Family Law Hub

JM v MM [2015] EWFC B74

Husband's appeal against a financial remedy order where the costs involved were completely disproportionate in relation to the assets. The appeal was allowed but the judge said that "this is a case that cries out for mediation".

  • Case No: GL13D00807




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    JM (Applicant / Appellant)

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    MM (Respondent)

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    Peter Duckworth for the husband

    Daniel Leafe for the wife

    Hearing dates: 18th and 19th June 2015

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    JUDGMENT HHJ Wildblood QC :

    1. This is a composite hearing of an application for permission to appeal and, subject to permission, of the resultant appeal by a husband from the decision given by a District Judge in Gloucester ('the District Judge') in financial remedy proceedings. The District Judge heard the case on 28th and 29th August 2014, gave a reserved judgment seven weeks later on 14th October 2014, followed by a correcting note on 27th October 2014 and then issued an order on 3rd December 2014 (it took some time for counsel to agree the final draft). I regret to say that I consider it obvious that I will have to allow the appeal and hold a rehearing. Mr Leafe has argued on paper and at the hearing that I should do otherwise, using his typical skill and extensive experience as an eminent ancillary relief practitioner but I am afraid that that brief is even beyond his reaches.

    2. As one would expect from Mr Duckworth this is a highly focussed and well directed application for permission to appeal. It is a small money case where the costs have become disproportionate. On the findings of the District Judge and ignoring pensions (the division of which is not controversial) the assets are just under £300,000 ('£300k'), with the husband arguing that before me, with apparent validity, that they are considerably less than that. The costs are as follows:

    Husband's costs
    Wife's costs at first instance
    Wife's further costs at first instance
    Husband's costs of appeal
    Wife's costs of the appeal

    3. Application for permission to appeal. Under rule 30.3(7) of The Family Procedure Rules 2010 'permission to appeal may be given only where – a) the court considers that the appeal would have a real prospect of success or b) there is some other compelling reason why the appeal should be heard'.

    4. Appeal – Under Rule 30.12 of the 2010 Rules it is provided that:

    (1) Every appeal will be limited to a review of the decision of the lower court unless - …(b) the court considers that, in the circumstances of an individual appeal it would be in the interests of justice to hold a rehearing;

    (2) Unless it orders otherwise, the appeal court will not receive: a) oral evidence or b) evidence which was not before the lower court.

    (3) The appeal court will allow an appeal where the decision of the lower court was a) wrong; or b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court'.

    5. The powers of the court when hearing an appeal are set out in Rule 30.11(2) of the Rules and include a power to order a re-hearing.

    6. In V v V (financial relief) [2005] 2 FLR 697, having referred to the previous provisions governing appeals under the Family Procedure Rules 1991 (as amended in 2003), Coleridge J said: 'That position, as set out in the rules, followed the Court of Appeal's decision in Cordle v Cordle [2001] EWCA Civ 1791, [2002] 1 WLR 1441, [2002] 1 FLR 207, where it was emphasised that any appeal from a decision of a district judge in ancillary relief proceedings should only be allowed if it had been demonstrated that there had been some procedural irregularity or that, in conducting the necessary balancing exercise, the district judge had taken into account matters which were irrelevant, or ignored matters which were relevant, or had otherwise arrived at a conclusion which was plainly wrong. Accordingly, my function in relation to this appeal is the same as in relation to any other such appeal; namely, to review the process undertaken by the district judge to determine whether or not he fell into error in the steps which he took and in the analysis which he brought to bear. I do not start from scratch'. Although I now operate under The Family Procedure Rules 2010, the impact of the new rules is no different to that set out by Coleridge J in the above passage unless it were to be argued, which it has not been, that this is an evaluative rather than discretionary exercise (in which case the appellant would have an even lower hurdle to surmount and thus the appeal would be even more compelling).

    7. Background –The husband and wife (as I will call them) married on 25th August 1999, separated thirteen years later on 13th August 2012 and are now divorced. There are no children of the family. The wife is aged 58 having been born on 18th February 1957, works as a primary school learning mentor and lives in the former matrimonial home. The husband is also aged 58, having been born on 7th August 1956, lives in rented accommodation and is a managing director of a small company. The financial remedy proceedings were started on 21st August 2013.

