England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)

		2 May 1995

1. WAITE LJ: This appeal arises in a case where the court, in the exercise of its powers to award financial support at divorce for the wife and children of a prosperous businessman, faced two difficulties standing in the way of a capital and income award on the scale that would normally have been appropriate for a man of his means and earning capacity. One of them arose from the fact that the husband was a member of Lloyds, required (as a condition of his membership) to provide a bank guarantee covering his potential liability up to a specified limit. Although his membership was expected to yield profit for the future, he had incurred past losses which he had discharged through a personal loan secured on the family home. In consequence the primary equity in the family home (that is to say the proportion of its value which would normally have been available, after discharging a conventional home loan mortgage, to provide a source of capital for the wife) was committed to the guarantor bank as security for the contingent liability which would arise by way of indemnity in the event of the guarantee being enforced and for the actual liability which had already been incurred in respect of the Lloyds losses loan. The husband claimed to be unable to offer any alternative security acceptable to the bank for either of those liabilities. If he was right, the residual equity in the family home after satisfying those charges would have been wholly inadequate to support the rehousing needs of the wife and children. The second difficulty arose from the restraints imposed upon the husband's primary source of immediate income — the family business of which he was joint managing director — resulting from the pursuit by that company of a policy of ploughing back profits and paying relatively modest salaries to the directors, while at the same time making very generous provision for them by way of pension contributions.
2. In the Nottingham County Court on 1 November 1994 his Honour Judge Heald dealt with those difficulties firmly. He held, first, that the husband had failed to satisfy him that it was beyond his power or means to free the primary equity in the family home by providing the bank with alternative security for the guarantee and for the Lloyds losses loan. He accordingly made a lump sum order in favour of the wife in an amount representing the bulk (though not quite the whole) of the primary equity in the family home. Secondly, in regard to income, he made an order for payment to the wife of periodic maintenance for the children at a figure which left the husband facing a deficiency of income after meeting expenses which included the cost of educating the children at private schools — the view being expressed by the judge that the deficiency was one which the husband could and should make good by procuring changes by the company in its policy towards the payment of dividends and/or the remuneration of its management. The husband now appeals against that order, claiming that it exceeded the proper bounds of discretion within which the court normally acts when exercising its matrimonial jurisdiction — wide though he acknowledges that discretion to be.

The law

3. The discretionary powers conferred on the court by the amended ss 23-25A of the Matrimonial Causes Act 1973 to redistribute the assets of spouses are almost limitless. That represents an acknowledgement by Parliament that if justice is to be achieved between spouses at divorce the court must be equipped, in a society where the forms of wealth-holding are diverse and often sophisticated, to penetrate outer forms and get to the heart of ownership. For their part, the judges who administer this jurisdiction have traditionally accepted the Shakespearean principle that 'it is excellent to have a giant's strength but tyrannous to use it like a giant'. The precise boundaries of that judicial self-restraint have never been rigidly defined — nor could they be, if the jurisdiction is to retain its flexibility. But certain principles emerge from the authorities. One is that the court is not obliged to limit its orders exclusively to resources of capital or income which are shown actually to exist. The availability of unidentified resources may, for example, be inferred from a spouse's expenditure or style of living, or from his inability or unwillingness to allow the complexity of his affairs to be penetrated with the precision necessary to ascertain his actual wealth or the degree of liquidity of his assets. Another is that where a spouse enjoys access to wealth but no absolute entitlement to it (as in the case, for example, of a beneficiary under a discretionary trust or someone who is dependent on the generosity of a relative), the court will not act in direct invasion of the rights of, or usurp the discretion exercisable by, a third party. Nor will it put upon a third party undue pressure to act in a way which will enhance the means of the maintaining spouse. This does not, however, mean that the court acts in total disregard of the potential availability of wealth from sources owned or administered by others. There will be occasions when it becomes permissible for a judge deliberately to frame his orders in a form which affords judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court's view of the justice of the case. There are bound to be instances where the boundary between improper pressure and judicious encouragement proves to be a fine one, and it will require attention to the particular circumstances of each case to see whether it has been crossed.
4. Those, in summary, are the principles which are in my view to be deduced from the authorities to which Mr Duckworth (for the husband) and Mr Wood (for the wife) referred us in the course of their clear and able submissions — namely Howard v Howard [1945] P 1, Donaldson v Donaldson [1958] 1 WLR 827, J-PC v J-AF [1955] P 215 per Sachs LJ at p 227, O'D v O'D [1976] Fam 83, B v B (Financial Provision) (1982) 3 FLR 298, Nicholas v Nicholas [1984] FLR 285, Browne v Browne [1989] 1 FLR 291, Crittenden v Crittenden [1990] 2 FLR 361, Green v Green [1993] 1 FLR 326, and H v H (Financial Provision: Capital Assets) [1993] 2 FLR 335.

