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Case study 1 Divorce – Financial provision – Ancillary relief – Capitalisation of earning capacity – Husband owning company for substantial period prior to marriage – Husband selling company following separation from wife – Net proceeds of sale of company amounting to £25m – Wife seeking lump sum payment of £10m by way of ancillary relief – Judge finding 60% of net proceeds of sale to represent non-matrimonial assets – Judge awarding wife £5.4m – Wife appealing – Whether judge erring by capitalising husband’s earning capacity at date of marriage and treating capital as non-matrimonial asset. Held – (1) A spouse’s established earning capacity at the date of the marriage should not be capitalised, or otherwise brought into account, for the purposes of the sharing principle. In the instant case, the judge had found that £15m of the ultimate net proceeds of sale of the company represented what the husband had brought into the marriage in 1996. He had done so in the light of the agreed fact that the value of the company in 1996 had been only £2m. Even were allowance to be made for any spring board within the company in 1996 and for passive growth in the company’s value from 1996 to 2007, it followed that the judge had placed a massive capital value on the personal capacity of the husband in 1996 to make money in his chosen field, born of the experience which he had gained during his employment in it since 1967. The judge had thus capitalised the husband’s earning capacity at the date of the marriage and proceeded to treat such capital as a non-matrimonial asset. There were three objections to such capitalisation. Firstly, the capacity was not easily measurable in capital terms. Secondly, the proper depth of any inquiry into a spouse’s expertise and acumen was not clear. The judge in the instant case had rightly laid stress on the knowledge which the husband had gained during employment in the field prior to 1986. However, without having his other qualities, whether inherited or acquired as a child, the husband would not have been able to put his knowledge to profitable use. In truth, the judge had placed a substantial capital value on the husband as a person; such was no function of the divorce court. A dangerous degree of hindsight was also likely to be deployed in analysing the extent of a person’s earning capacity at a date long past. Thirdly, capitalisation of the earning capacity established by one spouse by the date of the marriage was likely to be unjustly discriminatory if the other had not by then established an earning capacity. It followed that the judge’s decision in the instant case was flawed in that it ascribed a capital value to the earning capacity of the husband at the date of the marriage. In light of the flawed character of the judge’s assessment of the award to the wife and of the fact that, due to the forensic history, a rehearing was out of  1 FCR 242 at 244 the question, it fell to the court to exercise the discretion which had been vested in him (see , –, , , below); GW v RW  2 FCR 289 overruled and Miller v Miller, McFarlane v McFarlane  2 FCR 213 applied. (2) Criticism could be levelled at both approaches advocated before the judge for application of the sharing principle in the instant case; in different ways they were both highly arbitrary. Application of the sharing principle was, however, inherently arbitrary. The exercises, on the one hand, of adopting approach A and testing it against approach B and, on the other, of adopting approach B and testing it against approach A might indeed have subtly different consequences. At all events in the instant matter, particularly in circumstances in which a central valuation mandated by the husband’s approach had been crystallised by sale, it was preferable in the first instance to adopt his approach. The total assets of £25m would therefore be divided into the part reflective of non-matrimonial assets and that reflective of matrimonial assets. In doing so, however, it was necessary to remember that the court was unlikely to need, still less to achieve, a precise division. The remaining step to be taken pursuant to the husband’s approach would be easy, partly because in the instant case there was no ground for sharing the non-matrimonial assets other than 100% to the contributor and 0% to the other, and partly because, by contrast, there was no ground for sharing the matrimonial assets other than equally. It would, however, be necessary to test the result suggested by the husband’s approach against application of the wife’s approach, namely by identifying, for allocation to her, such lesser percentage than 50% of the total assets as seemed to make fair overall allowance for the husband’s introduction of his company into the marriage (see –, below). (3) The starting point for ascribing a realistic value to the husband’s company as at the date of the marriage was the agreed valuation at that date, namely £2m net. That sum required substantial adjustment for two reasons, the first of which arose out of further consideration of the concept of latent potential or, in