England and Wales Court of Appeal (Civil Division) Decisions

Wells v Wells [2002] EWCA Civ 476 (20th March, 2002)

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 WILSON)

		Royal Courts of Justice Strand, London, WC2A 2LL
		20 March 2002

THORPE LJ:

1. This is the judgment of the court.
2. The appellant husband is 55 years of age and the respondent wife 45. By the date of their marriage in 1985 the husband had been running a business, Soundtracs, for about 13 years. He had a home of his own. Equally the wife was already a veterinary surgeon and a property owner. Over the next 15 years the family prospered. A son was born in 1986 and a daughter in 1987. In 1986 the family moved to a house in Kingston and in the same year the husband’s company was listed on the USM. In 1988 they bought a holiday home in the South of France. However there were difficult years between 1989 and 1992. The wife became ill and there were proceedings for divorce, injunction and wardship. However by mid 1992 the parties had reconciled and the wife had successfully completed her treatment. In 1994 the family moved to a fine home, Woodcote End House at Epsom. Some years later the husband bought a neighbouring property in Woodcote Road as an investment. However by 1999 the marriage was at breaking point. Despite counselling, proceedings were issued and the husband moved to a rented cottage in Ashstead. Forms E were filed in February 2000 at a time when the husband's company was running into rough water. The business had provided the family's homes, private education for the children and a good standard of living for all. Adverse trading results dried up the flow of dividend income and jeopardised the husband’s future income as well as the financial security of the family. Against such a background it is not surprising to me that a settlement of the wife’s applications proved elusive. The result was a five day hearing before Wilson J commencing on 30 April 2001. He gave notice of his intention to hand down judgment on 5 June in the afternoon. However in the morning he allowed the husband to re-open the case and to establish that a potential buyer for the company had withdrawn and that his salary had been significantly reduced. The judge accepted the evidence and deferred judgment to 11 June.
3. The case was not essentially complicated. The value of the former matrimonial home was put at £1.067M net whilst Woodcote Road was put at £120K net. The wife had other assets worth £246K, having paid £71K on account of costs. The husband had other assets worth £390K having paid £81K on account of costs. In addition the husband had a pension fund worth only £104K and his shares in Soundtracs. Following the events of May 2001 his earned income amounted to £49K per annum net, supplemented by benefits worth £7K per annum. There was a dispute as to the wife’s earning capacity which the judge resolved by a finding that she should increase her earned income to £12K a year gross. School fees for the children amounted to £22K per annum which the husband agreed to pay. He also offered to pay £5K per annum per child by way of periodical payments.
4. The wife’s submission at the opening of the trial, when of course some of the issues found by the judge were still at large, was that she should receive assets totalling £1.504M as a clean break settlement. At the same stage and on the same basis the husband’s submission was that she should receive assets totalling £1.097M. Thus the sum of £407K was the scale of the dispute.
5. The judge’s conclusion was that the wife should receive the entire proceeds of sale of the final matrimonial home (£1.067M) to supplement her other assets. He held the husband should receive the net proceeds of 11 Woodcote Road to supplement his other assets. The resulting order as drawn is much more complex than my summary would indicate. That is partly because the judge provided that any surplus above the agreed value of Woodcote End House, or any deficit below that value, should be shared equally between the parties. He also subsequently allowed the insertion of a clause giving the wife liberty to apply for an order that ‘in the light of the results of marketing and offers received, the sale be to herself at a price to be identified by the court as being equal to the best price reasonably obtainable’. That last provision seems to signal a retreat from the judge’s rejection of the wife’s endeavour to stay on at the final matrimonial home by achieving a transfer of the husband’s half-share into her sole name. By a notice filed on 22 June the husband sought permission to appeal and on 5 October the court ordered an oral hearing on notice with appeal to follow if permission granted. However at the outset of the adjourned hearing the court granted permission and devoted a day to the husband’s appeal.