The family history

5. The husband and wife are now aged 43 and 34. They were married on 23 August 1980 and their two sons were born in November 1982 and June 1985 and are now 12 and 9. There is a firm intention that both boys should continue to receive private day-school education at a cost which runs at present at £6000 pa for each of them. The husband has at all material times worked for the family car sales company, founded by his father and uncle, of which he is now joint managing director with his brother. The company has enjoyed since the 1950s the exclusive county franchise for sales of [particular German] cars and is accepted to be a successful concern. In 1985 the family home was purchased in the name of the husband. During that same year he became a name at Lloyds. There were differences between the spouses in 1989 which led to a temporary separation. In November 1992 they separated permanently, after the wife had become attached to a man whom she still sees but with whom she does not live.

The family resources

6. The wife has no significant capital. The husband's resources are:

Family home:	£250,000
Insurance policies:	£13,394
Cash (Lloyds reserve):	£7,987
Securities (Lloyds reserve):	£25,000
Pension funds (estimated value at age 60: £1.3-2.8 m) current fund value:	£394,000
25.2% shareholding in the company (minimum):	£600,000
Interest under policies written on life of his mother:	£82,867

7. His liabilities are:

Mortgage to Midland Bank:	£78,000
Lloyds losses loan from Midland Bank:	£43,000
Liability to Midland Bank under his indemnity supporting the bank's guarantee to Lloyds:	£100,000
Personal overdraft:	£8000

The first three of those liabilities are secured on the family home. The mortgage is a home loan in the conventional sense; the second and third are existing and contingent liabilities linked with the husband's membership of Lloyds.

Sources of income

(A) The husband

8. His membership of Lloyds does not at present yield income, but it was held by the judge to be soundly based and likely to become income-producing in due course. He has one potential loss through a doubtful syndicate where the maximum liability is £100,000 secured by the guarantee. The Midland Bank has stated that it is not prepared to allow the indemnity liability under that guarantee to become unsecured, and there was in evidence before the judge a letter from the bank stating that for 4 years the bank would, if no alternative security was provided, require the existing charge on the family home to be maintained or to be replaced with cash cover paid out of the proceeds of its sale.
9. His earnings from the company (following a recent 10% increase in his salary) yield £2791 net per month. He is also in receipt of school fees policy income of £172 per month.

(B) The wife

10. She has no independent source of income but is engaged on a training course as a nursery nurse which should enable her to earn something when her course is completed in 2 years' time. It is agreed that the boys should live with her (subject to contact with the husband).

The company

11. The 4000 shares in X (Holdings) Ltd are held as to 50.05% by the husband and his brother equally; as to 25.05% by their mother and as to 24.9% by a trust, of which the husband and his mother and brother are trustees, for the benefit of the mother's grandchildren. The articles contain restrictions on transfer to non-members without board approval which in practice precludes members from borrowing on the security of their minority holding. The mother is a semi-invalid who has suffered a stroke and is in residential care. She nevertheless receives a director's salary of £21,000 pa. The judge's findings about the company were:

'. . . it is clear . . . that he and his brother have effective control of the day-to-day management of the company and are the people who can take decisions on the future direction of the company. Thus the company is considering opening a satellite franchise business in the north of the city and is contemplating an outlay of £1m which it hopes to be able to make without bank borrowings. Indeed the company has run throughout the recession without bank borrowings. The profits of the operating company have been ploughed back into the holding company and the assets of the holding company now approach £2m without considering the value of the operating company. The holding company is in effect acting as the banker for the operating company. The fairly recent division of the company into a holding company and operating company does enable a view to be taken of the success of the operating company and although it has incurred a loss in two recent years, it is once again a profitable company. It has, however, on only one occasion paid a dividend of £10 per share. That was under pressure from the Inland Revenue in order to settle a dispute between the company and the Inland Revenue. On other occasions the company has made very substantial payments to the pension funds of the brothers . . . One effect of the apparent unwillingness to pay dividends is that there has been no income receivable by the trustees of the children's trust fund and thus they have not accumulated any funds to pay for the children's schooling.'

