Family Law Hub

The risks of ‘nihilistic litigation’: Crowther v Crowther and Ors (Financial Remedies) (Rev 1) [2021] EWFC 88

In this case Peel J (‘the judge’) dealt with the final hearing in an application by Caroline Crowther (‘W’) for financial remedies following her divorce from Paul Crowther (‘H’).

  • INTRODUCTION

    In this case Peel J ('the judge') dealt with the final hearing in an application by Caroline Crowther ('W') for financial remedies following her divorce from Paul Crowther ('H').

    The application had been hotly contested from the outset. The judge noted 'with dismay' that, among other things, there had been 34 court hearings, including an appeal to the Court of Appeal and a preliminary issue hearing in front of Lieven J. Further, W and H had collectively spent £2.3m in legal costs. This was against a backdrop of the total assets at trial amounting to only - at most - c. £1.3m. It was clear to the judge that effective cooperation between the legal teams had broken down and he questioned whether 'the aggressive approach adopted by each side has achieved anything' other than 'vast costs and reduced scope for settlement.'

    BACKGROUND

    H is 55 and W is 51. The parties were married in 1996 and have three children (aged 22, 20 and 15). During the marriage the parties had a maritime business which the judge described as being 'H's background, skill, and inclination'. Alongside this they bought seven properties over the years which they renovated and sold on. H ran the maritime business and W assisted him with financial and administrative matters.

    In 2010, after a period spent in France, the parties started a business which operated vessels providing services in the construction of offshore wind farms and oil and gas subsea operations. The company was successful, eventually boasting 5 ships. This afforded the parties a very high standard of living, including a house in Sussex (bought in 2014 and sold in 2020 for £4.5m), a property in France, private education for the children, horses, expensive cars and a private aeroplane.

    In 2012 the parties were introduced to Mr Knight, a UK qualified accountant and specialist in international tax planning and asset management, who ran a business called the Castle Trust Group based in Gibraltar. Mr Knight and the parties came to an agreement. W and H had been attempting to expand their business by purchasing another ship. However, they had struggled to do so because the business was highly leveraged and had been struggling to finance its debts. Mr Knight saw this as an opportunity to invest.

    The structure of this investment, which took effect in November 2012, was that H and W transferred their ships and indebtedness to a new company set up by Mr Knight - Castle Ship Management Ltd ('CSM') - and the ships would then be bareboat chartered back to H and W's limited partnership AMA. The bareboat charter was stated to be for an initial period of 10 years with AMA and CSM having the right to terminate at any time.

    From this point Mr Knight appears to have been financially supporting the parties beyond the effective investment in their business:

    • he advanced to the parties by way of personal loans c. £1.6m over the years;
    • one of his companies lent them £500,000, which was used by the parties to purchase their most recent marital home; and
    • he allowed AMA to build up unpaid charter fees of £5.6m.

    The parties separated in 2019 after 24 years of marriage. The judge noted that H had been animated in his contention that the marriage had come to an end because of W's relationship with a local builder. The judge noted that H had been living a much more lavish lifestyle since separation due to the largesse of Mr Knight who, for instance, permitted H to holiday for two weeks on his high-end yacht without charge.

    Shortly after both parties had issued petitions in September 2019, H travelled to Gibraltar to meet with Mr Knight. Thereafter CSM suddenly gave notice of termination of the bareboat charter to AMA. On the same day CSM concluded a new bareboat charter with a new company owned by H. This was clearly a replica business which replaced AMA - 'phoenix like' - except that, crucially, it was not a joint business but one owned solely by H.

    Notably this action had the consequence of meaning that Mr Knight was not able to recover the £5.6m in unpaid charter fees. The judge noted that the fact of H's continued close association with Mr Knight was 'testament to the strength of relationship between H and Mr Knight.'

    FREEZING INJUNCTION PROCEEDINGS

    In December 2019 W applied to Lieven J for a freezing injunction to prevent H and Mr Knight (and the Castle companies) from disposing of etc., the vessels, which were said to be worth £8m. W alleged that the 2012 arrangements were a sham which had been entered into in order to reduce the parties' tax liabilities, for which Mr Knight received a fee. The reality, W averred, was that the company which managed the ships was in fact held fully on trust for her and H. W explicitly characterised this as illegal tax evasion, as opposed to avoidance.

