Neutral Citation Number:  EWCA Civ 896
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE PRINCIPAL REGISTRY OF THE FAMILY DIVISION (MR JUSTICE COLERIDGE)
Royal Courts of Justice
Wednesday, 18 June 2014
B e f o r e:
LORD JUSTICE LAWS
LORD JUSTICE TOMLINSON
LORD JUSTICE RYDER
DAR Transcript of the Stenograph Notes of WordWave International Limited A Merrill Communications Company 165 Fleet Street London EC4A 2DY Tel No: 020 7404 1400 Fax No: 020 7404 1424 (Official Shorthand Writers to the Court)
Mr M Pointer, QC and Mr G Kingscote (instructed by Mishcon De Reya) appeared on behalf of the Appellant
Mr L Marks, QC and Ms E Clarke (instructed by Withers) appeared on behalf of the Respondent
J U D G M E N T (Approved) Crown copyright©
LORD JUSTICE RYDER
This is an application for permission to appeal a case management decision made by Coleridge J on 8 April 2014. On that day, he refused an application by the wife for permission to adduce expert evidence as to the value of management entities through which the husband receives financial reward for the profitable management of a hedge fund. I hope the parties will excuse me for referring to them as husband and wife for the purposes of this judgment.
These are financial remedy proceedings ancillary to divorce and the final hearing is listed to begin on 30 June 2014. The question whether the management entities have any inherent value was not taken by the wife until 28 March 2014 when the application was made: some three months before the final hearing date.
Coleridge J refused the application on three bases. First, the proposed evidence was speculative in the sense of being theoretical and unlikely to be relevant to an issue in the case given that it is intended to be no more than a valuation of capitalised earnings. Second, the issues have been identified and disclosure before procedural preparations have been made in accordance with consent court orders made long ago in the full knowledge of the asserted issue now identified by the wife. Throughout the proper processes of the case and attempted dispute resolution, the proposed evidence has not been claimed to be necessary and it was no more so at the point of the application. Third, the application was made very late and in breach of the court's timetable and orders, compliance with which is a pre-requisite of the overriding objective and the fair trial of the individual case and, indeed, of all cases before the court.
I say at the outset I have come to the conclusion that Coleridge J was right on each basis. There is no real prospect of success in this appeal and I would refuse permission for the same and dismiss the appeal.
The background circumstances are these. The application by the wife concerns the alleged value of the husband's interests in vehicles known as the TCI management entities through which he exploits his talents. There is a fund which holds investments. The fund's board comprises of the husband and two independent directors and the husband does not control either the board or the fund. In contrast, the husband is the effective sole owner and controller of the management entities which are the vehicle through which he receives financial reward for the successful, that is profitable, management of the fund. The income stream of the management entities depends upon the husband's continued willingness and ability to manage the funds and the funds’ continued willingness to have him manage the funds rather than appointing a new fund manager. Since the husband does not control the fund, a decision, in theory, could be made to replace the management entities with a different fund manager.
The husband has not hidden the existence of the management entities. He asserted a value in respect of the same limited to their net investment asset value, that is excluding any goodwill, as long ago as December 2012 and as a part of his opening disclosure. The wife has, therefore, waited 16 months to make her application and has ostensibly participated in negotiation, including at the Financial Dispute Resolution appointment, without seeking to challenge the husband's position. Disclosure and questionnaires were successfully concluded without the issue being identified by the wife or, indeed, any complaint being made about the quality of the material so disclosed.
It is said that throughout the proceedings the husband has demanded a confidential process outside of the Rules. If that is right, it is equally clear that the wife has agreed to such a process. Although I make no concluded observations on that question, I am not sure that such a process is permissible under the Family Procedure Rules 2010 without the court agreeing to it. But I take the point that the wife says that the husband gets it all his own way and that that might have been an important factor in the evidence had the expert report been relevant and necessary.
The husband submits, as he did to Coleridge J, that he is the sole investment decision maker and "key man" whose inability or unwillingness to continue to manage the fund would trigger an inevitable liquidation of the fund and the cessation of the income stream which, he says, is the only value in the management entities apart from their investment asset.
