Family Law

Over 10 days in June 2017 Mr Justice Baker heard an application made by the wife for a financial order. Judgment was handed down to the parties six months later in December 2017, but was not made public until mid-June owing to reporting restrictions (see XW v XH [2017] EWFC 76).

In considerable summary, the parties met in 2007 and began a relationship towards the end of that year. They became engaged in May 2008 and were married in Italy in October 2008. The wedding ceremony was conducted entirely in Italian. The circumstances of the ceremony were the subject of intense analysis in the proceedings as at the ceremony the parties signed a document in Italian headed 'Atto di Matrimonio' (Deed of Marriage) which included a declaration that the parties had chosen the separazione dei beni regime. During the marriage the parties had one child, a son, who was diagnosed as suffering from a rare genetic condition. The wife petitioned for divorce in August 2015: a marriage of 6 years and 10 months, plus, on the wife’s case, cohabitation from the beginning of 2008.

During the marriage the husband’s company became very successful and ultimately went public and was sold. His shareholding realised around $540m.

Assets

The only joint assets were a property in Asia with a net equity of just under £3.7m, which was purchased with funds provided by the husband, and a current account containing about £3,000.

The wife also had assets in her own name, consisting principally of two properties in London worth £11.5m gross, purchased with funds provided by her mother. After deducting liabilities, including the sum of £500,000 representing her costs in these proceedings, plus CGT on the properties to the value of c.£400,000, the wife asserted that her net assets amount to approximately £10.5m.

There was, however, an issue as to whether the wife had an interest in a family trust. The husband asserted that she was, in effect, the beneficial owner of the trust which had assets worth over £23m. The wife asserted that this was a discretionary trust and she was not beneficially entitled to any of the funds. The trust predated the marriage and therefore did not count as a matrimonial asset which could be subject to the sharing principle. The husband asserted, however, that it was a relevant factor in the case.

Excluding his interest in the company, the husband’s assets prior to the marriage, including properties in London and Germany, and bank accounts, amounted to £3.8m. The husband’s shareholding in the company, and the manner in which it should be treated in the proceedings, was one of the major issues between the parties. On sale of the company in 2015, the husband received $540m, then worth approximately £370m. Through currency fluctuations, the value of many of the assets acquired with the proceeds of sale had increased substantially and are now worth in the region of £500m. There was disagreement between the parties as to how much tax the husband would have to pay to bring some of these investments onshore.

In summary the assets were as follows:

Item	Value per W	Value per H
Total Joint Assets	£3,695,922	£3,695,922
Total Wife’s net assets	£10,544,453	£34,156,464
Total Husband’s net assets	£506,997,461	£475,350,779
Total	£521,237,836	£475,350,779

Issues

The parties were around £250m apart in their open positions.

The husband asserted that the parties entered into an agreement which incorporated the separazione dei beni matrimonial property regime and which amounted to a nuptial agreement to which the parties should be held. His open offer was to transfer his share of their Asian property (c. £3.7m) to the wife on a Radmacher basis and pay a lump sum of £20m.

The wife sought half of the value of the increase of the husband’s shareholding in the company, resulting in a lump sum payment of £235m.

In the alternative, the husband’s case was that the wife’s claim in respect of the shareholding should be significantly reduced, if not rejected, for the following reasons:

1. Prior to the marriage he owned a substantial block of shares in the company which he argued constituted non-matrimonial property and were not amenable to division between the parties under the sharing principle;
2. By the time of the marriage he had put in place all the building blocks for the company’s later commercial success and this latent potential value had not been sufficiently valued by the expert; and
3. Further or alternatively, his exceptional role in the success of the company amounted to a special contribution so as to entitle him to a significantly greater share.

Over the 10 days, the judge heard evidence from the wife’s mother, 4 friends who attended the parties wedding and a number of the husband’s business partners.

Judgment

The judge set out his judgment in 14 sections and considered extensively the law on nuptial agreements (paras 73-86), unilateral assets (paras 154-169), latent potential value (paras 178-194) and special contribution (paras 206-220).

Reason #1: Marital Agreement

The judge concluded that when the wife agreed to the separazione dei beni matrimonial property regime she did not fully understand or appreciate the implications of the agreement, in particular as to whether it would apply in the event of the breakdown of the marriage. In those circumstances he held it would be manifestly unfair to hold her to the agreement, especially given the wholly exceptional increase in the value of the matrimonial assets over the seven years of the marriage. He concluded that no weight should be attached to the agreement in determining the division of the matrimonial assets in this case.

Reason #2: Unilateral Assets

The husband unsuccessfully argued that his shares in the company should be regarded as a species of non-matrimonial property which were not capable of being shared.
First, the judge concluded that the majority of judges in the Court of Appeal and above were of the view that the circumstances in which assets have been generated by one party during the marriage justified departing from equality, were limited to a small minority of cases.

Second, he held that there was no authority for the proposition that the scope for one party to acquire and retain separate property which is excluded entirely from the sharing principle, extends to cases where there are children of the marriage.

Third, he considered that to exclude unilateral assets from the sharing principle altogether in cases involving a marriage of just under seven years duration where there is a young child of the marriage (especially a child with special needs) would fundamentally undermine the principles of fairness and equality and would undervalue the (present and future) domestic contribution of the homemaker

However, the judge did find that the fact the shareholding in the company (worth around half a billion pounds) was generated by the husband’s business activities was a fact which could not be ignored and although it would be wrong to exclude the husband’s unilateral assets entirely from the sharing principle, the nature and source of the assets may be taken into account in deciding how it should be shared.