the judge’s words, the ‘spring board’. Although a professional valuation calculated by reference to future maintainable earnings would generally reflect the value of any such spring board, there would be rare cases in which a judge might be persuaded that it had failed to do so. In the instant case, the court had to work on the basis of clear findings by the judge that, at each of two different dates, there had been spring boards in place in the husband’s company which the respective professional valuations had failed to reflect. The finding of a spring board at the date of separation was vastly favourable to the wife in that it had precluded the husband from continuing to represent the post-separation increase as matrimonial. Although it would be wrong to follow the judge by increasing the figure of £2m to £15m, his figure being flawed by his allowance within it for the husband’s earning capacity at the date of the marriage, it was necessary, in fairness to the husband, to make some allowance for the spring board identified as being in place at the date of the  1 FCR 242 at 245 marriage. By reference to its latent potential, the value of the company at that date would therefore be taken as £4m rather than £2m. The second reason for adjustment was the need to allow for passive economic growth in the company between the date of the marriage and the date of sale. In light of its limited access to the relevant facts, the court could do no better than to apply to the sum of £4m an increase of 116%, such being the percentage increase in the FTSE All Share Oil and Gas Producers Index between the date of the marriage and the date of the sale. The value of the non-matrimonial assets, lifted by an allowance for passive growth, was therefore £8.7m, which (rounding the figure up to £9m) meant that the value of the matrimonial assets was £16m and the award to the wife would be £8m. The sum of £8m represented 32% of £25m which fell within a bracket which seemed to be fair to both parties. The appeal would therefore be allowed and an award of £8m would be substituted for the judge’s award of £5.4m (see –, –, below). Per Wilson LJ. In applying the principles of need and of sharing, the court is engaged in two separate exercises, which require it to refer to different considerations. The suggestion that the result of the assessment under the need principle can be introduced into the assessment under the sharing principle in order to identify the extent of departure from equality is inconsistent with the guidance given in authority that in principle the higher assessment should found the award; Miller v Miller, McFarlane v McFarlane  2 FCR 213 and Charman v Charman  2 FCR 217 considered. Per Sir Nicholas Wall P. It is necessary to remind all judges who sit at first instance of what Schiemann LJ said in HM Customs and Excise v A  3 FCR 481 at –. The primary function of a first instance judgment is to find facts and identify the crucial legal points and to advance reasons for deciding them in a particular way. The longer a judgment is and the more issues with which it deals the greater the likelihood that: (i) the losing party, the Court of Appeal and any future readers of the judgment will not be able to identify the crucial matters which swayed the judge; (ii) the judgment will contain something with which the unsuccessful party can legitimately take issue and attempt to launch an appeal; and (iii) reading the judgment will occupy a considerable amount of the time of legal advisers to other parties in future cases who again will have to sort out the status of the judicial observation in question. All this adds to the cost of obtaining legal advice. A system of full judgments has many advantages but one must also be conscious of the disadvantages (see –, below). Case study 2 Divorce – Financial provision – Ancillary relief – Parties divorcing after eight-year childless marriage – Wife seeking ancillary relief – Judge classifying husband’s deferred compensation scheme as illiquid fund – Judge awarding 65% of assets to wife and 35% to husband – Judge adopting wife’s unagreed schedule for calculation of award into cash terms – Schedule including scheme amidst immediately available resources and suggesting husband had wasted £1.9m – Husband appealing – Whether judge erring in treatment of scheme – Whether husband should be allowed to adduce fresh evidence – Whether schedule incorrectly estimating husband’s waste of family money – Whether judge overstating wife’s needs. Held – (1) The judge had erred in principle in her treatment of the husband’s deferred compensation scheme. There was abundant evidence to suggest the extremely limited nature of the value of the fund to the husband. It was elementary that counsel for the wife had to cross-examine the husband if she wished to challenge his evidence as to the character and limitations of the asset. Counsel had not done so and the wife’s schedule was inconsistent with the evidence. The judge had thus erred in expressing her award of 65% of available assets in monetary terms (see –, below). (2) Since there was no sufficient explanation as to why the husband