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The Court of Appeal recently gave judgment in XW v XH [2019] EWCA Civ 2262, an appeal by the wife (‘W’) against the financial remedy order made by Mr Justice Baker (as he then was) on 21 December 2017 (see XW v XH [2017] EWFC 76). He had ordered that W should receive capital resources which, when added to her own assets, would give her approximately £152m – a significant sum, but equal to only 29% of the parties’ combined capital resources of £530m. £115m of the W’s £152m award came from H’s shareholding in a company, and was referable to 25% of the growth in value of those shares during the marriage (based on the difference between the value of the shares at the start of the marriage, per expert evidence, increased by indexation; and the proceeds of sale realised when the shares were sold at the end of the marriage. Baker J had identified four factors which he believed justified a departure from equality:

  • That the parties had to a great extent kept their financial affairs separate during the marriage;
  • That the bulk of the parties’ wealth had been created through the husband’s (H) business activity and thus were ‘business assets’;
  • That there was ‘latent potential’ in H’s company at the time of the marriage which was not reflected in the expert’s valuation and this should be taken into account; and
  • That H’s contribution to the growth of his business assets could be considered a ‘special contribution.’ 

W appealed on six grounds:

  • How the parties managed their financial affairs during the marriage should have no impact on the division of the marital wealth;
  • H’s so-called ‘business assets’ should have been shared equally between the parties given that they were built up during the marriage and were thus marital property;
  • Baker J had erred in finding that the company had latent potential;
  • Baker J had erred in finding that the H had made a special contribution, in particular because he had not balanced H’s contributions against W’s when making this assessment;
  • Baker J had erred by failing to quantify how each of the factors which he stated justified a departure from equality impacted on the overall award; and
  • Baker J had erred in determining that W should not receive a share of H’s restricted stock units (‘RSUs’) and stock options.

It was submitted on W’s behalf that Baker J should have awarded her half of the marital property of £460m, namely a lump sum of £230m, as well as 50% of H’s RSUs and options. Overall, she sought £235m.

Background

H and W married in Italy in 2008 and separated in 2015. At the date of the judgment, H was aged 50 and W was 48. They were the parents of one child, AB, who had a rare, life-threatening condition and significant disabilities. Both parents were commended by Baker J as being ‘totally devoted’ to AB; although he noted that the vast majority of his care was carried out and arranged by W.

H was the CEO of a company that he had set up with some others in the years before the parties married. After the parties married, and in particular from the period 2011-2015, the company became hugely successful. When it was sold in 2015/16, H received the equivalent of approximately £370m from the sale of his shares. Due to investments and exchange rate changes, by the time of the Final Hearing before Baker J, the funds were worth some £500m gross, or £490m net of tax.

W was working as an artist at the time that the parties met. She was from a very wealthy family, and was found to have received substantial support from her mother both before and during the marriage, as well as benefitting from trust funds. In all, Baker J found that W had net assets of just under £34m.

Finally, the parties jointly owned a property valued at £3.7m net.

At first instance before Baker J, W had advanced a case that she should be awarded a sum equal to half of the marital property, which she asserted included the increase in the value of H’s shares in the company since the date of the marriage. In order to determine what proportion of the shares’ value could be attributed to before the marriage, she submitted that the court should apply the increase in the appropriate share index to the value given by the expert as at the date of the marriage. This left £460m as the marital element.

H’s case was that W was limited to a needs-based claim. He submitted that she was not entitled to a share of the wealth for a number of reasons, including:

  • When the parties married in Italy, they had signed a deed of marriage which elected ‘the regime of separation of assets’ rather than community of property – further, they had maintained a separation of assets throughout the marriage;
  • The shares in the company should be considered to constitute non-matrimonial property because they had existed and been owned by H before the marriage;
  • H’s exceptional business acumen should be considered to be a special contribution;
  • The relatively short length of the marriage should reduce the scale of W’s claim; and
  • W already had her own resources.

Baker J ultimately rejected H’s case in respect of the nuptial agreement. H did not appeal this, and it was not dealt with at length by the appeal court.

Baker J stated that he started from the position that the matrimonial assets should be subjected to the sharing principle and divided equally between the parties. He concluded however that in this case, there were certain aspects which demanded a departure from equality.

On the question of unilateral assets, Baker J rejected H’s case that the duration of the marriage and the fact that the assets were generated through H’s business activities meant that the shares should be considered as non-matrimonial or unilateral assets which were not covered by the sharing principle. He held that the consensus of appellate decisions was that the circumstances in which the fact that the assets had been generated by one party during the marriage justifies departing from equality in only a small number of cases. Further, there was no authority to support the proposition that the scope for one party to acquire and retain separate property, excluded entirely from the sharing principle, extends to cases where there are children of the marriage. The facts of the present case were fundamentally different from the facts of, for example, Miller v Miller [2006] UKHL 24. To exclude so-called unilateral assets in a case such as this would fundamentally undermine the sharing principle – Baker J went so far as to say that to do so would be discriminatory.

