Costs and control in Divorce

So February is nearly upon us, scary - one month down!

I have struggled this month with diet, exercise and all the new year resolution type things that I was to do but all of that pales into insignificance when I meet new clients struggling with all of that, normal life, children and the prospect of a separation.

Many have been happy that finally they have felt able to do something about the feelings that they have harboured for a long time but even when people have plucked up that courage and taken that step they find themselves trying to deal with a process that is alien to them and the costs that come with it.

I have read in several places over the last month or so that Divorce costs £10,000+ (I have seen that as a statement in itself with no qualification about the level of assets or complexity of the case).

Now whilst I accept that there are some cases that are complex or very contested and which attract alot of legal costs, there are many more that are relatively straightforward and that should not attract anywhere near that amount. It worries me to think that there are people who will shy away from getting the legal advice they need to make an informed decision because of scaremongering about costs.

There is a cost, of course, to obtaining specialist legal advice on Divorce - much as there is a cost to having your car fixed or taking financial advice - but there is also a value to that advice - be it in peace of mind, protection of assets or security for the future.

People going through the process of separation or divorce want control, they want fairness and they want to feel that they are not lost and that they have direction - that is fine but often the sticking point is cost.

In late 2012 I entered a Mediation Partnership with Mediation Worcestershire, along with a few other Solicitors in the area. The concept is that people who attend Mediation to resolve their differences but who naturally require legal advice at some point in that process, will be able to turn to members of the Partnership for that advice at a fixed cost.

The aim is to make sure that couples who are separating have the benefit of control through the Mediation process with access to the specialist legal advice that they need at a cost that is clear.

I am imensely pleased that as a profession as a whole we are trying to ensure that access to legal advice remains open and never will this be more important than post April 2013, when the availability of legal aid for family law cases will be abolished, save for those cases involving Domestic Violence or Care issues.

I know that there is a cost to bear for legal advice but I hope that as this year progresses people do not leave themselves counting the cost of not having had it!

New Year, next chapter?

Whilst this festive period may have been a happy time, for many the added stress, constant planning and financial pressure will have left their relationships at breaking point.  When the New Year comes round and people stand back to assess their lives and relationships, many may decide to separate or Divorce.

Rarely do I find that the Christmas period has been the cause of a relationship breakdown and often separation is something that couples have been discussing between themselves for quite a while. When another year arrives on the calendar people think about a new start, new opportunities and new possibilities. It often seems easier to draw a line in the sand at the end of the old year and try to be optimistic about the future at the beginning of the new one, whatever difficulties you might be facing.

Often, the idea of instructing a solicitor may seem 'too big a step' when all you really want is an understanding of what your options may be going forward and clients frequently tell me that they have delayed getting advice because they were concerned about the costs or fearful about feeling pressured into a certain course of action – presumably having listened to the media’s view of lawyers generally.

I can only imagine that in 2013, with Legal Aid being withdrawn by the government for almost all Family Law matters, the number of people feeling this way will increase. And yet, separation or Divorce is a major life decision and one that you should make with as much information as possible.

I offer a free initial consultation on family law issues and spend time explaining to clients the options and discussing ways forward. I hope that clients leave more reassured and clearer about their next steps and they frequently tell me that this is the case, which is good to hear!

Recently, we developed a range of fixed fee options, again, in the hope of reassuring clients and in anticipation of Legal Aid being withdrawn, to assist the many people that will require advice after April 2013 but simply cannot afford to pay on the basis of an hourly rate. It remains to be seen whether many other firms will take the same line but it I clear that the legal market is changing.

Couples separating will more and more be faced with a vast array of organisations and firms seeking to offer legal advice – they will have to decide, do I get advice from my supermarket, an online organisation or a traditional law firm. Do I want to deal with a call centre, someone over e-mail or do I value my life and future enough to want the person dealing with it all to be accessible, someone I can visit face to face and develop trust in?

So I start 2013 positively, having done all I can to enable our clients to access the advice they need at an affordable cost, and anxious to see how the legal market will change this year.

Bring on the next 12 months!

One too many days of Christmas?

