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Finance & Divorce May 2012 Update

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

Anna Heenan and David Salter of Mills & Reeve LLP

This update will be of particular interest to practitioners who advise on divorce and financial remedy cases. It is divided into two parts:

o News in Brief and
o Case Law Update.

News in brief

The Queen's Speech
Despite much speculation, the topic of 'gay marriage' did not make an appearance in the Queen's Speech. In March 2012 the Home Office launched a public consultation which set out the government's proposals to enable same-sex couples to have a civil marriage.

The speech did announce a new Children and Families Bill for the current parliamentary session. The Bill will legislate upon aspects of the Family Justice Review and the Action Plan for Adoption.

Further information is available here

Sir Paul Coleridge launches charity to strengthen marriage
Sir Paul Coleridge, the High Court judge, has launched the Marriage Foundation, which aims to "be a national champion (advocate) for marriage, strengthening the institution for the benefit of children, adults and society as a whole."

The Charity's Patrons include Baronesses Deech, Shackleton and Butler Sloss.

Click here for the news story.

The Law Society refuses to host a marriage conference which breaches its diversity policy
The conference, organized by the World Congress of Families in partnership with Christian Concern, was called One Man. One Woman. Making the case for marriage, for the good of society and was due to take place on 23 May. Sir Paul Coleridge had been lined up to speak about the effects of divorce on society.

The conference was pulled because it did not fit within the Society diversity policy. Click here for the full news story.

The Centre for Social Justice reports that the government is failing to tackle family breakdown
The Centre for Social Justice has published a report card reflecting on the Coalition's second year in office. Giving the Coalition a score of 4/10 in relation to family break-down, the report concludes "Despite emerging signs of a more distinctive family policy there remains a frustrating lack of coherence in tackling the tragic breakdown of family life."

For more on this story, click here.

Confidentiality and Openness in the Family Courts
A House of Commons Library Standard note has been published, summarising the current position in relation to confidentiality in the courts in England and Wales.  The note includes a discussion of proposed reforms and can be found here.

A new family court
The Crime and Courts Bill proposes a single family court with a single point of entry, in place of the existing system under which magistrates' courts, County Courts and the High Court can all hear cases at first instance.

Further detail can be found in Schedule 10 of the Bill, which is available here.

Changes to the funding of legal costs
As highlighted by Obiter J of law and lawyers (, sections 49-54 Legal Aid, Sentencing and Punishment of Offenders Act 2012 make changes to the Matrimonial Causes Act 1973 and the Civil Partnership Act 2004.

The changes, which are not yet in force, give the court the power to make orders between the parties for payment of legal fees in proceedings for divorce, nullity, judicial separation and connected financial relief proceedings.

The Act can be found here.

Case law update
This section of the update deals with cases involving the rescission of decree nisi and treatment of supplemental petitions under FPR 2010, the treatment of pre-acquired assets where many of the assets would not become available until the future, the distinction between suspension and termination of a retainer and a solicitor's ability to recover fees and the Official Receiver's interest in property which was the subject of financial remedy claims on divorce.

Kim v Morris [2012] EWHC 1103 (Fam) (Parker J) 2 May 2012
This case considers whether decree absolute should be granted in respect of an adultery petition where the parties had cohabited for four years after decree nisi.

The wife was South Korean and the husband was British. The parties were habitually resident in England during the marriage. The wife issued a petition based on adultery in January 2006 and decree nisi was granted in April 2006. The parties resumed cohabitation by July 2006. In 2008, the husband moved to Singapore for work and the wife joined him shortly afterwards. They sold their home in England and had not lived there since.   The parties separated in the latter part of 2010.  The wife lived in Hong Kong by the time of the hearing. She had no plans to return to England and the husband claimed to be domiciled in Singapore.

The wife applied for decree absolute in February 2011. On 14 March 2011, the wife applied for (1) rescission of decree nisi; (ii) leave to file a supplemental petition; and (iii) leave to file a fresh petition. The husband applied for divorce in Singapore on the same day and those proceedings were stayed pending the outcome of this case. If the wife could establish jurisdiction, there would be no bar to her presenting a fresh petition but the proceedings in Singapore would then be first in time.