had not carried out a through search and discovered the vital CD in proper time for the trial, his application to adduce fresh evidence had to fail, with the result that his attempt to unravel the judge’s critical evaluation of him failed. The judge had reached clear conclusions which she had been fully entitled to reach on the evidence before her (see –, below); Ladd v Marshall  3 All ER 745 applied. (3) It was clear that the total of £1.9m was wrong by a factor of approximately three. Extracting figures which were duplicated, plainly wrong, or fell outside the stated period of analysis, the withdrawals made by the husband sank to a figure of around £694,000. Furthermore, he was entitled to say that expenditure was not to be regarded as a waste if the use of the withdrawals was properly explained (see –, below). (4) The judge’s expressions regarding the wife’s needs had been overstated. The instant case involved an eight-year childless marriage. Both parties were aged approximately forty and each had a fresh start in life to make. There were £3m of assets to meet their respective needs in what was essentially a simple case with all the hallmarks of clean break and equality (see , below). (5) The award in the instant case would be reduced by deletion of the nominal periodical payments ordered in favour of the wife. The judge had already rejected equality of division to reflect the disparity in future earning capacity and to add a nominal order suggested duplication. It was obvious that the deferred compensation scheme had to be taken out of the  3 FCR 222 at 224 calculation of the respective shares of the parties. On that basis, the sum ordered in favour of the wife would reduce to approximately £1,522,000 and that payable to the husband would rise to £819,000. Whilst the judge had erred in departing from equality in reliance upon the wife’s ‘overwhelming’ need, there was an alternative rationale for the departure from equality. That rationale was not to be put in terms of need or waste, but as the price the husband had to pay for the clean break, recognising the disparity in their future earning capacity and in their future capacity to generate capital (see –, below). Case study 3 Divorce – Financial provision – Ancillary relief – Agreement – Husband and wife divorcing after 29 years of marriage – Husband transferring proportion of marital assets to wife on basis of alleged settlement agreement – Dispute occurring regarding costs of implementing agreement – Wife filing notice of intention to proceed with ancillary relief application – Husband issuing notice to show cause why order should not be made in terms agreed by parties – Applications being transferred to High Court for directions hearing – Whether appropriate to stay ancillary relief proceedings as contended by husband – Whether appropriate to deal with status of agreement as notice to show cause – Matrimonial Causes Act 1973, s 25. Held – (1) It would be wrong to ‘stay’ the ancillary relief proceedings in the instant case and to list the issue of the agreement as a preliminary issue isolated from a proper consideration of the factors prescribed by s 25 of the Matrimonial Causes Act 1973. However, where there was a factor of such magnetic importance that it had to dominate the discretionary process, the vehicle of a ‘notice to show cause’ could appropriately be regarded as the proportionate and just route by which to determine the extent to which that factor should be determinative of the action. There was no reason why, in an appropriate case, the status of an alleged agreement could not be dealt with as a notice to show cause determined against the back drop of a consideration of the s 25 factors. Such an approach was fundamentally different from one where the court embarked on a consideration of evidence as to the existence of an agreement as a preliminary issue, in a vacuum, with no consideration of the surrounding circumstances or s 25 factors; Smith v Smith  3 FCR 374considered. (2) There was a strong case to suggest that there had been a concluded agreement which had been implemented by both parties in the instant case. It was unlikely that a court would find the unresolved issue as to how the costs of implementing that agreement were to be paid as going to the heart of the agreement. Furthermore, there had not been a change of circumstances which would inevitably lead a court to conclude that the original agreement could not stand; the relevant time lapse in considering a change of circumstances was not to be calculated from the conclusion of the agreement, but from the last occasion upon which the wife had been seen to rely on its terms. In the instant case, that had been as recently as October 2007, only four months before a form A had been filed on the wife’s behalf. None of the issues raised by the wife undermined the fundamental significance of the alleged agreement. If the court were to find that there had been an agreement upon which both parties had relied for nearly three years and which had been implemented in its entirety save for the pension share, then the combination of those factors gave rise to a