ABC v PM & Anor

This is an application made by ABC for permission to appeal an order made by Robinson DJ on 18th July 2014. The matter was listed by order of Mostyn J on 15th October 2014 on the basis that, if I grant permission to appeal, the appeal would follow. I have therefore heard composite submissions from both counsel.

The Husband is in his late fifties. He was by profession a banker but has now been ordained into the Anglican Church and is currently the Bishop of X in Y country.

The Wife is in her mid-fifties. She was, until recently, a business manager for the NHS earning approximately £40,000 pa. She is now a teacher at a school in Y country. .

They married in Y country in 1983 and have two children, now both in their late twenties.

The Husband had a successful career as a banker, including a spell at the V Bank in the USA. The parties relocated to London following political upheaval in Y country in approximately 2004. The marriage had difficulties in the 1990s but they were able to reconcile. The final separation was in October 2010.

The Wife remained in the former matrimonial home known as Z property in South-West London. It is valued at approximately £825,000. Other than the charge about which I am concerned, there were no other mortgages or charges against the property at the time of the final hearing. Subsequently, the Wife has had to mortgage the property to meet the legal fees incurred by her in these proceedings. On 23rd December 2009, the Wife caused a Matrimonial Homes Act rights notice to be entered at the Land Registry.

She issued her petition on 20th December 2010. It included a prayer for a property adjustment order. On 29th June 2011, she applied for financial remedies in Form A, including an application for a transfer of property order in relation to Z property.

She applied to HM Land Registry the same day and secured two restrictions against the title to the property. The first was that there was to be “no disposition by a sole proprietor of the registered estate…under which capital money arises is to be registered unless authorised by an order of the court”. The second was in the following terms:-

“No disposition of the registered estate, other than a disposition by the proprietor of any registered charge registered before the entry of this restriction, is to be registered without a certificate signed by the applicant for registration or their conveyancer that written notice of the disposition was given to PM at Z property [address],.”

The Wife’s application for financial remedies and transfer of property order was very heavily contested. Serious allegations of non-disclosure were made by her against the Husband.

The hearing of the Wife’s applications began before Robinson DJ on 29th April 2013. Mr Burles, who represents the Wife now, also represented her then. He had lodged a Case Summary which made her position abundantly clear. She sought the outright transfer of Z property to her amongst other orders.

I am told that the Husband did not attend on 29th April 2013 although I do not consider that anything turns on that. He did attend on 30th April 2013 and executed a charge in favour of his solicitors, ABC for unpaid costs, secured against his interest in Z property. At the time, the charge secured £40,000 but it has since been reduced by him to £13,652. It appears that counsel’s fees may have been the prime motivation for the execution of the charge although there can be no doubt that the brief fee would have already been incurred at the time the charge was executed.

It is accepted that the Husband’s solicitors, ABC knew at the time of the execution of the charge:-

It is accepted that the Wife and her legal team were not informed in advance of the intention to execute this charge. They were told on 30th April 2013. Perhaps inevitably, they indicated an intention to challenge the validity of the charge. An application was made on 23rd May 2013 to set the charge aside pursuant to section 37 of the Matrimonial Causes Act 1973.

In May 2013, ABC sought to register the charge. On 14th August 2013, the Land Registry cancelled the application as “the applicant was unable to comply with our requisitions within the time frame stated”. I have not investigated this aspect further. On 18th September 2013, the Wife registered a further restriction to the effect that the charge should not be registered except under a further order of the court.

Robinson DJ gave his judgment on 28th October 2013. He found that the Husband had significant resources in addition to those disclosed. Adverse inferences were drawn as his disclosure was found to be lamentable and not frank. The finding was that he had hundreds of thousands of pounds in offshore accounts/investments along with further undisclosed assets in Y country although not on a massive scale. The District Judge transferred Z property to the Wife absolutely. He also ordered the transfer of some further properties in Y country and ordered the Husband to pay the Wife’s costs in the sum of £167,850. The order was eventually perfected on 9th December 2013.

It is right to note in passing that, on 30th January 2014, Bodey J gave limited permission to appeal in relation to the transfer of the Husband’s home in Y country to the Wife but, on 21st March 2014, he stayed the appeal until, inter alia, the Husband paid the costs order of £167,850 to the Wife. Mr Burles, for the Wife, informed me that the Husband was represented by ABC in relation to those applications and that he must have paid the costs of his own representation involved with those applications.