The issues were:

1. Was there an absolute bar on granting decree absolute because of s 2(1) Matrimonial Causes Act 1973, which provides that a party "shall not be entitled to rely...on adultery committed by the other if, after it became known to him that the other had committed that adultery, the parties have lived with each other for [a period or periods together] exceeding, six months.";

2. If there is no absolute bar, should the court exercise its discretion to grant decree absolute;

3. If there is an absolute bar (or the discretion is not exercised), should the decree nisi be rescinded; and

4. If so, should the wife be granted permission to file a supplemental petition, a second petition or should the original petition be dismissed.

An absolute bar to decree absolute?
Parker J noted that a marriage subsists until decree absolute is granted. Cohabitation undermines the basis for a petition or decree because it fundamentally undermines the assertion that the marriage has broken down irretrievably (in adultery cases it demonstrates that the Petitioner does not find it subjectively intolerable to live with the Respondent).

Parker J considered the case of Biggs v Biggs and Wheatley [1977] Fam 1, in which decree absolute was refused where the parties had cohabited for 6 months following adultery. She considered that there were two alternative basis for that decision: 1. there was an absolute bar on making decree absolute if cohabitation exceeds six months, which remains in effect during the whole of the marriage and 2. there is a discretion to refuse decree absolute.

She suggested that the decision could be summarized as follows, since the fact of cohabitation exceeding 6 months after the knowledge of adultery demonstrates that the basis upon which decree nisi was pronounced has been invalidated, then the fact of such cohabitation gives the court no discretion.

Should the court exercise its discretion?
In the event she was wrong in holding there was an absolute bar, Parker J considered that the reasons for the delay and the fact of cohabitation following decree nisi were relevant. The period of cohabitation was years and not months, "[t]he parties resumed their married life in the fullest sense very shortly after the decree. They seem to have treated the decree as an irrelevance... The facts of the case demonstrate to me that the marriage had not broken down as at the date of decree nisi." Delay was a relevant factor and cohabitation was of central importance to the exercise of discretion and Parker J declined to give leave for the decree to be made absolute.

Parker J did not consider it necessary to consider the quality of the cohabitation so the wife's claims about the husband's adultery during the period of cohabitation were not considered.

Should decree nisi be rescinded and should the petition be dismissed?
The husband wanted to keep decree nisi in place to block the wife proceeding in England and Wales by way of a supplemental or amended petition. The wife wanted to rescind it so she could supplement and revive her petition.

Whilst there was no specific reference in the FPR (either 1991 or 2010) to the power to rescind decree nisi if the wife's application was refused, both parties accepted this could be done in principle. However, the husband argued that this could only be done if the wife's petition was also dismissed. Parker J accepted the court could make any order it thought fit, including dismissing the petition. The question of whether this should be done was bound up in whether the wife should be permitted to supplement her petition. If she could not, then there was no point in a petition on which she could not proceed.

Should the wife be able to amend/supplement her petition?
The wife sought to file a supplemental petition or a second petition on the basis of adultery (although the second petition was not pursued during the hearing because of the jurisdictional issues).

It was noted that FPR 2010 did not provide for supplemental petitions (rule 7.13 provided for amendment only): "I accept that this is a deliberate omission, and effects a substantial and important change in procedure."

The wife's original petition was brought under the old rules (FPR 1991) (which would have allowed for a supplemental petition). However, Parker J considered the transitional provisions and considered the FPR 2010 should be applied.

If the FPR 2010 did not prevent the judge from giving the wife permission to supplement her petition, then the fact the route was no longer available must be a relevant factor in this transitional case. Parker J noted that, "the parties' connection with this jurisdiction is long past and... the petition is extremely "stale", and based upon events upon which W can no longer rely, and which cannot, in contrast with behaviour, be revived. The grant of decree nisi is a crucial watershed which cannot be ignored."

If the wife could not supplement her petition, as was Parker J's primary decision, then decree nisi must be rescinded and the petition dismissed.