6. Before recording submissions made by Mr Posnansky QC for the husband and the response by Miss Baron QC for the wife it is necessary to establish the route by which the judge came to his conclusion. The first section of the judgment was introductory and the second established the history. The third section tackled the difficulties arising out of the decline in the fortunes of the husband’s company. There were 10,142,500 five pence shares of which the husband held 58.38%. The wife had a comparatively modest holding of 100,000 shares. In 1999 when the parties separated the company earned a pre-tax profit of over £0.5M, declared a dividend of 1.1 pence and had a share value of 73.5 pence. By early 2000 the share price had nearly doubled. However from April 2000 the company’s performance declined dramatically with the result that for the year ended 31 October 2000 there was an operating loss of £581K. The management accounts for the first four months of the next accounting year indicated a further loss of £86K. No dividends were declared. The evidence received by the judge on 5 June suggested that in the fifth month, March 2001, a further loss of £97K had been incurred. This adversity and loss of profitability had not surprisingly deterred potential buyers. The hearing on 5 June also established the reduction in the husband’s gross salary from £94K per annum to £77K per annum. The judge found that this reduced income would leave him with £49K net after tax supplemented by benefits which the judge assessed to be worth £7K per annum.
7. In this section the judge endeavoured to value the husband’s shareholding in Soundtracs, considering in turn each of six alternative valuations advanced by the parties and their experts. The top figure of £1.307M was based on the balance sheet asset value. The judge dismissed this figure as being ‘of virtually no use to me’. That was because on any sale of the assets ‘it is inconceivable that they would realise their book values’. The next figure of £1.279M was based on the premise of a trade sale. The judge rejected this figure. He said ‘it is impossible to discern the value of the husband’s shares in the event of a trade sale’. The next figure was £1.176M, being the notional value of the husband’s holding at the current market price of 23.5 pence. Of that the judge said: ‘as the wife’s accountant concedes, the husband could not dispose of his shares in the market at anything like that price, if at all’. Then £806K was postulated on the basis of a management buy-out. The judge said that it was impossible to quantify the effect of a management buy-out upon the value of the husband’s shares. A lesser sum of £760K was advanced as the result of notional sale of the husband’s shareholding at a current bid price of 21 pence discounted by 30%. That was clearly unrealistic, the judge recording that ‘the brokers would be unlikely to be able to place even one third of the husband’s shares at the suggested discount or at all’. The lowest figure advanced was £578K on the basis of liquidation, which the judge described as ‘an unlikely though not inconceivable development’. However he said that that figure depended on many calculations, about six of which were ‘little more than guesswork’. Accordingly his conclusion was that the attempt to value on this last basis was impossible with any reasonable precision.
8. The judge’s inability to place any value on the husband’s shareholding was almost inevitable given its precarious state and the fact that in the preceding three years only 66,000 shares had been traded on the market.
9. The fourth section of the judgment recorded the other assets. The husband had the proceeds of sale of the holiday home together with other assets totalling in all £390K. The judge arrived at a higher figure of £575K by adding back the £81K paid on account of costs and adding in the value of the pension fund. The wife had her share of her parent’s estate worth £215K and other small assets bringing her concrete total to £246K. The judge arrived at the figure of £317K by adding back the £71K which she had paid on account of costs.
10. In the next section the judge dealt with the rival submissions as to the wife’s earning capacity before arriving at a finding of £12K per annum after expenses but before tax. He also held that it was not reasonable to expect her to work beyond the age of 60.
11. The sixth section is headed ‘The Need for Homes’. This was a typical case in which the parties had fenced by producing rival sets of particulars of sale. Of course the wife’s primary case was that she should stay where she was. That case was rejected. Her secondary case was illustrated by particulars of properties on the market between £825K and £875K. The husband’s rival batch ranged from £400K to £465K. The judge’s conclusion was that the wife’s reasonable need to include all incidental costs, including additional furnishings, lay in a bracket between £550K and £625K.
12. The judge dealt with the husband’s housing needs in brief. He said:

“I must in no way forget the husband’s need for a home. Mr Posnansky rightly accepted that, although the husband’s home will be, or must be hoped to become, the home for the children, it will be their secondary home. A degree of priority must logically be given to the funding of their primary home. Nevertheless, quite apart from his links with the children, the husband’s status and successful hard work entitle him to decent accommodation with at least three bedrooms owned either outright or, in the short-term more probably, subject to a mortgage which he needs to be able to service.”

13. In that there is no comparable quantification of the husband’s housing need. There is an inference that the total costs would exceed his free capital at the end of the judicial exercise.
14. The seventh section is headed ‘The Need for Annual Expenditure’. The following three paragraphs concentrate on the wife’s need which the judge put at £36K to £40K net per annum. He also held that capitalising that need, making due allowance for her earned income and for a 3.25% return on her other assets, required a payment of a Duxbury sum of either £425K at the low end or £580K at the high end of the income bracket. The only reference to the husband’s need has to be extracted from a single sentence ‘In the end, however, both parties will have to manage on the budgets which can reasonably be contrived for them out of the available resources’.
15. The judge then turned to contributions. In relation to finances he acknowledged that the wife’s assets ‘do not seem to have ennured to any significant extent to the benefit of the family’. He also acknowledged that Soundtracs was already a successful company at the time of the marriage and that it had then provided ‘the foundation of the family’s comfortable economy. That factor does create some imbalance of the party’s contributions’.
16. In the next paragraph the judge assessed the difficult years of the wife’s addiction. He held that throughout that period she had been disabled ‘from making a full contribution within the home and had placed concomitant demands upon the husband: I take that into account’. In the following two paragraphs he rejected any suggestion that the wife’s overall contribution had been negative.
17. The final section is headed ‘Conclusion’. The result is announced thus in paragraph 45:

“There is almost an obviousness about the fair result of the case. It is that the wife should receive the entire anticipated net proceeds of the sale of the matrimonial home and that she should transfer 11 Woodcote Road to the husband.”

18. We are troubled by that analysis. The outcome could only be described as obvious in the sense that to supplement the wife’s existing assets with the entire proceeds of sale obviously provided for all her earthly needs, guaranteeing her comfort and safeguarding her against want. But in a wider sense the outcome seems to us to be problematic and difficult to gauge.
19. In the following paragraphs he said that the wife would have assets of £1.384M and needs ranging between £975K (£550K plus £425K) and £1.205M (£625K plus £580K). The award fell only slightly below the middle of the range giving the wife flexibility to spend more on a home and less on a budget or vice versa.
20. He said that the husband would have assets of £695K together with the value of his shares in Soundtracs. He had the need to purchase decent accommodation. The result would serve this need even though the illiquidity of his pension fund and the potential burden in respect of costs might lead him to fund part of the purchase with a mortgage. Of course the figures taken by the judge to illustrate the options open to the parties included the monies that each had actually paid out in respect of costs as well as the value of the husband’s pension, more inaccessible than illiquid.
21. Mr Posnansky’s fundamental submission in his written skeleton was to this effect:

“In each element – housing, capital and income – the judge effectively provided first for the wife, leaving the balance for the husband. In its component parts, as well as in overall survey the judge’s order was unfair to the husband and substantially too generous to the wife.”

