Spending 94% of your liquid assets on lawyers: the worst example of disproportionate and ill-judged litigation? RM v TM [2020] EWFC 41

The husband (“H”, 53) and wife (“W”, 50) had been married for nearly 22 years and had three children together, aged 21, 19 and 14 at the time of the hearing. Since their separation in June 2018, they had embarked upon ‘ruinous and recriminatory financial remedy proceedings’ [1]. There had been 13 oral hearings, including two FDRs and an aborted five-day trial, and four applications by H for permission to appeal disposed of on paper by the High Court and Court of Appeal. The only liquid asset of any substance was the proceeds of sale of the parties’ family home (“FMH”), in the sum of £630,000. The combined legal costs were £594,000 – 94% of the proceeds of sale from the FMH. The difference between the parties’ offers was only £191,000. It was ‘hard to express what a calamitous waste of resources’ the litigation was [3].

As a result of the parties’ debts, in particular their legal fees, ‘the true net liquid wealth is virtually nil’ [2]. Nonetheless, Robert Peel QC (“the judge”), sitting as a Deputy High Court Judge, had to find a way to rehouse both parties.

Background

The parties had a ‘very comfortable’ lifestyle, and spent in excess of £100,000 per year [10]. However, to an extent their lifestyle was underpinned by W’s parents, and H said that for a number of years the parties had lived beyond their means.

Both parties were connected with two companies founded by W’s parents: A Ltd and B Ltd. W had been a director of A Ltd since 1994, when her parents gifted her a 24% shareholding in it. She had worked there since then, albeit with varying degrees of involvement due to her commitments to bringing up the parties’ children, and she was never involved at a strategic or operational level. She also had a 24% shareholding in B Ltd, but was never a director of, nor employed by, that company.

In 2005, H switched career from the banking sector and became the Managing Director of B Ltd, a position he held until the end of the marriage. In July 2018, he resigned. An inquiry by B Ltd revealed, it was alleged, a number of misdemeanours by H while he was Managing Director. His resignation was met with a letter from the company stating an intention to investigate ‘serious concerns about your own conduct’ [12]. In October 2018, H was arrested after B Ltd complained about his alleged financial misfeasance. However, although the police inquiry was still live at the time of the hearing, H had not yet been charged.

The companies

It was clear that the dispute between B Ltd (and thereby W’s family) and H ‘became a proxy war in the Family Court’ [12]. Many of the applications and appeals that so swelled the parties’ legal bills were related to the companies. H argued that W’s business interests had become matrimonial assets during the marriage. He made several applications and appeals to have an SJE value those interests, which were originally refused by a judge who was persuaded that they were were non-marital and illiquid. H then, unsuccessfully, applied for permission to appeal and, unsuccessfully, applied for a valuation again in the directions phase of the FDR, before one was eventually ordered at a directions hearing before the first, aborted trial (the right decision according to the judge in this hearing).

There was also much litigation concerning W’s allegations about H’s conduct while at B Ltd. At the pre-trial review, it was made quite clear that only matters relating to the children’s money (which H was alleged to have misappropriated) fell within the pleaded conduct case to be addressed at trial. However, at trial, W argued that H’s alleged misconduct was a general factor to take into account if her business assets were wholly or partly matrimonial in nature and were subject to the sharing principle. The judge appeared to accept W’s argument and on the last day of trial made orders for further inquiry into H’s alleged financial misconduct. H then made several appeals.

In fact, at the parties’ second FDR, H agreed not to pursue a claim that W’s business interests were matrimonial, and W agreed not to rely upon conduct in respect of either H’s role at B Ltd or the alleged misappropriation of the children’s money.

Liquid assets and liabilities

Apart from the proceeds of the sale from the FMH, there were no liquid assets of significance. However, there was a ‘dismaying level of legal costs indebtedness’: W’s litigation loan and unpaid legal fees totalled £214,830, and H’s £251,051 [45]. Both parties also argued that loans from family members should be taken into account as debts, but the judge treated these as soft loans because there was no evidence that repayments would be demanded. However, he did treat H’s credit card liabilities in the sum of £122,000, largely accrued during the marriage, as hard debts and pointed out that ‘until they are cleared, H will not be able to take out a mortgage’ [48]. He also treated a £33,000 contribution W’s brother had made towards reducing the mortgage on the FMH as a debt to be repaid, as otherwise the parties would have benefitted from a windfall increase in the value of their property, which would be unfair to W’s brother.

