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Finance Cases Round-Up: June 2015

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Lynsey Cade Davies of 29 Bedford Row summarises 3 finance cases which have been published recently: Fields v Fields [2015] EWHC 1670 (Fam), Davison v Davison [2015] EWCA Civ 587 and De Cruz v Rubino [2015] EWHC 1691


  • Lynsey Cade Davies, 29 Bedford Row

    Fields v Fields [2015] EWHC 1670 (Fam)

    This case sparked considerable interest from the press who revelled in the story of a Russian born beauty queen's divorce from her estranged millionaire husband, a US lawyer. The Press headlines were fuelled by Holman J's criticism of the £1.2m spent on lawyer's fees in respect of an asset base of c£6m.

    Holman J directed that the bulk of the hearing would be heard in public relying upon his reasons in Luckwell v Limata [2014] EWHC 502. He stated:

    "There is considerable current, legitimate public interest in the way the family courts daily operate, and that cannot be shut out simply on an argument that the affairs of the parties are private or personal. Precisely because I am a public court and not a private arbitrator, I must be exposed to public scrutiny and gaze. But the exposure is very avoidable by the parties themselves. That is one of the many advantages of settling a case." [§ 5]

    Richard Fields is an American lawyer aged 59. He had been married and divorced four times previously and has 2 adult children from his first two marriages. Ekaterina Parfenova Field was born in Russia and was voted Miss World University in 1990. She was 42 at the time of judgment. At the age of 18 she fled Russia and soon met her first husband, an American banker, with whom she lived in London.  

    The parties met in September 2001 and began to live together two months later. Within weeks of first meeting the husband signed a deed of gift under which he would pay the wife £500,000 in 5 annual instalments. In fact he never made those payments but instead, and by agreement, he transferred his shares in a certain company to the wife. Those shares were later transferred by the wife to her father and then by her father into the Parfenova Trust which was established for the benefit of the parties' children. The shares yield an income of c$180,000 pa and therefore the trust could contribute towards the children's needs.  

    The parties married in November 2002. The collapse of Enron coincided almost exactly with the date of the marriage and had the effect that the husband lost almost everything due to a failed business that was linked to Enron. As a result all the current assets (bar the wife's modest flat in Moscow inherited from her mother) had accumulated during the course of the marriage. Faced with those difficulties the parties returned to live in the US where the husband resumed work as a practising lawyer and began to earn at a high level.  

    In 2007 the husband set up a vehicle for institutional investors to fund the legal costs of a certain type of heavy civil litigation in return for a share in the proceeds of the claims. He generates a salary, bonus and potential performance fees by providing management of the investment funds and by identifying the suitable claims in which to invest. Holman J noted that the husband works "very hard indeed", some 70-80 hours per week, 6 days a week with 3 weeks holiday a year.

    The parties had two children: a son aged 7 and a daughter aged 5.  

    In 2011 the parties and the children travelled to London and rented a flat in Chelsea. The husband then returned to New York. Unbeknownst to the wife the husband had previously filed a divorce petition in New York. The parties never lived together thereafter. The total relationship was 9.5 years.  

    The assets were agreed at c£6.237m of which £3.285m represented liquid assets after provision for all the legal costs (NB some of the husband's pension pot was considered liquid as he could draw down his pension and be taxed at his marginal rate). The husband's gross income was c£1.377m pa (or approximately £850,000 net without any precise calculation of the tax relief on spousal alimony). In addition he receives performance fees.  

    The Judge considered the parties' respective ages, their health ("disability") and that of one of the children and the parties' standard of living as the magnetic s25 factors:

    • The husband suffers from a number of conditions which are exacerbated by the high demands of his professional life. A medical report described his medical condition as poor yet stable and was pessimistic about his future. The husband said he does not envisage retiring for many years.

      Nonetheless the Judge considered he could not expect or assume that the husband should continue to work as hard for much longer, and certainly not past 65. As a result the court considered security as an important feature given the likely decrease in the husband's high income before the children are adults.
       
    • Equally the wife suffers from a number of conditions including chronic fatigue syndrome. The range of ill health and disabilities was found to support the wife's need to have a flat rather than a house, her inability realistically to work and hold down a job and her need for considerable help from nannies and staff. The husband had argued that the wife could increase her earning capacity to c£20,000 pa. However, having regard to the size of the husband's income and to her health, her employment history and the needs of the children, the Judge concluded it would be unreasonable to expect her to generate a "marginal £20,000".

    • The parties' daughter has significant development difficulties for which she requires particularly intense care and attention, which the wife, with her own health problems, cannot fully provide unaided.  

