Hard, Soft, or Cynically Manipulative?: P v Q (Financial Remedies)  EWFC B9
24th February 2022
Final hearing involving assets of c.£6m, in which HHJ Hess summarised the principles applicable to loans from family members.
W (48) and H (45) began cohabiting in 2005 and married in 2006. They had two children; T (11), and U (10).
The parties purchased a family home in London in joint names with a joint mortgage in 2010.
In 2016 the entire family moved into rented accommodation in Germany. A German court order was made in October 2021 which secured that the children’s primary home was in Germany.
Also in 2016, the parties jointly set up and developed “XGmbH”, an energy business based in Germany. The business was a success and the parties sold it to Y Ltd, a larger energy business, in 2019.
Both parties acquired valuable shares in Y Ltd as part of the buyout deal and both were employed by Y Ltd, H as the CEO of the German business (based in Germany) and W as Chief Product Officer (based in both Germany and England).
The parties broke up during the take over.
In October 2021 W ceased to be employed by Y Ltd and enrolled on a MSc at LSE. The result was that H resided in the rented property with the children in Germany, whilst W lived in the family home in London.
The parties had assets of c.£6m; W and H had c.£2.4m in funds respectively; had an additional pension fund of c.£370k; and family home in London had a net equity of c.£870k.
Whilst most of the figures in the case were uncontroversial, His Honour Judge Hess (“the judge”) had to consider the extent to which assets affected by the respective transactions between each party and members of their own family should be included on the asset schedule.
The following picture emerged:
- W’s initially asserted that H had given his sister £25,000 to which she was not entitled and that this money should be added back. W withdrew this assertion upon hearing h’s explanation.
- W also asserted something similar in relation to F’s father. However, the judge found that W had not established, to his satisfaction, that H’s father was holding money for H and rejected W’s claim.
- H’s mother, R, had sold her business for £2m in 2007. In 2010 she advanced £150,000 to each of her three children to help them with their respective housing costs. No documentation was drawn up contemporaneously or later to record the terms of the advance, and there was no indication that tax planning advice had been sought at the time. No repayment was ever demanded, nor were there any discussions about the circumstances in which repayment would or might be expected. In her oral evidence, R said that she could not envisage pursuing the loan debts and that, in the event they were not repaid, she would simply rearrange her will to reflect that any child who had not made any repayment had enjoyed the benefit of the unredeemed loan.
- In June 2020 H, without any demand from R or reference to W, paid £150,000 to his mother. He argued that this money should not be included on the schedule. W claimed the payment was a cynical and manipulative device.
- In 2004, prior to the parties meeting, W received €30,000 from her father, S, to enable her to fund an MBA. W relied on a contemporaneous document which recorded the arrangement as “an interest free loan” for which “a date for repayment has not been set" and that the arrangement included the term that “as long as the father does not demand any extraordinary urgent repayment, the daughter will repay the loan back at her own discretion”.
W did not make any repayments over the years, and claimed to have “completely forgotten” about the liability. W claimed she did not expect her father to pursue the debt, but felt that he could and that she was raising the point in view of the points taken by H in relation to his mother.
Hard and soft loans
In neither instance had either party produced persuasive evidence of the intention to give- the animus donandi- in the respective advancing parent. As such, the judge accepted that, on the face of it, both of these transactions were loans which could, in theory, be enforced.
“In the family court, however, that is not the end of the matter because the inclusion or exclusion of a technically enforceable debt in an asset schedule can depend on its softness/hardness”. 
Although a somewhat “elusive”, the judge derived the following principles from the authorities [at 19]:
- There is not any hard or fast test as to when an obligation or loan will fall into one category or another, and the cases reveal a wide variety of circumstances which cause a particular obligation or loan to fall on one side or other of the line.
- Analysis will usually target whether or not it is likely in reality that the obligation will be enforced.
- Factors which on their own or in combination point the judge towards the conclusion that an obligation is in the category of a hard obligation include (1) the fact that it is an obligation to a finance company; (2) that the terms of the obligation have the feel of a normal commercial arrangement; (3) that the obligation arises out of a written agreement; (4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings; (5) that there has not been a delay in enforcing the obligation; and (6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.
- Factors which may on their own or in combination point the judge towards the conclusion that an obligation is in the category of soft include: (1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship; (2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement; (3) there has been no written demand for payment despite the due date having passed; (4) there has been a delay in enforcing the obligation; or (5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations.
- It is for the judge to determine, looking at all of these factors, and maybe other matters, what the appropriate determinations to make in a particular case in the promotion of a fair outcome.
Applying the principles
Applying the above principles to the present case, the judge concluded:
- The debt owed by W to her father was very much at the soft end of the scale. It seemed most unlikely that she would be required to make any repayment, especially as she had forgotten about it until January 2022, despite the existence of a contemporaneous loan document.
- The debt owed by H to his mother also fell very much onto the soft end of the scale. The judge was satisfied that H and his mother had been quite content to leave things be without any repayment, until the intervention of the argument on divorce. It would not be right for the judge to raise H’s debt to his mother to hard debt status just because he had repaid it. This would reward and encourage manipulative behaviour.
This was not a case in which the issue of spousal maintenance arose. Instead, the judge took the fact that W was taking a short period to re-establish herself into account when alighting on an overall fair distribution of capital.
Both of the parties’ offers significantly departed from equality in their own direction; H proposed a capital division of 61/39, whilst W proposed a 58/42 split.
W tried to justify the departure from equality on the fact that she was currently unemployed, and that she would have the additional cost of travelling to Germany to be with the children. Additionally, H’s position was more secure.
Whilst there was some merit in these arguments, the judge found that W, on completion of her studies, was likely to secure a position with a salary of c.£90k-£110k. With such an earning capacity, the judge did not think her arguments could justify a departure from equality anything like the asserted level.
H’s proposed division of assets left him with an asset pool very much dominated by shares in Y Ltd (in contrast to W’s receipt of the secure bricks and mortar of the London family home) and that this leaves him at substantial exposure to risk of the potential vagaries of the international energy market).
The judge considered the principles ser out in Wells v Wells  EWCA Civ 476 and, in particular, to Moylan LJ’s judgment in Martin v Martin  EWCA Civ 2866. He considered these in relation to the specific facts of the case:
- W’s wealth (albeit to a lesser extent than H) will also continue to be heavily reliant on the share price of Y Ltd.
- It is H’s deliberate choice not to seek a sale an equal division of the net sale proceeds of the London family home to ameliorate the problem he has.
- The judge had formed the impression that H took an optimistic view of the future of Y Ltd. Of course, that optimism may be misplaced, and H could turn out to be another Mr Myerson, but on the other hand, as the then Mr Mostyn QC argued in Myerson v Myerson what has soared may plunge and what has plunged may soar again".
- A transfer of shares from W to H would trigger an immediate tax liability- H’s tax liability would remain latent whilst some of W’s tax liability will become immediately repayable.
Overall, the judge reached the conclusion that the arguments for a departure from equality should be treated as broadly balancing each other out.
The judge took the view that a fair outcome would be as follows:
- The family home in London to be transferred to W who should commit to releasing H from the mortgage, failing which (within two years) the property should be sold and 100% of the net proceeds paid to W.
- H to take over the benefits and obligations of the German rental property, and indemnify W against any liabilities arising from the rental.
- W to transfer 20,000 of her Y Ltd shares to H.
- There to be a 50% pension sharing order against H’s pension.
- Clean break.
On the basis of the above, the overall capital division was 50.1% to W and 49.9% to H.