England and Wales High Court (Family Division) Decisions

IN THE HIGH COURT OF JUSTICE
FAMILY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/09/2012

Mr Justice Ryder :

1. These are financial remedy proceedings in the Family Division of the High Court. I shall refer to the parties where appropriate as wife (W) and husband (H) respectively. The Crown Prosecution Service (the Crown) is an intervener.
2. There is an application for financial relief in all forms issued by the W on 20 April 2010 and an application by the Crown to vary a restraint order imposed by the Crown Court on 27 May 2009. There is also an application by the Crown in contempt against both the H and the W which has not been pursued and is by an order made in this hearing withdrawn.
3. The background to the proceedings is that a criminal investigation was started in April 2009 regarding theft, Fraud Act and money laundering offences, the victim being Friends Provident Life and Pensions Ltd which I shall refer to as Friends Provident (FP).
4. The H held 2 investment policies with FP. One of the facilities open to him was the opportunity to switch units from one fund to another within those policies in order to legitimately enhance returns. On 20 December 1996, H took out a Capital Investment Bond Policy with FP, making a single premium investment of £120,000: the assured lives being H and W, although the policy was in H's sole name. From the commencement of this policy until 1 May 2003, H and W made a number of switches for which returns were achieved. The value of the Bond as at 1st May 2003 was £501,170.33.
5. On 3 August 2005, H started an Investment Portfolio Bond with a single premium of £269,088.73 funded primarily by a re-mortgage over the former matrimonial home.
6. On or about 2 May 2003, FP changed its daily unit price fixing time. From this date, approximately 950 switches of funds on the two policies were made in each case on an instruction sent by fax. The faxes were received either from the former matrimonial home, a property in France which the parties owned or two hotels. The majority of the faxes were fraudulently and purportedly sent several hours earlier than actually received by FP. This allowed H to take advantage of being able to study the markets before making switches.
7. Both H and W were arrested on 6 May 2009. H was charged on 12 November 2009 with a number of criminal offences covering a period from May 2003 until April 2009. At Swindon Crown Court in May 2010, he pleaded guilty to eight Fraud Act offences occurring between 2007 and 2009. For the purposes of the confiscation proceedings, the Crown did not accept the basis of plea put forward on H's behalf relying on the Court of Appeal's rejection in R v Chambers [2008] EWCA Crim 2467 of the submission that the judge in confiscation proceedings was bound by the basis of plea. H was sentenced to 3 years imprisonment on 27 July 2010 and subsequent to his arrest a restraint order was made over his assets pursuant to section 41 of the Proceeds of Crime Act 2002 (POCA 2002).
8. Confiscation proceedings against the H were heard in the Crown Court in January 2012. At that hearing, a confiscation order was made against the H in the sum of his benefit i.e. £4,812,245. A compensation order was made in favour of FP in the sum of their loss i.e. £4,287,563 which is to be paid from the sum confiscated. The H was given six months to pay. Accordingly, the questions of benefit, the value of that benefit, the amount to be recovered (the confiscation order) and the amount to be returned to the victim (the compensation order) are now settled, subject only to any application to vary the confiscation order. It should be noted that the quantum of the confiscation order is wrongly set out on almost all of the documents submitted to this court. The confiscation order made by the Crown Court as confirmed by the order before me is in the sum of £4,812,245.
9. At an earlier hearing in the Crown Court the possibility of unravelling the transactions was canvassed and an opportunity was provided by this court to investigate the feasibility of that course and its tax and costs implications without prejudice to the Crown's submission that such a course might undermine the effectiveness of the compensation regime. In the event, the H did not succeed in persuading anyone to pursue that course. The issues in the Crown Court proceedings and the family proceedings have been considered separately in accordance with the principles explained by the President in Webber v Webber (Crown Prosecution Service intervening) [2007] 1 WLR 1052.
10. The H and W were married in 1994. The H is 51 and the W 53. The H was released from prison in the Autumn of 2011. On 20 April 2010, the W presented a petition for divorce. There are two children of the marriage: a daughter aged 17) and a son aged 15). The W lives in the former matrimonial home with the children. At the time of the hearing the H was about to move to accommodation provided by a friend. This was a 16 year marriage. The children are both at school and I am told that they will each wish to move into tertiary education. The son has a rare medical condition which is unexpectedly in remission but which is relevant to the discretionary exercise this court is asked to undertake.
11. An agreed schedule of the matrimonial assets is attached to this judgment. The only amendment required is as to the liabilities of the W.
12. The W asserts a 50% beneficial interest in the former matrimonial home, a 50% interest in a property held in joint names (the second English property) at which the W says is a pre-criminal untainted joint investment and 50% of the sale proceeds of the parties' French property on the basis that it was purchased with funds from an earlier untainted French property. She seeks to have the former matrimonial home transferred into her sole name and for there to be a lump sum which would have the effect of allowing her to discharge the mortgage if her own assets are preserved and remain available to her. Accordingly she seeks an order that:

