US v SR [2018] EWHC 3297 (Fam)

Family Division, 29 November 2018, Roberts J

During the marriage, the husband worked in the oil and gas industry, earning a substantial income. At the time of the separation, in 2010, there were assets of over £6 million. However, the couple’s financial remedy proceedings were bitterly contested, highly acrimonious and extremely expensive. The husband failed to disclose the existence of an offshore bank account containing US$850,000 and went on to forge bank statements in order to conceal the non-disclosure. The wife entered into a series of property transactions using matrimonial funds without the husband’s permission, resulting in a financial loss to the family of about £1 million. Of the £5 million assets that remained, £1.76 million was tied up in pension funds which were already being drawn by the husband and the couple’s combined unpaid costs represented 40% of the remaining liquid assets.

At the conclusion of the hearing in 2014, the judge provided for the couple’s main Moscow property, valued at about US$3 million to US$3.5 million, to be sold, and the net proceeds divided equally between the husband and wife (this was expected to produce about £926,000 for each of them plus £100,000 for an education fund for the couple’s daughters). From his share, the husband was to pay the wife £30,000 to cover his contribution to the girls’ future expenses, plus just under £70,000 as part of his contribution to the wife’s costs. He was, in addition to pay off the wife’s substantial commercial litigation loan of over £230,000, using most of his remaining liquid capital. Title to the family’s English home, which the wife and children were, at this stage, still living in, was to be transferred to the wife once the Moscow property had been sold, on the basis that, once this had happened, the wife would be able to take over the mortgage repayments on the English property, which was thought to be worth about £1.1 million with an equity of £777,000. The wife was also to retain a tenanted Russian investment property, to secure her future income needs; this property was believed to be worth about US$1.05 million, was mortgage free and was expected to generate about £27,500 pa.

Both husband and wife had been represented by counsel to this point, but both counsel were thereafter dis-instructed because of lack of funds and there was therefore a significant delay in the court receiving a draft order. In the interval, rather than remaining in the English property, as the judge had been expecting, the wife in fact swiftly moved to Moscow, with the apparent intention of renting out the English property. The husband issued a Barrell application.

The eventual order, dated May 2015, gave conduct of the sale of the main Moscow property to the husband, with various provisions to penalise the wife if the property was still tenanted by the end of August 2015. The husband was to be entitled to the rent on the English property in the short term, to enable him to cover the mortgage payments, with a specific date by which the wife was to take on the mortgage payments. The wife’s commercial litigation loan was duly discharged by the husband, leaving the remaining £70,000 to be paid by the husband to the wife’s solicitors once the main Moscow property sold.

Further litigation followed. The wife made applications seeking: additional financial provision for the youngest child; permission to appeal; and release from her obligation to pay the mortgage on the English property. In response the husband made applications seeking to enforce the wife’s obligations under the May order and an order for sale of the English property. In fact, although she did not return to England, the wife did resume payments for the English mortgage, which meant that various default provisions in the May order were not triggered.

Then, in 2016, the wife’s former solicitors obtained a default judgment in relation to the remaining £70,000 plus interest, in the total sum of £107,361.07; however, the wife had no assets within the English jurisdiction against which they might have been able to enforce this judgment debt. In 2017 the solicitors’ debt recovery proceedings were transferred to the Family Division to be consolidated with the ongoing enforcement proceedings. The wife was refused permission to appeal in January 2017. Almost immediately, the wife transferred the Russian investment property into the name of one of her daughters. In June 2017 the wife’s former solicitors were joined as a party to the financial remedy proceedings. In February 2018, the judge set aside the default judgment regarding the debt owed to the solicitors, substituting an order for costs of just under £70,000 that were definitely due. Also in February, the husband applied for a lump sum payment from the wife of £1 million in full and final settlement of his entitlement to part of the proceeds of sale of the Moscow property.

The Moscow property had still not sold; the wife claimed this was because of a complete collapse of the Russian property market. The husband had remarried and had a 7 year old daughter with his new partner. The couple’s three daughters together were now all studying at undergraduate level or above.

