Family Law Hub

Arif v Anwar & Anor [2013] EWHC 624 (Fam)

  • Neutral Citation Number: [2013] EWHC 624 (Fam)

    Case No: FD11F00482



    Royal Courts of Justice

    The Rolls Building

    Fetter Lane

    London, EC4A 1NL

    Date: 21/03/2013

    Before :


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    Between :

    Sofia Arif (Petitioner)

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    Arif Anwar (1st Respondent)


    Raziz Rehan (2nd Respondent)

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    James Ewins (instructed by Hughes Fowler Carruthers Ltd) for the Petitioner

    Valentine Le Grice QC (instructed by Zak Solicitors) for the 1st Respondent

    Christopher Brougham QC and Nicholas Fairbank (instructed by Saints Solicitors) for the 2nd Respondent

    Joseph Curl (instructed by Speechley Bircham LLP) for the Trustees in Bankruptcy

    Hearing dates: 12, 13, 14, 18 February 2013

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    Mr Justice Norris:

    1. This case requires a consideration of how an issue relevant both to proceedings in the Family Division and in the Chancery Division might sensibly be managed.

    2. In summary, W presented a petition for divorce on the 21 June 2011. H (who was then an insolvency practitioner) was made bankrupt on his own petition on the 6 October 2011. The bankruptcy may, or may not, have been tactical: H says that it was the direct result of W's claim for ancillary relief. For the management of the issue which has arisen it does not matter and I express no view. A substantial claimant in the bankruptcy is S (H's son by an earlier marriage).

    3. The only asset in the bankruptcy estate is the former matrimonial home ("No.68"). Until recently the registered proprietor of No.68 was W: in November 2003 she had executed a declaration of trust under which H was declared to be the absolute beneficial owner. The value of No.68 at the date of the bankruptcy order is, for the purposes of argument, taken at approximately £1.8m.

    4. The value of No.68 is not treated as £1.8m in the Statement of Affairs which H prepared for his bankruptcy. In that Statement of Affairs S is shown as entitled to a charge over No.68 to secure repayment of £925,000.00 (reducing the value of H's interest to £925,000). In his Form E dated 16 August 2011 H put the matter rather differently. He said:-

    "In 2006 I agreed to share my beneficial ownership of the property equally with [S] on the basis of which he invested over £500,000.00 in the property".

    He later expanded upon this by saying:-

    "By 2006 when [S] was aged 20, he had accumulated further capital... My home [No.68] needed refurbishment and I therefore suggested to [S] that he should sell [a property] and use the proceeds and his further capital to invest in a substantial extension and improvement at [No.68] in return for which he and I would become equal joint beneficial owners".

    H attached a schedule of payments said to have been made by S pursuant to that agreement, those payments being received by H, by W or by the builders between 13 July 2006 and 27 June 2007, and totalling £503,785.00.

    5. The reason why No.68 is the only asset in the bankruptcy estate is because of the collapse of H's insolvency practice. That practice was conducted through a company ("RMC1"). On the 16 January 2012 RMC1's bankers appointed administrators, because H's bankruptcy put in jeopardy his insolvency practitioner's and accountant's licences on which the businesses depended. RMC1 had filed accounts at Companies House, but had withdrawn them at the insistence of HMRC. This meant there were only unaudited accounts. The unaudited accounts for the year ending 30 April 2010 had shown that RMC1 had net assets of £1.14m. That net figure would have been reached after allowing for the repayment to H of his director's loan account (which stood at £200,000.00 or more). H was the sole shareholder of RMC1 (and so was entitled to the value of the net assets).

    6. Most unfortunately in June 2011 (the month in which W's petition was served) there was (according to H) a software accident in Pakistan which led to the destruction of RMC1's primary records. Not only that, but the administrators have been unable to obtain RMC1's management accounts (or secondary records). This means that the administrators do not know who owes money to RMC1, and so they are unable to collect the book debts or value the work in progress. This means that H will not receive any distribution in respect of his substantial director's loan account, and that the value of his interest in the business (which stood at £1.6 million on the last accounts) has evaporated. Of course, someone with personal knowledge of the business of RMC1 might well know who owed it money: but the administrators are not in that position.

    7. As to liabilities in the bankruptcy the following are worthy of note. First, the difficulties faced in the administration of RMC1 and the fact of H's bankruptcy meant that the bankers called upon personal guarantees and called in loans. Fortunately for H, S has paid off these banks and taken over the debts: so that in the bankruptcy the votes which would have been exercised by banks with purely commercial considerations in mind are now being exercised by his son who is able to take into account his father's family interests. Second, S has done the same in relation to debts claimed by H's friends to be owing to them, payment being said to be made in Pakistan (totalling £70,000). Third, as I shall have to explain, there is a debt owed to Barclays Wealth in Jersey in the sum of about £425,000.00: this was secured on a property at Charles Lane which is beneficially owned by S. S has also discharged this debt (and accordingly in the bankruptcy again casts the votes attached to it).