strong argument that a possible result of the s 25 exercise would be that the wife received no further financial reward and that an order should be made in the terms sought by the husband. In all the circumstances, the alleged agreement was a factor of such magnetic importance that it necessarily had to dominate the discretionary process. Since the agreement had to be considered in the context of s 25, the ancillary relief proceedings would not be stayed or adjourned, but it would be ordered that the notice to show cause would be determined at the next hearing and any additional disclosure would be limited; Crossley v Crossley  1 FCR 323 considered. Case study 4 Ancillary relief – Pre-nuptial agreement – Peaceful enjoyment of possessions – Husband signing pre-nuptial agreement without legal advice or knowledge of wife’s assets – Husband seeking needs based order in ancillary relief proceedings – Whether possible to characterise award of capitalised maintenance as interference with property rights – Whether pre-nuptial agreement constituting enforceable property right – Whether resolution of financial proceedings on divorce pursuant to relevant domestic legislation amounting to interference with property rights – Matrimonial Causes Act 1973, s 25 – Human Rights Act 1998, Sch 1, Pt II, art 1. Held – (1) A transfer of property order or a lump sum was an order which was capable of affecting an individual’s peaceful enjoyment of their possessions and in such circumstances the Protocol was engaged. The husband’s assertion that art 1 thereof could not be engaged since his claim was based upon need and, as such, amounted to a claim for maintenance, could not be accepted. Whilst a lump sum in lieu of income was properly characterised as maintenance, where the amount was substantial the award could amount to an interference with the other party’s capital rights. Accordingly, art 1 was engaged in a general way in the instant case; Wilson v First County Trust Ltd 4 All ER 97; M v Secretary of State for Work and Pensions  1 FCR 497; Pye v UK  ECHR 44302/02 considered. (2) Pre-nuptial agreements were not enforceable, per se, in English law. A review of authority showed that, over the years, judges had become increasingly minded to look at the precise terms of agreements and would seek to implement their terms provided the circumstances revealed that the agreement was fair. Despite that, it was clear that the old common law rule remained to the effect that a party who had made a pre-nuptial agreement could not sue on it as if it were a valid contract. Upon divorce, when a party was seeking quantification of a claim for financial relief, it was the court that determined the result after applying the Act. The court granted the award and formulated the order with the parties’ agreement being but one factor in the process and, perhaps, in the right case, the most compelling factor. The enforceability of the parties’ agreement resulted from the court’s order and not from the agreement itself. The consequence was that the pre-nuptial agreement was not an enforceable right and so art 1 of the First Protocol could not apply to it because it was not property as so defined; N v N (divorce: ante-nuptial agreement)  2 FCR 583; F v F (Ancillary Relief: Substantial Assets)  2 FCR 397; S v S (matrimonial proceedings: appropriate forum)  3 FCR 272; X v X (Y intervening)  1 FCR 35 at 37  1 FLR 508; M v M (pre-nuptial agreement)  1 FLR 654; K v K (ancillary relief: prenuptial agreement)  1 FLR 120;Crossley v Crossley  1 FCR 323 considered. (3) In assessing the husband’s needs account was to be taken of all the circumstances of the instant case. His award was to be circumscribed to a degree to reflect the fact that at the outset he had agreed to sign the pre-nuptial agreement. Of course, from an English perspective the agreement was flawed and it was necessary to take full account of the fact that the husband’s agreement was tainted because he had not known what his future wife had been worth and had not had independent legal advice about the ramifications of the deal. Nevertheless, he had understood the underlying premise that he would not be entitled to anything if the parties divorced. His decision to enter into the agreement therefore had to affect the award. Furthermore, whilst he could not be criticised for his decision to embark upon an academic life, it had not been jointly made in the context of the marriage and so its effects could not, in fairness, simply be visited upon the wife in the sense that she had to fund a lavish banker’s lifestyle for the remainder of his life. The financial consequence of his decision had to be marked in the balancing exercise. On the evidence, he needed £2.5m to enable him to buy a home in England as a base for himself and the children. The wife would also pay £700,000 to cover his debts and £25,000 for additional capital items. In the circumstances, he needed a net spendable income of £100,000 odd. That Duxburized at £2.331m, which would be rounded up to £2.335m. In addition, the wife would provide €630,000 (£504,000) for housing in Germany and £70,000 pa for the children.