a) She retain all assets in her sole name

b) She retain funds held on account (but restrained) by her solicitors

c) The former matrimonial home be transferred to her

d) She receive a lump sum payment to discharge the mortgage secured on the former matrimonial home

e) She receive nominal periodical payments from the H

f) She will relinquish to the Crown/transfer to the H her interest in any other jointly owned property

g) The restraint order be varied to enable implementation of the above.

13. The H agrees with the W's position.
14. The Crown dispute that the W is entitled to the relief sought by her. It disputes that the W has the beneficial interest asserted by her in the properties, in particular, the balance of the proceeds of sale of the French property. It disputes that she should receive the lump sum sought by her although it concedes that to the extent to which there are surplus assets over the amount required to meet the confiscation order against H, some of those can be transferred to the W.
15. At the confiscation hearing in January, the H accepted that he held assets with a value greater than the benefit received by him i.e. greater than £4,812,245. The Crown submits that the H is bound by that concession, and unable in these proceedings to argue that he holds assets worth less than that sum.
16. As regards the W's position, however, the Crown accept that she is not bound by the H's concession. In the case of In re Norris [2001] UKHL 34, their Lordships' House considered that, because a third party applicant was not a party to the confiscation proceedings and so had no standing in the same, it could not be argued that that third party was bound by the Crown Court's findings as to the defendant's realisable assets. It is open to the W to assert that she has a greater beneficial interest in the assets than that suggested by the H.
17. In the event that this court makes findings in these proceedings that the W has a beneficial interest in assets considered to be realisable assets in the Crown Court or succeeds in having those assets transferred to her then the H will apply under section 23 POCA 2002 for a reconsideration of the available amount.
18. I have heard oral evidence from both the W and the H, who have been cross examined in some detail by the Crown. The Crown's evidence as to realisable assets and as to the nature and extent of benefit and tainted assets is contained in written evidence which has been the object of detailed submissions.
19. Despite serious and sustained cross examination by the Crown, the W's evidence was never seriously in doubt. I hazard a guess that is why the Crown never pursued a case against her in the criminal courts. For all that the Crown's position is entirely proper, and as a matter of public policy it is, in so far as it was an attempt to show that the W was tainted rather than the assets, it had all the appearance in fact of an expensive, adversarial and ultimately disproportionate exercise. It became patently obvious from shortly after the W got into the witness box that she had not known of the H's fraud at the time he perpetrated it and that her knowledge of financial matters both generally and domestically was superficial and by and large obtained after the events upon which the Crown relied. That would have been as obvious to the investigating officers as this court. The W was a credible and reliable witness of her own lack of financial sophistication and her entire and unquestioning reliance on the H. I find as a fact that she neither had knowledge of nor was complicit in the H's criminal activity.
20. The W's evidence, which I accept, is that the H and W did not jointly conduct any relevant financial transactions through a joint account, although one existed from a date which has not been established to the court's satisfaction. The H's investment behaviour was consistent throughout the relationship i.e. it was unchanged during the period of the fraud and it always produced legitimate income from which the family benefited. Save for a short period the H was in addition always in well paid employment until he was arrested. The standard of living was good without being excessive.
21. The H's successful investment activity enabled him to resign and take a break from paid employment during 2005-6 which was part of the time the family spent in France (2003 to 2006) absorbing a different culture and way of life. During that time the W assumed that the family outgoings were covered by their income. That would have been right if the rental from their UK property covered that property's outgoings and if the cost of living in France where education was free enabled them to live more modestly. In so far as she didn't know whether she was right or wrong, the point only went to emphasise the detached view she took of the family's finances. It was not that she didn't care or that she deliberately turned a blind eye but rather that she trusted the H and what had always turned out well before, she expected to again. Even if I am wrong, the W's behaviour was no different than many caught up in a credit bubble: it was at worst an exercise in hope by someone who 'does not do' mental arithmetic. She was unable to remember or reconcile figures when they were put to her in a simple and clear way during her oral evidence.