    8. Fourth, in his Statement of Affairs dated 5 October 2011 H says that he is indebted to a business associate ("Declan") in the sum of £500,000.00 (inclusive of approximately £100,000.00 in interest). This is as a result of advance commission received in 2004 and 2005 in respect of a "commercial deal that did not complete" so that the commission became returnable. In the Family Division proceedings by his Form E dated 16 August 2011 H had estimated this debt at £750,000.00 and had said:-

    "In 2004/5 I assisted [Declan]... in an investment project in Ireland. As a result of the deal, I was due a commission of €600,000.00. As I wanted the cash upfront, partly for investments in Lahore, I asked [Declan] if he would loan it to me as an advance on my commission and he agreed to do so. Unfortunately, the property market in Ireland collapsed and the commission was no longer due to me, and [Declan] has therefore demanded repayment of his loan. At the point the deal failed, we agreed that I would pay interest at the Dublin Central Bank rate plus 7% as I was unable to repay the loan. [Declan] originally indicated that he would accept repayment in sterling, but given the dramatic movement in the exchange rate he is now insisting on repayment in Euros..."

    9. From Declan's loan H says that he paid £200,000.00 to S: H says this payment was a gift and not a loan or nominee arrangement.

    10. H's bankruptcy obviously impinged on W's financial claims in the Family Division Proceedings. First, unless there is a clear surplus of assets over liabilities in the bankruptcy it will not be possible for an award to be made in her favour in the ancillary relief proceedings: see Hellyer v Hellyer [1996] 2 FLR 579.

    11. Second, for that reason W sought to annul the bankruptcy order so that in the exercise of the jurisdiction under section 25 of the Matrimonial Causes Act 1973 her claims to provision could be taken into account along side the claims of creditors: see Paulin v Paulin [2009] EWCA Civ 221. That application was obviously made in the bankruptcy proceedings. The regulation of proceedings in bankruptcy is a matter for the registrars and judges of the Chancery Division. But as Patten LJ pointed out in Arif v Anwar [2012] EWCA Civ 986 at paragraph 21:-

    "That said, judges and registrars sitting in bankruptcy need to be alive to the real possibility that husbands (or wives) may attempt to use the protection of a bankruptcy order as a shield against the claims of their spouses for ancillary relief. Where there is credible evidence of this, they should not be afraid to use the powers which they have to order full disclosure and to require the attendance and cross examination of witnesses where this is necessary in order properly and fairly to determine the annulment application. In such cases the more convenient course may well be to transfer the annulment application itself to be heard along side the ancillary relief application in the Family Division, where the evidence and issues are likely to be similar and costs can be saved by having a single hearing of both applications".

    W's attempt to achieve that end did not succeed in the instant case because the Registrar made a proper case management order for the determination of the annulment application to remain in the Chancery Division. W abandoned the application; so the bankruptcy proceedings continued. (W must, of course, now face the consequences of commencing and then abandoning annulment proceedings; for an adverse costs order has been made and the costs of the bankruptcy have enormously increased. The Trustees' time costs to 28 January 2013 were said to be £207,000 - of which £80,000 related to the annulment application - plus disbursements on legal fees of £146,000. Even allowing that time costs are not the basis upon which the remuneration of an appointee is assessed, the potential costs burden is heavy).

    12. Third, to establish the surplus in the continuing bankruptcy it is in W's interest to enlarge the estate (by challenging S's claim to an interest in No.68) and to reduce the claims upon it (by, for example, asserting that the loans from the banks were to some extent for the benefit of S, and that the payment off by S does not entitle him to be subrogated, or by saying that there was some sort of running account between H and S of which repayment of the bank loans was only part). But an effective examination of the claims made by S (or by Declan) in the bankruptcy cannot be forced by W because she has no real standing in the bankruptcy.

    13. If there had been any question of H entering into a transaction at an undervalue with the intention of putting assets beyond the reach of W (which is not alleged in this case) then she would have had standing as "a victim" to apply to restore the position: Ram v Ram [2004] EWCA Civ 1452. But the fact that she has a claim for unpaid maintenance pending suit does not give her standing as a creditor because such a debt is not provable in the bankruptcy: Insolvency Rule 12.3(2)(a). Nor does her current claim for a lump sum payment give her standing as a contingent creditor: she is not a creditor at all within section 382 of the Insolvency Act 1986 until the ancillary relief order is made in her favour: Re Jones [2008] BPIR 1051, the reasoning in which is consistent with the decisions of the court of appeal in Glenister v Rowe [2000] (Ch) 76, Steele v Birmingham City Council [2005] EWCA Civ 1824 and Casson v Law Society [2009] EWHC 1043.