    8. The former matrimonial home is in Gloucestershire and is currently vested in joint names; it bears a value of £320k, a mortgage of £236k and a consequent equity of £76k. The District Judge described the wife as being significantly over-housed in the property but thought that she should be given the time limited opportunity to release the husband from the mortgage and show that she could afford the mortgage and other outgoings.

    9. Income and income needs– The District Judge found the monthly income of the husband to be £8,000 and that of the wife to be £1,187. There is a significant dispute about whether the District Judge was correct in his findings about the husband's income; that dispute forms one of the two areas that I am asked to consider in this appeal. However, there is also a further point which is that the husband seeks to contend, on the basis of fresh evidence, that there was clear warning before the District Judge that his income would not return to the levels achieved in 2012/13 and that the District Judge's predictions that they would return to that level are now demonstrably wrong. For reasons that I give it is unavoidable that that fresh evidence should be admitted in the circumstances that arise.

    10. The District Judge considered the income needs of the wife at B21 and concluded that they were £2,700 p.m. At B22 he considered the husband's income needs and concluded that, ignoring liabilities, they were between £2,500 to £2,760.

    11. Therefore, the District Judge concluded, the wife had a shortfall of £2,700 - £1,187 = £1513 and the husband had a surplus of £8,000-£2,900 = £5,100 [this is adjusted in according to the DJ's note at B28]. Therefore on the findings of the District Judge, the husband had ample funds to pay the maintenance. At B25 he said that he did not regard a term order appropriate and went on: 'in other words, it will be what we call a joint lives order. There can be variations / terminations in the future under section 31 of the 1973 Act…' At B26 he said: 'I believe the right approach is to meet the wife's needs on a generous basis and to that end I shall order the sum of £2,250'

    12. The order of the District Judge - The order falls provides as follows:

    i) The former matrimonial home is to be transferred to the wife subject to the mortgage.

    ii) The order states 'the Respondent shall indemnify the Applicant as from 1st September 2014 in respect of all of the offset mortgage interest account payments which are secured on the said family home and furthermore the Respondent will seek to procure the Applicant's release from the said mortgage covenant by 1st November 2015'.

    iii) In the event that the wife did not secure the release of the husband form the mortgage the former matrimonial home is to be sold and the net proceeds are to be paid to the wife.

    iv) The wife is to transfer her 49% shareholding to the husband in return for a lump sum payment of £99,600.

    v) There is to be a pension sharing order in relation to three of the husband's pensions.

    vi) The husband is to make periodical payments to the wife at the rate of £27k p.a. as from 1st September 2014. The order was expressly not backdated.

    vii) The husband is to bear any liability to tax that might arise from the transfer of shares to him. The District Judge said at B26: 'the thinking behind this is that the continuing party will be able to absorb such liabilities from trading over the ensuing period, whereas the outgoing party is likely to find it difficult to meet unknown liabilities from a finite income and a deduction from capital sum is likely to leave that party short on an amount the court has assessed as appropriate'.

    13. The company- The District Judge had before him the report of Ruth Dooley which valued the company at £206k and the discounted value of the wife's 49% shareholding to be £60,550. The District Judge added the whole of the gross value of the company to the capital balance sheet. There are some very straightforward and foreseeable points that are made by Mr Duckworth about that approach.

    14. Appeal - By his appeal the husband seeks a reduction in the lump sum payment to £20,000 (by amendment, the original proposal being £60,550), time to pay that lump sum and a clean break.

    15. Capital - The District Judge concluded that the capital in the case was as follows [B21]:

    Former matrimonial home 
    The company
    Policies / accounts
    Lump sum agreed

    16. Mr Duckworth contends that the actual net effect of the District Judge's order is as follows in relation to capital:

    Director's loan
    Lump sum
    CGT on company

    17. The pensions were valued at £276,475 (husband) and £79,102 (wife), making total combined values of £355,577. The effect of the pension sharing orders (which have not been appealed) was that there was a transfer of pension values from the husband to the wife of £111,616. Thus the effect of the order was that the husband's residual pensions had a value of £164,859 and the wife's of £190,718 – 53.6% to the wife.

    18. The lump sum – The District Judge said at B26 that the appropriate starting point for capital was equal division. By reference to the figures that I have set out above he calculated that, on those figures, a further lump sum of £40,550 would need to be paid in order to equalise the capital. He concluded that this would meet the wife's needs and allow her to re-house herself if she had to sell the former matrimonial home.

