CR v SR

This is the hearing of the husband’s application for permission to appeal a financial remedy order made by a District Judge at the Principal Registry on 7^th November 2012. Given the resources available to the parties, they have been ill able to afford litigation and can ill afford to have the expense of an appeal against the District Judge’s order. Unusually, counsel for both parties have appeared, in part, it seems because of a lack of clarity as to the nature of the hearing. Mr. Collins appears on behalf of the husband, and Mr. Fee appears on behalf of the wife.

There has been some debate during the course of the hearing as to the proper test to apply in respect of the application for permission to appeal. Pursuant to Rule 30.3(7) of the Family Procedure Rules 2010, permission to appeal may only be given where:

“(a)

the court considers that the appeal would have a real prospect of success; or

(b)

there is some other compelling reason why the appeal should be heard”.

Mr. Collins has not sought to submit that there is “some other compelling reason” why the appeal should be heard. He confines his case to the submission that the appeal has “a real prospect of success”. The meaning of the phrase “real prospect of success” in Rule 30 has been considered in two first instance decisions.

The first is a decision of Mostyn J, namely NLW v. ARC [2012] 2 FLR 129. He says, in para. 8:

“In his skeleton argument Mr. Chamberlayne has suggested that the object of the test is only to weed out the hopeless appeal. I would not go that far. I would suggest that the concept of a real prospect of success must mean, generally speaking, that it is incumbent on an appellant to demonstrate that it is more likely than not that the appeal will be allowed at the substantive hearing. Anything less than a 50/50 threshold would of course, by linguistic definition, mean that it is improbable that the appeal will be allowed and in such circumstances it would be hard to say that any appeal had a real prospect of success; rather, it could only be said as a matter of logic that it had a real prospect of failure”.

In the course of his judgment, Mostyn J. makes it clear, in particular in para. 3, that:

“The new procedure set out in Part 30 of the Family Procedure Rules is intended to align the procedure for appeals from district judge to judge with the procedure that has obtained since the year 2000 under CPR 52 in relation to appeals from judges to the Court of Appeal”.

In a later decision, AV v. RM (Appeal) [2012] 2 FLR 709, Moor J. reaches a different conclusion to that of Mostyn J. as to the meaning of the phrase “a reasonable prospect of success”. He says at paras. 9 and 10 of his judgment:

“9)

It has been on said on many occasions that judges should not place a judicial gloss on the words of either the statute or the rules. With the greatest of respect to Mostyn J., it may well have been that this aspect was not argued fully before him and that his attention was not, in particular, drawn to a decision of the Court of Appeal, of Tanfern Limited v. Cameron MacDonald & Anor. [2000] 1 WLR 1311, in which Brooke LJ. said the following (at para.21):

"21.

Permission to appeal will only be given where the court considers that an appeal would have a real prospect of success or that there is some other compelling reason why the appeal should be heard. Lord Woolf MR has explained that the use of the word of 'real' means that the prospect of success must be realistic rather than fanciful [see Swain v. Hillman, The Times, 4th November 1999; Court of Appeal (Civil Division) Transcript No. 1732 of 1999].

10)

The test for permission to appeal is, of course, exactly the same in the Court of Appeal. It, therefore, follows that this court is bound by Tanfern Limited v. Cameron-MacDonald and I consider that there should be no gloss placed on the words of the rules other than to say that ‘real’ means that the prospect of success must be realistic rather than fanciful”.

It is clear to me - given, as Mostyn J. rightly points out, that the intention or purpose of the new rules is to align the procedure for appeals from district judge to judge to that which applies in relation to appeals to the Court of Appeal - that the test to be applied should be the same in both circumstances. I, therefore, as did Moor J., consider that I should apply and am indeed bound by the interpretation given to the phrase “real prospect of success” by the Court of Appeal in the decisions referred to above.

I also propose to quote from the White Book 2012, Vol 1 para. 52.3.7:

“The first ground (“real prospect of success”) presents no conceptual problems. It is precisely the same test as that which the courts apply when considering summary judgment: see rule 24.2. The rationale is the same. If a claim or defence has no real prospect of success, the court will prevent the litigant from pursuing it. Likewise, if an appeal has no real prospect of success, the court will prevent the litigant from pursuing it. The main practical difference is that, for obvious reasons, more appeals are weeded out by this process, than first instance claims or defences”.

The White Book then refers to Swain v. Hillman [2001] 1All ER 91 and to Tanfern Limited v. Cameron-MacDonald.