    14. The abandonment of W's attempt to annul H's bankruptcy meant that the bankruptcy continued, with issues being determined in the Chancery Division. The Trustees will need to obtain possession of No.68, and that will entail an examination of the extent of S's interest in No.68. The Trustees will also have to admit debts to proof, and this will involve an examination of the claims of S and of Declan. The nature of the assets in the estate means that there are no ready monies out of which the costs of any detailed investigation or litigation could be paid: so the Trustees have not settled upon the commencement of proceedings. The creditors cannot be looked to as a source of funding any proceedings, since the principal creditors are S and Declan, whose dealings would fall for examination. Any funding arrangement requiring approval from the creditors would face the difficulty that the votes attaching to the principal debts are now exercisable by S.

    15. Essentially the same issues fall for consideration in the Family Division. W is conducting her proceedings in that division under a contingency funding arrangement. This permits her to ask the court to give direction for the formulation and resolution of those issues in that division.

    16. The matter is one of pure procedure. The law by reference to which the issues would be determined is identical to that which would be applied in the Chancery Division: see, if authority is needed for such a proposition, TL v ML [2005] EWHC 2860 (Fam) at paragraph [34] and A v A [2007] EWHC 99 (Fam) at paragraphs [21] and [22].

    17. There is, however, one procedural device available in the Family Division not frequently deployed elsewhere. In OS v DS [2004] EWHC 2376 (Fam) Coleridge J was concerned with applications about disclosure, production of documents, and the joinder of parties. It seemed to him that he would be assisted by hearing from the husband on oath in relation to a number of crucial, central and highly contested financial issues. He therefore gave directions for a "preliminary-oral discovery" hearing. Amongst the advantages he saw in adopting this process (see paragraph [11]) were:-

    a) Explanations and factual issues could be fully tested at a far earlier stage than would otherwise be the case

    b) Trips down blind alleys could be ruled out or at least curtailed:

    c) Preliminary indications or even findings could be made

    d) The party under scrutiny would be able to appreciate at an early stage what would be faced in terms of examination.

    But he warned that any judge conducting such a hearing must be astute to ensure that both parties' right to a fair hearing of the substantive issue itself was not jeopardised.

    18. In exercise of this jurisdiction on 6 November 2012 Eleanor King J ordered that there be:-

    "A preliminary hearing to determine the consequences on [H]'s financial resources of

    (a) The effect of transactions between [H] and [S] on (i) the beneficial ownership of [No. 68] and (ii) the extent of any personal debts between [W] and [H] and [S].

    (b) The effect the transactions between [Declan] and [H] either personally or through their businesses, on the extent of any debts between [Declan] and [H]".

    She gave directions as to evidence including a direction the S must include in or exhibit to his sworn evidence all documents and information on which he relied.

    19. Permission to appeal that order ("the November Order") was refused. Accordingly, the hearing proceeded before me over 5 days.

    20. On the morning of the first day H (supported by S) submitted that I should review the November Order and should direct that W's application for oral disclosure should be adjourned generally, pending an examination in the Chancery Division into the size of the bankruptcy estate and an examination of the claims upon it. This was in essence an application that W's claim for ancillary relief in its entirety should be adjourned generally. The ground of the submission was that Eleanor King J had proceeded on the footing that even after the deduction of very substantial matrimonial costs W's most basic needs (namely housing for herself and for the child of her marriage to H) could be met albeit at a modest level: but that matters had moved on and it could now be demonstrated that in no circumstances would there ever be any surplus in the bankruptcy estate. Accordingly, it was argued, a summary determination of this present application (and, logically the entire ancillary relief proceedings) was warranted. I rejected that submission.

    21. The afternoon of the first day was taken up with an application by S (supported by H) that the hearing should not proceed because it was procedurally unfair. So far as H was concerned, it was said that if the trustee in bankruptcy had a settled intention to take proceedings against him then it would be wrong to subject H to what was, in effect, a private examination in advance of such proceedings. So far as S was concerned, it was said that it was procedurally unfair that his third party interest (in No. 68 or in transactions with H which W labelled "shams") should be determined in the absence of the Trustees in bankruptcy and without any properly pleaded case. I rejected those submissions. I reminded myself that the process on which I was embarked was a form of "oral disclosure", and that whilst Coleridge J had suggested that the outcome of the process might be "preliminary indications or even findings", that could only be the result if a judge, who was astute to ensure that the right to a fair hearing was not jeopardised, considered it procedurally fair. There was no procedural unfairness inherent in the process of oral disclosure itself.

