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Finance and Divorce August 2012 Update

Anna Heenan, solicitor and David Salter, Joint Head of Family Law at Mills & Reeve LLP analyse July’s financial remedies and divorce news and cases.

Anna Heenan and David Salter both of Mills & Reeve LLP

This update covers developments during July 2012 and is divided into 2 sections:

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.

Sixth update on progress with the Family Modernisation Programme published
Mr Justice Ryder has published his sixth update on the Modernisation Programme, which sets out the test of a speech given by him on 26 June 2012.

For the full story, click here

Process and timetable set out for the Family Modernisation Programme
In a recent speech, Mr Justice Ryder also outlined the process and timetable for the programme.

For further information, click here

Husband's right to private life prevents reporting of financial remedy judgment
The Press Gazette reports that, after balancing the rights of the media to freedom of expression and the right of the husband (and others) to respect for private and family life, District Judge Bradley held that details of a financial remedy case could not be reported.

It had been claimed that publicity about the case would embarrass the husband, damage his career and possibly put his life at risk.

For the full story, click here

Lady Hale suggests that Scots law could inform cohabitation reform in England and Wales
The Solicitors Journal reports on the Supreme Court ruling in the Scottish case of Gow v Grant [2012] UKSC 29 in which Lady Hale suggested there were a number of "lessons to be learned" from Scottish cohabitation law.

For the full story, click here 

Lord Neuberger appointed next President of the Supreme Court
Lord Neuberger, who is currently Master of the Rolls, will be sworn in on 1 October 2012.

For the full story, click here

Case law update
This section of the update deals with cases involving permission to appeal an order providing for a lump sum payment towards outstanding legal costs where no costs order had been made, an appeal on the basis of fresh evidence of non-disclosure, judicial encouragement of trustees and variation of settlement.

Alaymi v Mussalam [2012] EWCA Civ 898 (Ward LJ) 15 May 2012
This was the husband's renewed application for permission to appeal part of an order of Coleridge J.

Ward LJ describes that order as follows: "having ordered an unusual arrangement for money to be paid by the wife in order to buy a property for the husband, [Coleridge J] went on to make a lump sum order or perhaps, though questionably, of a further lump sum order of £50,000… to cover [the husband's] outstanding costs."

The husband had costs from two sets of proceedings:

1. Proceedings under the Children Act 1989.
The judge in those proceedings made no order for costs against the wife so the costs were the husband's liability.

2. Proceedings and proceedings under Part 3 of the Matrimonial and Family Proceedings Act 1984.
The wife had already paid part of the husband's costs of these proceedings in an order under A v A [2007] EWHC 1810 (Fam).

Ward LJ observed that the first instance decision illustrated a tension in the way that the Family Division was currently operating. There had been no order for costs in either of the sets of proceedings referred to above. However, one of the factors that the court must consider under s 25 Matrimonial Causes Act 1973 is any liability of either party (which would include their legal costs). For that reason, he granted permission to appeal. Ward LJ did, however, urge the parties to try and settle this matter prior to the hearing.

Musa v Karim (Thorpe and Sullivan LJJ and Morgan J) 13 July 2012
This case concerned the husband's appeal of a financial provision claim on the basis of fresh evidence of non-disclosure by the wife.

At first instance, both parties had alleged that the other had fabricated documents and concealed assets. The judge criticised both parties, but preferred the evidence of the wife where there was a conflict.

The wife's evidence was that:

The judge at first instance ordered an equal division of the assets as described by the wife.

The husband appealed on the basis that the judge's decision was fundamentally vitiated by the wife's non-disclosure regarding her inheritance from her father and the other properties. The husband produced fresh evidence regarding ownership.

The Court of Appeal allowed the appeal. It noted that it was open to the husband to appeal to either the Court of Appeal or the first instance court.

The husband had produced significant fresh evidence that appeared to undermine the wife's case that she had divested herself of the inherited properties following the payment of $125,000. The evidence suggested that the wife had dealt with the properties after that payment and, significantly, that she had transferred the properties at a critical point in the proceedings. She had also made these transfers at a significant undervalue. If the evidence was correct then this would make the wife guilty of deliberate non-disclosure and advancing a false case.

The husband's evidence regarding the other overseas properties suggested that two of them had been confiscated by the state, which cast doubt on the wife's assertion that she had no interest in them. There were also unanswered questions about the rest of these properties.

The wife's attempts to answer the husband's case were feeble. The matter required reinvestigation and was remitted. 

RK v RK [2011] EWHC 3910 (Fam) (Moylan J) 21 November 2011
In this case, Moylan J considered the extent to which judicial encouragement of trustees was permissible.

The wife was 40 and the husband was 39. There were three children of the eight-year marriage. The husband was the beneficiary of a number of different discretionary family trusts. The trusts' principal assets were shares in the family company (FC), which was engaged in farming and owned a large estate. Throughout the marriage the parties lived in properties owned by FC. Their outgoings had consistently exceeded their income.