So the festive season is nearly here, there are Christmas displays in shop windows and the build-up has well and truly begun.

Whilst this for many is a happy time of year the added stress and debt can put strain on relationships and cracks may start to appear or become more apparent for those who are not used to spending long periods with their partner or children.

The constant planning and pressure for everything to be perfect can leave couples at breaking point and it is a sad fact that reports of Domestic Violence and people seeking advice for relationship breakdown often double in the post-Christmas period.

With the recession still in force, this year may seem particularly difficult for many but nobody wants to suffer upset at Christmas so how can you try to Christmas proof your relationship?

1. Keep a check on your alcohol consumption – excessive alcohol can frequently lead to people being more aggressive/argumentative or expressing views that they may later regret – alcohol and the pressure of a family Christmas can be a disaster

2. Agree a budget for each family member or for the children and stick to it – financial pressures are one of the biggest strains at Christmas and can be source of many arguments, even in to the New Year when debts need to be paid off

3. If you’re struggling, refusing to speak to one another, whether that is because you simply can’t bear it or because you fear it will cause a row, will see tensions build – try and clear the air about issues as quickly as possible and away from family members.

4. Perspective – with the added stress and pressure the smallest of things can become a source of major irritation. Stand back and count to 10, is it that big an issue? If it is then speak about it, if not, let it go.

It is rare that Christmas is the cause for a relationship breaking down but it can magnify cracks in a relationship and be the last straw – if that is the case, seek out specialist advice in the New Year and remember that friends may be well meaning but they are frequently wrong or influenced by their own experiences.

For those couples already separated, particularly with children, the issue of how to deal with Christmas can raise other difficulties, here are a few tips to help…

1. If you have recently separated, or even if you have been for some time, rely on your friends and family for support. Surrounding yourself with close friends will lift your mood and stop you dwelling on matters.

2. Make Christmas your own – often when there are children involved, a family will have certain traditions done each year. Don’t focus on what has always been done, make your own traditions and memories and move forward

3. Forget the emotion – maybe you are still processing emotions from the breakdown of your marriage/relationship try not to let your children sense that over Christmas. Remember this, as long as children see both of their parents over the Christmas period they won’t be too concerned about who they see on Christmas Day – Christmas starts when the presents start and ends when the presents end – who said Santa can’t leave their presents in 2 houses?

4. Communication is key – when you separate there will be all sorts of emotions to process and you will both be feeling them, not necessarily the same ones at the same time. Communicating with your ex about Christmas presents, arrangements etc. will enable you and the children to have an enjoyable break.

Applying the brakes

Following my last post, we saw a fast car and an open road for unscrupulous spouses who may wish to put assets beyond the reach of the family courts on divorce.

There is action that can be taken by the money-makers to make the most of any company structure but equally some things that the spouse chasing settlement might focus on for best effect – I use the example of wife in this post as chasing settlement, although it could just as easily be the husband.

So…how do we apply the brakes?

1. Look at the family home first…

Even where the Family Home is owned in the name of the company it is often possible to argue that, as the company has allowed the family to reside in the property, it has created a “settlement”.

2. Check the husband’s directors’ loan account

It is possible for the family court to order transfer of the loan account to the wife, who will then be able to enforce payment of the account against the company to extract the monies.

3. Look at Transfer of Shares…

Entirely possible for the family courts to make such an order but be careful…some company articles of association mean that the board has the discretion not to recognise any transfer of shares, which will render any such transfer pointless

4. Check the source of funds….

Check where money for the purchase of company assets came from. If it came from the husband then it may be possible to argue that those assets purchased in the company’s name but with the husband’s money are held on trust for him, therefore opening up the possibility of them being transferred to the wife

5. Prevention is better than a cure…

Ensure that any pre-nuptial agreement considers these issues. 

6. If all else fails...

Be very careful about the drafting of any family court order. Consider drafting a lump sum order in instalments, which will allow the possibility of applying to the court to commit the husband to prison for breach of each instalment, as opposed to one payment – which will allow only one committal application

There may be one large brake applied as I understand that permission has been given to Mrs Prest to appeal to the Supreme Court against the order of the Court of Appeal. We shall await with interest the outcome of that.