    19. Before the District Judge the husband offered to pay £60,550 and, until I received his supplemental skeleton argument on the morning of the hearing, I understood that he continued to do so. By his supplemental skeleton argument the husband now argues that he should pay no more than £20k.

    20. The mathematics that the District Judge used were correct. The principles that he applied most definitely were not.

    21. The District Judge said this about the lump sum that he ordered: 'I infer that the husband can raise this amount from the company…his fall back position would be surrendering or selling the …policy. The husband appears content (or at least resigned) to continuing to rent…he put no case of wanting to buy. However he has a substantial mortgage capacity…taking everything into account I see no reason to depart from equality in this case. As regards how this is expressed I leave this to the parties to agree. It might be a single lump sum of £101,100 if it is decided not to express the agreed lump sum as consideration for the shares'.

    22. It relation to the lump sum:

    i) It was simply wrong for the District Judge to add in the whole of the capital value of the company when deciding upon the appropriate capital division. The company is not going to be sold and the husband could not contemplate selling it whilst facing the obligations that the District Judge placed upon him. The business is no more than an asset that produces an income stream from which both parties are to benefit under the order of the District Judge. There is no question of the husband being able to use his ownership of the shares as a means of raising £206k. It is not just a matter of the company not displaying a copper bottom. It is that its current value is purely hypothetical, because it cannot be accessed without destroying the husband's earning capacity. In so far as it is necessary to cite authority on that point I cite V v V again (see paragraphs 26 and 28); although Mr Leafe kindly referred me to the case of F v F (Clean break: Balance of Fairness) [2003] 1 FLR 847, I do not think that there is any inconsistency between the two cases (see para 90 of the decision in F v F). If the value of the company were to be accessed through sale it certainly would not produce anything like the income return of £8,000 p.m. suggested by the District Judge as being the husband's current income. The District Judge recorded that 'Mr Somerville [H's then counsel] [is] not attributing any value at all to the company – bizarrely in my view; I do agree that the asset is illiquid but don't see that as relevant to present circumstances'; I can well understand why Mr Somerville adopted that approach.

    ii) In calculating the assets for the purposes of the exercise carried out by him, the District Judge's approach to the husband's indebtedness was unsound. Mr Duckworth says that he ignored the husband's true indebtedness of £61,101.16 and a further liability for costs of £7,200 taking the total to £68,191 as at the time of Mr Duckworth's first skeleton argument – slightly more by the time of the supplemental skeleton. The figure taken into account by the District Judge for the husband's liabilities was £20k which, Mr Duckworth says has no evidential basis at all. The relevant passage of the judgment is at B22: 'I can only go by what is in the bundle. I conclude that I can attribute no more than £20,000 to the husband by way of liabilities'. Mr Duckworth and his solicitor have checked the bundle and have produced a schedule of the documentation about the husband's liabilities that were included in it. That schedule is at C62 and reveals documentary evidence of indebtedness of £61,101.16. Therefore, Mr Duckworth says, there was evidence in the bundle and it went without analysis in the judgment. Further, the combined effect of that indebtedness, costs and the lump sum liability is quite obviously beyond the husband's reach, says Mr Duckworth with apparent justification. Mr Leafe suggests at A21 that the District Judge was 'careful in his analysis of what material he did and did not is not known what evidence is said to exist that there were liabilities of £62,974…the District Judge acknowledges that he may not have assessed H's liabilities with perfect accuracy but he could not be said to be plainly wrong as he is in no doubt as to where any blame for that lies'. I regret that I am unable to accept Mr Leafe's submissions – there was evidence of the debts; it is the figure of £20k that is without any evidential basis. Mr Leafe says that the schedule at C62 covers a number of different dates meaning that the District Judge was unable to produce a current schedule of indebtedness. I do not accept that the solution to this was to produce an evidentially unsound figure of £20k. Further, if there was difficulty about the correct figure for this sort of indebtedness the whole issue could and should have been put right at trial by the husband being directly to get the evidence there and then; where there is an issue of £40k difference in such a small money case that very simple solution should be followed. Further still, it is far from unusual in financial remedy hearings for the documentation about credit card indebtedness to cover a range of dates; rarely is the documentation on such an issue entirely up to date especially where there are so many debts.