The husband's net liabilities were just over £300,000. The total included an investment property owned by him, which was subject to a charge in favour of one of the trusts (leaving a net equity in the property of £7,000). The total also included loans from the trusts and the husband's father of £194,000. Moylan J concluded that the trustees must have been aware that the husband would not be able to repay the loans without a further loan from elsewhere. Therefore, he considered that these were not debts the husband would have any obligation to repay in the foreseeable future.

The wife had debts of around £245,000 (of which just over £200,000 were legal fees).

The husband's net income was around £49,000, plus benefits in kind which were valued at around £33,000. These included housing, a car and the payment of various bills. The husband also received rental income and income from the trusts which, together, totalled £10,500 per annum. The wife had not really been in paid employment during the marriage. She received around £10,000 per annum in child benefit and tax credits, and £6,000 in maintenance from the husband. The wife's s 25 statement said that she eventually expected to earn £15,000 as a caterer.

The wife sought £400,000 for a house (by way of life interest) and £25,000 to fund the costs of purchase and a car. She also sought £245,000 to cover her debts, a pension share and maintenance for herself and the children of £30,000. Moylan J concluded that the wife's claim for £400,000 for a house, excluding associated costs, was reasonable. In assessing the wife's income needs, Moylan J noted that the wife had pitched these at a relatively modest level. He concluded that a fair assessment of these would be £40,000 per annum.

Moylan J heard evidence from both parties and the professional trustee of the trusts. He noted that the trusts had very significant illiquid capital resources and limited liquid resources (£600,000 - £700,000). Moylan J also noted that the trustees had, rightly, acknowledged that they had a significant part to play in resolving the wife's financial claims and dealing with her needs and those of the children.

The trustees had made several offers to the wife, the most recent of which was for a total of £400,000 to be used to purchase a car (£10,000), to purchase a house (£375,000) and to purchase furniture and meet the costs of moving etc (£15,000). The trustees commented that the wife's "personal debts have become out of control and the trustees have neither the fund not the inclination to settle those debts."

The trustees' position was that they would want to take the judgment into account when deciding how to exercise their discretion. This was not an indication that they would necessarily make additional resources available, as they would have to consider the implications for the other beneficiaries. Moylan J noted that the husband did not consider himself under any obligation to find out from the trustees what resources they might make available to the wife. The husband had misunderstood and failed to comply with his obligations as the respondent in this respect.

The authorities
Moylan J considered the cases of Thomas v Thomas [1995] and Charman v Charman [2006] and concluded that:

"…the question is one of fact. Resources held within a bona fide discretionary trust are a party's resources to the extent which, on the balance of probabilities, they are likely to be made available to that party either now or within the foreseeable future. This would encompass provision for that party's own needs as well as provision to enable that party to meet an award made against him or her in favour of the other party..."

After reviewing Re: The Esteem Settlement [2004] JRC 92 and Whaley v Whaley [2011] EWCA Civ 617 Moylan J observed that:

"The court will expect trustees to respond positively if the court concludes that the interests of the trust and of the other beneficiaries would not be appreciably damaged if the trustees were to provide the husband with the resources he requires to enable him to make proper financial provision for the wife and children. They would be expected to respond positively because the court would have concluded that the husband would making a reasonable request and trustees are expected to act reasonably in the discharge of their duties. This requires… that [the trustees and the court] are surveying a broadly similar landscape and from a broadly similar perspective."

The judge accepted that the trustees were, reasonably, reluctant to use all the liquid funds in the trust for the benefit of the parties. There were other beneficiaries, to whom loans had been made who might be expected to have further needs in the future. Moylan J accepted that if the husband were to repay the loan to the trust in respect of his investment property then this would increase the liquid funds available by £102,000. Such repayment would only reduce his net income by a bit over £3,000.

As the wife's home would remain within the trust structure, Moylan J held that the trustees could provide a greater housing fund without damaging the interests of the other beneficiaries. He, therefore, awarded the wife £425,000.

The issue of whether the husband should be ordered to make a lump sum payment to meet the wife's debts was more difficult. Moylan J felt that the litigation conduct of both husband and wife could be criticised but he did not make an order for costs. Instead, he ordered a lump sum payment of £50,000 to the wife. This was a fair amount in respect of her debts and it was the amount he considered the trustees would make available from the trust resources for these purposes. This would not appreciably damage the interests of the trust or the other beneficiaries. The judge also noted that the trustees had provided the husband with £86,000 in respect of his costs.

Moylan J concluded that the husband could afford to make periodical payments of £28,000 per annum to the wife. When combined with her state benefits, this gave her an income of £38,000, which was just short of her needs. These payments would not be reduced at all in respect of earnings up to £5,000 per annum, they would be reduced by half in respect of earnings from £5,001 - £10,000 per annum and reduced pound for pound above that sum. Any reduction in tax credits would need to be taken into account. This arrangement was to reflect that the wife's costs (child care etc) were likely to increase when she began working. The periodical payments were not index-linked.