    22. Over the remaining 4 days I heard evidence and submissions. I do not consider it fair to W, H, S or Declan to make dispositive findings. I have decided that on two issues it is appropriate to give directions for the determination of preliminary issues in the Family Division: in the case management of those issues I have taken as a starting point what was not (by the end of the hearing) the subject of dispute. I will set out only so much of the material I have heard as is necessary to explain why I have reached that view.

    23. I should begin by recording that I do not consider that either H or S has made a wholehearted effort to comply with the Order of Eleanor King J. The impression I have gained from reading all of the evidence and from watching the process of oral disclosure (reinforced by the successive applications not to give effect to that order) is that H and S wish to avoid scrutiny of their affairs. There is a case for further enquiry: but not the sort of roving commission sought by W. That leads me to these directions.

    24. First, I direct the hearing of a preliminary issue ("the Beneficial Interest Issue") namely that it be determined whether in the events which have happened S was on 6 October 2011 (a) the beneficial owner of a 50% share in No.68; or (b) was entitled to some other (and if so what) interest in No.68; or (c) was a creditor of H in respect or all or some of the alleged payments identified in paragraph 54 of the Affidavit of the Second Respondent (an unsworn copy of which is in Bundle 9 and to the truth of which he affirmed at the hearing ("S's Affidavit")).

    25. As to case management in relation to this issue, I direct that S shall be the claimant in the issue, and that H, W and the Trustees shall be the Respondents (the Trustees being joined for that purpose). The joinder of the Trustees to the preliminary issue in the Family Division proceedings shall be without prejudice to the right of the Trustees to apply in the Chancery Division for a stay under 285 IA 1986. I am not making this explicit because I consider such an application is warranted (otherwise I would not be making the present order), or because I anticipate such an application being made. Indeed, I cannot think why the Trustees would not want the issue determined, and at the expense of someone other than the estate. But it is desirable to emphasise that although the determination of the Beneficial Interest Issue lies in the Family Division the Chancery Division is where control of the bankruptcy proceedings lies. H is joined, not because he has any subsisting property interest in No.68 (for his interest is vested in the Trustees); but because the outcome of the determination may affect any order that might be made against him in the ancillary relief proceedings, since he is (or will be) discharged from bankruptcy.

    26. S is the Claimant in the issue because the burden is upon him. It is common ground that there is a Deed declaring that the entire beneficial interest is vested in H. If S has acquired a beneficial interest in No.68 that can only be because H has disposed of part of his interest. By s.53(1)(c) of the Law of Property Act 1925 a disposition of an equitable interest subsisting at the time of the disposition must be in writing signed by the disponor. Both H and S have assured the Court that they have put forward the best evidence they have available to them, and this evidence contains no written disposition. S explains that it was intended "to amend the Trust Deed": but this was never done. That is why both H and S assert a constructive trust. But as regards the disposition of a subsisting interest (as opposed to the ascertainment of those interests on acquisition of a property) the type of constructive trust which enables the disponee to rely on s.53(2) is of a much more particular sort. It is for S to establish exactly the necessary facts: and until then W (and the Trustees) can rely on the express Declaration of Trust and the absence of any assignment.

    27. The payments to the builder for the work on No.68 cannot be established because most unfortunately the relevant cheques have been destroyed. The cost of the works (and how the actual expenditure was funded) is not at present known because most unfortunately all of the records of the refurbishment costs were inadvertently thrown away following a burst pipe incident at No.68 in 2008. It will therefore be necessary for S to plead in Points of Claim all of the facts he relies on as establishing the constructive trust which he asserts. I therefore give the following directions:-

    (a) Points of Claim by S in the Beneficial Interest Issue by 4.00pm 8 April 2013;

    (b) Points of Defence by H and W by 4.00pm 22 April 2013;

    (c) Permission to the Trustees (if so advised) to file a Defence indicating that (subject to the reservation of the right to apply to amend and to the right to attend and participate in any hearing) they will abide the decision of the Court on the Issue;

    (d) Points of Reply by S by 4.00pm 29 April 2013;

    (e) Standard disclosure by list by S, H and W by 13 May 2013 (to be accompanied by copies of the disclosed documents);

    (f) Any requests for specific disclosure or objections to disclosed documents to be made by 20 May 2013.