All we need is a fast car and the open road…

And that is exactly what “money-makers” got according to LJ Thorpe in the recent Chancery judgement in Petrodel Resources Ltd & Ors v Prest & Ors.

The facts of the case are summarised as follows:

The parties married in 1993 and had 4 children, all teenagers by the time of the hearing.

The Husband founded several companies, collectively called the Petrodel Group and the parties lived a lavish lifestyle. There were properties owned in London, Nigeria and the Caribbean and the parties agreed outgoings of about £700-£800k per year.

The Former Matrimonial Home in London (with a value of about £4m) and the properties elsewhere were all held in the names of various companies forming the Petrodel Group and in essence this caused the central issue in the case.

The family court heard evidence from the parties and was tasked with trying to establish the extent of the husband’s wealth. This was easier said than done as the husband had failed to frankly disclose his assets and had throughout the proceedings been less than honest and open. He had breached orders for maintenance that he was to pay to his wife and his brother even issued injunctive proceedings in Nigeria to prevent the release of papers or information relating to one of the companies (although the husband did, when it suited him, disclose certain papers).

The Court ultimately determined that a fair settlement to the wife would be a sum of £17.5m. It was decided that although the former matrimonial home was owned in the name of one of the companies, it was held on trust and, therefore, could be transferred to the wife without difficulty.

The bigger issue for the Court was to consider what orders it could make against the other property or shares held in the names of the various companies.

This was important because under the relevant legislation only property to which a party is “entitled” can be ordered to be transferred to the other. This means that the party must be legally or beneficially entitled to the property or it cannot be transferred.

So, a party who owns shares can be ordered to transfer them, a party found to have a beneficial interest in a property legally owned by someone else, perhaps because he has paid all of the outgoings/expenses, can have the property transferred to his spouse.

In this case, the companies were the legal owners of the property but did this mean that the husband was not “entitled” to it?

The husband was the majority shareholder in the companies and the Court found that the husband had controlled the companies and assets for the benefit of the family and had been able to use the companies to pay his own personal and legal expenses.

The Court was in no doubt that the husband was the effective owner and controller of the companies and that he had unrestricted access to the assets and could dispose of them as he wished, without any need for a board to approve his actions.

The Court did accept that the companies had been established legitimately for tax and wealth protection purposes and that there had been no impropriety on the part of the husband in running the companies.

The Court felt that the property effectively belonged to the husband and that he was “entitled” to it and that, therefore, it could be transferred to the wife.

The companies appealed the decision, as did the husband. The husband was initially granted permission to appeal subject to him paying to the wife the money owed under the maintenance orders that he had breached. He did not do so and so his appeal was struck out – the companies continued with their appeal.

The majority of the appeal court disagreed with the family court decision, except the one family judge sitting on appeal, LJ Thorpe who said that if the decision of the family court was reversed in terms of the company held assets, it would put those beyond the reach of the family court and fairness then could not be achieved.

On majority, the court determined that the husband was not “entitled” to the property and that it was wrong to consider that because he was the majority shareholder he could deal with the property as if it were his own. They said that it was not enough to be satisfied that it was “effectively his” – he had to be entitled to it.

Companies are separate legal entities and assets held in company names belong to that company entity. The normal starting point is that shareholders have no interest in the company’s assets.

It is, of course, possible to go behind the “corporate veil” but only where there has been impropriety i.e. that the company structure has been improperly used to avoid or conceal liability and that it should be disregarded to ensure that no benefit is gained from its improper use.

But the husband’s lack of co-operation in proceedings and his less than honest disclosure to the Courts is not impropriety in terms of the company structure and so the Courts cannot look behind it.

What followed from the appeal court was a look at various case law and a telling off for the family courts for using “family justice” rather as a catch all to get around having to apply strict legal principles of the law in other areas.

The court could not, therefore, order transfer of the properties owned by the companies and whilst of course it remains open to the Court to order the husband to pay a lump sum, such an order would have no teeth, as there was no realistic way of enforcing it against the husband.

This judgement is likely to have a significant impact on the ability of the family courts to achieve fairness in cases where one party is involved in the running of a company or companies which own certain assets.

