Getting Divorced in the UK: are assets divided 50/50?
Wednesday, February 15, 2017
The Dilemma of Sharing v Needs: two of the bases upon which financial matters are decided in divorce cases.
In X v X (Application for Financial Remedies Order) (2016), reported in 2016, the court turned their mind to the difficult act of balancing these two approaches, namely whether the case should be decided on a needs basis or a sharing basis and the tension between the two.
There was a secondary issue but an important issue as to how the assets were to be valued. This really broke into two parts. The first was whether the Husband, who was one of several beneficiaries under a trust, had to bring these trust assets into the pot for the financial award. Secondly, whether the court should discount shares held by the Husband and the trust in a company on the basis that he was of unique importance to the company.
The Husband’s position was that the court should adopt a needs approach, so that the Wife would receive only an amount to enable her to meet her needs.
As a secondary argument, he said that if the court preferred the sharing approach so that the Wife would receive a percentage not linked to her needs necessarily then it should take into account some factors to reduce that percentage, namely his pre-marriage wealth, his genius enabled him to generate exceptional wealth, his work after separation to increase the value in the company and his exceptional contribution to the children’s wellbeing whilst the Wife battled alcoholism.
Interestingly, the Wife accepted that the history of the case justified a reduction in her award from a 50% equality, but said she preferred the needs approach as she thought this would lead to a bigger payment to her. Both were in their mid-40s at the time of the trial, having married in 1999. The children were in their mid-teens.
In terms of history, the Husband after University went straight to an investment bank until 1999 when he set up the company. They married. His income was about £1.4m a year by then. He was told that he was getting $1m from his father in 1996 and he actually received it in 2002.
The Wife had no formal qualifications, having left school at 16 and gave up her job in 1997, as she was spending time with her husband, who was then based in Hong Kong.
In February 2000, the Husband and two other former colleagues of the bank set up business to exploit one of his ideas. In that year, he purchased their first home for approximately £2m from his savings and earnings and a mortgage of over £800,000. He also created a British Virgin Islands trust which came to own most of the shares in his company.
In 2006, the Husband bought the final home for £7.7m and a chalet in Courchevel for €2.85m.
The Wife said her alcohol problems started in 2007, the Husband 2003.
In 2008 the Husband’s father created a second trust and the first trust sold all the shares in the Husband’s company to the second trust in return for a loan of £26.1m, which over time was reduced to £612,000.
At trial, the Wife’s liabilities exceeded her assets. She had a loan from a family member of £700,000 and a litigation loan of £575,000 and unpaid costs of £700,000.
The Wife valued the family funds at trial at £41.5m, the Husband at £15m. They had different formulae for calculating the values of the shares and the Husband discounted the trusts
When the question arose as to whether the trusts were assets of the Husband to be taken into account in the divorce, the Husband’s father said that it was his intention when he gave money for the whole of the extended family, not merely the family of the Husband, to benefit from the creation of the second trusts. The court accepted this.
The court also decided that it must assess the likelihood of the assets being received or available to the Husband so they heard from the trustee and decided it was most likely the trust funds were a resource which would be made available to the Husband if he needed them.
The court heard evidence as to what discount was to be applied to the company shares and in the end, having heard expert evidence, allowed a discount but not as low as the Husband argued.
The court said that the Husband’s long term investment plan shares were only available to the Husband due to his employment at the company he built up during the marriage and therefore they were in the pot, but said they were built up at a time when the marriage had broken down and so halved their value.
In the end, the court assessed the marital pot at almost £37m.
Even on such an exceptional career as the Husband had, the Judge still found that this was not a case where a special contribution had been made by his genius so did not further reduce the Wife’s claim on those grounds.
But the court did say that there had been significant financial endeavour by the Husband after the separation, which it would not be fair to ignore and therefore reduced the Wife’s award accordingly.
The court adopted a sharing approach, but ordered that the Wife receive 37.5%, or almost £14m.
The court confirmed that they could not fetter a trustee’s discretion over the second trust but looked at it as a resource and took evidence from the trustee and included it in the asset base at the date of the hearing.
So this confirms the approach taken by the judiciary, that even in high value divorce cases they are prepared to look at needs as a basis for the final award.
In this case, they decided that sharing was the correct approach, but discounted the amount from 50% to 37.5% of the overall assets based on the principles set out above.
If you look at our last posting in relation to needs and sharing, there is no clear rationale in either of these cases to point practitioners or clients to say why a wealthy family will be divorced on the basis of the needs of the other spouse or on the basis of sharing.
It therefore makes it incredibly difficult to advice clients as to the likely outcome will be until the judiciary set out clearly and precisely at what point any case turns one way or another.