England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE – FAMILY DIVISION
(MR JUSTICE CHARLES)

		Royal Courts of Justice Strand London WC2A 2LL
		20 December 2002

THORPE LJ:

1. The parties were married on 15 November 1980. At the date of this appeal they are both 44. They have two children, a boy of 17 and a girl of 16, both at fee-paying day schools. In about 1987 the couple launched the family business, 2 Heads Global Design Limited, a company that subsequently prospered greatly. Each held 50 shares and both worked hard to make the company a success. In 1993 they bought in their joint names a four acre brownfield plot known as Star Works at Checkendon to provide a site for the company's future activities. They held their ownership of the site separate from their ownership of the company.
2. The marriage failed in early 2000 and in July the final matrimonial home was sold. The wife received the proceeds which enabled her to purchase her present home for £520,000 subject to a mortgage of £90,000. The husband borrowed almost all the cost of a flat which he has recently sold at a loss. He intends to move into one of the two cottages on the business site which has in the past been occupied by the company.
3. Each petitioned for divorce and on 8 January 2002 a decree nisi was pronounced on the wife's petition. The wife's participation in the management of the company ended in January 2001. Thereafter the husband made voluntary arrangements to support the wife and the children. The financial proceedings commenced in the Reading County Court and were listed for an FDR hearing on 5 July 2001. That hearing was aborted by a belated claim from the wife that the Star Works site could and should be sold for residential development. That resulted in an order transferring the case to the High Court with a direction for the trial of the preliminary issue:

"Whether the ancillary relief application should be adjourned to enable an application to be made for planning permission for residential development of the Star Works Kit Lane site."

4. In the Principal Registry a direction was made that if the outcome of the preliminary issue trial was the refusal of adjournment then the ancillary relief application should be determined within the same fixture. Three days were allowed. The case came before Charles J on 14 January. He gave three days to the preliminary issue at the end of which he rejected the wife's contention that the Star Works site was ripe for residential development for reasons which he reserved for incorporation in his judgment on the application that was to follow. Three further days were devoted to the trial of the application. After reserving his judgment Charles J worked assiduously on its preparation. He sought answers and comment from leading counsel for the parties in written exchanges. Later he acceded to an application by the husband to reopen the evidence at a hearing on 22 March. On 22 April he sent out his draft judgment. On 8 May he held a further hearing to deal with a number of issues arising out of the draft judgment, which he then handed down. At a hearing on 22 May he handed down a separate judgment on costs. To the main judgment there was annexed a schedule setting out the judge's preliminary view as to the form of provisions and covenants binding on the parties and their estates to ensure that in the event that the husband ever realised the potential inherent in residential development of Star Works after the judgment the gain should be shared equally with the wife. This mechanism has generally been referred to as the claw-back provision. We were told that the mechanism is known to conveyancers as overage.
5. Charles J refused the husband's application for permission to appeal and his application to this court for permission was lodged on 31 May. On 7 June I ordered the application to be listed for oral hearing on notice with appeal to follow, with a one-day time estimate. On 18 June the wife filed a respondent's notice seeking permission to appeal the judge's costs judgment. Pending the hearing in this court each party instructed an expert conveyancer to settle the terms and provisions of the claw-back provision ordered by the judge. Their respective submissions were submitted to Charles J in writing and on 26 November he delivered his preliminary determination on those written submissions. Although his determination runs to some 47 paragraphs it is tolerably clear that it is not by any means conclusive and the indication is that an oral hearing would be required to determine the detail and extent of the claw-back provision if it survives the attack which the appellant has mounted on it before us.
6. The judge's order, perfected on 28 May, is (relatively) complex. Its essential structure provides for the wife a lump sum of £925,000 in return for her half-share in the company and in the premises at Star Works. In addition she receives the benefit of the charge over the premises to guarantee her half the net gain resulting from future residential development. Finally the order provides periodical payments to each child at the rate of £5,000 per annum and for the husband to pay the costs of their education.
7. The judgment that explains the order is long and conspicuously thorough. It consists of 39 pages, omitting the schedule and the 10 pages of the costs judgment. However approximately 14 pages explain the judge's determination of the preliminary issue. In summary the evidence established that there was a negligible prospect of residential development in the short or medium term and that any prospect beyond that was exceptionally low because it was entirely dependent on a wholesale shift in national and local planning policies. We are not in any way concerned with those issues which are not the subject of appeal. The judge's judgment has subsequently been reported at [2002] 2 FLR 1075. The structure of that part of the judgment with which we are concerned emerges from its sub-headings. The judge turned first to introduce the section 25 exercise and proceeded to what he identified as the main issue, namely whether there should be a clean break or a clean break with a claw-back. Having dealt with other issues, he established the assets, liabilities and valuations that were in play. He next explained why he imposed the claw-back provision and reasoned the figure of £925,000 as the wife's lump sum. That figure resulted in an overall division of assets that gave the wife 54.3% and established the divergence of 8.6% between the wife and husband. In the final sections of the judgment the judge offered an overview and dealt with some miscellaneous matters.
8. At the outset of the hearing of the appeal we granted permission on both applications and stood over the wife's cross-appeal on costs to await the outcome of the husband's attack on the judge's conclusions. The attack falls into the following broad sections:

i) Mr Posnansky QC submits that the wife should not have received a greater share of the family assets. Whilst he conceded that she was entitled to an equal share if the court had ordered the sale of the company and the Star Works site, he submitted that the wife should otherwise only have received 45% to reflect the illiquidity of the family assets and the huge burden of debt that the husband would have to assume in order to pay her out.

ii) Second Mr Posnansky submitted that the claw-back provision was unprincipled. The agreed value of the Star Works site at trial contemplated its development potential. The valuers had allowed little or nothing for hope value simply because the development prospects were too slim to merit any uplift. To impose a claw-back provision was to impose an unreasonable fetter on the husband's future ownership, inhibiting his ability to borrow against the security or to let the site in whole or in part. Finally he submitted that the imposition of a covenant of indefinite duration was plainly inconsistent with the court's duty to strive to liberate the parties by a clean break.

iii) Third Mr Posnansky submitted that the consequence of the judge's elevation of the lump sum to a figure of £925,000 imposed on the husband an obligation to borrow £1.05M in order to implement the order. That was a massive and daunting burden which his client might well be unable or unwilling to bear. It was wrong of the judge seemingly to have ruled that, if he declined to bear it and elected to sell the company and the Star Works site, the wife should still receive 54.3% rather than 50% of the largely liquid family assets.

iv) Fourth Mr Posnansky submits that the judge was wrong in principle to saddle his client with the full costs of the children's education after not only giving the wife more than half the family assets but also giving her the majority of that share in cash.

9. Mr Jonathan Cohen QC in his response essentially sought to uphold the judge's reasoning on the four points against which Mr Posnansky's attack is directed. As to the quantum of the lump sum he emphasised, of course, that the judge exercised a broad discretion and that we should not tinker. He submitted that the judge's conclusion that the husband was capable of discharging the lump sum by a borrowing of £1.05M was well founded on evidence of the availability and cost of finance submitted by the wife's forensic accountant. By contrast the husband adduced no evidence as to the availability and cost of borrowing other than a letter from his accountant, which Mr Cohen described as plainly self-serving. Mr Cohen did not accept that the lump sum represented working capital in the wife's hands since she intended to use about half to secure her position by discharging her debts.
10. As to the submission that the husband should have the option to reject the judge's scheme and seek an order for sale of the jointly owned assets with equal division of the proceeds, Mr Cohen submitted that that would make a mockery of the litigation process. If the husband chose to sell as sole owner after transfer the wife must be entitled to enforce her lump sum order against the proceeds.
11. In his defence of the claw-back provision Mr Cohen submitted that the agreed valuation of the Star Works site was expressly directed to exclude hope value and that was the approach of the valuers instructed by the wife. Equally he emphasised the husband's concession in his oral evidence that it would be plainly unfair to the wife were she not to share equally in any future development windfall. Mr Cohen embraced the suggestion from my lord, Sedley LJ, that the judge's reasoning could be characterised as a defensible means to a defensible end.
12. In relation to the education expenses Mr Cohen simply commended the judge's approach: the husband's future earnings would exceed the wife's, accordingly it would be fairer were he to bear the education costs.
13. Neither counsel cited authority. The facts rendered authority superfluous. This was a case unaffected by the shifts signalled by the decision in White v White [2001] 1 AC 596.
14. Before expressing my conclusions on these submissions it is necessary to see how the judge dealt with the four issues that Mr Posnansky challenges. First however it would be helpful to record the family assets and the valuations put upon them by the judge. This section of his judgment comprises 10 paragraphs commencing at paragraph 90. The judge's survey is comprehensive and meticulous. For present purposes I need only extract the following:

Star Works … … … … £1,263,000

2 Heads Global Design Limited … £762,200

The wife's home … … … £439.250

Other assets, including pensions … £125.149

Total net assets … … … £2,589,399

15. The judge totalled the wife's liabilities to £60,000 and the husband's liabilities to £37,000. Thus the liabilities totalled £97,000 reducing the family's net assets to £2,492,399. To this simple picture I add only two footnotes. The first is that the company's value was agreed by the forensic accountants in January 2002 and had regard to the husband's evidence contained in his statement of 17 December 2001 as to the downturn in turnover and profits since the last year of account. The accountants arrived at a gross figure of £876,100 by applying a PE of 7.1 to notional earnings of £114,000. The gross figure reduced to the net figure by allowing for notional costs of sale and CGT on disposal. Second the net value of Star Works resulted from a current market value agreed at £1.5M (the wife's valuers had contended for a figure of about £1.75M and the husband's valuers for a figure of £1.35M). The gross figure was again reduced to the net by deduction of notional costs of sale, CGT on disposal and the existing mortgage of £100,000.
16. There are two stages to the judge's conclusion that the wife should receive more than half the family assets. The first stage consists of the judge's assessment of the husband's future earnings as the sole owner of the company and its site. For the future 20 years, taking the husband to age 64, he assumed that he would have a gross income of £240,000 per annum to enable him to service a 20 year loan of £1.05M at a fixed rate of 7% interest. After further deductions for income tax, periodical payments and school fees he held that the husband would have a net spendable annual income of £44,000. The judge made no comparable assumptions as to the wife's future income over that period. He simply said in paragraph 115:

"The estimates of her income therefrom were quite wide and were between £15,000 to £30,000. She said that she planned to go into property development in a small way at first using her knowledge of local tradesmen to buy and 'do up' houses for resale. No projections of her income from that potential source were provided."

17. From this foundation Charles J explained his conclusion that the wife should have a lump sum of £925,000 in his penultimate section with the sub heading 'An Overview'. Having recognised that the effect of a lump sum payment of £925,000 would result in the wife receiving 54.3% and the husband 45.7% of the family assets, he reasoned that conclusion in paragraphs 160 – 162 thus:

"160. In my judgment my conclusion that the company is likely to trade through its present difficulties and return to making good profits in the future from the base or platform created by the joint efforts of Mr and Mrs Parra, and the consequential conclusions as to

(i) the income by way of remuneration and other benefits Mr Parra will or could receive as the managing director of the company,

and, but to a lesser extent because it is in part covered by the valuation of the company and a clean break has to be based on such a valuation

(ii) the increase or potential for increase in the capital value of the company and the potential for dividend income,

have the consequence that in all the circumstances of this case to achieve a result that meets the yardstick of equality, which is a compelling one in this case, Mrs Parra should be paid a lump sum of £925,000 which gives her more than 50% of the net assets on the agreed values.