    (g) Paragraphs 46 to 58 of S's Affidavit shall stand as his evidence in chief on the Beneficial Interest Issue;

    (h) H and W's evidence (including the answers to questionnaires) shall stand as their evidence in chief on the Beneficial Interest Issue;

    (i) Any application to adduce additional evidence must be made by 27 May 2013 (and the application must be accompanied by the evidence sought to be adduced);

    (j) H, W and S shall by 20 May 2013 agree (i) a description of No.68 as at 1 January 2013 (ii) what work was done at No.68 between 1 January 2006 and 31 December 2007 (iii) for which of that work any necessary planning and building regulations approval was obtained (iv) a description of No.68 as at 1 January 2008. In the event of any failure to agree by the due date each of H, W and S shall be under an obligation immediately to seek the directions of the Court.

    (k) All parties shall co-operate in the identification by 27 May 2013 of a single joint expert valuer for No.68 (and shall facilitate the completion of a valuation). In the event of any failure to agree by the due date each of H, W and S shall be under an obligation immediately to seek the directions of the Court. The valuer shall value No. 68 (i) as at 1 January 2006 in its then condition; (ii) as at 1 January 2008 in its then condition; (iii) as at the date of the valuation.

    (l) The valuation report shall be produced by 10 June 2013.

    (m) The issue shall be set down for hearing (time estimate 1 and a half days) for first open day after 24 June 2013. I will take the case if I am available

    28. The directions include an order for standard disclosure. I am not satisfied that all relevant documents (save those exhibited) have been destroyed or lost. The surviving evidence indicates that key documents were held at places other than No.68: and under questioning S indicated that he would give authority to W's solicitors to approach Barclays Private Clients International in Jersey authorising the disclosure of statements for all accounts held with that bank by S (whether in his own name or in joint names or in the name of another but in which he had an interest).

    29. There is one issue which I consider it is unnecessary to explore. Paragraphs 59 to 71 of S's Affidavit contain details of expenditure said to have been undertaken by S since 2007. No account is taken of this expenditure in the directions contained in the preceding paragraph because it is not legally relevant to the constructive trust case advanced by S and by H both in the bankruptcy and in the ancillary relief proceedings.

    30. Second, I direct the hearing of a preliminary issue ("the Dealings Issue") namely that it be determined (1) whether S has repaid the following sums borrowed by H and W and applied for his benefit (i) £245,000 borrowed from Barclays Wealth as indirect replacement for the Norwich Union mortgage charged upon Charles Lane (ii) £390,000 borrowed from Woolwich BS and £155,000 borrowed from Barclays Wealth and used to fund the purchase of Tema House (together with £16,450 borrowed from the same source to pay the costs and stamp duty) and (iii) £174,250 transferred to a Capital Account for S's benefit from the Barclays Wealth facility ("the Mortgage Liabilities"); (2) whether any such repayments by S in respect of the Mortgage Liabilities (and if so, which) were made out of funds not derived from the accumulated or accruing rental income of Charles Lane (" the External Funds"); (3) what was the source of the External Funds used to repay the Mortgage Liabilities and what was the nature of S's interest in them; (4) what drawings were made on the Barclays Wealth account (secured by a charge on Charles Lane) between 29 May 2009 and 6 October 2011 and which of them was not for the benefit of S.

    31. I direct that S will be the Claimant in the Dealings Issue. That is because it is clear on the documents that borrowings were made and applied for the benefit of S, and it is accordingly for him to show that he had repaid those borrowings and is no longer liable to indemnify his trustees (H and W).

    32. As to case management I direct

    (a) Points of Claim by S in the Dealings Issue by 4.00pm 8 April 2013;

    (b) Points of Defence by H and W by 4.00pm 22 April 2013;

    (c) Permission to the Trustees (if so advised) to file a Defence indicating that (subject to the reservation of the right to apply to amend and to the right to attend and participate in any hearing) they will abide the decision of the Court on the Dealings Issue;

    (d) Points of Reply by S by 4.00pm 29 April 2013;

    (e) Standard disclosure by list by S, H and W by 13 May 2013 (to be accompanied by copies of the disclosed documents);

    (f) Any requests for specific disclosure or objections to disclosed documents to be made by 20 May 2013.

    (g) Witness statements from S's witnesses (to include any witness statement from H supportive of S's case) to be served by 4.00pm 27 May 2013.

    (h) W's evidence in answer (and H's, if any) to be served by 4.00pm 7 June 2013 ;

    (i) Any supplemental evidence in reply to be served by 4.00pm 14 June 2013

    (j) The Dealings Issue shall be set down for hearing (time estimate 1 day) for first open day after 24 June 2013 immediately following and to be heard by the same judge as the Beneficial Interest Issue.

    33. These directions derive from whatever common ground was established before me, and from my understanding of the evidence as it stands. What follows records that understanding but does not represent a final finding of fact.