The family home

12. This is expected to realise £250,000. After deducting the mortgage to the bank (£78,000) the primary equity in the property amounts (in round figures) to £170,000. That is, however, subject to the bank's charge to support the husband's contingent indemnity liability under the Lloyds guarantee (up to a ceiling of £100,000) and the Lloyds losses loan (£43,000).

The wife's needs

13. There was agreement that the wife needs to be rehoused, but a good deal of dispute at the hearing before the judge as to the appropriate price range for the new home to be purchased for herself and the boys. The figure chosen by the judge (£125,000) was at the upper end of the debated range. He found that she would need considerable further funds to decorate, repair and furnish it.

The children's needs

14. It is agreed as between the parents that the boys would benefit from continuing at their present schools at a cost running at present at £6000 pa for each boy, rising to a higher figure when they go on as day boys to public school.

The expert evidence at the hearing

15. Accountants were called on each side. There was a good deal of debate as to whether means existed of providing alternative sources of security for the husband's contingent liability under the Lloyds guarantee. It seems to have become more or less common ground that the husband's pension fund could not be directly charged without risk of destroying its status as the subject of a revenue-approved pension scheme. One other possibility, explored in cross-examination of the husband's accountant by Mr Wood, counsel for the wife, was that the pension fund trustees or managers might enter into a loan commitment with the husband to advance him £100,000 in the event of a call being made under the guarantee. The accountant's reply was that such an idea, though it was not one within his own expertise, 'would be worth investigating'.

The costs of the litigation

16. These have already reached an alarming figure of £80,000. The ironic consequence is that the costs of the argument now fall little short of the very liability which principally gave rise to it -- namely the £100,000 required by the husband to support his Lloyds guarantee. A further unsatisfactory consequence is that a once-and-for-all capital settlement has ceased to be an objective commendable merely on human and family grounds but is now dictated as an absolute necessity by the need to pay off the lawyers' and accountants' fees.

The order made by the judge

17. The order of 1 November 1994 provided for:

(1) the sale of the family home; and after completion

(2) payment by the husband to the wife of a lump sum of £158,000;

(3) the extinguishment thereafter of all capital claims by each spouse against the other (or the other's estate);

(4) payment by the husband to the wife of periodic maintenance for the children at the rate of £1500 per month;

(5) payment by the husband of the school fees for each of the boys;

(6) payment by the husband of the wife's costs.

The judge's reasons

18. The justification for the lump sum order was stated by the judge in these terms. He first of all held, when describing the Lloyds guarantee liability, that it was contingent, and a liability 'very much in the future and by an adjustment in his financial arrangements [the husband] can certainly meet it'. Then later, in connection with the directions for sale of the family home he said:

'There is no real evidence that the guarantee will be called in. The husband has continued to be a member of Lloyds and considers it is still a sound investment. If the house is sold the [husband] will have to substitute an alternative guarantee which is acceptable to the Midland Bank or whoever guarantees his liability to Lloyds. There are other securities available such as the shares in the company or the pension policies which have at present an actual value of £374,000. There may be other ways also of overcoming the problem. I am not satisfied that they have been investigated by anyone skilled in these financial matters.'

Although in that passage the judge speaks of substitute security being found only for the Lloyds guarantee it is clear from the context of the judgment generally — and in particular from a section (which I need not quote) in which he calculates what he regards as the available equity in the family home — that he intended his remarks to apply equally to the obtaining of substitute security for the Lloyds losses loan.

19. He expressed the justification for the periodic payments in this way:

'I assume that the company has been run in this conservative manner because it was the combined view of the family as advised by their financial advisers that this was the most beneficial way from the point of view of the family and the company to run it. However, the financial adviser to the company did seem to indicate that the company had been run in this way because it was the decision of the family rather than that it was the advice of the financial advisers. It seems to me that [the husband] has got to the stage in his life where he has to consider what is in the best financial interests of his children over the next 10 years and try to convince his co-directors and shareholders that that interest is also the interest of the company.'