22. In relation to housing Mr Posnansky submits that there was simply no basis for assessing the husband’s housing needs at any lower figure than that adopted for the wife. In relation to capital he draws the clear distinction between assets that are readily saleable at stable prices and assets that are both illiquid and risk laden. Of the assets in the former category the wife exits with £1.313M and the husband with £510K. On the income front he is particularly critical. He contrasts the wife’s guaranteed lifetime budget of about £38K per annum net against the husband with £17K net plus benefits of £7K per annum after he has paid the school fees and the periodical payments for the children. In summary he submits that the conclusion was so unfair that it must be plainly wrong.
23. In a spirited defence Miss Baron not only reminds us of the width of the judicial discretion but asserts that this was a valid application of the section 25 criteria that manifestly arrives at a fair result. She submits that the husband above all wanted the company that was his creation and his life work. With the freedom to trade out of his present difficulties he is left with £510K to establish a new home. If the company fails he would be bound to receive a capital sum equivalent to the wife’s Duxbury fund. Only in the sphere of income did Miss Baron concede that the husband was over burdened. She said that her client would accordingly be prepared to pay half the school fees.
24. Having read the skeleton arguments and the judgment we were at once struck by the security of the result that the wife had achieved in contrast to the risks confronting the husband’s economy. The family’s standard of living has throughout been dependent upon the fortunes of the husband’s business. Had the marriage survived the family would undoubtedly have shared adversity as it had shared prosperity. The years of marriage comprise the years of the husband's commercial vitality between his late 30s and his mid 50s. The harvest of those years is represented by the concrete assets totalling £1.823M. But the future years look hazardous. It seems unlikely that the husband will restore the pattern of prosperity and savings from income in the years ahead. After all if it is reasonable for him also to seek to retire at 60, he has only five years in which to recover the profitability without which Soundtracs will not be easily realisable for significant value. In principle it seems to us that the separation of the family does not terminate the sharing of the results of the company’s performance. That is easily achieved in any case in which the wife’s dependency is met by continuing periodical payments. It is less easy to achieve in a clean break case. In that situation, however, sharing is achieved by a fair division of both the copper-bottomed assets and the illiquid and risk laden assets. After all the wife was already a shareholder in Soundtracs and a substantial increase in her shareholding would at least have enabled her to participate in future prosperity by dividend receipts or capital receipts on sale or a cessation of trade. An increase in her share of the illiquid and risk-laden asset would have allowed a reduction in the Duxbury fund, if not in the housing fund. If profitability were not recovered then both parties would share the experience of a marked reduction in standards of living.
25. At the outset of the appeal we enquired as to the extent that this approach had been canvassed at the trial. It became plain that the husband’s priority at trial was to retain the company with a larger share of the hard assets than the judge allocated. We were referred to expert evidence from his accountant who asserted that the company’s future operation would be handicapped if not crippled were the wife to become a substantial shareholder. The expert evidence from the wife’s accountant challenged that proposition but suggested instead that a substantial transfer of Soundtracs shares to the wife would create a CGT liability. No doubt because the husband wanted his shares, there was no response to the CGT point. In this court Mr Posnansky, having taken instructions from his client, was more receptive to the solution of a significant sharing of the risk-laden asset in return for a greater share of the concrete assets. However his primary case was for a fairer division of the concrete assets without any adjustment of their respective holdings in Soundtracs. Miss Baron was understandably resistant to the court’s proposition. She submitted that neither party had sought that outcome and it was inconceivable the court would impose it, thereby creating an unnecessary tax charge. On this aspect of the case Miss Baron’s submissions undoubtedly prevail. Whilst it might have been an option for the judge it is plainly not an option for this court in present circumstances.
26. So if the husband is to carry all the risk and all the disadvantage of the Soundtracs shares, is the judge’s allocation of the risk free realisable assets fair? To answer that it is necessary to ask whether the judge has fairly identified and provided for the husband’s needs which cannot be met by his control of the company. Certainly the tenor of the judgment is uneven. Throughout there is a concentration on the applicant’s needs and upon their quantification in cash. In my citations from the judgment I have extracted all the references to the husband’s needs. The tenor of the judgment does to some degree support Mr Posnansky’s primary submission that the judge approached the case as though his only task was to quantify the wife’s reasonable needs, since the extent of the family assets made it unnecessary to consider whether the balance was sufficient to meet the husband’s needs. It can be said that the judge never posed the question: ‘is £510K sufficient to meet the husband’s housing needs’? Insofar as he indicated that the husband, but not the wife, should be dependent upon mortgage finance, he does not appear to have considered how the mortgage was to be financed out of the husband’s disposable income of £17K per annum.