161. In my judgment having regard to my conclusions on the prospects of the company following her receipt of a lump sum on a clean break basis Mrs Parra's income taken over the working lives of herself and Mr Parra will be, or will be likely to be, considerably less than his.

162. Further in my judgment when they cease working the growth of Mrs Parra's capital is unlikely to have matched the growth in value of the shares in the company particularly and importantly if, which is quite likely, Mrs Parra has had to spend the interest thereon or dip into the capital thereof to supplement her income. On the other side her ability to use her capital if she wanted to from time to time is an advantage she would have over Mr Parra because his capital would be tied up in the company."

18. As to the claw-back provision his essential reasoning is to be found in paragraph 103:

"In my judgment Mr Parra was being fair and was correct when in his oral evidence he accepted that if the value of the land was increased by the grant of planning permission for residential development Mrs Parra should have half of that increase. Put another way I agree with the submission made on behalf of Mrs Parra that if such uplift in the value occurred it would be a terrible unfairness to Mrs Parra if she did not share in it. To my mind my finding that the chances of obtaining planning permission for residential development in the short term are very low does not alter this because what one is looking at is the chance of an uplift over the long term (at least to the retirement of the parties) and thus in line with their hopes when they bought the land."

19. As to the future costs of education the judge's reasoning is all contained within paragraph 144:

"They are at fee paying schools. The continuation and completion of their education is clearly important for them as is the provision of a home. At present they live with Mrs Parra. Mr Parra argued that he and Mrs Parra should each pay half of the school fees. Having regard to their respective earnings and earnings potential I do not agree that this would be fair and in my judgment Mr Parra should pay the school fees and the fees relating to the higher education of the children and the related expenses. The detail of these provisions can be dealt with when the terms of the order are finalised."

20. Finally paragraphs 77-80 of the judgment suggest that both sides were understandably circumspect in advancing alternative cases until they had the judge's ruling on their primary cases. However it seems plain from those paragraphs that Charles J did not consider that a simple order for sale of the jointly owned assets with equal division of the proceeds could be contemplated without further evidence and argument.