The Wife’s application pursuant to section 37 of the Matrimonial Causes Act 1973 to set aside the charge was subsequently heard by Robinson DJ on 28^th March 2014. He reserved his judgment until Sir Peter Singer had given judgment in another case called J v J-M. Once this judgment was considered and further written submissions had been made, Robinson DJ handed down judgment on 17th June 2014. At an inter partes hearing on 17^th July 2014, he made the order that is the subject of this appeal. He accepted an undertaking from ABC that, in the event that the charge becomes enforceable in the future (such as following a successful appeal), ABC would not seek to enforce their charge by applying for a sale of Z property at any time thereafter. Nevertheless, he set aside the legal charge dated 30th April 2013 pursuant to section 37. He refused ABC permission to appeal. He ordered the firm to pay the Wife’s costs of the application, summarily assessed at £8,020.08 by 2nd August 2014.

The Husband had refused to waive privilege in relation to ABC’s advice to him. In his judgment, the District Judge, rightly in my view, held that no inference could be drawn against a litigant who does not waive privilege.

He then considered the test in section 37, namely:-

The District Judge was satisfied that the Husband had, at least as one of his purposes, executed the charge so as to defeat the Wife’s claim rather than use his offshore funds to pay his costs. The Husband had not rebutted the presumption in subsection (5). It was then necessary for the District Judge to turn to subsection (4). It is clear that the disposition is reviewable unless all three of the requirements of the subsection are satisfied.

There was no dispute that there had been valuable consideration (the provision of the legal services). Equally, ABC had acted in good faith. It all therefore came down to whether or not ABC had notice of the intention of the Husband to defeat the Wife’s claim.

Following the case of Kremen v Agrest [2011] 2 FLR 478, the burden of proof lay on ABC to establish that it did not have notice. The case of Kemmis v Kemmis [1988] 2 FLR 223 was authority for the proposition that the notice did not have to be actual notice. It could be constructive notice. The District Judge found that ABC did not have actual notice but the firm did have constructive notice. He therefore set aside the charge, saying at Paragraph 29 of his judgment:-

“In this case, I remain satisfied from the evidence which is before me that the solicitors knew something which should have put them on further enquiry, which would have revealed had they thought about it that the payment of their fees from the equity in Z property was in part intended to defeat the Wife’s claims. By continuing they did so at their own risk.”

The Notice of Appeal contains one single ground, namely that the District Judge was wrong to find ABC was fixed with constructive notice of the Husband’s intention to defeat the Wife’s claims.

The matter came before Mostyn J on 15th October 2014 without notice to the Wife. He directed that the application for permission to appeal be listed inter partes for the court to consider the application but with appeal to follow if permission was granted. I have been hearing the application for permission and, if granted, the appeal.

Rule 30.3 of the Family Procedure Rules 2010 provides that:-

Permission to appeal may be given only where –

In AV v RM [2012] EWHC 1173; [2012] 2 FLR 709, I held that the court was bound by Tanfern Ltd v Cameron-McDonald [2000] 1 WLR 1311. No judicial gloss should be placed on the words of the rules other than to say that “real” meant that the prospect of success must be realistic rather than fanciful.

If I grant permission, Rule 30.12 comes into play:-

Whilst in general, financial remedy applications involve the exercise of discretion, the appeal in this case raises an important point of law. I take the view that the point is, at the very least, arguable. Moreover, Mr Warshaw QC who appears on behalf of ABC referred me to a passage at Paragraph 21 of the judgment in which the District Judge, having found that ABC did not have actual notice of the intention to defeat the claim, said that ABC “must necessarily have known that the transaction was at least in part intended to defeat her claim.” I accept Mr Warshaw’s submission that this finding is contradictory to the earlier finding as it purports to say that ABC did have actual notice rather than constructive notice.

It follows that I am satisfied that the appeal satisfies Rule 30.3(7) and I should give permission to appeal. I therefore do so. This does not, of course, mean that the appeal necessarily succeeds.

The only issue in the appeal was whether or not the District Judge was correct to find that ABC had constructive notice of the intention to defeat the Wife’s claim.

In Hunt v Luck [1901] 1 Ch 45, Farwell J said:-

“Constructive notice is the knowledge which the courts impute to a person upon presumption so strong of the existence of the knowledge that it cannot be allowed to be rebutted, either from his knowing something which ought to have put him on further enquiry or from wilfully abstaining from inquiry to avoid notice.”

This was considered further by the Court of Appeal in Kemmis v Kemmis where the Husband had mortgaged the matrimonial home to release funds to support his lifestyle. The bank knew about the family circumstances and the mortgage was set aside at first instance. The Court of Appeal rejected the bank’s contention that actual knowledge was required but accepted that the bank was not put on notice of the husband’s intention to defeat the wife’s claim. Purchas LJ said at p232:-

“The basic concepts are “knowing something” which ought to have stimulated enquiry or “wilfully abstaining from inquiry to avoid notice”. Both import that the enquiry, if made, would necessarily have revealed the knowledge, constructive notice of which is to be imported. As will be seen subsequently in this judgment it is important to distinguish this position from the position where the evidence establishes a state of affairs from which the court could infer actual knowledge, which would not necessarily be acquired by the further inquiries indicated.”