The High Court judge varied the original order, so that:

(i) The wife was to retain the legal and beneficial ownership of the Moscow property, free from any further claim by the husband;

(ii) The English property would be sold and the net proceeds divided as to 70% to the husband and 30% to the wife. From his share, the husband would discharge his remaining liability for costs in the sum of £69,906, this sum to be paid directly to the wife’s former solicitors by the conveyancing solicitors;

(iii) The Russian investment property was to be sold. The wife would retain the net proceeds of sale free from any further claim by the husband, on the basis that the husband’s liability of £80,000 in respect of his contribution to the children’s educational and other expenses would be set off against any entitlement he might have to a share in that property;

(iv) In the event that the wife was adjudged liable for any accrued interest in respect of the deferred costs liability of £69,906 (but not on any other element of her outstanding costs), the husband was to pay her a lump sum equivalent to 50% of any such interest;

(v) In all other respects, there would be a full and final clean break between the parties in accordance with the terms of the original order;

(vi) There was to be no order in relation to the costs of this hearing.

Applying Bezelianasky v Bezelianskaya [2016] EWCA Civ 76, which itself approved Thwaite v Thwaite [1981] 2 FLR 280, the Court of Appeal had confirmed that the court retained the power to make a new or varied order in the light of new evidence whilst an order remained executory. Mostyn J in SR v HR and SC (his trustee in bankruptcy) [2018] EWHC 606 (Fam) had made no reference to Bezeliansky v Bezelianskaya or to L v L [2006] EWHC 956, in which Munby J (as he then was) had made observations about the exercise of the so-called Thwaite principle. The decision in L v L represented both a “cautious” and “conservative” approach to the re-opening of an order where there had been both a failure to implement its terms and some material change in the basis on which the original order had been made, confirming that the essence of the jurisdiction was that “it would be inequitable not to [vary its terms] because of or in the light of some significant change in the circumstances since the order was made”.

In this case, whilst there had been no formal application under FPR 2010 r. 9.9A by either party, each of them – acting as litigants in person – had made a plethora of applications designed to achieve a variation or rescission of the May 2015 order, in circumstances where they both accepted that the failure to sell the Moscow property required the court to revisit the terms of its original order. The case management directions since January 2017, when the Court of Appeal had refused the wife’s application for permission to appeal, had all been tailored to the provisions of r 9.9A. This hearing had been the effective rehearing envisaged by r 9.9A(5), in terms of the invitation which both parties had extended to the court to rehear the financial remedy proceedings or “otherwise make such other orders as may be appropriate to dispose of the application”. This was very far from a case where there had been “mere delay in implementing a routine property adjustment order”: per SR v HR. For what it was worth, the court agreed with Mostyn J’s comments in SR v HR that the latter scenario could never amount to a ground for a set aside under r 9.9A.

In the original May judgment the court had explained exactly what it had anticipated each party would receive, on the basis of the best evidence available at the time, factoring into the judgment how those receipts would meet needs on both sides of the case and the basis of the departure from an equal division of the assets which were justified on the facts. No one had anticipated that, some 4 years later, the Moscow property would remain unsold and/or that its sale would produce a sum very significantly below the agreed value of US$3 million to US$3.5 million. It was essential that steps were now taken to resolve the current impasse. The court had jurisdiction in this case to revisit the terms of the May 2015 order, accepting, following SR v HR, that any such revision must be contained and, so far as possible, should reflect the underlying intention of the original extraction route embodied in the May 2015 order. In fact both parties consented to the court exercising that jurisdiction, but the court did not need such consent in order to do so. This was a jurisdiction which flowed both from the Thwaite principle (contained, as explained above) and from the jurisdiction conferred on the court pursuant to the FPR 2010.

The court’s objective was to interfere as little as possible with the outcome and net effect of the May 2015 order, whilst finding a solution for each of these parties to the practical difficulties of realising value in the underlying matrimonial estate. For present purposes the court proposed to treat the current value of the husband’s remaining pension funds as broadly equal to the equity which the wife would retain in the Moscow property and would leave both out of account for the purposes of the assets to be shared between them. The court agreed with the parties that the liquidity which each would need for their future English house purchases would have to come, in part, from the sale of the current English property, which the parties had agreed to value at £1.4 million. In terms of the Russian investment property, without formal valuation evidence the court could not determine whether the available equity was £300,000 (on the wife’s case) or £450,000 (on the husband’s case) and would assume a mid-point valuation of £375,000.