22. It was in this context that she did not question the re-mortgage of the former matrimonial home that financed the second policy when that no doubt put at risk her own asset contributions to the matrimonial pot. Despite the Crown's assertion that this was a deliberate part of the H's criminal activity which the W must have known about, I came to the clear conclusion that it was a rational and legitimate investment opportunity taken by the H which he subsequently used without the W's knowledge as the vehicle for his fraud. The W did as she was asked by the H and that included signing a couple of the fax switch documents. In so far as the Crown's case is that she signed many more, I accept her evidence and that of the H that he photocopied the blank forms that she had signed. If that is right and the Crown did not satisfy me otherwise, then she had signed 2 documents in a period of 10 years. She did not inspect the detail of the switch documents (i.e. the dates and times) and even if she had, I doubt that she would have realised the fraud being perpetrated.
23. It is undoubtedly correct that the H subsequently reduced the mortgage on the former matrimonial home by two payments whose source cannot be unravelled so that those payments are regarded in whole or in part as tainted. In so far as I have concluded that I am not satisfied on the evidence that the re-mortgage was necessarily part of the criminal conduct then a balancing payment into the mortgage account, even if made with tainted funds does not deprive the Crown because they still have access to the full value of the funds in the second policy which includes untainted monies that reflect part of the W's beneficial interest. I accept that this is a broad brush approach but it is consistent with the task which this court should undertake where tainted and untainted funds are necessarily intermingled and no party suggests that a detailed tracing exercise is appropriate. Indeed, all parties submit that such a detailed exercise is not appropriate.
24. So far as the W's contributions to the marriage are concerned, she was the homemaker, she worked before and after their daughter was born and before their son was born and she contributed assets that became intermingled with those of the H e.g. the proceeds of sale of her own pre-marriage flat. She was originally a nurse and has since the separation re-trained so that she is now able to work again as a nurse. During the marriage she worked primarily as airline cabin crew. If the Crown intended to suggest that the court should make any value judgement about the relative contributions of a mother and wife as against a father and husband in a marriage of entirely conventional contributions save for the H's fraud, then I reject that on the facts and on public policy grounds. Their contributions to the marriage but not to the fraud were equal.
25. The W's present circumstances are constrained by the welfare of the parties' children. They are dependent and living at the former matrimonial home. Their school fees have been met by soft loans from the W's brother and others and by bursaries generously provided by the schools. That circumstance may not continue and in any event both of the children hope to continue their education into the tertiary sector. The W has a projected income of £17,154 per annum (£1,430 per month) based upon her salary as a nurse and the benefits and tax credits to which she is believed to be entitled. In addition, the W would like to be able to start a small business offering a room or two for bed and breakfast accommodation. Her plans in that regard are reasonable provided she has the space to be able to run the business. Her budget of £1,398 per month is just within her means but includes no sum for the exigencies of everyday living with older children. I accept the W's evidence both as to her income and her outgoings into the foreseeable future.
26. The H's pre-criminal income was in the region of £100,000 gross and he received bonuses of approximately £20,000 per annum. He was employed for all but a year of the marriage in 2005/6. The family moved to France in 2003 but he commuted until 2005 and then returned to work in 2006. There is one issue of detail in the evidence of the H which is important and that is that the French property was funded by the sale of a previous French property and a mortgage provided by BNP Paribas. The overall funds made available included some of those used to fund the renovation works. While the Crown is undoubtedly correct in identifying that tainted funds were used in the renovation of the property, I am not satisfied that the purchase involved tainted funds or that all of the renovation was funded by tainted payments.