The argument on appeal

(1) The lump sum award

20. Mr Duckworth, counsel for the husband, submitted that the lump sum order was made improperly and prematurely. It was improper, because it assumed without sufficient evidence that the husband could find substitute security for the Lloyds guarantee and the Lloyds losses loan, or (alternatively) because it placed unfair pressure on him to throw himself on the charity of third parties such as his mother and/or brother. It was premature, in that if the husband had merely failed to prove a negative — ie failed to satisfy the court that alternative assets were not available to support the security — the judge ought to have ordered an adjournment to enable the feasibility of alternatives to be explored further. Mr Duckworth submits that the judge ought to have accepted the only proposal which it was within the powers of the husband to offer — namely (to state it in the form in which it was finally refined in argument in this court) that the proceeds of sale of the family home be paid to the husband, upon his undertaking to settle £90,000 upon trust for the purchase of a new home for the wife and children, upon terms that the husband would be at liberty to mortgage the new property for up to £80,000 of its purchase price, pay the instalments of capital and interest under the mortgage, and discharge the mortgage in full at age 65 or on his earlier retirement.
21. Mr Wood replied that on a broad view of the case there was material on which the judge was entitled to reach the conclusion he did as to the potential availability of alternative security to support the Lloyds guarantee and the Lloyds losses loan and thereby release the primary equity in the family home from those charges; and that it was legitimate for the judge to expect the husband to improve his income and capital position by arrangements which he could very easily make with his brother and mother.

(2) The income award

22. To make an order which results in a deficiency in the hands of a husband after he has paid for his children's education, amounts, so Mr Duckworth submits, to a flagrant breach of the principles of self-imposed constraint on which the court normally acts, particularly where the interests of third parties are involved, when, exercising this jurisdiction. Mr Wood, on the contrary, contends that it was entirely proper for the judge to take account of the fact that an increase in the husband's income could readily be achieved at minimal cost to the company and without involving any substantial departure from its policy of self-financed expansion.

Conclusion

23. The court was confronted by a husband with immediate liquidity problems but possessing substantial means. He was proposing that the court should make a capital order which would extinguish for ever all claims by the wife to capital relief from him or his estate. The order that he was suggesting was paltry when measured against his total resources and expectations, assessed in the broad terms which the Act requires. On such a husband a heavy onus lay to satisfy the court that all means of access to liquid funds to support suitable outright provision for his wife had been thoroughly explored and found to be impossible. If he failed to demonstrate that, he ran the risk of having the inference drawn against him that ways and means could be found of funding suitable provision for the wife's capital needs.
24. The judge was in my view justified in making the order that he did in respect both of capital and of income. The evidence was in a state which entitled him to draw inferences as to the availability of funds to provide alternative security for the guarantee and for the Lloyds losses loan, and thus liberate the primary equity in the family home to provide a lump sum appropriate to the rehousing needs of the wife and children and of sufficient scale to justify shutting her out from any future capital relief. I do not accept the submission that having decided to draw those inferences it was his duty to adjourn the proceedings to provide the husband with an opportunity either of rearranging his affairs or of demonstrating that he was being asked to perform the impossible. It was common ground between the parties that although a final settlement was not yet feasible as regards income payments, any order made by the judge in respect of capital should be a final order extinguishing all future claims on either side. Against that background, and with due regard to the demands of finality in a case where the parties had accumulated costs already on an alarming scale, the judge cannot in my view be faulted for acting as he did on the material presently available to him. He was also entitled to draw the inference that capital relief on the scale he was ordering would not leave the husband homeless. His family circumstances (which it is unnecessary to describe in detail) would justifiably have left the court in no doubt that — during what will undoubtedly be a difficult transitional period for him while he awaits receipt of income from his Lloyds membership and adjusts his affairs generally for the future — he will be at no serious risk of being without a suitable base, even though he may be obliged to live for a time in rented or borrowed accommodation.
25. The periodic payments order did not leave the husband destitute: it left him with a deficiency of income over expenses only so long as those expenses include the cost of private education for his sons. It is true of course that these parents are united in wishing their sons to attend fee-paying schools, but the judge was in my view fully entitled to regard independent school education as a luxury which the husband would either have to forgo altogether if his circumstances are indeed as constricted as he claims, or else achieve with help from his brother and mother. The judge's order certainly involved a powerful inducement to the extended family to come to the husband's assistance, but the provision of that incentive fell, in my judgment, within the bounds of judicious encouragement and lay well short of the kind of order that is condemned in the authorities as placing improper or undue pressure on third parties. The judge therefore acted within the proper limits of his discretion and his decision is not one with which this court could interfere.
26. I would dismiss the appeal.
27. GLIDEWELL LJ: On the hearing of the wife's application Judge Heald, against whose decision this appeal lies, decided that the amounts he ordered to be paid — a lump sum of £150,000 plus £8000 for a car, and periodical payments for the wife and the two boys at the rate of £1500 per month in total — were necessary to enable her and the children to continue to live in what the judge described as 'an appropriate manner for boys of their background'. The husband's response was that neither the capital which would be available to him when the matrimonial home was sold nor his income would enable him to pay such sums. In other words, it was impracticable to order him to pay these amounts. Section 25 of the Matrimonial Causes Act 1973, since an amendment in 1984, no longer specifically requires the court to have regard to what is practicable. Nevertheless it would be wrong for a court to order a husband to pay amounts which there was no realistic chance that he would be able to pay, whatever financial arrangements he made. Mr Duckworth, for the husband in this appeal, submits in effect that this is what the judge has done. He has reached conclusions about the husband's ability to pay which, on the evidence before him, he could not properly reach. Thus the judge's decision was clearly wrong, and ought therefore to be set aside.
28. The two practical difficulties which the husband will need to overcome to enable him to comply with the judge's order have been described by Waite LJ in the first paragraph of his judgment, which I have had the advantage of reading in draft. I need not repeat them. The question for this court is, was the judge entitled to conclude, on the evidence before him, that the husband probably would, and will, be able in practice so to arrange his financial affairs as to enable him to pay the sums he has been ordered to pay?
29. The matters to which the judge was required to have regard in reaching his decision are to be found, first, in s 25 of the 1973 Act. It is not necessary to set them out. It suffices to remind ourselves that, under s 25(1), first consideration is to be given to the welfare of the two children whilst they are under the age of 18. It is also to be noted that s 25(2)(a) requires the court to have regard as one of the eight matters listed not merely to a party's present or likely future income, earning capacity, property and other financial resources, but also to any increase in earning capacity '. . . which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire'.
30. The judge also had, as we have, the guidance to be derived from the various authorities to which Waite LJ has referred. Those which are the most helpful in this case are, in my view, the decisions of this court in O'D v O'D [1976] Fam 83, B v B (1982) 3 FLR 298 and Browne v Browne [1989] 1 FLR 291. From these authorities I derive the following principles:

(a) Where a husband can only raise further capital, or additional income, as the result of a decision made at the discretion of trustees, the court should not put improper pressure on the trustees to exercise that discretion for the benefit of the wife.

(b) The court should not, however, be 'misled by appearances'; it should 'look at the reality of the situation'.

(c) If on the balance of probability the evidence shows that, if trustees exercised their discretion to release more capital or income to a husband, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response. In that situation if the court decides that it would be reasonable for a husband to seek to persuade trustees to release more capital or income to him to enable him to make proper financial provision for his children and his former wife, the court would not in so deciding be putting improper pressure on the trustees.

31. In relation to the facts of the present case, I would apply these principles to the family company as if it were a trust, and the shareholders (the husband, his mother and brother) the trustees.
32. On that basis, the judge was in my judgment entitled to reach the conclusion he did. I note in particular the passage in his judgment where he said:

'. . . the financial adviser to the company did seem to indicate that the company had been run in this way because it was the decision of the family rather than that it was the advice of the financial advisers. It seems to me that the respondent has got to a stage in his life where he has to consider what is in the best financial interest of his children over the next 10 years and try to convince his co-directors and shareholders that that interest is also the interest of the company.'

33. The judge might have added that, since the husband and his brother are the trustees of the trust for the benefit of the children which owns one-quarter of the shares in the company, they would be obliged as trustees to use their vote in the interests of the children, eg when considering whether to declare a dividend which would put the trust in funds to pay for the children's education.
34. As to the lump sum payment, the judge was justified in concluding that only the 'pension mortgage' should be considered a proper charge against the present house for the purpose of determining what Waite LJ has called 'the primary equity'. Thus the primary equity of approximately £170,000 exceeds the lump sum ordered to be paid to the wife. The judge clearly took the view that there were ways in which the problem created by the charges securing the Lloyds loss loan and the Lloyds guarantee could probably be overcome by a man with the husband's potential financial resources, and that he was not satisfied that the possible solutions had been properly investigated. Applying the principles to which I have referred, we cannot say that he was wrong so to conclude.
35. For these reasons, in addition to those given by Waite LJ in his judgment, I also would dismiss this appeal.