He adds:-

“With great respect to Balcombe J, whether or not the step should be taken must, in my judgment, depend on whether the results of those enquiries would necessarily have given the bank notice of the intention on the part of the husband to defeat his wife’s claims for financial relief within the provisions of s37(4). In order to have this knowledge it is necessary for the bank to know that the wife was making, or was about to make, a claim for financial relief. Once in possession of this knowledge, it might, in the circumstances of this case, be difficult for the bank to avoid a finding that they should then have realised that the husband had the intention to defeat or prejudice the wife’s claims. The fact that the wife may not have any equitable or proprietary interest in the s37 application is not directly relevant, nor may I add with deference to existing authority, to the fact that the wife had or had not registered her interest.”

On the facts of Kemmis, the bank escaped a finding that they were fixed with constructive notice largely because the mortgage entered into was created long before the claims by the wife were ever launched. Purchas LJ said:-

“At the date of the mortgage, the wife was not contemplating divorce. She was content to remain in occupation of No 1 receiving support from her husband. If at that time the bank had asked her if she had an interest in the property or objected to her husband charging it by way of mortgage it must be pure speculation what her reaction would have been. For my part, I do not consider that her reaction upon the occasion when she was asked to sign the licence 3 years later and at the same time was told that the husband would not continue to support her, could be taken as a reliable indication as to what she would have done if the bank had approached her in 1980. In these circumstances, I find it impossible to say that there was any evidence upon which the judge could infer that the wife was contemplating divorce proceedings and therefore, whatever indirect motives the husband may well have had at that time, of which the bank would have had notice, one of them could not have been an intention to defeat the wife’s claims for financial relief.”

This was, therefore, a very different situation to the case here where ABC was well aware of the Wife’s application and the impact of entering into the charge, namely that the sole UK asset would be burdened by the Husband’s costs obligations. The firm was also well aware of the gross defects in the Husband’s disclosure.

The case of J v J-M was an application by a wife to set aside the husband’s disposition by way of a charge over his Bentley motor car in favour of his solicitors for his cost liabilities both outstanding and forthcoming. The Deputy Judge made the same findings as in this case as to valuable consideration, the solicitor acting in good faith and her lack of actual notice. However, he further found that she did not have constructive notice either. He said:-

“Clearly she did not regard herself at that point as in a situation where she lacked any relevant element of knowledge, nor was there any aspect of doubt in her mind about the transaction such as would have made it obvious that she should consult some third-party…therefore she could not be fixed with constructive notice of the husband’s intention by virtue of any failure on her part diligently to enquire further into the nature and effect of the proposed transaction….I have no evidence upon which I could form the conclusion that I doubt what (the solicitor) says, or indeed that I disbelieve her. And, I repeat, it is her state of mind which is the issue.”

Mr Burles for the Wife distinguishes this case from J v J-M. He points to the fact that the solicitors in J v J-M entered into the charge before the wife had made any claim against the motor car as opposed to the position here where the Wife had “explicitly set her sights on the Husband’s interest in the former matrimonial home.” The charge in J v J-M was entered into at any early stage of the proceedings, well before the FDR. As a result, the evidence of the Husband’s guilty intention and the wife’s case as to that intention was embryonic and limited. In contrast, he says, ABC’s charge was entered into on day two of the final hearing, after service of the Wife’s evidence and her counsel’s Skeleton Argument, all of which had made explicit her strong evidence of the Husband’s gross non-disclosure and her strong claim for an outright transfer of the former matrimonial home. Finally, he points to Paragraph 51 of the judgment in J v J-M where Sir Peter said:-

“The solution to this might be that in the ordinary case courts might make it clear that they would not normally exercise their discretion to set aside such transactions. That said, I have to say that in this case I would have set aside the transaction (if I had found constructive notice). For I take the view that it is unconscionable that the husband should be in a position and in effect have a blank cheque to fund his lawyers fully to the hilt of the Bentley’s value. On the other hand, the Wife and her present lawyers are respectively left without the ability to offer and to receive security for the rising costs, which in present circumstances she has little option but to continue to incur so long, obviously, and so far as they are reasonably incurred, and her lawyers are prepared to take the risk of non-recovery.”