In exercising its jurisdiction to revisit the terms of the original order the court was obliged to consider needs. Needs had been the driving factor in the original decision and, as one of the s 25 factors, needs remained pivotal to the outcome. The only feasible and practical way forward was to leave the main Moscow property in the wife’s hands as a resource earmarked for future income generation. The court was satisfied that there was sufficient equity in the property to meet the wife’s future income needs, whether she retained the property as a commercial rental investment or in the event that she decided to sell and reinvest elsewhere. Despite the apparent convenience of leaving both the Russian properties in the wife’s hands, there was insufficient equity in the English property to enable both parties’ housing needs to be met from that source. There was therefore no alternative but to sell the Russian investment property as swiftly as possible. The wife would retain the proceeds of sale of the Russian investment property; she would need to realise the equity in that property to be able to rehouse in England. In order to incentivise her to make progress with the sale of the investment property, the court would allow the husband to make his contribution of £80,000 towards the children from his share of those proceeds; in fact the wife was probably going to have to apply the £80,000 towards the discharge of debt. However, the husband’s costs liability must come from the sale of the English property. In circumstances where the balance of the wife’s capital would be coming from the sale of the Russian investment property, she would be best placed to conduct the sale of that property and ensure it was transacted as swiftly as possible. The court did not know whether the transfer of the Russian investment property into the daughter’s name would delay matters but, if it did, this was a situation which was wholly of the wife’s making. From the sale proceeds of the English property, the husband was to receive 70% (the equivalent of just under £750,000, leaving him with about £680,000 once he had paid the final instalment of his costs liability). The wife would receive 30% (the equivalent of £320,400). Together with her share of the proceeds of sale of the Russian investment property, the wife would receive £615,400 in total, as well as retaining the Moscow property.

The only further adjustment to these figures would be the payment by the husband to the wife of a contingent lump sum award in respect of the outstanding third party claim for interest. Should that claim succeed, he would be liable for 50% of any interest element which was due and payable. Any such liability would impact upon the potential housing funds of both parties. In circumstances where it was not possible on the evidence to attribute blame for the delay in selling the Moscow property squarely at the feet of the wife, this was the only fair way of sharing this liability.

The wife would not be in a position to buy a new home for herself until the sales of both properties had been completed. The court appreciated that she would be receiving less than the husband to buy a house in England but she would be retaining another property worth nearly £1 million (the Moscow property). Whilst that property had been earmarked for income generation in the future, she could, if she chose, sell it and divert part of the proceeds into a more expensive home in England. There would then be scope later on in life for her to release equity from her English home for the purposes of supplementing her retirement income. The husband would continue to receive his pension but that fund gave him no flexibility in terms of any further release of capital. The court was satisfied that the provision being made for the wife would enable her to meet her own (and the children’s) ongoing housing needs, albeit that the resources in this case were now sufficiently stretched to the point where expectations on both sides would need to be contained in terms of housing aspirations.

Postscript

Since handing down a draft of the judgment, the court had been advised that the best offer received to date for the English property was £1.18 million. As was often the case in financial remedy cases, the court had had to proceed on the basis of the best evidence available at the time of the hearing. It was for this reason that the judgment had been and the order was being framed in terms of a percentage division of the proceeds of the English property. Insofar as there remained a shortfall below the assumed value of the property when a sale was completed, that shortfall would necessarily be borne between the parties on a pro rata basis. Budgets for rehousing might have to be trimmed significantly on both sides, even on a needs basis. In this context there was no scope for further adjustment so as to enhance the husband’s share of the net proceeds, because to do so would necessarily reduce the funds available to the wife. In this context the parties had to look to the roles which each had played in the haemorrhage of costs which, over more than 5 years of increasingly acrimonious litigation, had transformed their financial position from one of relative prosperity to one where each might struggle financially to meet basic needs.