27. The H is not at the moment able to provide any financial support and is only able to meet his own needs by reliance upon the generosity of friends i.e. he works for and with them and derives modest benefits in kind: he is effectively unemployed. I accept that he intends to obtain remunerative employment and that despite his conviction he is likely to be able to do so. When that happens he will be able to and should contribute to the support of the children.
28. Having heard oral evidence from the W, I accept that her liabilities are in the sum of £72,381 made up as to £48,826 owed to TD, £7,720 owed to CW, £7,720 owed to DE, £6,000 owed to GD and legal costs of £8,115. These are monies owed to family and friends for legal costs and school fees. They are soft debts in the sense that provided the W does not 'fall out' with any of the principals then they will wait for their monies to be returned. There is no evidence that any of them will waive their right to the monies and I accept that the W feels honour bound to make repayments as soon as she can.
29. The son's health is not secure. The unchallenged medical opinion is that he suffered 'an extremely severe episode of haemophagocytic lymphohistiocytosis' (known as HLH). The condition is life threatening and extreme psychological distress could increase the risk of viral reactivation. The condition is rare and normally presents as continuing ill health. He is fortunate in that he is in remission and is the exception which proves the rule. It is known that 3 other adolescents treated by the same specialist team for this condition have died. He could relapse at any time and is subject to regular consultant review. He remains mentally insecure as a consequence of his illness and all that has befallen him as a consequence of his father's fraud. On any basis, therefore, he is a young man with special medical needs.
30. I reiterate that no party has asked the court to conduct a detailed or particular tracing exercise to separate out tainted payments and assets from those that are legitimate. The reason has been set out in the authorities more than once. It would be wholly artificial to try and separate out the source or sources of any individual payment not least because a legitimate payment may only have been possible because of the existence of tainted funds (see for example R v Ginwalla [2005] EWCA Crim 3553 per Richards LJ at para [20] cited with approval by May LJ in Gibson v Revenue and Customs Prosecution Office [2008] EWCA Civ 645, [2008] 2 FLR 1672 at para [7]). To engage in a tracing exercise would be a much too narrow approach on the facts of this case.
31. The Crown's submission that the W does not have a 50% beneficial interest in the former matrimonial home, the French property (or rather the proceeds of sale) and the joint accounts is based on the written evidence of Mr Mahoney, an accredited financial investigator with the police. That evidence concentrates almost exclusively on the financial contributions of the H and W and an attempt to conduct a particular tracing exercise in relation to allegedly tainted payments made by the H.
32. There is nothing in the evidence this court has heard and read which demonstrates at the time of the purchase of either the former matrimonial home or the second French property any intention on the part of the H and W that their beneficial interests should be different from their legal interests. The properties were purchased in joint names and the funds used for their purchase did not emanate from criminal monies. There is nothing to suggest that their intentions changed. As between themselves, there is no doubt that the W is the beneficial owner of 50% of the equity in both properties. This is consistent with the opinion of Baroness Hale of Richmond in Stack v Dowden [2007] UKHL 17 as applied by the Court of Appeal in Gibson v Revenue and Customs Prosecutions Office supra. R v Edwards [2011] EWHC 1688 is clearly distinguishable on its facts i.e. the common intention of the parties in that case was influenced by the source of the purchase funds and that is a relevant factor in a Stack v Dowden analysis.
33. To suggest otherwise falls into the trap described by May LJ at paragraphs [6] and [11] to [22] of Gibson. There is no statutory provision or free standing public policy jurisdiction which can be invoked to deprive the W of her 50% interest. She was not subject to the confiscation proceedings. It would be wrong to infer a notional and fictitious intention to reduce the W's interest. That was what Gibson was all about and it is surprising that this court needs to repeat the very clear words that the Court of Appeal used.