    • The parties' standard of living was high with estimated expenditure of c£800,000pa.

    The wife wanted to live in Kensington and purchase a flat for £5m. The husband suggested the wife should live in Battersea and spend c£1.8m to £2m. The judge provided a housing fund of £2.5m. 

    The judge agreed with the wife's claim for an award for "stockpiling" given the ages of the parties and the children in relation to each other. However such an element of stockpile should be saved and ring-fenced so it is available to meet future needs and can be taken into account if the husband's income drops. The court considered that investing the stockpile element in a repayment mortgage would be acceptable and a "wise way of saving". However if this route were taken, then the wife would have to downsize in due course to release funds for income.  

    After lengthy analysis Holman J ordered the husband to pay the wife a lump sum of £1.2m to bring her liquid assets to £2.55m and periodical payments of £370,000 pa broken down as follows:

    • An overall budget of £350,000 pa is "fair, but generous" 
    • The Parfenova trust will pay £80,000 pa towards the children's expenses in addition to their school fees, leaving a shortfall of £270,000;
    • An additional stockpile element of £100,000 pa, bringing the total to £370,000

    After deduction of tax the total net burden to the husband of paying periodical payments of £370,000 pa is £237,200. The court did not award the wife any share in the performance fees but in the event of any future application to vary the payments downwards on account of a reduction in income, she would be entitled to rely upon the performance fees as a source of income from which periodical payments should be paid. 

    Practitioners will be interested in the provision by way of periodical payments by way of a "stockpiling" award. We saw a similar approach in the case of McFarlane in 2009 and following this decision we can expect an ever increasing claim for stockpiling, especially in cases where there is a disparity in the parties' ages or where the payer's income is high but likely to be short-lived.

    Davison v Davison [2015] EWCA Civ 587

    The author represented the wife in what is the end of a 10 year legal battle in resolution of her claims for ancillary relief. The Court of Appeal unanimously allowed the wife's appeal against the order of Moor J concerning the interpretation of an order of the late Baron J. 

    The parties were involved in protracted litigation from 2005 to 2010. Baron J concluded that the husband had been guilty of litigation misconduct and had caused inexorable delay in the resolution of the wife's claim. The main asset was Tillingdown Farm, a property in Surrey, which was owned by an offshore trust via two BVI companies. The trust was settled by the husband and until the financial remedy proceedings had no nominated beneficiaries. Following the instigation of court proceedings in 2005, the husband's three children were nominated as beneficiaries. The property was unusual in that it had been a victim of years of illegal waste tipping by the husband and was therefore subject to enforcement action by Surrey County Council. This had caused Baron J to find the value of that property was devalued by £1.05m to £3.2m gross.

    The proceedings before Baron J concluded in 2009 with an order which provided for variation of the trust so as to provide the wife with a capital lump sum predominantly for £756,000, plus any maintenance arrears pending payment, any costs orders due and subsequently made.

    In the event the lump sum was not paid by April 2010 the trust asset, a farm in Caterham, Surrey (owned via two BVI companies), was to be sold. The lump sum was not paid by the due date and therefore the trustees commenced marketing the property in 2010. The farm was a difficult property to sell due to the illegal tipping of waste that had occurred on the land in previous years. The sale was finally concluded in December 2013 after various aborted sales. Mrs Davison therefore received her award no less than 4 years after Baron J's judgment.  

    Baron J's order provided for the wife to receive additional sums, in the event of a sale of the farm, payable pursuant to paragraphs 3(a) and (c) of the order. The relevant paragraph was paragraph 3(c), which read as follows:

    "c) In the event the capital gains tax payable upon sale of the said property is less than £1,090,000 the Petitioner Wife shall receive 45% of the difference between the actual capital gains tax payable and £1,090,000."

    During the course of the ancillary relief proceedings, HMRC issued assessments against the husband and one of the BVI companies for various unpaid taxes. The calculation of £1.09m derived from an in-house note prepared by the husband's solicitors which dealt with corporation tax and CGT referable to the gain in value of the property since acquisition. In her judgment Baron J had refused to allow various heads of tax claimed by HMRC to prejudice the wife's claim, insisting that such elements of tax, penalties and interest should be borne by the husband alone. She identified three distinct categories which would each receive different treatment as follows:

    (a) should be properly deducted from the asset schedule and therefore shared by both parties;

    (b) should be added back to the husband's side of the asset schedule, eg penalties incurred by the husband for failing to declare income and pay tax;

    (c) should be neither added back nor deducted namely the potential tax on the tipping income on the basis of conclusions that if no such income had been received, as the husband asserted, there would be no tax, but if such income had been received then the husband had an undisclosed resource.