In terms of illiquid assets, both parties had pensions: H’s was worth just over £500,000, while W’s was worth just over £229,000. The judge declined to treat W’s interests in A Ltd and B Ltd as liquid assets on the basis she had a minority, 24% holding in each, and there was no plan to sell the businesses and no meaningful liquidity within them. However, he did take the view that W’s shares did ‘have a value and therefore represent a resource in W’s hands to be taken into account, albeit unlocking such value should be viewed on a long-term basis’ [55]. In total, ignoring any minority discount because the businesses bore ‘all the hallmarks of a quasi-partnership’ [59], W’s business interests after CGT came to £253,800 in A Ltd, and £66,048 in B Ltd. The judge also included £11,000 which W was owed by B Ltd as an illiquid asset.

Overall, the parties’ total liquid assets came to £10,791, and their illiquid assets came to £1,220,904.

Income

H worked at a plumbing and heating company and earned £32,000 pa gross. W received £36,500 pa as basic income from A Ltd, plus medical insurance worth £4,877 pa. From 2014/15 until 2017/18, she had received dividends or bonuses on top of her basic income, but these had disappeared as A Ltd’s turnover and profit had deteriorated. The judge concluded that ‘W has greater prospects than H of receiving measurably higher income, but not in the immediate future’ [64].

Family assistance

The judge asked whether the court should inquire into the willingness of the parties’ wider families to assist one or both of them. He distinguished between two categories of situation:

1. Where a spouse has an interest in an asset together with other family members, and the court frames its order so as to ‘judiciously encourage’ the other family members to assist in extraction by the spouse of value referable to his/her interest (the Thomas v Thomas doctrine).
2. Where family members, who are gratuitous donors, are willing to make funds available by gift or loan to the relevant spouse, but where that spouse has no legal or beneficial interest in those funds.

The judge declined to judiciously encourage W’s family to enable W to extract funds from the businesses in which she had an interest, since her family had never provided financial assistance through business arrangements. Rather, ‘such assistance has been from their personal resources’, and therefore fitted more neatly into the second category [67].

However, since ‘the liquid assets are so modest that there is a real possibility that one or both parties may be unable to re-house’, the judge considered to what extent the wider families might ‘come to the rescue’ [69]. He applied the following principles, listed at [68]:

• i. There is no obligation on a third-party family member to provide funds from their personal resources.
• ii. Wider family members may show themselves prepared to assist, willingly and under no pressure from the court to do so, either in meeting specific needs personal to the spouse in question or in making a payment to the other spouse to assist in bringing financial remedy proceedings to a conclusion. Evidence of such willingness must be clear: ‘[m]ere speculation, or optimistic assumption, is insufficient’.
• iii. The court should not place pressure on the third party, who is perfectly entitled to decline to provide support.
• iv. If the evidence shows that third party family members will likely provide financial support to one or other of the spouses, ‘that, in my judgment, constitutes a resource that a court is entitled to take into account. To do otherwise would be artificial’.
• v. In terms of evidence, the judge made the following observations:
  1. Usually the court will look to see whether bounty has been provided in the past, in what quantity, and over what amounts of time, as evidence of a pattern.
  2. The court can also look at specific offers of long-term future financial support made to a spouse before or after marital breakdown.
  3. Offers of interim provision to tide the spouse over with assistance towards legal fees and income needs during litigation ‘will be of very limited evidential relevance to the question of whether long-term future support will be forthcoming’.
  4. Absent clear evidence which establishes (1) a track record of historic payment and/or (2) reliable representations of future subvention, the court will be hard pressed to be satisfied of this class of resource.

The judge found ‘there is clear evidence that W’s family will assist her financially rather than see her (and the children) unable to rehouse appropriately. Her parents have been generous to W in the past, in particular with financial support for the children’ [70]. Since W’s open proposal left her unable to buy a property, the judge did ‘not consider that she would have made that proposal if she truly thought there would be no assistance forthcoming from her family who are clearly of reasonably substantial means’. He said he was ‘quite sure that her wider family will not see her homeless’ [71]. However, there was insufficient evidence to conclude H could rely on any financial assistance.

Needs

Both parties agreed that a clean break was appropriate and desirable, and accepted that their respective incomes would have to be enough to meet their budgets because ‘[t]here is no scope for periodical payments either way’ [73].

The most pressing need of the parties was housing. The judge considered that W’s need was greater, at least in the medium term, because of her primary responsibility for the parties’ youngest child and the need to provide a base for the university age children. He concluded that W’s housing need was about £375,000 and H’s about £250,000, each including costs of purchase.