If there was no absolute bar on filing a supplemental petition, then various factors supported Parker J's refusal to allow the wife to do so:

a. the antiquity of the petition, followed by over four years cohabitation;
b. the parties' lack of jurisdictional and actual connection with this jurisdiction (subject to the husband's domicile);
c. the application was made before the implementation of the new Rules and the new Rules were now in force and must be taken into account;
d. to supplement the petition was artificial: were it not for the jurisdictional issues the wife would have sought to issue a fresh petition.

The wife could issue a second petition: but only if there was jurisdiction.

R v R [2011] EWHC 3093 (Fam) (Coleridge J) 5 April 2011
This case considers the treatment of pre-acquired wealth in a "needs" case where half of the £4million assets would not be available for some years.

The husband was 48 and the wife 35 when they married in 2002. This was the third marriage for both of them. The relationship broke down in 2009. The wife had a daughter from her first marriage and the parties had a daughter together.

The wife did not work. The husband was a successful chartered surveyor at the time of the marriage, and had become managing partner of his firm by the hearing. The assets totaled around £4.5 million, made up as follows:

- The Barn, the former matrimonial home worth around £1.45 million with a net equity of £567,000;
- X House, the husband's home (interestingly, this was built by the wife's family prior to the marriage) worth around £1.9million with equity of £1.1million;
- The Lodge (the value of which is not listed in the judgment)
- The Spanish property (the value of which is not listed in the judgment)
- L Way (the value of which is not listed in the judgment)
- The "Deferred Fund", made up of a minority interest in two property development businesses, which the judge considered to be worth £2million before CGT.
- Approximately £250,000 in liquid assets

Pre-acquired assets
Almost all were the fruits of the husband's earlier assets. Coleridge J noted that recent case law advocated removing the pre-existing assets from the account and splitting the remainder 50:50. On that approach the wife would leave with a little over £1.2 million which would not meet her needs. If she took this from the current assets to meet her immediate costs then she would have no entitlement to the "Deferred Fund", which might be worth many millions if it continued to grow at the same rate (although most growth would be the result of post-separation effort by the husband).

The wife wanted to retain the former matrimonial home. The husband agreed that she could do so, but not as a way of justifying a greater proportion of the capital or income now. The judge accepted that the wife was over-housed and that £800,000 would meet her housing needs and those of the children. However, he noted that the children remained caught up in an acrimonious contact dispute and that it would be better not to subject them to a move if it possible.

To generate £800,000, the wife was awarded the equity in the Barn, the Lodge and L Way. She was also awarded a lump sum of £450,000 to meet her costs. Given the animosity between the parties, the fairly short marriage and the husband's retirement in the near future, Coleridge J decided not to award the wife a fixed percentage of the "Deferred Fund". Instead he provided for an immediate lump sum of £650,000, inflated at a fixed rate of 5% per annum until payment, to provide a clean break as soon as possible. This might allow the wife to remain at the Barn with careful management, but if not she would have to downsize.

Add-back in relation to costs
The wife's costs were double the husband's and he argued for an add-back. Coleridge J accepted the wife's arguments about the husband's non-disclosure and litigation misconduct as "necessarily very costs-generating" and decided against any add-back. He commented that it was easy to be wise after the event and to demonstrate certain actions were unnecessary.  The wife had had to make the running and she was, to some extent, justifiably suspicious because the husband had told her he had hidden assets in previous divorces. Coleridge J said he would discourage add-back as a matter of principle as it lead to a quasi-assessment of costs at a hearing without a court having the material that would be available to a costs judge. It also flew in the face of the no-order principle.

The use of post-White case law
The judge concluded that "the injection into the process in this case of the new principles that have been collected from the well-known recent cases (for example, White, Miller v Miller and Charman) have provided a greater degree of sophistication in the never-ending quest for fairness in cases where there is a large surplus over and above the parties' financial needs. However, as this case graphically demonstrates, this has been done at the expense of simplicity where as I find the resources are only barely able to cover the debts and needs…"

Cawdery Kaye Fireman & Taylor v Minkin [2012] EWCA Civ 546 (Ward, Stanley Burton and Elias LJJ sitting with Senior Costs Judge Master Hurst as an assessor) 18 January 2012
This case considers the circumstances in which a solicitor can suspend or terminate a retainer and the impact of this on the client's liability for costs.