    iii) In approaching the value of the company the District Judge did not take into account that the husband has a debt of £62,987 which he owes to the company. Therefore, although Ms Dooley does value the company at £206k on a net asset basis, the value in the husband's hands of the company should be discounted at the very least by £62,987 (since of the sum of £206k, £62,987 represents that liability of the husband to the company). The point that is made is that, on the construction of the order made by the District Judge, there was no way that that sum would ever be paid by the husband (not least because he does not have the means to pay it). Therefore the company held an 'asset' in the form of the sum due from the husband, which would never be realised. If that sum is taken into account as an asset of the company it should also be taken into account as a debt of the husband. The points that Mr Leafe seeks to advance on this issue at paragraphs 43 to 47 simply do not address this point. It was not for the husband to call Ms Dooley to challenge this issue since there was nothing to challenge; it was a fact that this money was owed. Other failures in disclosure would not affect this issue – the question was: 'is the figure of £206k correct?' Past receipt by the husband of that sum would not make it available now. The husband might find a way round the debt but that would mean that the company would not receive it. For some bizarre reason it appears that this point was not 'run with' before the District Judge although there may have been oblique reference to it. I accept that it is a point that Mr Duckworth has picked up and, insofar as necessary I give permission for that issue to be raised at this hearing (how could I do otherwise in the interests of fairness?).

    iv) The District Judge ignored tax when looking at the value of the company ('first, it is not possible to get anything out of the company without paying tax'), says Mr Duckworth and he is right.

    v) The District Judge did not conduct a correct analysis as to whether the husband could raise the lump sum. He inferred that the husband could raise it from the company but did not examine how [B26]. Mr Duckworth says: 'the judge disregarded the evidence before him, which was in the trial bundle at D440 and is now in the appeal bundle at E23 that the company had only £70,559 at the bank, £17,254 of which was VAT owed to the government'. Even if that sum could be drawn from the company gross (which it cannot) it does not account for a lump sum of £101k. Further, the fact that the husband offered £65k by way of lump sum does not mean that he could raise £100k.

    vi) The District Judge wrongly ignored CGT in relation to the value of the company on the grounds that 'it will only be payable in the future, and who knows what the rates or allowances will be (in particular, following a general election next year)'[B20]. Further, Mr Duckworth says that the District Judge ignored that Ms Dooley was saying that the most tax efficient way for the wife's shares to be acquired was by the company buying them and that this would lead to a tax liability of £21,982. Further, says Mr Duckworth, there is a latent CGT liability on the husband's shares of £9,406. Mr Leafe argues that the District Judge made a clear and reasoned decision that it should not be taken into account. I do not accept that there is any valid basis upon which CGT on share valuation can be ignored in circumstances such as this. It will have to be paid sometime.

    23. The husband's income – The District Judge took the husband's net income to be £8,000 p.m. [B19]. He referred in particular to the opinion of Ms Dooley at C60 where she aid: 'Counsel takes an average of 2011 to 2013 and compares it to the average of 2012 to 2014 (albeit in principle being in mind the points above. In my view 2013 gives a reasonable indication of the relatively steady performance of the business prior to 2014. The performance of the business declined significantly in 2014 for the reasons indicated in my report. I assessed the chances of the business returning to its former level to be 50%. I do not have more up to date information, however, and therefore think it should be matter for the judge to assess the chances of the business returning to its pre-2014 trading position'.

    24. The expert, Ms Dooley, said at C29: 'The analysis of the years from 2011 to 2013 show a relatively steady business with a reasonable EBITDA (earnings before interest, tax, depreciation and amortisation). The 2014 results are draft but there has been a significant drop in margins probably primarily due to The husband's personal difficulties…In my view there is a 50/50 chance of the business being able to recover to its pre 2014 performance level. Therefore to calculate a normalised EBITDA, a 50% weighting should be put on the 2014 EBITDA and a 50% weighting on the 2013 EBITDA. This gives a normalised EBITDA of £68,221'.

    25. At B19 the District Judge said: 'I prefer to use the expert's figures which show a net monthly figure (salary and dividends) of £8,700 in 2012/13 and £4,900 in 2013 / 14. In my judgment, it would be literally correct to say that if there are other factors that I believe add weight to the expert's opinion by only an additional 1% then, on he balance of probabilities, I can conclude that the business (and hence the husband's income) will return to its former level.' At B19 the District Judge said that the probability is that the husband would be revitalised once the divorce was resolved. The District Judge then went on to say that the following factors warranted a confidence that the husband's income would return to its previous levels:

    i) The husband had incorporated a new business, servicing machinery;

    ii) The fact that the husband's health had suffered as a result of the divorce and, the District Judge thought, would restore itself once the case had ended;

    iii) The husband's non-disclosure.