The judge commented on M v B (Ancillary proceedings: lump sum) [1998] 1 FLR 53, where Thorpe LJ said ‘in any case where there is, by stretch and a degree of risk-taking, the possibility of a division to enable both to rehouse themselves, that is an exceptionally important consideration and one which will almost invariably have a decisive impact on outcome’. The judge thought that Thorpe LJ’s dicta, ‘[a]lthough not an iron rule…apply self-evidently in the majority of cases, and certainly in this one’ [75]. This was despite Lord Hoffman saying in Piglowska v Piglowski [1999] UKHL 27 that to cite M v B ‘as if it laid down some rule that both spouses invariably have a right to purchased accommodation is a misuse of authority’.

After the £33,000 owed to W’s brother was deducted from the proceeds of sale, H would receive £377,000 and W £220,500. The net effect of this was that H had liquid assets of £5,423 after repayment of his debts. He had a mortgage capacity of £128,000, but would have to rent a property until October 2021 when he would turn 55 and be able to draw down £125,000 tax-free from his pension.

W would be left with liquid assets of £5,368. She had a mortgage capacity of £132,000, which was insufficient to buy a property without family assistance. However, the judge said ‘I am satisfied that her family will ensure that the shortfall will be made up to buy suitable accommodation’. He added ‘[l]est there be any doubt, my confidence is based on a finding to that effect; it is not based on speculation or assumption, nor am I engaging in judicious encouragement’ [81].

Costs

The judge declared that ‘[n]either party is entirely free from blame in the conduct of the litigation’ [94], although he said that H was ‘more blameworthy’ [95]. Consequently, he was satisfied that ‘there is ample justification for me to make a modest costs order against H’ [97]. H was ordered to pay £15,000, to be set off against a costs order made against W in January 2020 for which the sum payable was likely to be assessed at c. £15,000. This would leave the net outcome of the judge’s decision undisturbed.

Conclusion

The judge ended his judgment by referring to the litigation as being ‘self-defeating’ and observing that ‘[i]t is scarcely credible that at the end of it all, they emerge with about £5,000 each of liquid assets, having incurred nearly £600,000 of costs’. The judge said ‘[t]here may be worse examples of disproportionate and ill-judged litigation, but none spring readily to mind’ [98].

This case is a textbook illustration of the dangers that spiralling litigation can hold for litigants. It is dispiriting that in this case so much money was spent on applications and appeals relating to H’s alleged conduct and the matrimonial nature of W’s business interests, both of which were ultimately agreed before the second final hearing.

It is notable that in this case, had W’s parents not been so obviously willing to assist her to rehouse, the parties probably would not have both been able to live in purchased accommodation. Although the judge was, happily, able to find a way to achieve this, it is tragic that the parties burned through nearly all their liquid resources when that money could have been put towards purchasing houses of substantially higher quality than their eventual housing budgets will allow. H’s litigation loan and unpaid legal fees totalled more than the entire housing budget the judge ascribed to him.

Other cases with enormous litigation costs

Similar cases where parties spent large proportions of their assets on legal costs, to disastrous effect, include:

• ABX v SBX [2018] EWFC 81, where the parties had incurred costs of almost £1.1m between them and had total net assets of somewhere between £1.5m and £5.4m. Francis J said the costs were ‘wholly disproportionate to the size of the assets’ [2].
• JE v ZK [2015] EWHC B87, where the parties spent £123,819 between them on costs and the total capital was £345,686.
• MF v SF [2015] EWHC 1273 (Fam), where the parties incurred costs of £980,000 and the total assets were worth £2.6-3 million.
• J v J [2014] EWHC 3654 (Fam), where the parties’ total litigation costs were £920,000. This represented a third of all the assets the parties had built up over 18 years.
• US v SR [2014] EWHC 175 (Fam), where the parties spent just under £1 million on costs and had net liquidity of c. £4 million.
• Chiva v Chiva [2014] EWCA Civ 1558, where the total capital pot for distribution was £415,659 but the wife had spent £174,000 in legal costs and the husband £60,000.
• Seagrove v Sullivan [2014] EWHC 4110 (Fam), where the parties had spent £1.3 million on costs and were only arguing about each of them receiving a further £500,000.
• Kavanagh v Kavanagh (2012, unreported), where the parties spent nearly £1 million (£980,000 according to the wife) on legal costs as a result of which the FMH, which was worth c. £3m, would only have equity of c. £200,000 to be split between the parties. HHJ Million said ‘The ship of marriage may founder, but this couple have driven theirs full tilt onto the rocks. They wrecked the ship, then turned their attention to the lifeboats’.

Whether RM v TM really is the worst example of disproportionate and ill-judged litigation is a matter of opinion, but it must certainly be one of the worst given that such a large percentage of the parties’ liquid assets was paid to their lawyers.