The key man clause has been put to this court by way of submissions on an agreed basis, part of which I shall recite as follows: "If, in the opinion of the directors, the principal becomes disabled, deceased or otherwise unwilling or unable to develop a majority of his professional life to the investment manager (each a "key man event") the director shall promptly notify all shareholders. Except as otherwise provided for below, during the form of period following such notice (the "key man period") redemptions will not be given effect so as to facilitate an ordinary transition in the investment management of the fund and the master fund. The business day following the first valuation day occurring after the expiry of the key man period shall be designated redemption day and shareholders may elect to submit a redemption notice to redeem on such day without any penalty."
At no stage in the proceedings was there any suggestion that a direction was needed in relation to the value of the management entities, far less that there was a need for expert valuation evidence in relation to the same.
Between 4 April and 7 June 2013, a timetable was agreed to to take the case through to final hearing, including for the provision of witness statements, for listing of the pre‑trial review and the final hearing. Eleanor King J gave formal directions by consent on 14 June 2013. This was known and intended to be the only directions hearing prior to the PTR. It stood in the place of a conventional first appointment. No direction was made or sought at that hearing for the valuation of the management entities.
Accordingly, at least at that stage, the wife tacitly accepted the husband's presentation. The first hint of a possible challenge to the husband's stated position of the valuation of the management entities was in a letter from the wife's solicitors of 24 February 2014 as follows, "Were any appraisals/valuations performed in respect of those entities?" The response the following day was, "No." A week later on 3 March 2014, that is a week before the Financial Dispute Resolution appointment, the wife's solicitors posed a specific request to "explain why your client has subscribed no enterprise value to the TCI entities". That was answered on 6 March 2014 by reference back to the explanation which had been previously been given in December 2012. Until those exchanges of correspondence, there had been no suggestion that any additional value might be ascribed to the husband's interests in the management entities.
The parties had been in negotiation since the husband's initial disclosure on 12 December 2012. Throughout the whole of 2013 and the first three months of 2014 leading up to the FDR, the parties had proceeded on the common basis that the available assets were those revealed by the husband supported by voluntary disclosure, answers to a questionnaire and answers to a supplemental questionnaire. It would appear that the Rules based Forms E were dispensed with. Settlement of the case at any time during that period could only have been on the basis of the husband's disclosure.
It emerged at the FDR on 11 March 2014 that at some stage the wife had engaged an expert to advise on the value of the management entities. A draft report was disclosed shortly after the FDR on a without prejudice basis. That report has not been disclosed openly and the wife does not seek to rely on it. This court has not seen it, nor does this court have an affidavit dealing with the asserted relevance of its contents, nor did Coleridge J.
The FDR took place on 11 March 2014. There are only two possibilities. Either the FDR was going to be a genuine attempt by both parties to settle the case on the basis of the assets as disclosed or it was not. For my part, I entirely accept that it was. Mr Pointer who appears on behalf of the wife makes the point properly that the wife was using all of her endeavours to try and involve herself in settlement negotiations, in effect, right up to the last moment in these proceedings. It is said by Mr Marks that no negotiated settlement could have been possible at the FDR if one party was contending for a nil value for the management entities and the other believed that the value of the same was, in fact, substantial.
Seventeen days after the FDR and without the report that it was intended be used, the wife made her application. By the time of the hearing of the wife's application on 8 April 2014, there was still no report upon which reliance could be placed. On 28 May 2014, the wife served the report on which she wishes to rely. Were the wife's appeal to be allowed, it would not necessarily result in an adjournment of the final hearing. The husband could and probably would elect to deal with the issues raised by a late expert report of his own or no expert at all.
The totality of the resources available to the parties as a consequence of their marriage are significant. They comprise investments in the fund worth no less than $1.15 billion; the management entities valued by the husband at $109 million,exclusive of the alleged value of their trading activity; other investments of about $30 million; pensions worth about $85 million; and properties worth about $36 million.
The court's obligation under the Matrimonial Causes Act 1973 section 25 is to have to regard to: "The income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future..."