    Lieven J granted the injunction. Holman J heard the return date in March 2019. In the meantime, the new bareboat charter had been itself terminated and instead H's new company was receiving income for technical management services provided to Mr Knight / Castle. Holman J discharged the freezing order. This decision was reversed by the Court of Appeal in June 2020, where Males LJ listed a number of reasons why W had a good arguable case as to the 2012 arrangements being a sham.

    In July 2020 CSM and various other companies of Mr Knight issued proceedings in the Admiralty Court, seeking a declaration of the legal and beneficial ownership of the vessels. This was transferred to the Family Court and the various Castle Group companies and Mr Knight became parties to the divorce proceedings.

    PRELIMINARY ISSUE AND SETTLEMENT

    In July 2020 Lieven J ordered a preliminary issue hearing to determine ownership of the various vessels, the ownership of funds held offshore by Mr Knight and his companies, and the extent to which H and W and Mr Knight and his companies were in debt to one another.

    W's pleaded case in the Admiralty claim, which stood in relation to the question of the ownership of the vessels in the preliminary issue hearing, was that the 2012 arrangements were 'an elaborate conspiracy' between Mr Knight / Castle and H to 'perpetrate a fraud' upon W and the court; that their aim was to 'reduce the value of the assets available for distribution in the court proceedings.'

    Shortly before the trial in December 2020 W and Mr Knight / Castle settled the preliminary issue. The terms of the agreement included, inter alia, that W dropped all of her claims and accusations against Mr Knight / Castle. In return W was released from all debts to them, including the £500,000 loan used to purchase a former marital home, and was to be paid two lump sums of £80,000 and £670,000. The settlement agreement annexed a draft Tomlin order, staying the proceedings pending implementation of agreement.

    Lieven J ordered W to pay H's costs relating to the preliminary issue on the indemnity basis, on the principle that a party who discontinues a claim should generally pay the costs, and even more so in circumstances where the allegation withdrawn is fraud. The judge estimated W's liability in this regard at c. £320,000.

    WITNESSES

    The judge described W in reasonably positive terms, saying he 'thought she was truthful.' H was described as 'trying to answer truthfully', although his anger against W sometimes meant that he 'tended to display a sense of injured righteousness', and he admitted that he could be 'litigious'. The judge appears to have been struck by H's inability to acknowledge the 'destructive approach' of closing the joint business and transferring all its assets and staff to the new one.

    A (presumably now 'former') close friend of the parties - Mrs Y - was also called to give evidence. The judge deprecated this decision. Mrs Y was 'partisan to H' and seems to have offered nothing by way of evidence helpful to the determination of the case, instead focussing on W's perceived personal conduct.

    THE £670,000 DEBT TO W

    At the PTR the judge was informed that Mr Knight / Castle had failed to pay the £670,000 owed to W pursuant to the preliminary issue settlement. W sought an order that this should be paid, pursuant to the Tomlin order.

    The judge asked for submissions from Mr Knight / Castle who claimed that they had not been able to pay the sum because of W's behaviour in refusing to allow the proceeds of sale of the FMH (sold in November 2020), which had been held on account and amounted to £1.8m, to be dipped into by H in order to pay the £500,000 debt to Mr Knight / Castle. Although the preliminary issue agreement had released W from this liability, Mr Knight / Castle claimed that H was still indebted in this sum.

    Rather circuitously, Mr Knight / Castle claimed that, since they had not been repaid the £500,000, they could not afford to pay W the £670,000. They prayed in aid of the Prevention Principle, claiming that this was a defence to their non-payment. The judge did not agree and converted the agreement into an enforceable debt. He was not convinced that the payment of £500,000 was an implied term on which the payment of £670,000 was conditional.

    THE £500,000 LOAN

    Mr Knight - seemingly via one of his companies which had not been joined to the proceedings - sought repayment of the £500,000 loan against the former marital home. His case was that he had agreed with the parties that he would have a secured charge against the home for this sum. However, the mortgagor, HSBC, had objected to this and Mr Knight's argument was that there was nevertheless an equitable charge which the court ought to take into account. The judge declined to do so. He held that the settlement agreement had released W from all debts including this one and that - this being a joint debt - H had also been released. He considered that this claim did not prevent him from distributing the entire proceedings of sale of the former matrimonial home.