It is more likely to come into its own in the future, once parties have taken advice and recognise the real opportunities that this case provides for assets being put beyond the reach of the family courts on divorce.

It will mean that creative thinking will be required when settlement terms are made, both in the construction of the deal and the wording of any order. It may also have an impact on the construction of pre-nuptial agreements and may see each respective side seeking certain clauses that before now perhaps would have been less important.

In my next post I’ll deal with some of the brakes that might be applied to this fast car which, at present, has an open road in front of it….

Bankruptcy and Divorce

In this economic climate, whether we are recovering from recession or not, the issue of bankruptcy on divorce or after the event often raises its head.

The recently reported case of McRoberts saw the Court consider the issue of what to do with a debt arising from an Order in family proceedings when the payer (in this case the husband) had been made bankrupt.

The Order was made by agreement on the parties’ divorce in 2003 and provided for the husband to pay to the wife £450,000 by instalments. The wife received about £211,000 of that but the husband then defaulted and was declared bankrupt in September 2006.

The wife entered a proof of debt in the bankruptcy for £244,966 (which represented the balance owed to her plus interest) but there was no money available to the creditors of the husband and the wife, therefore, was not paid anything.

The husband was discharged from his bankruptcy in September 2007 and then in 2012 the husband applied to the Court for him to be released from the debt still owed to his wife.

It is fair to say that quite a bit rested on the judgement of this case as, had the husband succeeded, it may well have opened the gates for others to try and avoid paying money due under family Court orders to their ex-spouses by way of bankruptcy.

The default position, which was accepted by both parties, is that orders made in family proceedings or under a maintenance calculation made under the Child Support Act 1991 are not discharged by bankruptcy. There is however discretion for the Court to provide release from such debts.

This discretion has been the subject of only limited case law but it is clear that is a discretion that is unlimited.

So….how will the Court decide when to use its discretion and release applicants from such debts.

Answer....The Court will try to balance any prejudice to the Respondent in having the debt released if there might be a chance of some or all of it being met and any prejudice to the Applicant in building a new life and financial future for himself and his dependents if the debt were to remain.

It is the Applicant that has the burden of proof – i.e. it is the Applicant who must satisfy the Court that there will be prejudice to him and that, as such, the debt should be released.

Mr McRoberts -

1.   suggested that the initial order of the family courts was in fact an obligation to pay maintenance to the wife (worded as an order for a lump sum in instalments) and that it should be viewed by the Court as a maintenance obligation or at the very least a lump sum payable by instalments, both of which can be varied under matrimonial legislation.

2.   argued that the variation should and could be done by the Court hearing the current application under their discretionary powers

3.   suggested that as the order was in fact maintenance, disguised as a lump sum by instalments, the arrears of maintenance over 12 months old could not be enforced by the wife without the Court’s express permission

4.   suggested that the length of time that had passed with the wife not seeking to enforce the order against the husband leant towards the debt being released

5.   and finally….. suggested that if the debt was released at this stage, it would not prejudice the wife because in the event that the husband had significant capital or income in the future, the wife could apply in the family courts for financial provision because the “Clean Break” (you’ll remember that from an earlier post!) that the order had provided for had no effect until the terms of the initial order had been met and they had not.

Mrs McRoberts -

1.   pointed out that the Matrimonial Causes Act (under which many family financial matters are determined) provided specifically for lump sum orders by instalment independent of any suggestion that those types of orders are “maintenance orders”

2.   pointed to the order itself, which said that the entire lump sum was to become payable on default of any instalment. As the husband had defaulted in payments, the debt was clearly now  all due as a lump sum and, as such, could not be varied under matrimonial legislation

3.   and finally…. pointed out that ,in the event that the debt was released, whilst the wife could apply in the future for financial provision such an application would only be judged on her needs at the time and would not reflect her interest in the previous marital property - which of course the award of £450,000 in the initial order did.

The court felt that the initial order was for a lump sum and that, as such, the order could not be varied.