The wife submits that it is obvious that in order for the court to compute the total value of the parties' resources, a true figure needs to be ascertained for the value of the management entities. She says that the effect of the modern law post White, Miller and McFarlane is that a claimant wife can ordinarily expect to receive one half of the resources that the parties have built up during the marriage. In this case, she submits that the husband has indicated that he proposes to argue that the generation of wealth constitutes a special contribution by him such that the proportion to be allocated to the wife should be reduced from the conventional half. She observes that it is likely that she would receive something in the Charman bracket. That is between 33 per cent and 45 per cent of the total assets. The husband in open correspondence has offered only 25 per cent of the same. On either basis, the wife submits that the total asset base needs to be known.
In response to the charge that the process proposed is theoretical and speculative, the wife points to the standard basis for the proposed valuation, which is the extraction of a maintainable profits figure and the application of a ratio or number of years purchase to that profit and then the consideration of the discount to the resulting figure to reflect the importance to the business of the husband's role in iti.e. a key man discount.
They indicate a value for the husband's shares in the entities to be in the range of £513 million to £872 million. They assert that the key man discount would not be 100 per cent as indicated by Coleridge J, but less than half of that. There is no answer to the question posed by the court; namely, whether the management entities could be sold as a going concern without the husband. Perhaps the lack of an answer to that question is indicative.
The key factor, in my judgment, is that the proposed expert's report would not deal with a valuation on the basis that the husband left the entities at the date of trial. If anything else crystallises the application on the merits, it is that. The report can only be a hypothetical capitalisation of earning capacity which, in my judgment, would be neither relevant nor necessary.
If a judge, as this judge did, forms the view that evidence of the kind proposed would be unlikely to effect the decision on the ultimate issues in the case, he is obliged to refuse to allow the adduction of that evidence in that it may only be admitted if he is of the opinion that it is necessary.
The admission of expert evidence in family proceedings is governed by FPR 2010 Part 25 which is to be administered in accordance with the overriding objective of dealing with cases justly; specifically FPR Rule 1.1(2)(a):
"(a) ensuring that it is dealt with expeditiously and fairly
(d) saving expense; and
(e) allotting to it an appropriate share of the court's resources, while taking into account the need to allot resources to other cases."
FPR 2010 Rule 1.4 requires the court actively to manage cases, including:
"(b) identifying at an early stage ‑
(i) the issues;
(c) deciding promptly –
(i) which issues need full investigation and hearing and which do not;
(e) controlling the use of expert evidence;
(m) giving directions to ensure that the case proceeds quickly and efficiently."
FPR 2010 Rule 1.3 provides that: "The parties are required to help the court to further the overriding objective."
FPR 2010 Rule 25.4 provides that a person may not without permission put expert evidence before the court. That does not prevent a party obtaining expert evidence. In a case such as this, it would usually be expected that a party wishing to adduce expert evidence would obtain that evidence and then seek permission to adduce it. That is what the wife did, probably earlier this year, but certainly before 11 March 2014.
By FPR 2010 Rule 25.4(3), formerly Rule 25.1 when this application was considered by Coleridge J, the court may give permission to adduce the evidence: "Only if the court is of the opinion that the expert evidence is necessary to assist the court to resolve the proceedings."
The language of the rule is discretionary and an opinion upon the evidence is necessary. It is also permissive. Evidence may be admitted if the court is of the opinion that it is necessary, but cannot be admitted if the court is not of that opinion. In order to decide whether the expert evidence is necessary, the court must consider a number of factors set out in FPR 2010 Rule 25.5(1), specifically including: "Any failure to comply with rule 25.6 or any direction of the court about expert evidence."
FPR 2010 Rule 25.6 provides the mandatory timetable for seeking expert evidence: "...parties must apply for permission... as soon as possible; (d) in proceedings for a financial remedy, no later than the first appointment..."
Again, the emphasis is on steps being taken early and promptly.