34. The alternative submission made by the Crown is that payments made by the H to or for the benefit of the W were gifts which may be brought into account for the purposes of the confiscation order. In so far as regular payments such as ordinary repayments of mortgage and payments of regular outgoings are concerned, there is a well established answer to this submission, namely that the W provides consideration by bringing up the children and looking after the home i.e. the payments are not gifts at all (see for example, para [10] of Gibson). The Crown is on stronger ground, however, in relation to irregular or extraordinary payments.
35. The Court is familiar with the principles of equitable accounting and the Crown specifically raise the question of the two substantial payments that the H made to decrease the mortgage on the former matrimonial home. They rely on the principle explained by Millett J in Re Pavlou (a bankrupt) [1993] 3 AllER 955 i.e. in circumstances where one joint owner of a property has made a significant contribution to the same, the other party would be expected to account to them for that contribution. That would provide an answer to the Crown's desire to reduce the value of the W's beneficial interest were it not for the fact that this was a balancing payment for the re-mortgage which restored the status quo ante. In the factual circumstances of this case, there is no accounting exercise to perform in relation to the former matrimonial home.
36. The position is different in relation to the French chalet. The balance of proceeds of sale is a sum agreed as £541,571 at 14 January 2012. Even having regard to the H's evidence as to purchase and the financing of the same by a BNP Paribas mortgage and the evidence of the H and the W as to the source of untainted funds i.e. from the first French property, the Crown are able to adduce in evidence the H's concession obtained as long ago as August 2009 about the extent of tainted contributions to the refurbishment works (which is not contradicted by other evidence) and the fact that the property appears to have been sold at a loss. I agree with the Crown's submission that the W is liable to provide an equitable account for the sums provided by the H. In broad terms that is in the sum of the H's concession that Euros 500,000 and £56,000 came directly from his fraud. That is approximately £451,000. The sum of £90,571 plus any interest on that sum from 14 January 2012 remains. The W is entitled to a 50% share which is £45,285.50 together with 50% of the interest on the £90,571.
37. The effect of the court's conclusion on the facts is that although the policies are in their totality tainted assets, the former matrimonial home is not and the W starts with a 50% beneficial interest in that property. She also has 50% of what remains after the equitable accounting exercise has been completed in relation to the French chalet i.e. approximately £45,285.50. There are two other properties where the position is even clearer. The second English property was purchased before the period of offending in joint names and there is no evidence other than the Crown asking the court to make an inference that the maintenance costs of this property would have been funded by the proceeds of the H's criminality. That is not a necessary or reasonable inference. The second English property is an untainted asset. The same argument applies to a tenanted investment property (the tenanted property) in which the H has an interest: that is also an untainted asset.
38. Finally, there are joint accounts with RBS and Stroud and Swindon. The W's evidence was that the parties did not have a joint account when it is clear (not least from the H's evidence) that they did. These accounts were used by the H and I am satisfied that the Crown is correct in asserting that the monies held in these accounts are exclusively or primarily derived from the H's criminality. I am satisfied that the W must account for those sums and assuming her beneficial interest to be 50% it is in practice extinguished by such a process.
39. In undertaking the analysis that I have, I have borne in mind the submissions made by the Crown as to the principles described in Stodgell v Stodgell [2009] EWCA 243 i.e. whether or not I had not accepted the Crown's submission as to an equitable account due from the W or the diminution of her beneficial interest, I would still have to consider whether there is an equivalent civil debt to the confiscation order which can be recovered by the Crown which prevents or limits the exercise of discretion by this court under the Matrimonial Causes Act 1973 [MCA 1973].