In any event, the Court was clear that what the Insolvency Act did not allow the Court to do in these circumstances was to review the merits or fairness of the initial order or debt. That was so even where the circumstances of the case or parties have changed so that a review of the initial order might be appropriate.

In the McRoberts case this was relevant as the wife had been successful following the divorce and was at the time of judgement in a more secure financial position than the husband.

The husband did not set out the details of any future enterprise or business that would be affected if the debt remained and no special reason why the debt remaining would prevent him moving forward.

Lessons –

Be aware that a change in circumstances leading to bankruptcy will not clear debts or obligations under previous family court orders.

Be aware that even where the debt remaining seems “unfair” in the circumstances, the Court will not use Insolvency legislation to vary or review the debt.

Inheritance & Divorce

Divorce and the financial negotiations that ensue are already difficult creatures for clients to have to face in the aftermath of a separation but add to that inherited assets or wealth and you have a more complicated situation.

Leaving aside the added emotion that comes from the feeling that money or property handed down from parents or family members is at risk of going to your ex-spouse, how those inherited assets are dealt with by the Court will also be up for discussion.

What is clear from case law is that inherited assets or wealth are “non-matrimonial” by their nature. That distinguishes them from “marital assets”, which are those accrued during the marriage by the effort of one or both parties jointly and commonly include the former marital home, savings, pensions, investments etc. etc.

There may be arguments of course that some assets though accrued within the marriage were built as a result of a special or stellar contribution from one party alone – that I leave for another day!

The importance of distinguishing inherited assets as “non-matrimonial” is that this class of assets is not subject to the normal “sharing principle” that marital assets are i.e. there is no entitlement by one spouse to an equal share of the other’s non-matrimonial assets.

Sounds great! Surely that means my inheritance is safe!

If all in family law were that clear cut the Court wouldn’t have the wide discretion that it does and litigants in person would be in a much better position.

The fact is that whilst the Court has been clear that inherited, non-matrimonial property is not subject to the normal “sharing principle” it will not be discounted entirely.

Firstly, we must look at whether there has been any “mingling” with marital assets i.e. part of an inheritance used to pay off the mortgage on the marital home or purchase the marital home outright. Any money mingled with a marital asset (which the marital home is, however it was purchased) has the effect of diluting the “non-matrimonial argument” and the payer may have to accept that those monies have been taken into the “pot” for sharing (in which case he/she may have to rely on arguing that their greater financial contribution should give them more of a % settlement).

If inherited monies have been kept separate and apart and identifiable i.e. in separate savings/investment accounts then the Court may also look at the timing of the inheritance and whether the family has been used to drawing any income from the assets, in the case of investments or shares.

Ultimately, the Court will come back to look at the needs of the parties. Even if you have been successful in establishing that assets are inherited and therefore non-matrimonial the Court will invade those assets if that is the only way in which the needs of the other party can be met.

This was very recently evidenced in the case of YvY, in which the husband had a landed estate worth about £26m. The marriage was 26 years long. The wife was awarded 32.5% of the assets which the Court felt fairly met her needs. The Court made comment about sharing and felt that, taking into account the origin of the wealth, the award that they had settled on met not only her needs but also was fair in terms of any entitlement to share.

In the end, the needs of the parties tends to trump all other arguments and this recent case shows that, even in big money cases, needs arguments can be key to settlement.

To give clients the best possible chance (absent any post-nup or pre-nup agreements) the advice must be to keep any inheritance separate and apart and try not to have recourse to it to fund family life – not sure how feasible that is within the context of a marriage! – and accept that, whatever steps are taken, if it is necessary to fairly satisfy the needs of the other spouse on divorce it will be used.

I do wish for my clients that I could say “yes, you’ll be able to keep all of that” or “no, that will have to be shared” and the proposal that marital finances on separation should be resolved by applying a formula sounds appealing to those who crave certainty.

..…the difficulty is, and probably always will be, how to legislate to provide certainty whilst ensuring a fair outcome for all, given the diversity of circumstances surrounding family structures and wealth and the vast differences that there can be in arguments about “needs”.

Ultimately, the Court retains its discretion as regards inherited wealth and assets and the way in which it takes such assets into account in any particular case so there can be no absolute certainty.