Despite rejecting H’s argument that the shares were unilateral assets, Baker J concluded that the fact that the wealth was generated almost entirely by H’s business activities could not be ignored entirely. While it would be wrong to exclude these assets from sharing entirely, the nature and source of the assets could be taken into account in deciding how they should be shared.

Ultimately, Baker J determined that the fair outcome was one that departed from the sharing principle, and left H with a significantly greater proportion of the assets. Accordingly, he ordered that W should receive capital resources which, when added to her own assets, would give her approximately £152m, or 29% of the parties’ combined capital resources.

The Appeal

W’s appeal was allowed. Regarding the issue of special contribution (which, having been addressed extensively in Gray v Work [2017] EWCA Civ 270, was only considered here briefly) Lord Justice Moylan held that Baker J had failed to consider whether there was such a disparity in the parties’ respective contributions to the welfare of the family that it would be inequitable to disregard. This was the clear test from Gray v Work and it had not been applied. As a consequence, Baker J’s finding in this respect was set aside. Moylan LJ did offer some further guidance on special contribution, stating at [122] that in his view, ‘the search for an analysis of whether a special contribution is established should be undertaken through a relatively general, or broad, assessment of the evidence.’

On W’s first two grounds of appeal, Moylan LJ attempted to clarify the concept of so-called ‘unilateral assets.’ He set out the relevant cases, and repeated the caution echoed in Waggott v Waggott [2018] 2 FLR 406 about ‘the inaptness of undertaking a ‘detailed textual analysis of what had been said in some of the cases’ as though they were statutes.’ He also noted that the court had not been referred to any authorities in the 13 years since Miller and Charman v Charman (No 4) [2007] 1 FLR 1246 were decided in which the concept of unilateral assets had been applied to support an unequal division of assets beyond short, childless marriages. Ultimately, Moylan LJ held that Baker J had been wrong to decide that the fact that the ‘assets which grew so substantially during the […] marriage were the husband’s business assets’ was relevant to the division of that wealth between the parties, and that insofar as they were the product of endeavour during the marriage, they were marital assets which should be shared equally between the parties absent other factors. Baker J’s determination that they way that the parties had run their lives – specifically, by keeping their finances largely separate – had some bearing on the concept of unilateral assets could not stand on its own as a distinct factor.

Regarding latent potential, Moylan LJ held that Baker J had been entitled to find that part of the proceeds of sale of the shares was non-marital property to which the sharing principle did not apply. He had also been entitled to determine what proportion was not marital property other than by applying the expert’s valuation increased by indexation. It was open to him to undertake ‘a broad evidential assessment’ and to conclude that there was significant value not reflected in the formal valuation.

However, this ground of appeal was still ‘caught’ by Baker J’s error in not setting out his determination of the extent of the marital property in this case. Moylan LJ commented at [130] that ‘I would suggest that in most cases the court will be able to, and should, make clear at some stage what part of the value of the asset or assets the court has determined is non-matrimonial property… The difficulty with the approach the judge took in this case is that […] sharing applies to the marital wealth and special contribution, as a factor, impacts on the division of the marital wealth, and not on what part of the wealth is marital.’ Accordingly, the appeal court was unable to separate out that aspect of Baker J’s decision for the purposes of deciding whether or not to uphold it.

Finally, as to the issue of the RSUs and stock options, Moylan LJ held that he was not persuaded that Baker J was wrong to decide that they were ‘dependent on future performance’ and should, therefore, be ‘disregarded’.

Having allowed most of W’s grounds of appal, the Court turned to the final determination of W’s claim in financial remedies. W had not sought a rehearing, but rather requested that the Court of Appeal substitute its own fair outcome. H had proposed earlier that if W’s appeal succeeded in respect of latent potential value of special contribution, the case should be submitted for a rehearing because the points were significant and of a nature that could not be properly determined by the Court of Appeal. He accepted however that if W succeeded only in respect of the other, ‘smaller’, points, it would be appropriate for the Court to determine an alternative award.

Ultimately, Moylan LJ concluded that a full rehearing was not required. To substitute an alternative award at this stage would be in keeping with the overriding objective of dealing with cases proportionately and expeditiously. The Court were able to determine what he labelled ‘the marital property question’, and make a broad assessment. Consequently, he ordered that there be an equal division of the total marital wealth of £296.7 million. This led to W receiving a lump sum of £145 million (in place of Baker J’s £115 million) and the jointly owned property worth £3.7 million. This then gave W 34.5% of the parties’ combined wealth and left H with 65.5%, as opposed to the 28.75% to 71.25% as had been originally ordered by Baker J. 

Kate Strange, Barrister, 1 Hare Court

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