    34. It is apparent from W's evidence that her case is that in general the apparent dealings between H and S do not reflect the reality of the case, that whatever S held really belonged to H, and that this was the custom of their people. Ownership is not determined by cultural norms but legal rules. Unless the Court is (a) to order an inquiry into every dealing between H and S; and then (b) in the light of the outcome of that enquiry direct W to identify which of those transactions constitutes a sham; and then (c) adjudicate upon each such transaction, this is not a case that is fairly justiciable. Given that resources are limited it would in this case (I say nothing of others) be wholly disproportionate. I agree with Mr Le Grice QC and Mr Brougham QC that it is necessary to identify issues. It is possible to do so.

    35. In his financial statement dated 16 August 2011 H had said that at the death of his first wife in 1999 a commercial property at Charles Lane (a) had been beneficially owned by her and was almost mortgage free: and (b) that S had inherited it. This account appears substantially inaccurate.

    36. At the hearing it came not to be disputed (a) by W that the equity in Charles Lane belonged to S; and (b) by H and S that Charles Lane had a value (in 1999) of £425,000.00 but was subject to a mortgage of £226,000.00 granted by Norwich Union. S had been left a legacy of £231,000.00. Charles Lane was appropriated to H and W as trustees for S in satisfaction of that legacy. Since under section 35 of the Administration of Estates Act 1925 the general rule is that Charles Lane must bear the burden of the associated debt, S's trustees took subject to the Norwich Union liability. H repaid the mortgage in 2001. Most unfortunately the documents relating to the redemption do not appear to be available: but its effect was to substitute for H and W's secured liability to Norwich Union (in respect of which they were entitled to an indemnity from S's funds) an unsecured liability to H alone (in respect of which the indemnity continued). (For simplicity I am ignoring questions of subrogation).

    37. The evidence (particularly the documentary material) strongly suggest that in 2003 H and W (as trustees) borrowed £600,000.00 from Barclays Wealth in Jersey on security of the Charles Lane property, and H instructed his solicitor that £245,000.00 of the mortgage advance should be paid to him in reimbursement of this expenditure. The effect of that transaction was that the unsecured liability of H and W as trustees to H became a liability owned by H and W as trustees to Barclays Wealth, but secured on Charles Lane (and in respect of which they had an indemnity against S's trust fund).

    38. Charles Lane was let, and according to H's evidence the net rent was credited to a Capital Account belonging to S. It was not used to keep down the interest on or to repay the capital amount of the £245,000 Barclays Wealth mortgage advance which had replaced the original funding ultimately deriving from the Norwich Union advance.

    39. In November 2003 (according to S's Affidavit and H's evidence) the money accumulated in the Capital Account was used to buy a property called "Tema House". How the purchase was actually financed and how any borrowing was repaid is not at present known because most unfortunately all of the relevant records were thrown away following a burst pipe incident at No.68. So only sketchy details are available. They derive from some solicitor's correspondence containing instructions from H: but at the hearing H said these were only instructions and were not necessarily carried into effect. But it reliably appears that Tema House was bought for £545,000, funded as to £390,000 (or perhaps £387,500) by a mortgage from Barclays (formerly Woolwich) and £155,000 sourced from the £600,000 advance from Barclays Wealth to which I have referred. A further £16,450 in respect of the costs of purchase came from the same source.

    40. It also appears from a letter or report prepared by H's solicitors in about October 2003 that the sum of £174,250 was transferred to S's Capital Account, and that that money also derived from the Barclays Wealth advance. This was not disputed.

    41. The starting point as at January 2004 therefore is that H and W had borrowed (jointly or in H's name alone) £245,000 + £390,000 + £155,000 + £16,450 + £174,250 = £980,700 ("the Mortgage Liabilities") to fund the acquisition or retention of property that belonged beneficially to S or to "top up" his Capital Account. It seems to me that before S can claim to be subrogated to Barclays or Barclays Wealth in respect of the discharge of debts in his name he must show that he has himself discharged the Mortgage Liabilities.

