Rupert Chapman

Conduct in Needs-Based Financial Remedy Cases

The issue of conduct is one often raised by litigants in financial remedy cases. The court’s treatment of it, however, is often not what the parties would wish it to be, often because the court considers the parties’ needs to be the guiding principle for consideration – one that is thought to ‘trump’ all other issues. In the recent case of R v B and Capita Trustees [2017] EWFC 33 Moor J took issue with this approach.

The case involved a 15-year relationship where all the assets (around £3.5 million) were in the wife’s name. The wife was an artist and had an interest in various dynastic trusts, on which the court did not place a value. The parties had separated in 2005 and the wife petitioned for divorce in 2010. The wife’s assets largely derived from a share in a family business set up by her father in the 1950s. The husband, however, had become involved in the running of the business during the relationship and had spearheaded a restructuring that involved the creation of various trusts in Jersey, one of which was for the sole use of the wide and the children and was a post-nuptial settlement within the terms of the Act. He continued in this role after separation.

That role came to an end when the CEO of the company discovered that H had incurred liabilities of £22 million in the business. There was a further dispute over the funding of the purchase of a property in France, intended as a hotel development, and over monies provided by the wife to her new partner. The litigation was extensive, drawing in the parties’ adult children and including a lengthy trial on the preliminary issue of the ownership of various assets.

It was agreed by all parties that this was a needs case given the source of the assets, but each party made allegations against the other; the husband alleged a wanton dissipation of assets to her partner, while the wife alleged that the husband had incurred huge liabilities either by fraudulent or incompetent mismanagement of the business, as well as litigation misconduct.

Moor J, in a lengthy judgment handed down after hearing the parties’ evidence, considered the role of conduct in general, and particularly in needs cases. He held that;

  • As had been established in previous cases, including Miller/McFarlane [2006] UKHL 24, conduct would be relevant in only a few cases, and only where it was both obvious and gross.
  • The burden of proof is on the party seeking to allege conduct, and the standard of proof is the usual civil standard. The seriousness of the allegation makes no difference to the standard of proof, and the inherent probabilities are merely something to be taken into account.
  • The wanton dissipation of assets by one party, however, would not be ignored. Applying Martin v Martin [ [1976] Fam 335 ‘A spouse cannot be allowed to fritter away the assets by extravagant living or reckless speculation and then to claim as great a share of what was left as he would have been entitled to if he had behaved reasonably.’ The Judge held that ‘if a spouse has created unnecessary debt or incurred unnecessary liabilities, this detracts from his or her contributions as well as meaning that the assets have been reduced. Moreover, provision needs to be made for liabilities that have not yet been discharged’ (citing Charman v Charman [2006] EWHC 1879).
  • Conduct was not only an issue for sharing cases, but was relevant to needs cases as well. For example, the conduct might be such as to prevent the court from satisfying the needs of both parties. In such a case, the court ‘must be entitled to prioritise the party who has not been guilty of such conduct’ (para 85).
  • In doing so, the court might reduce the award to the offending party from the standard provision of meeting their reasonable requirements generously assessed to ‘something less’. While the issue should not reduce a party to a position of real need (unless there is no alternative), it could be relevant to the level of need to be met. By implication, needs would be assessed in a more parsimonious way where that party is guilty of conduct which could not be ignored.
  • Where a party adopts a litigation strategy ‘so extreme that it would be inequitable to disregard it’ the way he had conducted proceedings could be reflected in the award made to him even in a needs case (applying M v M (Financial Provision: Party Incurring Excessive Costs) [1995] 3 FCR 321). In most cases this should be reflected in a costs order, but in an exceptional case the award itself could be effected.

The Judge found that the husband was a liar in several respects. While he had made contributions to the marriage that were significant, including through his work in the business, he had engaged in deliberate and fraudulent deception in hiding two loans of more than £7 million from the wife and her family, through his general management of the business and of his own finances. He had failed ever to declare any income tax to HMRC, but rather he had used the family business to fund his lifestyle, taking whatever he needed from wherever he could get it ‘regardless of the ownership structure’. His conduct was clearly so severe that it would be inequitable to disregard it. The wife, on the other hand, had been reckless in her dissipation of assets to her partner, which was not conduct, but rather a significant liability set off against her significant contributions through family money. The result was a potential liability to the business and trusts of between £9 million and £12 million, largely in tax liabilities incurred because of the parties’ (mostly the husband’s) cavalier treatment of the assets.

The husband was given a capitalised maintenance fund of £839,000, based on half the income that the wife would receive each year from the family business (she received around £100,000 net pa). There was to be no pension provision even though the husband had no state pension, having never had a national insurance number or paid any tax – the wife should not fund his misconduct. He would receive £411,000 to pay some of his personal debts of £1.35 million (excluding £950,000 in costs), and no other capital for his housing needs – the judge considering that because of his conduct there was insufficient to meet both parties’ reasonable needs. The wife retained the balance and all of her interests in the various trusts.

The judge considered the costs to be completely out of control and the litigation to be ‘financial suicide’. The preliminary issue hearing itself had ‘achieved nothing apart from the waste of over £2 million in costs’, caused entirely because of the husband’s irresponsible conduct of the family finances. The husband’s overall legal costs were £3 million.

The lesson of this case is principally that where a party is guilty of gross and obvious conduct, particularly where it substantially reduces the available assets they can expect either to have their reasonable needs assessed at the lowest end of the spectrum, or to have them unmet where the other party’s needs can only be met in this way. In exceptional cases, this will extend to litigation conduct as well as more general financial conduct.

Rupert Chapman

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