Reason #3: Latent Potential Value

The judge conducted a detailed review of the authorities and made reference to the apparent difference of opinion between on one side the two Nicks (Lord Wilson and Mr Justice Mostyn and on the other the majority of the rest of the senior judiciary. He referred to the approach of Lord Justice Wilson (as then was) in Jones v Jones in which he subtracted the pre-marital value of the company (once latent potential value and passive economic growth had been taken into account) from the value of the company at separation and then divided the balance equally, subject to road testing the outcome with the overall percentage test. He also discussed the approach taken by Mr Justice Holman in Robertson v Robertson [2016] EWHC 613 (Fam), [2017] 1 FLR 1174 (ie treating 50% of the value of the business at sale as having been created before the marriage). He accepted it was not possible to properly assess the latent potential value of the company but was of the view that its existence (along with other factors referred to below) justified a departure from equality. He dealt with the extent of the departure after considering whether the husband had also made a “special contribution”.

Reason #4: Special Contribution

The judge embarked upon another detailed review of the law in relation to special contribution. He commented that there had only been four previous cases in which "special contribution" had justified a departure from equality (Cowan v Cowan [2001] EWCA Civ 679, [2001] 2 FLR 192, Sorrell v Sorell [2005] EWHC 1717 (Fam), [2006] 1 FLR 497, Charman v Charman (No 4) [2007] EWCA Civ 503, [2007] 1 FLR 1246 and Cooper-Hohn v Hohn [2014] EWHC 4122 (Fam), [2015] 1 FLR 745). He also noted that the Court of Appeal had expressed a view in Charman that in the event the court did find special contribution, it was unlikely to produce a departure of less than 55/45 or greater than 66/33. Taking everything into account, the judge felt that the husband's contribution (coupled with other factors) did justify a departure from equality and more than this.

The outcome

The judge outlined the reasons for the departure, as follows:

1. 'The parties have to a very substantial extent kept their financial affairs completely separate during the marriage… In this case, the way this couple chose to run their lives was to keep their financial affairs separate. This is, to my mind, a matter of considerable relevance… In my judgment, that is a factor which the court should take into account when deciding the extent to which the assets should be shared now that the marriage has come to an end.'
2. 'The assets which grew so substantially in value during the latter years of the marriage were the husband’s business assets' and 'the fact that the enormous wealth at issue in this case was created through the husband’s business activity is something which must be taken into account in reaching a fair decision'.
3. He was 'satisfied that there was a latent potential in the company not reflected in the conventional valuation conducted by Mr Kay. The ultimate phenomenal success of the company was due in part to developments and decisions taken before the marriage – the creation of the company'. He went on to say: 'I propose to undertake a broad evidential assessment before deciding how the wealth should be divided.'
4. He was also satisfied that the 'husband’s contribution to the growth in value of the business assets during the marriage comes within the concept of special contribution'.

In all the circumstances the judge concluded that a fair outcome would be to award the wife a lump sum equivalent to 25% of the difference between the husband’s share of the proceeds of sale of the company in 2015 and the value of the husband’s shares at the date of the marriage as assessed by the expert but increased to take account of passive growth applying the appropriate share index. This resulted in the wife retaining her own assets (£33.75m), receiving the jointly owned property (£3.7m) and a lump sum of £115m, giving her 28.75% of the overall assets.

Discussion

At the outset of the judgment the judge commented that the length of the judgment (252 paras) might be open to criticism and apologised to the parties for the time it had taken to prepare. Whilst neither party was subject to any financial detriment pending the release of the judgement, he recognised the personal aspects and the desire for both parties to know the outcome and move on with their lives as soon as possible.

The judge was clear as to why the marital agreement should not be upheld and the concept of unilateral assets should not be extended so as to deprive a wife of seven years, who had given birth to and cared for the child, from being able to share in the increase of the value of the company during the marriage. He also took the view that there should be some departure from equality to take into account the latent value in the company at the date the parties married.

However, that departure was not insubstantial and the way in which the final figure was reached, and the decision also to increase the departure because of the husband's 'special contribution' is more difficult to follow.

It would have been hugely beneficial had there been further explanation as to the rationale behind the extent of the departure although, it is perhaps not surprising given the uncertainty surrounding so many concepts within matrimonial finance law.

Ultimately, the fact that 'the law in this area remains in something of a state of flux, as illustrated by the sheer number of recent cases cited in the course of the hearing [meant] identifying and reconciling the principles in those cases, and applying them to the facts of this case, has not been straightforward'. He also commented that 'the fact that [it had not been possible to reduce the guiding principles derived from case law to a set of propositions which other judges can then apply] in matrimonial finance law means that there is an unacceptable level of uncertainty, to the great disadvantage of parties, practitioners and judges, which continues to drive the campaign for root and branch reform in this area of the law'.

Whilst it is appreciated that a judge should retain a degree of discretion to do justice on a case-by-case basis, there is merit in the attempts of judges to seek to provide greater clarity to the way in which cases are decided. Until that happens, parties will continue to litigate.

It is understood an appeal is being contemplated or may be on course already.