    Following the judgment, the trust entered into negotiations with HMRC to reach a compromise. The property was sold and the trust were able to negotiate a compromise payment of £850,000 in full and final settlement of all taxes, interest and penalties. Due to the husband's death in 2011, no capital gains tax or corporation tax was due. Instead an inheritance tax charge of £393,653 was assessed on payment of the lump sum to the wife. The taxes, penalties and interest claimed by HMRC amounted to £2.684m (of which £393,653 was not included in the negotiations but subsequently covered by the terms of the compromise).  

    Upon the wife's application, Moor J was asked to interpret paragraph 3c of the order and assess what uplift would be due to the wife. The husband's estate was not represented and the trust presented a neutral stance. The wife advocated a proportionate approach and asked the court to calculate the uplift by:

    (i) deducting those categories of tax which Baron J had decided should not be borne or shared by the wife;

    (ii) expressing the resulting taxes as a percentage of the original claim of £2.684m;

    (iii) applying the resulting percentage to £850,000 thereby producing a figure to be deducted from £1.09m;

    (iv) awarding the wife 45% of the difference. 

    Moor J did not accept that approach stating he was unaware whether HMRC considered certain aspects of their claim to have more strength than others. He therefore assessed the wife's entitlement at £108,000 being 45% of the difference between £850,000 and £1.09m.

    The wife appealed. King LJ gave the lead judgment in which she disagreed with Moor J's approach and supported the pro rata approach advocated by Mrs Davison. King LJ provided a helpful review of the authorities on construction of a judicial order and referred to the comments of Lord Sumption in Sans Souci Limited v VRL Services Limited [2012] UKPC 6:

    "The construction of a judicial order, like that of any other legal instrument, is a single coherent process. It depends on what the language of the order would convey, in the circumstances which the court made it, so far as those circumstances were before the court and patent to the parties. The reasons for making the order which are given by the court in its judgment are an overt and authoritative statement of the circumstances which it regarded as relevant. They are therefore always admissible to construe the order. In particular the interpretation of an order may be critically effected by knowing what the court considered to be the issue which its order was supposed to resolve."

    The appeal was allowed and Mrs Davison received an uplift of £212,467 with interest.

    This case shows practitioners how important it is to understand the nature and extent of any claim by HMRC against the parties' assets as early as possible in the proceedings. In this case, there were considerable difficulties in assessing the impact of HMRC's involvement and Baron J refused to order a third adjournment of the final hearing. Ideally the court should be fully appraised of any potential claim to tax and possible methods of mitigation. If so, it should be in a position to make final orders that include contingencies if more or less tax is actually paid. This decision also provides important guidance on the interpretation of orders where subsequent events means a literal interpretation of an order does not achieve the intended outcome.

    De Cruz v Rubino [2015] EWHC 1691

    In the context of an order for child periodical payments, the father applied to vary downwards the sum payable. The order provided for three children aged 22, 20 and 19. At the time the children were living with the mother in America under a shared residence order whereby they also spent substantial time with their father. The level of maintenance was broadly fixed by reference to the amount that would have been payable under the CSA.  

    The eldest child moved to England after school, attended university in England and made his primary home with his father. This led to the variation application. By the time of this judgment the child had left university and was working. The matter was heard by District Judge Robinson. There was some confusion as to whether the hearing was due to be a directions hearing or a final hearing due to ambiguity in the previous court order and the mother's failure to file a Form E.  Nonetheless DJ Robinson proceeded to make a final order which provided for the father to pay arrears to the mother of £2,060.90. The father applied for permission to appeal which was heard by Holman J. 

    Holman J granted permission to appeal as there was a "real prospect of success" in that there was some substance to the argument that the father was taken unfairly by surprise when the DJ decided to embark on a full final hearing that day. However Holman J was careful to draw a distinction between this case and the recent Court of Appeal authority of Re S-W (children) [2015] EWCA Civ 27. Holman J also considered there may have been substance to the father's argument that the arrears may have been overstated, or even should be reduced to zero to reflect his argument that the eldest child was living in England with him. The court considered the father's submission that the mother should be treated as under an actual or notional obligation to pay maintenance to the father for the eldest child as unreal.  

    Unsurprisingly Holman J expressed concern about proportionality in this case given the arrears amounted to £2,060.90 and the father's costs already exceeded £3,000. He warned the father that permission to appeal is a relatively low threshold test "somewhere below a 50/50 prospect of success" and therefore he was far from saying that the appeal would succeed on any of the proposed grounds.  

    Practitioners are reminded of stare decisis and the status of a decision of the court on a permission to appeal hearing.


Published: 09/07/2015

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