27. However it is in the provision for the income needs of the parties that I consider the judge’s conclusions to be most vulnerable. Any assessment of the wife’s future income needs surely has to reflect not only the 15 years of rising prosperity but also the adverse results of the previous 18 months of trade and the dire future that the husband faced. If he had only five years left and if he failed to turn the company round in that period, he faced a future without earned income and with an extremely modest pension supplemented only by what he could extract on the cessation of trade. One cushion against such a bleak future was the stored profit from the fat years. If the years ahead were to prove lean he needed and was entitled to his share of that store just as much as did the wife. Furthermore he would be carrying to perhaps the age of 65 the cost of the education of his daughter, assuming some programme of further education. The judge recognised that the husband’s own income needs could not be met from his current salary if current school fees were paid out of income. Either his income needs had to be met partly out of capital or the school fees would have to be met out of capital reserves. An analysis of the husband’s income needs and of his foreseeable future income inevitably leads to the conclusion that he must have recourse to capital reserves. The judge has supplemented the wife’s future earned income with a capital fund of approximately £0.5M. In so doing he does not seem to have identified the husband’s competing needs and balanced them by a sharing of that fund.
28. The same point can perhaps be put in another way by positing whether a 45 year old wife with an earning capacity of £12K a year gross and a 55 year old man with an earned income of £77K a year gross in separate households justify one spending approximately £38K a year net without disparity. Miss Baron’s concession recognises that the judge’s conclusion is unsustainable, but in my view the offer from the wife to pay £11K a year in school fees is not a sufficient correction.
29. Having looked at these elements within the section 25 exercise individually it is necessary to consider whether overall the judge’s allocation was fair, as Miss Baron submits. Had the case come for trial prior to the dramatic deterioration in the profitability and value of Soundtracs no one could sensibly have contended that the outcome was unfair to the husband. But, as the judge recognised, any analysis of the division of assets between the parties in percentage terms was dependent upon the valuation of the company. Once the judge found it impossible to value, it became no more than an uncertain source of future income for the husband. Its retention of course conferred on the husband a chance, namely the chance that he might trade out of deep difficulty and achieve a level of sustained profitability sufficient to create demand for the shares and with it a realisable value. The extent of that chance was not quantified and was probably incapable of quantification. Against that uncertain future the family’s financial security rested on what had been accumulated prior to the onset of adversity. Of the hard assets available for division all but the wife’s inheritance, and perhaps a few other small assets, derived from that source. So the accumulation, after deducting the wife’s monies derived from other sources, amounted to about £1.6M. In our opinion a fair reflection of the section 25 criteria, not forgetting the contribution factors found by the judge to tell for the husband, could not restrict the husband to only £510K of that accumulation. In recognition of the under-funding of the husband’s pension scheme and on the basis that he will continue to be solely liable for the costs of private education for the children, we would increase his share to £700K by reducing the wife’s share of the anticipated proceeds of sale to £877K. We would strike out clause 1(iv) giving the wife the right to apply to purchase the property. We would not vary clause 2 of the order providing for equal division of any surplus or deficit in the assumed proceeds of sale. Finally we would defer absolute finality by introducing a mechanism enabling the wife to apply in the event of a sale of the husband’s shareholding within five years from the date of this order. Since the wife remains a shareholder in the company she will be entitled in her own right to regular information as to its performance.
30. Miss Baron rightly reminds us that there is no more experienced judge in this field than Wilson J. Equally she emphasises the width of the discretion vested in the trial judge. Mr Posnansky’s response is that even Homer may nod. We have every sympathy for the judge who was undoubtedly faced with an exceptionally difficult situation with the husband’s application of 5 June. At that stage he had already written a judgment on facts significantly more favourable to the wife’s cause. The recasting of the judgment to reflect the further information which he had received and accepted posed very great difficulties and in that sequence of events no doubt lies the explanation for the eventual disparity of outcome.
31. Finally we record Mr Posnansky’s supplemental submission that the judge should not have added back the costs spent, applying the practice established in Leadbeater v Leadbeater [1985] FLR 789. The practice was introduced on the premise that the assessment of an applicant’s needs without both adding back payments made and disregarding liability for unpaid costs incurred and to be incurred, would effectively anticipate the costs order that would eventually be made. However in this modern world of time costing and departmental targets few if any litigate on credit. In reality solicitors require to be put in funds either in advance of each step along the litigation road or soon thereafter. There is therefore an artificiality in the practice and judges must be careful not to lose sight of the reality. In the husband’s case the money was spent and was most unlikely to be his to spend again. In the wife’s case the money was spent and might be recovered in whole or in part dependent on negotiations that might have been conducted in Calderbank correspondence. That of course was only the wife’s due if she had been pushed all the way to trial by the husband’s failure to negotiate realistically. In the present case we are quite satisfied that Wilson J never lost sight of these realities and we therefore reject the submission. However the adoption of the Leadbeater mechanism should never be automatic. It is probably more useful in cases where one party has paid money out and the other has obtained credit by offering security or where the court suspects some element of contrivance or artificiality in the arrangements which one party has set up.
32. In conclusion we allow the appeal and vary the judge’s order to the extent indicated in paragraph 29 above.
Order: Appeal allowed; Judge’s order varied to extent indicated in para 29. Costs order below to remain; appellant to have his costs of the appeal; application for permission to appeal to House of Lords refused. (Order does not form part of the approved judgment)