England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE PRINCIPAL REGISTRY OF THE FAMILY DIVISION
(MRS JUSTICE MACUR)

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st January 2010

Lord Justice Thorpe:

1. The parties to this application and appeal are both children of distinguished parents and have experienced affluence all their lives. They had a successful marriage over many years, and there are three children of the marriage who are now all firmly grown up and developing their own independent lives. Sadly the marriage broke down, and in 2003 the husband shifted his habitual residence from England to Switzerland. They were unable to agree the division of assets following the divorce and contested ancillary relief proceedings developed, which culminated in a trial before Macur J, who delivered her judgment on 20 April 2009. It is unnecessary to go into much detail, save to say that she divided the family assets broadly equally but with an advantage to the husband in the mathematical division to compensate him for a possible future tax liability which was dependent on the outcome of current negotiations between his accountants and the Revenue.
2. A difficulty within the case was that the husband was highly geared and, in order to retain the accommodation of his bankers, he had provided them not only with the security of his own assets but with the security of a second charge over commercial properties owned by the wife in Pembridge Road W11. An issue for the judge to decide was whether this facility should remain open to the husband after the division of assets in what was intended to be a clean-break resolution. The judge decided that issue in the penultimate paragraph of her judgment, which reads as follows:

"The only remaining issue is the release of the charge on the Pembridge Road properties which secures the husband's indebtedness to HSBC in the sum of £1,345,000. As Mr Moor QC correctly identified, the bank is unlikely to agree to do so. If the husband was forced to raise this money from the sale of one or other of his properties, there is little doubt of a potential domino effect and his financial ruin. But there is sufficient equity in some of his properties to execute a cross charge in favour of the wife in the event of the HSBC charge being called in. The consequent deferred release is less than ideal; it hampers the wife's dealing with these properties but at least keeps the money in the computed matrimonial assets and means that the wife is not called upon to effect transfer of assets to the husband to achieve equality by reason of what would then become depletion of his asset base by £1.345,000. I direct that he uses his best endeavours to re-assign the charge to one of his properties, but in any event to secure his wife's position in the indemnity as indicated above."

3. The order to give effect to judgment was drafted by counsel, Mr Philip Moor QC for the husband and Mr James Turner QC for the wife. The relevant paragraphs come at once in these terms:

"AND UPON The Respondent undertaking to the Court and agreeing with the Petitioner:

A. to use his best endeavours to secure the removal from the petitioner's properties at 10 and 14 Pembridge Road, London W11 3HL, of the charges presently registered against these properties in favour of HSBC securing the Respondent's indebtedness… ; for the avoidance of doubt this excludes the mortgage account…which shall remain the Petitioner's absolute liability;"

4. Pausing there the mortgage account is the first charge on the Pembridge Road properties which is, beyond argument, the liability of the wife herself.

"B. until such time as the said charges are so removed, to indemnify the Petitioner, and to keep her fully and effectively indemnified, against all claims under (and any other liability pursuant to) the charges including (but not by way of limitation) any costs incurred by her in responding to and dealing with any attempt (including the taking of proceedings) by HSBC to make or enforce any such claim or liability, and any loss occasioned to her as a result thereof, and in this regard to forthwith execute an irrevocable Deed of Indemnity in the form annexed hereto:"

5. We are told that the annexed indemnity has indeed been executed.
6. The wife's advisers were dissatisfied with this outcome, and an Appellant's Notice was filed on 11 May 2009. By my order of 31 July the application was adjourned to an oral hearing on notice with appeal to follow if permission granted. That is the hearing which we have conducted today.
7. Mr Turner, in support of his application and appeal, attacks the rationality of paragraph 61, which I have cited. In particular he says that the judge has completely misunderstood the effect of her financial design, demonstrated by her observation that a benefit of the costs-deferred release would be to avoid a situation in which, were the husband deprived of the facility, he would have to deplete his asset base by the sum of £1.345 million and that depletion would require a reverse payment from wife to husband in order to maintain the broad outcome of equality, which was at the heart of the judge's ruling.
8. As Mr Turner pointed out in his skeleton and in his oral argument, this reveals a complete judicial misunderstanding. All that the husband would be doing would be raising £1.345 million by sale but using that money to reduce his liabilities pound for pound, thus the effect on his net asset base would be nil, and that the judge could not have simply slipped into untidy language by omitting to describe the depletion as being of his gross asset base, because she had amplified her understanding by saying that it would call for the consequential reverse payment from wife to husband to achieve equality.
9. Mr Philip Moor in argument sensibly conceded that this criticism could not be answered and that no sense could be made of this passage in the judgment that would rescue it from Mr Turner's attack.
10. I also have some misgivings about the earlier sentence to the effect that a consequence of forcing the husband to raise money from the sale of one or other of his properties would be to bring about his financial ruin. What was the evidential basis for that finding? Mr Turner says none. Mr Moor says it is to be found in paragraph 44 of the judgment.
11. I do not read paragraph 44 as supporting the conclusion in paragraph 61 that I have identified. In paragraph 44 the judge recorded that both parties had maintained very high annual rates of expenditure. Both parties were heavily obligated to banks. She then in the paragraph cites the financial burdens that the wife was carrying without any seeming source of income and she continued:

"The husband is in personal debt through overdraft in a like amount [and I interpolate that is a sum of £1 million]. I am satisfied that neither has the opportunity to increase their borrowing to fund their needs as has happened in the past, nor otherwise to arrange their financial affairs to release equity from their assets without punitive effect upon their entire asset base."

12. But what was sought was not necessarily that the husband should sell to release equity in order to fund a high lifestyle but that he should re-arrange his affairs so that alternative security could be found for the banks in substitution for the security of Pembridge Road.
13. Accordingly I am left with considerable anxiety as to the rationale for the judge's decision to defer the release of the charge.
14. The resulting scheme, namely undertakings A and B, could be said to be the product of counsel's drafting and it does not seem that there was any disagreement or that the judge herself settled the terms of the undertakings in order to resolve dispute between the parties.
15. What leaps out to me from the terminology of the first undertaking is that it is quite unlimited in time. The obligation to secure the removal is not only a best endeavours obligation but there is no date by which it has to be achieved.
16. If there was a case for the husband to be allowed the unusual concession of a charge on an assets that was to the wife's after the division, it should only have been made available to him for the minimum reasonable time.
17. As a matter of general principle it is undesirable that either spouse should have the use of the other's property as security for borrowings after the resolution of their financial dispute and a separation of their assets. Insofar as the arrangement is allowed it is a departure from the desired end of clean break.
18. In a case such as this, inevitably so long as the best endeavours undertaken remains on foot, there is a temptation to the husband for his own advantage to leave things as they lie, and there will be an anxiety on the wife's part that he is not exerting himself sufficiently and maybe a suspicion that he is doing so for his own selfish ends.
19. So it is easy to demonstrate that the arrangement is not truly consistent with clean break and as a matter of principle should not be allowed to endure for long beyond the necessity of present circumstances. In fairness to the judge it does not seem that there was any suggestion from the Bar that the undertaking should be time-limited and she was not asked to rule on the point. But during the course of this hearing Mr Moor has sensibly proposed on his client's behalf that there should be a time provision of five years from the date of trial. In a sense this elaborate and expensive appeal process, in order to resolve a point that perhaps should have been raised and argued at the conclusion of judgment, seems the traditional sledgehammer to crack a nut. Nevertheless I am persuaded that there is sufficient irrationality and a lack of evidence to support the finding in paragraph 61 to require this court to intervene and to make fine adjustment.
20. I, for my part, think that five years is altogether too generous to the husband and that he should have but a period of two years from the date of trial in order to achieve his removal of the second charge. I think that if, at the termination of the two-year period, he has not already secured removal, then the mechanism should be an order that he pay a lump sum to the wife in the sum of £1.345 million which she would undertake to receive purely for the purposes of onward payment to HSBC. So that would simply be a mechanism to allow the husband to clear the charge through the medium of the wife's account. It is impossible obviously to foresee what lies ahead in these uncertain financial times, and I would accept that there should be a liberty to the husband to apply in the event of a change of circumstances not today foreseeable that would impede him from discharging this liability within the two-year period. How all this should be expressed in the form of an order of this court, I would leave for discussion with counsel. I would grant permission and augment the order below to that small extent.

Lord Justice Wall:

21. I do not propose to take my unhappiness about this application to the extent of a formal dissent from the judgment my Lord has given and I agree with the order he proposes. However, I think I should express why I am unhappy about the application. I notice from the face of the transcript that it was a poor standard of recording and was therefore not possible to produce a high quality transcript in the case. However, I do not understand for the life of me why this application was not made to the judge below and, when counsel had the opportunity to draft the order, as they plainly did, why they did not with their joint expertise realise that something was amiss and take it back to the judge to argue, instead of which it has been set down for a day of this court's time. In my judgment this order and the application reflects badly on the Family Bar.
22. That said, when I come to look at paragraph 61, on one reading it is quite clear what the judge was intending. This is the way the family has operated. In paragraph 6 of her judgment she sets out precisely the way in which the family had operated and she also says that she had formed a very favourable impression of both husband and wife and therefore she plainly trusted the husband with the undertakings that she extracted from him.
23. Unfortunately when you come to paragraph 61 she does make one very blatant error which cannot be overlooked, namely the idea that the husband's assets will be depleted in the sum that she identifies, and if the matter had been argued properly before her on a separate occasion, I have no doubt she would have expressed herself more forcefully and in better terms than she did, when she obviously accepted Mr Moor's submission that the husband would face financial difficulty ruin, as she puts it, if he were forced to sell.
24. Mr Moor has two answers to the points put to him. He says, first of all, as I have indicated, this is how the family operated throughout the marriage. It is plain from paragraph 6 the judge understood that and she trusted the husband to continue to operate in the same way and, secondly, if he were forced to sell on the day of the order or immediately thereafter he would be in financial meltdown and likely to have the majority of his assets liquidated. Those which were in the form of shares would be very difficult to liquidate. Had the point been argued before the judge, had she been asked to rule on it, she would have no doubt have explained herself better. But I quite agree with my Lord that, on the face of it, what she says about financial ruin does seem to be something of an overstatement and she has plainly made a mistake about the sum of £1.345 million.
25. In principle, I do agree with my Lord that it is important in the circumstances that if a husband as such as this husband is to be given an indulgence, as he plainly was, and if there was to be a clean break it should be a clean break on terms and one of the terms should be that he should fulfil his obligations within a specified time. For those reasons I do not find myself in disagreement with the idea of the orders proposed, although I have to say I regard this appeal as unnecessary.

Lord Justice Rimer:

26. I agree with the order my Lord has proposed and with his reasons for proposing it. Paragraph 61 of the judge's judgment does appear to me to raise difficulties. First, I do not understand the evidential basis for the judge's view that if the husband were compelled to engage in an immediate realisation of one or more of his properties in order to raise money to redeem the second charges encumbering the Pembridge Road properties, there would be a consequential domino effect leading to his financial ruin. The judge ought to have recognised that such sales and redemption would in theory leave the husband with the approximately £4.2 million of net assets which she intended him to have. Secondly, I also do not understand on what basis the judge apparently regarded the consequence of the husband's redemption of the charges as depleting his asset base by £1.345 million. It would not. The relevant figure with which she should have been concerned was his net asset base, which would not be affected at all. This error may have fed the judge's erroneous thought that a sale of all the properties would spell his ruin. These two considerations cause me to conclude that, insofar as the judge took account of them in the manner in which she exercised her discretion with regard to achieving a clean break between the former spouses, she fell into error in relation to the way in which she provided for the redemption of the relevant charges. It is that part of her order, reflected in her acceptance of the undertakings which my Lord has read, that I consider that we can and should reconsider.
27. If I may say so, I consider that in principle the scheme reflected in those undertakings was essentially sound, since I regard the judge as entitled to provide some reasonable latitude to the husband within which to redeem the charges. The imposing upon him of a duty to effect immediate sales in order to do so, particularly at a time when market prices were depressed, was one that I can well understand that, even apart from the apparent errors to which I have referred, the judge would have been anxious to avoid. The vice in the order that she did make is, however, that it is entirely open-ended. It admittedly incorporates a "best endeavours" undertaking, which is one that imposed a high burden of responsibility upon the husband. So far as I understand it, however, all that he has done is to discuss with his bank whether it could see a way to releasing the relevant charges, which discussion has come to nothing. For my part I would have some reservations as to whether in the nine months or so since the judge's order was made, the husband was not required to do rather more than he has so far done, including procuring sales of one or more of his properties in order to enable him to redeem the charges.
28. I infer, however, that thoughts along those latter lines may not even have been on his radar although I do not understand why not. But we are not here considering a contempt application. We are concerned with the appropriateness of the order the judge made. Its error was in my view that it failed to have any real teeth for achieving a redemption within a reasonable period and it was obviously a matter of importance to the wife that such a redemption should be so achieved since the Pembridge Road properties represent part of the assets that were and are intended to provide for her future capital and income needs. It is plain that she was entitled to have them disencumbered from her husband's liabilities at as early a stage as possible.
29. It may be that, given the judge's apparent perception of the perils to which sales of his properties would have exposed him, the open-ended feature of her order was an intended one. What, in my judgment, the order should have done and what this court should now do, is to impose some real teeth onto the husband's obligations, and to that end I would respectfully agree with the order that my Lord has proposed, namely that he should be given a two-year period within which to achieve the removal of the relevant charges, in default of which there should be a lump sum obligation of the nature to which he has referred with also a liberty to apply in any such changed circumstances as he has also described.
30. I would, accordingly, also give permission to the wife to appeal and allow her appeal to that extent.
31. Order: Application granted; appeal allowed in part