The client, Mr Minkin, instructed Mr Cooper of Cawdery Kaye Fireman & Taylor ("CKFT") to represent him in his wife's application for occupation and non-molestation orders. Mr Minkin wanted to keep costs down and Mr Cooper provided an estimate of £3,000 + VAT to represent him. Mr Minkin paid £2,000 on account.

The subsequent retainer explained that the firm charged on an hourly rate and that any "estimates are not intended to be fixed or binding and other factors may mean that the estimate will be varied from time to time." The retainer also provided that Mr Minkin should consult the firm immediately with any query about the bill.

The firm's standard terms reiterated that estimates were a guide only and may be exceeded. They explained that if an account was overdue for payment, without reasonable justification, that the firm may suspend or terminate services. The terms further explained that Mr Minkin could terminate his instructions in writing at any time, but that the firm could only decide to stop acting for him on reasonable grounds and on giving reasonable prior written notice.

The day before the hearing it was discovered the Mr Minkin's wife had left the matrimonial home and rented it to tenants. The occupation order was, therefore, dismissed and the non-molestation order adjourned, with costs reserved until that hearing. At court, counsel and a trainee at CKFT discussed obtaining a copy of the tenancy agreement, bringing possession proceedings against the tenants, and attempting to obtain Mr Minkin's share of the rent.

Mr Minkin was sent a bill totaling £5,472.50. The covering letter explained that the firm could not begin court action until the outstanding balance had been paid. On 3 August, Mr Minkin expressed shock at the size of the bill. Mr Cooper explained this was the result of a great deal of work having to be done prior to the hearing when it became clear that the property was tenanted. Mr Minkin said he could not pay until he had recovered costs from his wife and Mr Cooper replied that the firm could not carry on acting on this basis.

Later that day, Mr Minkin asked whether he could go to the house to check for his post and recover his possessions. Mr Cooper advised against this, he reiterated reasons for the higher bill, and said that because Mr Minkin had queried it he was concerned that he should not carry out any further substantive work: the firm would not continue acting based on the possibility of recovering costs from the other side.

Mr Minkin agreed to, and did, pay £1,800 on 18 August.  It was made clear that part of the bill remained outstanding. Mr Cooper suggested that the only way to get the tenants out was to make an application for possession which Mr Minkin instructed him to do.

On 20 August, there was further correspondence in which Mr Cooper explained that fees would need to be up to date and he would need money on account before beginning possible proceedings. In various emails throughout the day, Mr Minkin said the firm should get hold of the rent money to pay his fees and Mr Cooper explained that the primary liability for costs rested with Mr Minkin. Mr Cooper's final email made clear that the firm could not continue to act while there were outstanding arrears.

Mr Minkin's wife issued a without notice application for an occupation order on 21 August. CKFT received this on 25 August, the date fixed for the hearing. Mr Cooper's secretary explained that she would not fax the court firstly because it was too late and second, because the outstanding invoice had not been settled, the firm could not continue to act.

On 1 September there was a further exchange of emails culminating in Mr Minkin's request for the senior partner to review matters. A final invoice was raised. The firm did not apply to come off the court record, but wrote to the court to say they were no longer instructed.

The firm's bills were sent for assessment and Mr Minkin's solicitors argued that CKFT were in breach of the retainer. It was held that this was an entire contract and the solicitors were not entitled to receive any fees for the work they had done and should repay any sum received on account of fees.

The Court of Appeal disagreed. The firm had suspended its retainer, rather than terminating it. This was demonstrated by the language of Mr Cooper's email of 3 August ("Given that you have queried the bill I am concerned that I should not carry out substantive further work for you"). The email of 20 August, making clear that the firm would not act until the money was paid, also pointed to suspension as it implied a willingness to act when there was money on account.