Mr Warshaw QC argues to me that this is a matter of general importance. He submits that it was not open to the District Judge, in the circumstances of this case, to find that the solicitors did not know of the intention to defeat the claim but were fixed with constructive notice. Constructive notice means knowing something which ought to have stimulated enquiry or wilfully abstained from enquiry. He argues that a matrimonial solicitor is not like a bank or an ordinary third party. The solicitor has access to all the facts already. He knows every detail of his client’s financial position as well as the detail of any allegations of non-disclosure and the ambit of the other side’s case. There was therefore, he says, no need for the firm to consult some third party. There was no enquiry that ABC ought to have made or that the firm could have carried out. The District Judge drew an impermissible inference to overcome this problem. He correctly identified that he could not draw inferences from the Husband’s assertion of privilege but he concluded he could draw an inference that ABC was put on enquiry.

He further raises the spectre that a failure to allow this appeal would open the floodgates to applications in all non-disclosure cases by the other party to set aside monetary payments previously made to the solicitors acting for the non-discloser.

I accept that this is an important area of the law, particularly in the context of the removal of legal aid by LASPO and the need for spouses to fund matrimonial litigation. Solicitors are entitled to be paid and the court must be well aware of the dangers of setting aside transactions entered into in good faith.

I have, however, come to the clear conclusion that this appeal must be dismissed. I am satisfied that ABC “knew something that ought to have stimulated enquiry”. The firm knew that:-

The restriction provided that no disposition of the registered estate (ie Z property) was to be registered without a certificate that written notice had been given to the Wife of the disposition. I am quite satisfied that the further enquiry that should have been stimulated was giving notice to the Wife’s solicitors of the intention to charge the property, as the restriction required before any charge could be registered.

The Wife would, at that point, have been able to make her case to ABC as to the intention to defeat her claim. This would have put ABC on actual notice. Moreover, the Wife could have done one of two things. She could have agreed to the charge, although I consider that was highly unlikely in this case. Alternatively, she would have had the opportunity to apply to the court for an injunction to restrain execution of the charge. She was entirely denied that opportunity although I am satisfied that she would have expected that the restriction had given her that protection.

Mr Warshaw then argues that, had she applied for a freezing injunction, the resulting order would have had to make provision for the Husband’s legal costs reasonably incurred. I do not agree. The application would have been made on day two of the final hearing. It would not have been for a freezing injunction over all the Husband’s assets. It would have focussed on Z property. The Wife would have been able to point to all the evidence she had put together as to non-disclosure. I consider it is highly likely that the District Judge would have made an injunction preventing the execution of the charge until the conclusion of the case. At that point, given his findings, it is quite inconceivable that he would have discharged that injunction to permit the charge.

The costs provisions commonly included in freezing injunctions do not in general cover costs already incurred. Indeed, my experience is that, at least initially, such provisions apply primarily to the costs of taking legal advice on the injunction, preparing a statement of assets and applying to vary or set aside the injunction, if so advised. Even if an exemption for costs provision is made, it usually requires disclosure as to the source of the funding. Almost invariably, this will be an otherwise frozen bank account. It would be extremely rare for a court to permit the costs to be secured by a charge over the very asset that is the subject of the dispute. However, regardless of these arguments, the simple fact of the matter is that the Wife was not given the opportunity to make the application by the failure to give her notice.

Indeed, if I was to rule to the contrary, no litigant could rely on a restriction. There would have to be an application for a freezing injunction in each case. That cannot be right. I am of the view that, where there is a restriction, it is always incumbent on a solicitor to give notice of an intention to execute such a charge over real property. If no action is taken by the other side by the expiry of a reasonable period, the solicitor is then in a position to proceed to execute the charge without fear that it will subsequently be set aside.

I further find that the failure to give notice in this case, notwithstanding the restriction, distinguishes the matter from the decision of Sir Peter Singer in J v J-M. In that case, there was no claim at the time against the Bentley. There was no restriction against it.

I do not accept that my decision creates the spectre of a court setting aside retrospectively monetary payments made to solicitors for the firm’s costs. If nothing else, there would be no restriction on the register against such payments. To this extent, Mr Warshaw is wrong when he says that there is no difference between cash and real property. I cannot conceive of a situation in which the payment of cash itself would ever give rise to constructive notice sufficient to engage the Kemmis doctrine and require further enquiries. The solicitor receiving a monetary payment is not therefore obliged to inform the other side in advance. It is entirely incumbent on the other party to apply for an injunction to restrain such payments being made if he or she considers the application has merit. It is not open to that party to raise the matter retrospectively.

It follows that I cannot fault the District Judge’s conclusion in Paragraph 29 of his judgment that he remained satisfied from the evidence that was before him that:-

“…the solicitors knew something which should have put them on further enquiry, which would have revealed had they thought properly about it that the payment of their fees from the equity in Z property was in part intended to defeat the Wife’s claims”.

For these reasons, I dismiss the appeal.