FLR 1108 were not met and declined to order this.

3. Her costs for the leave to remove element of the litigation.
As they were separate proceedings, the court could only make provision for costs by finding that the order in relation to costs had been a pragmatic decision to resolve the case and detailed consideration was needed to "add back" the wife's costs of those proceedings. The husband's failure to inform the wife of the Spanish job offer was unfortunate but not "wanton" such that it should be penalised.