It follows that one of the matters which the court is obliged to consider when deciding whether expert evidence is necessary is whether it has been sought as soon as possible and if not by the date of the first appointment, which in this case was the directions order made by Eleanor King J on 14 June 2013, the reason why it was not sought at that time. The fact that in June 2013 all other valuations were directed is relevant.
‘Necessary’ in the context of FPR 2010 Part 25 has a meaning: "Lying somewhere between 'indispensable' on the one hand and 'useful', 'reasonable' or 'desirable' on the other hand", having "the connotation of the imperative, what is demanded rather than what is merely optional or reasonable or desirable."per Sir James Munby P in Re: H‑L (A Child)
 EWCA Civ 655.
On this aspect, Coleridge J held that he was: "Completely persuaded that this exercise would be so theoretical as to do nothing more than generate an argument which would not assist the court at all. I have become convinced that it is shot through with so much theoretical speculation that the court would find itself quite unable to ascribe any sort of reliable value to it. The key factor in any valuation would be the extent to which the husband's own contribution to the business was relevant. The fact that there are others in the organisation in which he works who assist him by the production of the raw material, the production of analyses, does not in any way meet the point that in a business, which is wholly dependent upon the investment eye of the individual concerned, it is quite impossible for the court to carry out a valuation exercise of the organisation in those circumstances."
On the material put before this court, I have to say I tend to agree, but in any event, I cannot regard that judgment as being wrong.
It is speculative to suggest that a purchaser could be found to pay for an income stream that can and would walk out of the door together with the vendor of that income stream. The evidence filed in the case included disclosure of the offering memoranda in respect of the underlying funds. The key man provisions were patent and their purpose is self‑evident.
I would go further. Some assets cannot sensibly be ascribed a capital value. It is a fallacy that every asset must be valued in every case or even in every sharing case. Of course, the court will need to draw a balance sheet or asset schedule, but that does not lead to the conclusion that every asset must be valued in order for the court's statutory duty to be complied with. The valuations sought in this case would likely be theoretical. It would not be a valuation of assets available for distribution between the parties.
That is not to say that it will not be open to the wife to argue at trial about the division of existing capital assets which might reflect the fact that the husband could augment his share in the future from his substantial earning capacity within the management entities. There could be a Wells sharing of any profit in respect of the husband's subsequent earning capacity. Those are matters for the final hearing judge.
Accordingly, on the basis of the first two aspects of the application as put to Coleridge J, namely, relevance and necessity, I have come to the conclusion that an application for permission to appeal is without sufficient merit.
In any event there remains the importance of the timing of the application put to the judge in the court below. The application should have been made as soon as possible and no later than the substituted directions hearing in lieu of the first appointment. One only has to look at FPR 2010 Rule 25.6 for that. The judge was entitled to take into account the time between the making of the application and the proposed date by which the evidence would actually be produced and the commencement of the trial.
He was also entitled to look at compliance with the Rules and Practice Directions in Part 25 FPR 2010. In Re: W (A Child) Re: H (Children)
 EWCA Civ 1177, the President said: "The court is entitled to expect ‑‑ and from now on family courts will demand ‑‑ strict compliance with all such orders. Non‑compliance with orders should be expected to have and will usually have a consequence."
Asanction or a refusal to allow relief against a sanction in the Rules can be inferred where a party shall not be permitted to do something if the Rule is not complied with. Parties to financial remedy litigation should expect that approach to be followed as much in their cases as it is in children cases and civil litigation generally.
Here FPR 2010 Rule 25.5(2) specifically provides a sanction for breach of FPR 2010 Rule 25.6; namely, that the fact of the breach can be taken into account when considering whether the evidence is necessary. A judge is entitled to refuse even a consensual application to adduce expert evidence: see for example Re: F (A Child)
 EWCA Civ 656 where the Court of Appeal refused permission to appeal from a case management decision of a judge.
Accordingly, on the third basis, namely that the application was well out of time and not in compliance with the Rules and without explanation as to the same, the judge was right to refuse the same.
I would accordingly refuse permission and dismiss this appeal.LORD JUSTICE TOMLINSON:
I agree.LORD JUSTICE LAWS:
I also agree.