    42. It is the case of H and S that between the end of 2003 and 29 May 2009 all of this money was repaid by S to H. How and when this repayment was achieved cannot be detailed because, as I have explained, most unfortunately the relevant documents have been destroyed. In the alternative it was said that insofar as records have survived they have all been handed over to the trustee in bankruptcy (and neither H nor S has access to them). S explained in the course of his evidence on oral disclosure that (despite the clear terms of Eleanor King J.'s order) he had not really delved into how all the money borrowed to fund the properties he owned had been repaid. His focus had been post May 2009. It is for S to show that he is no longer liable to indemnify his trustees: if the documents he produces do not demonstrate this, then he must plead a case and prove it by other evidence. Bare evidence of payment (e.g. entries on bank statements) will not avail unless the source of the funds in the account can be demonstrated. H and S say that the ultimate source of the repayments is the accumulated rental income from Charles Lane. But the available documents and the result of oral disclosure suggest that this cannot really be so. Just standing back and looking at the broad picture it is not at all easy to see how S came to repay £980,000 (in respect of the Mortgage Liabilities) and invest £500,000 in No. 68 and lend £425,000 to H after May 2009 when his disclosed net income from Charles Lane for over a decade amounts to just over £50,000, when for a significant part of that time he was a student, and when he obviously indulged himself to the full in the purchase of expensive cars (one apparently costing £175,000). But on disclosure his tax returns may well demonstrate earnings and capital gains sufficient to cover such expenditure.

    43. I have mentioned lending by S to H. H and S say that the Barclays Wealth account ceased to be overdrawn in May 2009 and that from and after 29 May 2009 H was a net debtor to S. S says that his lending to H is equal to the sum standing overdrawn on the Barclays Wealth account at the date of the bankruptcy in the sum of £425,000: H says that of this balance about £87,000 represents drawings by S (in connection with car purchases) so that the true sum H owes is £339,000. Whether there is any such balance due from H (and if so, whether there is any outstanding liability upon S to indemnify H in respect of other borrowing) obviously affects the amount for which S may prove in the bankruptcy and so the possibility of any surplus.

    44. It is these considerations that have caused me to identify the issues for determination and case manage them in the way directed.

    45. Part of the function of an oral disclosure hearing is to identify issues which it is not, for one reason or another, appropriate to pursue in the ancillary relief proceedings. These I now identify.

    46. I do not consider it right to direct the joinder of Declan and the formulation of a preliminary issue in relation to the sums due him (notwithstanding that the account he gave in oral disclosure of the origin of H's liability to him differed so markedly from that described in paragraph 8 above). I give no indication that his debt is provable in H's bankruptcy. That is a matter for the Trustees: and on the material produced at the hearing (and the answers given by Declan) they may well have issues to examine before admitting the debt to proof in full. The relationship between Declan and his Group on the one hand and H and RMC1 on the other was plainly not simply that of client and accountant/financial adviser, and having regard to the context of those dealings and to the context of the payment of the sums said to constitute the debt (a possible over-provision for Irish capital gains tax that Declan thought his accountant might as well have) there may be inquiries which the Trustees might want to make. But that does seem to me pre-eminently a matter for them; and that there is no reason to bring debt questions into the Family Division. Family relationships undoubtedly influenced the dealings of H and S. But the oral disclosure hearing was helpful in demonstrating that family relationships did not appear to influence the commercial dealings of H and Declan. It did not strike me as likely (though it may prove to be so on enquiry) that the existing commercial relationships between Declan and H were collusively re-characterised so as to cause the maximum disadvantage to W.

    47. Further, I do not consider it right to conduct in the Family Division an inquiry into whether S has collected monies due to RMC1. In March 2011 "Rescue my company" ("RMC2") began to trade: it was funded, staffed, serviced and accommodated by RMC1 and seems to have looked after some of the clients of RMC1. It collected some fees that were due to RMC1: H said, I thought surprisingly, that it made no difference since he was the shareholder and director of both companies. S became a director of RMC2 shortly before RMC1 went into administration. After the commencement of the administration of RMC1 money that appeared to be due to RMC1 or RMC2 was paid directly into S's bank account. £163,000-worth of such potential payments were identified. S said that appearances were deceptive. The money was due to RMC2 (not RMC1). It had been paid to him because by two unrecorded agreements RMC2 had agreed to buy furniture, computers and network routers that former tenants had left at Charles Lane (and which S claimed personally), and that rather than pay for these directly RMC2 had asked some clients to pay S (rather than RMC2). None of this seems to me to have anything to do with what debts are provable in H's estate in bankruptcy (and so whether there is a surplus available for W). It might go to the credit of S: but disclosure going to credit is a wholly exceptional thing to order or pursue. I will leave that matter to the administrators or liquidator of RMC2.

    48. Lastly, I see no reason to examine in the Family Division the claims made by H's friends for repayment of loans (which repayment has been made by S in Pakistan). It is for the Trustees to decide whether to admit these to proof, and they can (if so minded) at little cost require S to demonstrate repayment to the relevant creditors in Pakistan: and if that is established, then payment by the relevant creditors to H in the first place. A representative of the Trustees attended the hearing before me: and the Trustees will have formed a view from the oral disclosure process what they may accept at face value and what may warrant further enquiry.