The Judge then considered various subsidiary issues:

1.     The wife had claimed an interest in one of two paintings that the parties had purchased together using money the husband had inherited. Moylan J concluded that it was not unusual for such items to be divided between the parties as a fair division of the chattels of the matrimonial home and awarded the wife one of the pictures.

2.     He did not consider it appropriate to make an order in respect of the family dogs.

3.     Whether the children continued in private schools was a matter for the trustees and the husband to consider.

4.   The wife had entered into a Sears Tooth agreement with her solicitors under which she assigned all her interest in any financial provision or costs order made in her favour. It, therefore, included periodical payments orders. Moylan J said that he would be surprised if the purported assignment of any periodical payments order was enforceable.

Hope v Krejci [2012] EWHC 1780 (Fam) (Mostyn J) 29 June 2012
The parties' application for financial remedy had been determined in July 2011. The husband was ordered to pay the wife a lump sum of £268,000 and a contribution to her costs of £100,000 (which included sums recoverable under earlier costs orders). Since that judgment, the husband had not paid anything towards this award. The husband had also unsuccessfully tried to appeal the award and the earlier costs order.

The structure of the trusts and companies was that the family trust (KFT) owned a Jersey company (which had various assets). The Jersey company, in turn, owned DUK (a company the husband had some involvement with). DUK owned commercial properties but the company was described as virtually "underwater" by the time of the hearing.

The wife had initiated proceedings in the Companies Court to wind up DUK. The husband applied:

1. to the Companies Court to prevent the winding up petition being advertised;
2. to the Queen's Bench Division in respect of default costs certificates relating to the earlier costs order; and
3. for pre-action disclosure in a free-standing civil fraud action against the wife, alleging non-disclosure of material facts about her bankruptcy in her application for financial remedy.

The wife recovered some costs from DUK through the winding up proceedings which meant that, with interest, the husband owed the wife £373,082. DUK also owed the wife £13,500 in relation to the costs of that litigation (which was not within the costs order from the financial remedy proceedings).

The wife applied:

1. for enforcement under the new procedure in rule 33.3 FPR 2010; and
2. to restore her application for variation of a nuptial settlement. This had been adjourned in the financial remedy proceedings but that judgment provided that it could be restored if the husband did not pay the lump sum by 1 October 2011.

She sought the following orders:

1. a variation of KFT to pull out a fund of £373,082 for the wife absolutely. This would include assets held by the Jersey company;
2. should that be implemented, the enforcement application would be adjourned generally; and
3. a non-statutory civil restraint order preventing the husband from embarking on any kind of satellite litigation against the wife in any court without the prior permission of this court.

Variation of settlement
Mostyn J reviewed his own summary of the law at paragraphs 7-13 of BJ v MJ (Financial Remedy: Overseas Trusts) [2011] EWHC 2708 (Fam). He commented that:

"In most overseas trust situations there will likely be an offshore company interposed between the trust and the underlying situation. This is the position here. The fact that there is an interposition of a company has to my knowledge never been argued, let alone found, to be an impediment to making an effective variation…

In my judgment, in a variation of settlement case, the court can, metaphorically speaking, travel right down the lift-shaft from the top floor to the basement, without having to stop at any floor in between."

Piercing the corporate veil
Mostyn J held that it was, strictly speaking, unnecessary to address this issue given his conclusion on variation of settlement. He did, however, review the recent case law on the basis that a higher court might disagree with his primary finding.

This case
Mostyn J found that nothing he had heard caused him to doubt his findings about the scale of the husband's undisclosed assets (at the hearing of the financial remedy application he had found these to be approximately £1 million). However, he considered that he did not need to find impropriety to make a variation of settlement order and he considered how this could be done.

The assets within the jurisdiction only totaled £90,000 and therefore, if these were pulled out, £283,000 of the award would remain unsatisfied. If the court was to order this additional sum to be pulled out of the trust then the court would need to identify it in the trustees' hands. The wife would also need to persuade the Royal Courts of Jersey to make a reciprocal enforcement order (and there was no evidence that they could or would do so). He concluded that "I believe the variation should nonetheless be made, even if that too proves to be an empty vessel in the hands of W." The only other living discretionary beneficiary of the trust was the parties' adult child, who did not object to the wife's proposed variation.

The wife's enforcement application under rule 33.3 was adjourned generally with liberty to restore.

Finally, Mostyn J considered the wife's application for a civil restraint order. The wife had applied for this under the court's inherent power in a way which had not been used since 1839. The judge considered that the wife was effectively seeking a limited civil restraint order under FPR 2010 PD 4B, para 3. The threshold for these applications was that the party had "persistently made applications which are totally without merit". Mostyn J considered that the husband had not yet crossed this threshold as he had only made one application that was totally without merit (and not two as is required). The judge did not consider it appropriate to use his inherent powers to outflank the statutory scheme in this case.