Mr Minkin's complaint about the bill could not stand in the face of the retainer and terms of business which made it clear that estimates were not fixed and binding. He had been informed of his right to challenge any bill he felt was excessive, which he did not exercise. Mr Minkin could not reasonably expect his solicitors to wait for payment until they had an order for costs against his wife. The unexpected complication did not justify the refusal to pay a bill which became payable on presentation. Mr Minkin was, therefore, in breach of the terms of business and the solicitors were entitled to suspend the retainer pending payment. Whilst the secretary's statement on 24 August that "CKFT cannot continue to act" sounded like the language of termination, it had to be read in the context of what preceded it and what followed.

The retainer was terminated by Mr Minkin's email of 1 September saying that he had lost faith in the firm's ability to get matters resolved. In doing so he absolved the firm from any further performance of the contract. This did not, however, absolve Mr Minkin from paying costs properly incurred to that date.

KK v MA & Others [2012] EWHC 788 (Fam) (Charles J) 29 March 2012
This judgment, which follows an earlier fact-finding hearing, considers the Official Receiver's interest in property which was subject to financial remedy proceedings.

The husband had been made bankrupt in 1992. A preliminary issue arose in financial remedy proceedings about the ownership of shares in various companies and properties. The court also had to deal with a claim brought by the Official Receiver before it was possible to deal with the wife's financial claims.

The events leading up to husband's bankruptcy were as follows:

- July 1998: Southend (a company) was incorporated. The husband held 99 issued shares and the remaining one was held by Mr A.
- 23 December 1998: the husband transferred all of his shares to S (his sister), on the basis that she would hold them on his behalf, to avoid his creditors.
- November 1991: a bankruptcy petition was issued against H.
- 1 March 1992: Mr A transferred his share to S.
- 31 March 1992: the husband was adjudged bankrupt.

The husband did not disclose any interest in the Southend shares to the Official Receiver (he said he was an employee of the family business).

The bankruptcy was discharged on 31 March 1995.

The parties married in February 1996. In 1997 S transferred 25 shares to each of the husband, the wife, the husband's mother and another sister. It was found that the intention was that the husband would remain the beneficial owner of the shares.

In November 2001, AA (a second company) was incorporated and the business and related assets of Southend were transferred into it for no consideration. The shareholders of Southend were initially given shares in AA in the same proportions.

By 2002, the husband and wife each held 35 shares in both companies and the husband's mother and sister held 15 shares each in each company.

In March 2003, the following transfers occurred:

- The husband transferred his 35 shares in AA to S;
- The husband's 35 shares in Southend were transferred to his mother.

The husband and wife separated in 2004. In the same year, both companies increased their share capital and issued shares to the husband's family so as to dilute the wife's shareholding. Southend effectively ceased trading in 2005.

A number of properties had been purchased using dividends declared by both companies. The Official Receiver brought a claim based on the statutory vesting in him of the husband's estate during his bankruptcy followed by a proprietary remedy (tracing). 

The Official Receiver held the husband's estate for the statutory purpose.  If and when there was a surplus of assets over debts, the Official Receiver would hold that on trust for the husband.  The surplus would only be identified when all debts were paid.  As the debts had not all been paid here, the discharge of the husband's bankruptcy did not divest the Official Receiver's interest in the husband's estate.  Therefore, the husband had no interest in the shares and could not deal with them or any dividends declared. This also meant that the Official Receiver had the right to trace the dividends and property purchased with them.

It was held that in 1992, S held shares in Southend as trustee for the husband so his interest vested in the Official Receiver.

The Official Receiver could also follow the beneficial interest in the AA shares because the ownership of them was based on the ownership of the Southend shares. This meant the Official Receiver was entitled to an interest in the properties purchased with the AA dividends and also to the family loan accounts through which properties had been purchased. Charles J felt that various arrangements and agreements surrounding the properties could be ignored for this purpose.

The sale proceeds of the properties and the monies in the family loan account should be transferred to the Official Receiver. 

When the surplus in the bankruptcy was ascertained, and the final distributions made, the assets held by, or for, the Official Receiver representing the surplus would be vested in the husband.  At that stage, they should be preserved to meet orders for financial remedy.