Conclusions

21. I am struck by the fundamental simplicity of this case. The proceeds of sale of the final matrimonial home (an asset itself acquired by the parties' joint endeavours) had been used to re-house the wife and the children. Extracting the value of the two pension funds the assets, apart from the company and its premises, amounted to only £25,500. Unusually each owned half the issued shares in the company. Equally clear was their joint ownership of the land. There were only two obvious solutions: either the business assets were sold to enable each to make a fresh start or the husband bought out the wife so that she could make a fresh start. If the parties agreed on the first option equal division of the proceeds of the sales was the natural if not the inevitable consequence. If the price for buy-out could not be agreed the court was there to fix it. Cases of considerably greater complexity are routinely decided by district judges in the county court throughout the jurisdiction. The transfer to the High Court and the lengthy trial before a judge of the Division appear to me to be the direct consequence of the wife asserting a development value in the site which she singularly failed to substantiate at trial.
22. The judgment that emerged is a tribute to the judge's exhaustive investigation of a mass of detailed evidence. The result is painstakingly thorough. But the outcome of ancillary relief cases depends upon the exercise of a singularly broad judgment that obviates the need for the investigation of minute detail and equally the need to make findings on minor issues in dispute. The judicial task is very different from the task of the judge in the civil justice system whose obligation is to make findings on all issues in dispute relevant to outcome. The quasi-inquisitorial role of the judge in ancillary relief litigation obliges him to investigate issues which he considers relevant to outcome even if not advanced by either party. Equally he is not bound to adopt a conclusion upon which the parties have agreed. But this independence must be matched by an obligation to eschew over-elaboration and to endeavour to paint the canvas of his judgment with a broad brush rather than with a fine sable. Judgments in this field need to be simple in structure and simply explained.
23. The detail of the judgment in the present case has presented both counsel with opportunities for criticism. I take one example. The judge accepted the husband's evidence to the effect that the company 'over the last year or so and at present has had, and is having, difficulties to a large extent brought about by the state of the market'. Mr Posnansky submitted that on that finding, and absent any other evidence, it was simply not open to the judge to conclude that the husband's future income remained secure at the levels achieved in the immediately preceding years 1999-2001. On the other hand Mr Cohen submitted that the judge was quite wrong to have accepted the husband's evidence when the forensic accountants had agreed within days of the trial that the average profit over those three years provided the multiplicand to which the PE ratio should be applied.
24. Accordingly my criticism of the judge's conclusions on the issues in dispute does not relate to his calculations but to his assumptions, which do not in my judgment justify a departure from the natural outcome of equality.
25. The judge adopted the same process of reasoning to support the unequal division of assets and to impose upon the husband the sole obligation to meet education costs. My first criticism is that his assumptions are one-sided. The husband's income is assumed at a gross figure of £240,000 over a twenty-year span. I recognise that the assumption rests upon the company's track record and that it is the husband who will be continuing to trade from a secure base. But the wife's entitlement to an equal share of the family assets is founded upon her equal achievements in creating and building up the company. She is an able and experienced businesswoman whose educational qualifications are much more impressive than the husband's. Her future of course depends upon her making a fresh start. She is not confined to seeking employment at a salary of £15,000-£30,000 per annum. She has approximately £950,000 of working capital. A going concern with the same profit potential as 2 Heads Global Design Limited could be acquired in principle for a consideration of about £875,000. Thus I do not find justified the judge's assumptions to the effect that over the next twenty years the wife's earned income will be considerably less than the husband's or that over the same period his business assets will inevitably grow in value at a significantly faster rate than hers. Of course they face the challenge of the second phase of their business careers with different talents and different ammunition. The husband has the advantage of the going concern but the disadvantage of having to shoulder and carry a long-term debt burden approximately equal to half his net asset value after transfer. The wife has the challenge of starting afresh but she has the advantage of nearly £1M of liquid funds.
26. In my appreciation the overwhelmingly obvious solution in this case was equal division of family assets. I would almost see more attraction in Mr Posnansky's submission that the full value of the wife's holding should be discounted for immediate cash realisation than in the judge's decision to discount the husband's share by 4.3%. However the simply virtue of equality outweighs sophisticated arguments for adjustment one way or the other. If there is a principle it should I think be this: that in comparable cases the division of assets for which the parties have themselves elected should not be adjusted by judges on the grounds of speculation as to what each may achieve in the years of independence that lie ahead.
27. The parties had, perhaps unusually, ordered their affairs during the marriage to achieve equality and to eliminate any potential for gender discrimination. They had in effect elected for a marital regime of community of property. In such circumstances what is the need for the court's discretionary adjustive powers? The introduction of the 'no order' principle into section 25 of the Matrimonial Causes Act might contribute to the elimination of unnecessary litigation. As a matter of principle I am of the opinion that judges should give considerable weight to the property arrangements made during marriage and, in cases where the parties have opted for equality, reserve the exercise of the adjustive powers to those cases where fairness obviously demands some reordering.
28. That disposes of three of the issues in the case. First the lump sum should be reduced to £818,641, the payment that results in an equal division of the family assets. Second the parents should contribute equally to future education costs. Equal division of assets should ordinarily be matched by equal division of obligation. Third if the husband cannot or will not raise the necessary borrowing to pay the lump sum within the period agreed or ordered the business assets (ie the company and the land it occupies at Checkendon) must be sold and the net proceeds divided in accordance with the formula proposed by Mr Posnansky.
29. Turning now to the final issue I conclude that if the husband acquires sole ownership of the Star Works site by payment of the reduced lump sum his ownership should be fettered by a claw-back provision along the lines indicated by the judge but restricted in duration to the joint lives of the parties. However I regard the imposition of such a charge upon the property of either spouse at the conclusion of an ancillary relief trial to be highly exceptional for a number of fairly obvious reasons. First such a provision is plainly inconsistent with the court's duty under section 25A of the Matrimonial Causes Act 1973. A break that imposes such an obligation can hardly be said to be clean. Second, as this case illustrates, the negotiation of the mechanism is laborious and expensive. Third, again as this case illustrates, it carries the potential for conflict beyond the grave: the mechanism as defined by the judge might result in litigation between an ex-wife and a future wife on the husband's demise. That last spectre I would eliminate by reducing the duration of the charge.
30. In the present case I accept much of the force of Mr Posnansky's submissions. First, whatever the direction of the court initially, it is plain that the residential development potential of this site was reflected in the ultimate agreement as to value. Second, or perhaps alternatively, the prospect of residential development is so slender as to be better compensated by the simple mechanism of some slight shading in the consideration for the transfer. Third the imposition of a charge is a real and perhaps unreasonable fetter on the husband's future freedom both to let and to borrow against the security of the land.
31. The only bases upon which I would be prepared to uphold the imposition of the charge in the present case are these. First, although the prospect may be remote, the scale of the windfall would be great. In round figures the grant of consent for residential development would increase the value of the site by at least £3.5M. Second the judge was entitled to place greater weight upon the husband's evidence than his counsel's submissions. As the judge said at paragraph 7 of his costs judgment:

"In his oral evidence Mr Parra recognised that if in the longer term planning permission for residential development of the land was obtained it would be unfair to Mrs Parra if he received all the benefit therefrom. In my view this was a proper recognition by Mr Parra that if the land was transferred to him it would be fair for there to be a claw-back. However this recognition was not reflected in the submissions made on his behalf which throughout the case were that having regard to (a) the prospects of obtaining planning, and (b) the advantages of a clean break there should not be a claw-back."

32. I would therefore allow this appeal and vary the order below to the extent indicated in this judgment.

SEDLEY LJ:

33. I agree with both the reasoning and the conclusions of Thorpe LJ. I add my own brief reasons out of respect for the painstaking work of Charles J for which we are substituting a much simpler calculus.
34. In making provision which the parties have agreed should take the civilised form of an equal division of assets, the court must have very good reasons for doing anything but go as nearly as possible down the middle. Mr Posnansky's submissions for the husband have the unhappy appearance of arguing for the propriety of a departure from equality so long as it goes his way. But the husband himself has been creditably content throughout for the court to stick to straightforward equality.
35. The uplift by the judge of the wife's share was the result of a recalculation of its absolute amount. It happened to be 4.3 percentage points above parity – a true percentage uplift, therefore, of 8.6 per cent. Standing back, this is both counter-intuitive and objectively unjustified. Like Thorpe LJ I see rather more reason to reduce the wife's share below 50 per cent in recognition of its accelerated payment in liquid form. But to do this would likewise be a departure from parity without strong enough reason. There is, it appears, no reported decision on the question whether a cash share of the matrimonial assets should be discounted as against an illiquid share which has to be realised by borrowing, and there is force in the view that the party who elects to retain assets rather than realise them should bear the cost of doing so.
36. I too have hesitated about the appropriateness of the claw-back. But in the end it seems to me defensible on the ground that it preserves parity, albeit at the expense of a clean break. The weight of expert opinion is that nothing will come of it. If something does, however, the wife should arguably have her share of the uplift. To this extent I am not willing to interfere with Charles J's decision, any more than I would have thought it right to interfere had he decided instead to include the land in a clean break with a nil development value. But, like Thorpe LJ, I accept that there must be some fixed end to the period of speculation, and that it cannot be further away than the duration of the parties' joint lives.
37. We will have to deal separately with the allocation of costs, but one cannot leave the substantive part of this appeal without a sense of despair at the financial haemorrhage which this litigation has now inflicted on two people who not long ago set out to achieve the simple purpose of making an equal division of their assets. There must be better ways of bringing a failed marriage to a decent and equitable conclusion.

LATHAM LJ:

38. I also agree.
Order: Appeal allowed; agreed minute of order supplied to the court. (Order does not form part of the approved judgment)