    26. Regrettably, at no point of the judgment does the District Judge analyse the evidence that he had heard about this issue, in particular he did not analyse the trading information of the company. Was the business of the company such that previous levels of income were likely to be restored? The issue was left open by the expert for him to resolve. The reasons that he gave for his opinion that the income would be restored are not analytically sound. The creation of a new business did not create any basis for saying that the main business would restore its profitability; it was not a profit making enterprise at the time of the hearing and the very fact that it was being set up suggested a need for the husband to branch out into other areas of trading. The husband's ill-health did not form a basis for saying that trading conditions would restore themselves and his alleged non-disclosure in other areas of the case did not affect this issue at all. What is more, there is no apparently credible evidence that events have shown the District Judge's predictions to be wrong.

    27. The application to adduce fresh evidence - I intend to resolve that by applying the strict rules of Ladd v Marshall [1954] 1 WLR 1489 because, it is perfectly obvious that this fresh evidence must be admitted even under the strictures of the test that arises from that case. Further, the reality is that, if I reject the application to adduce fresh evidence a variation application is bound to follow. That variation application would take place against the same demonstrably vulnerable analysis of the District Judge's judgment – it could not possibly take place, even on the terms of the District Judge's judgment, on any assumption that in August 2014 the husband definitely had the income that the District Judge found. It would have to take place on the basis that the District Judge had recognised that there was a risk that the husband's income was not as high as he, the judge, anticipated. On a variation application the husband would be entitled to say that the identified risk had occurred (if he could substantiate it on evidence).

    28. Thus there is an inevitability that the issue of income will have to be revisited in any event. It is highly regrettable that that inevitability has not been faced up to without this considerable incursion of costs into the very limited means of these parties.

    29. Returning to the test in Ladd v Marshall:

    i) the evidence could not have been obtained without reasonable diligence at the time of the hearing because most of it was not available then;

    ii) the evidence, if accepted, would be of fundamental impact on the correct level of periodical payments. There is no doubt what the wife earns and there are findings about the parties expenditure that are hardly the stuff of further litigation;

    iii) the evidence is apparently credible. It is as much as the husband could be expected to provide in these circumstances and with his finances being as they are.

    30. The key point about that evidence is that the husband says this: 'The real disaster came in October 2014 after the court hearing. The owner of X Ltd, Tim Brown, requested a meeting on 9th October with Y…the purpose of the meeting was to induce Z Co Austria to supply all its machines and servicing direct to X, so that we were cut out….the events of October 2014 have had a catastrophic impact on the business. X used to purchase 6 to 9 machines a year. [H's company] machine sales and servicing accounted for 90% of our total turnover and, of that, 60% was generated by X. The income has gone forever and it is impossible to generate similar earnings from any new customers that we may be able to find'. Either that is true or it is fraudulent.

    31. In those circumstances, it is obvious that permission to appeal must be given and the appeal must be allowed in relation to the capital provision. The evidence in relation to income must be admitted and therefore there are compelling reasons why the issues of periodical payments must be reheard (justifying leave) and, in the light of that evidence, it would be unjust for the current order to remain (justifying the allowing of the appeal on that issue also).

    32. Further in allowing the appeal, I observe that the issues of capital cannot be severed from income and, thus, capital and periodical payments will have to be reheard.

    33. In relation to income there is the further point that there is now credible evidence, through the admission of fresh evidence, that the District Judge's assessment of income was wrong as at the time that he heard the case.

    34. It could not be just for me to determine the issues that now arise at an appeal hearing. There will have to be a rehearing, which I will have to conduct myself. That is highly regrettable in a case where the costs of the parties are so disproportionate and they both seem locked into conflict.

    35. Pending that re-hearing, this is a case that cries out for mediation. I would strongly recommend to both parties that they either arbitrate on their differences or mediate. It may be very much in their interests now to arrange for a specialist mediator (such as a lawyer mediator practising in this field) to be approached by them.

    HHJ Stephen Wildblood QC

    18th June 2015.

Judgment, published: 24/06/2015


See also

  • Husband's appeal against a financial remedy order where the costs involved were completely disproportionate in relation to the assets. Case note, 23/07/2015, members only

Published: 24/06/2015


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