    NON-DISCLOSURE

    The judge then considered W's allegations against H in respect of non-disclosure. Her case was that H had hidden substantial sums from her. The judge considered that the 'evidential platform' for a finding of this sort could be supplied by one of:

    • Direct evidence of an asset which the alleged non-discloser has not revealed.
    • Failure to comply with court orders or to respond properly to questions, from which adverse inferences can be drawn.
    • Evidence of a lifestyle which is wholly inconsistent with disclosed financial resources.

    Direct evidence was limited. W had only been able to find one undisclosed bank account containing a one-off consultancy fee of £10,000. The judge was not satisfied that this indicated that H had concealed substantial sums. As to compliance with court orders the judge considered that H had been difficult, but had released vast quantities of financial disclosure to W. As to H's lifestyle, the judge was not convinced that this meant that H had access to undisclosed capital. Much of the £1.2m W had calculated as being H's outgoings was financed by the sale of other assets.

    However, the judge did consider that H had been concealing the extent of income available to him, which had allowed a lavish lifestyle.

    CONDUCT

    W argued that H had committed conduct by his 'destruction of the family business'. H claimed that W had acted maliciously and had made it impossible to continue operating jointly. The judge rejected H's case on this, holding that H could not justify having cut W out of the business. W also drew attention to H having diverted marital funds of £670,000 into a company under his sole control before advancing most of this to Mr Knight / Castle, supposedly to repay debts.

    The judge listed of other examples of conduct included H having sold the parties' aeroplane, having attempted to resist a sale of the former matrimonial home by creating a tenancy in the grounds of the property in the name of his sister, and placing tracking devices on her cars and hacking her email account.

    The judge considered that H had committed serious litigation misconduct and, although W was not entirely free of blame, H had behaved much worse.

    COMPUTATION

    The judge computed the parties' net assets as being £738,375.

    W's earning capacity was 'modest', since her secretarial / administrative skills were somewhat outdated.

    H's earning capacity was harder to gauge. The parties' business between 2011 and 2018 had had an average turnover of c. £7m pa with profit of £244,000. The parties had drawn an average of £718,000 pa, well in excess of profitability. The judge considered that the main enabler of this had been the substantial loans made by Mr Knight to the parties. His most recent annual income was claimed to be £212,500 gross. Mr Knight was now the source of all H's income, as well as paying H's staff and owning the vessels. The business had changed and shrunk down to two vessels. The judge concluded that Mr Knight and H were close associates and that Mr Knight valued H's maritime expertise.

    The judge therefore had no hesitation in concluding that H had a much higher earning capacity than W; he could earn at least £180,000 pa.

    CONCLUSION

    Both parties made open proposals which would leave the other effectively bankrupt.

    The judge decided to clear the parties' debts and then divide the remainder unequally to reflect her lower earning capacity and greater childcare responsibilities. The net effect was that H should have c. £77,000 and W should have c. £660,000.

    The judge then considered costs, noting that W's debt to H of £322,000 referable to costs from the preliminary issue hearing would have the effect of equalising the net effect outcome. The judge then took into account H's litigation conduct and decided to equalise their debts - effectively neutralising them by having H pay 25% of W's costs of the financial remedy proceedings.

    LAST WORD

    The judge concluded by noting that the 'only beneficiaries of this nihilistic litigation have been the specialist and high-quality lawyers', whilst the main losers were probably the parties' children; both in terms of the emotional pain of the proceedings, and also in terms of the money which would now never come to them.

Case note, published: 05/11/2021

Topics


Published: 05/11/2021

Copyright 

Copyright in the original legal material published on the Family Law Hub is vested in Mills & Reeve LLP (as per date of publication shown on screen) unless indicated otherwise.

Disclaimer

The Family Law Hub website relates to the legal position in England Wales and all of the material within it has been prepared with the aim of providing key information only and does not constitute legal advice in relation to any particular situation. While Mills & Reeve LLP aims to ensure that the information is correct at the date on which it is added to the website, the legal position can change frequently, and content will not always be updated following any relevant changes. You therefore acknowledge and agree that Mills & Reeve LLP and its members and employees accept no liability whatsoever in contract, tort or otherwise for any loss or damage caused by or arising directly or indirectly in connection with any use or reliance on the contents of our website except to the extent that such liability cannot be excluded by law.

Bookmark this item