40. In my judgment, the principles described in Stodgell have to be applied to the facts of the case. To do otherwise would be to render the financial remedy jurisdiction of no effect. In Customs and Excise v A [2003] 2 WLR 201 Shiemann LJ set out an analogous argument as between the MCA 1973 and the confiscation provisions of the Drug Trafficking Act 1994. The essence of his conclusion set out in 7 principles at paragraph [41] is that neither statutory regime takes priority and this court has to balance the competing needs and Convention rights of all of the parties: H, W and the Crown. The importance of the respective rights and public interests in play is emphasised between paragraphs [43] and [49]
41. Having performed part of the balance which is before this court, it is now necessary to complete the MCA 1973 discretionary exercise. The Crown concede that any surplus that there may be over and above the confiscation sum in the jointly held assets can be transferred to the W and the H accepts that this would be appropriate having regard to the W's needs. Although the Crown has commented upon the possibility that the Stroud and Swindon policy held in the W's sole name has benefited from payments that are tainted, they do not actively seek to deprive her of that. Accordingly, the W has a 50% beneficial interest in the former matrimonial home, an interest in the balance of proceeds of sale of the French property amounting to £45,285.50 plus some interest, the Stroud and Simpson policy and an ISA with Hargreaves Lansdown.
42. On any basis and in any event it is conceded by the H, the evidence relating to the section 25 MCA 1973 factors demonstrates a need for the W to be housed with the children so that the children might have at least some security and stability for the rest of their secondary education and some hope of entering into tertiary education. The welfare of the son is particularly strongly evidenced. The W has done as much if not more than she might reasonably have hoped to establish an income and earning capacity but it remains the case that even in his reduced circumstances the H's earning capacity is greater than the W's. The H has an obligation to meet his confiscation and compensation orders and as a consequence the W will be wholly financially responsible for the children until the H secures employment with reasonable remuneration. There remains a significant disparity between the H's and the W's pension provisions.
43. In my judgment, the only question which remains in the balance of factors I have to conduct is whether the former matrimonial home should be transferred to the W in its entirety with a lump sum sufficient to enable the W and children to be housed there mortgage free or whether it should be sold and the W should obtain a more modest property. There are various competing factors.
44. Does the W need to stay in the former matrimonial home rather than down sizing? In my judgment she does. The house provides the W with an extra earning capacity because she would have the space to operate a bed and breakfast business and it provides for the welfare of the children, in particular the son. Further, it provides a means of paying off her debts should she choose to down size when the children have left home.
45. Are there sufficient untainted assets to enable the transfer and lump sum payment to be made? In my judgment there are. I have decided that the former matrimonial home is untainted and that there is no argument to reduce the W's interest in it. If I transfer it to her, she needs to be able to discharge a mortgage of just over £307,000. The untainted assets are the former matrimonial home, £45,285.50 plus some interest arising out of the French property, the second property which has a net equity of £164,476 and the tenanted property which has a net equity of £80,025. A lump sum reflecting the H's interests in those properties (£162,263) together with the W's interest in the second property (£82,238) and £45,285.50 plus some interest i.e. £289,786.50 together with the interest on the £45,285.50 would achieve a just and equitable result and would be an appropriate balance between the Crown's interest and those of the W and the H and an appropriate balance of the rights in play.
46. The W will be able to discharge the mortgage only by using assets that are in her sole name. She will have to defer re-payment of some or most of her debts until she can downsize but in my judgment that should be possible.
47. The H accepts that this is fair and in any event he retains a pension fund that is significantly better than the W's. He will retain sufficient assets to meet his compensation order such that the victim of his crimes is not prejudiced. In the event that the H regains a level of earnings which justifies a contribution to the W then a nominal periodical payments order will permit such an application to be made.