    49. As to costs, I will order H and S to be jointly and severally liable for 20% of W's costs since 6 November 2012 of and in connection with the oral disclosure application (those costs to be the subject of a detailed assessment on the standard basis); and that the remaining 80% shall be W's costs in the ancillary relief application.

    50. The whole oral disclosure exercise is necessitated by the failure on the part of H to provide adequate financial information. Had there been compliance with the Rules there would have been no need for that process.

    51. The Order of Eleanor King J dealt with the costs of the oral disclosure application down to 6 November 2012. Since then much time was spent in evidence and in argument in seeking to prevent the carrying into effect of that Order. In that H and S presented a united front and afforded mutual support. No distinction can be made between them. The attempt failed and the order for costs should reflect failure on that discrete issue.

    52. As to the balance, the whole exercise is brought about by the nature of H's evidence in the ancillary relief proceedings (including the evidence contained in his Statement of Affairs in the bankruptcy), and there should be no circumstances in which W has to pay H or S for examining their mutual dealings in the light of their vague evidence and without the aid of the destroyed documents. But it would be wrong to make an order against H and S which does not contemplate the possibility that this whole process results in no surplus in the bankruptcy and no worthwhile order outside the bankruptcy estate (the position which H and S contend is readily apparent even without any examination of their dealings).

    53. I do not expect the attendance of legal representatives when this judgment is handed down unless there are any applications to be made or there is any difference of view as to the terms of the order arising from this judgment.

    54. Having circulated this judgment in draft and specified a time for comment and editorial correction I received, about an hour before the time set for handing down, an e-mail from S's legal representatives citing ZM and JM [2008] EWCA Civ 1261, raising five substantive issues and asking me not to hand down judgment. I will briefly address these issues.

    55. First, timescales. It is submitted that the timescales set for the preparation of the issues I have directed should be tried is too tight and that the requirement to plead a case has somehow been sprung on S. The timescale was set in the light of (a) Eleanor King J's order that in his evidence for the oral disclosure hearing S must exhibit all the documentation and information on which he intended to rely and (b) S's evidence at the oral hearing that he had adduced the best evidence available to him. It now appears that he would wish to introduce additional evidence (including additional bank statements from himself and third parties). Implicit in any case management order is a permission to apply to vary it: and I propose that my order should contain an express provision to that effect.

    56. Second, in paragraph 29 above I comment that claimed expenditure on No.68 by S after 2007 was not legally relevant to the constructive trust case advanced. That is because the only claim acknowledged by H and advanced by S is to 50% of No.68 arising from an agreement between H and S that he should invest £500,000 (which it is said he did by the end of 2007). It is now said that S might wish to advance some estoppel claim or unjust enrichment claim (neither foreshadowed in evidence or argument) and that this post-2007 expenditure might be relevant to the establishment of an interest and its quantification. If such a case is to be advanced it would obviously need to be formulated before it could be considered and made the subject of case management directions. Eleanor King J's order was quite clear as to what was required of S. I see no reason to delay handing down judgement on this account.

    57. Third, a question is raised as to why S is the Claimant in the Dealings Issue, and it is said that S's case is that his monies were improperly used. I hope my reasoning is clear. The evidence shows that part of the loan advances raised (in respect of which H and W are entitled to be indemnified by their beneficiary S) were applied for S's benefit. S says he actually repaid all money so applied so that the outstanding indebtedness is that of the trustees themselves. The Dealings Issue requires him to lead evidence of when the repayments occurred. There is a separate breach of trust issue (which S has advanced in correspondence in general terms): this relates to the period after 2009. If he wishes to advance a claim for breach of trust he would naturally be the claimant in that issue. I see no reason to revise my view or to delay hand-down on this account.

    58. Fourth, S wants to advance his breach of trust claim. So be it. That can be done by commencing proceedings in the Chancery Division to establish liability, or by submitting some claim in the bankruptcy. But S has taken no such steps. My identification of preliminary issues in the ancillary relief proceedings does not inhibit him from taking either course.

    59. Fifth, time estimates. S joins with the Trustees in suggesting that the time estimates for the hearings I have set out above may be insufficient. I can well see that the identified issues may together take a total of 4 days. The order should so provide. I was and am concerned that this litigation should not balloon. What is at its heart (and may be lost sight of) is whether modest provision can be made for the basic needs of W and the child of the marriage (S's stepmother and half-brother) who had until the divorce lived in a house worth £1.8 million and enjoyed a high standard of living. Extensive and expensive litigation will absorb funds that could go a long way to making that provision.

    60. The hand-down has therefore proceeded.

Judgment, published: 22/03/2013


See also

Published: 22/03/2013


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