In my view, as I have already indicated, I should apply the test set out in Tanfern Limited v. Cameron-MacDonald, namely that the husband in this case must show a realistic, rather than fanciful, prospect of success.

Setting out the background facts very briefly: the parties were married in 1995 and separated in 2011. The husband is aged approximately 45, and the wife is aged approximately 46. They have three children, now aged 14, 12 and 6. Their only substantial capital asset, as found by the District Judge, is the former matrimonial home, which had an agreed value for the purpose of the hearing before the District Judge of £975,000. It is subject to an interest only mortgage of £600,000, and there were arrears on the mortgage of about £13,000, giving a net equity of approximately £330,000.

In addition, the parties have a number of debts. In particular, there are credit card debts of £19,000, and a liability for unpaid school fees of £20,000. The parties have other liabilities or potential indebtedness to other people in addition to these specific liabilities.

At the hearing before the District Judge, the husband contended that the former matrimonial home should be sold and that the wife should receive all the net proceeds of sale, save for the sums required to enable the credit card and school fees liabilities to be paid, namely the total of £39,000. He proposed that, in return as it might be called, for the wife receiving the entire capital that the parties had accumulated during the marriage, her right to claim maintenance should be dismissed. He proposed that he should pay maintenance for the children of a total of £15,000 per annum.

The wife proposed that the former matrimonial home should be transferred to her and that the husband should pay maintenance of £3,000 per month, split as to £2,000 for herself and £1,000 in respect of the children.

The wife’s net income was found by the District Judge to be just under £2,200 per month. This is derived in part from her work as an emergency nurse practitioner. She works part-time and, in addition, does some bank work and receives benefits which together total just under £2,200 per month.

There was a substantial dispute before the District Judge as to the level of the husband’s income. The husband conducts his business through a partnership with a Mr. J. The partnership agreement provides that the profits and losses are to be divided equally between them. In respect of their drawings, the partnership agreement specifically provides that the amount that each partner may draw during an accounting year should be fixed at the commencement of the year, and neither will be entitled to draw more except by agreement. It also provides that, at the end of the year, an account will be taken by the partnership accountant so as to determine what, if any, further profits remain to be divided between the partners. These will be divided equally within a month of that determination, unless they agree otherwise.

As at the date of the hearing, it was estimated that the husband’s partnership account was overdrawn by about £300,000. It was also said that he had other liabilities to HSBC, although the District Judge commented during the course of her judgment that there was no specific documentary evidence as to whether or not the facility had all been utilised.

For the purposes of the hearing before the District Judge, a report was obtained from a jointly instructed accountancy expert. In the course of his report, he states:

“In the circumstances, I consider that each of the selected growth rates may [and I emphasise the word ‘may’] be achievable”.

The selected growth rates, which are set out in para. 5.28 of his report dated 25^th June 2012, are for a 20% rate growth in the company’s business, 30% growth and 40% growth. He sets out, in the notes appearing in 5.28, the circumstances which he says support his conclusion that these selected growth rates may be achievable. He says in a section headed “Drawings” that, because of the overdrawn balance on the husband’s capital account with the partnership, he does not consider that he will be able to draw more from the partnership than his annual income. He also says in para. 5.36 that:

“Because of working capital constraints and because it is generally considered imprudent to fully draw on account of profits which have not yet been made, it is usual for partners to draw only a percentage of their anticipated income for a year during the year itself and to draw the balance as and when the accounts have been finalised and working capital conditions permit”.

He concludes in para. 5.37 in these terms:

“It would not, in my view, be unreasonable for the petitioner to expect to be able to draw £5,700 per month. It would not be unreasonable to expect that the petitioner might be able to draw any undrawn profits in respect of the year ending 31^st March 2013 by 30^th September 2013”.

The reference to undrawn profits is based on the assumed growth rates as set out in para. 5.28. The middle assumption, namely a 30% rate of growth, would result on the analysis undertaken in the report in the husband being entitled to a gross profit share of just over £136,000.

For the purpose of her judgment, the District Judge concluded that the husband was likely to be able to draw £5,700 per month. In coming to this conclusion she rejected the husband’s evidence that he could draw only £4,000 per month on the basis, in part, that his partner would agree to more being withdrawn. The conclusion that the husband’s drawings in respect of profits for the year would be £5,700 per month was also based, as is clear from the judgment, on the District Judge accepting the expert evidence as to future gross income.

The order made by the District Judge was to transfer the former matrimonial home to the wife, and to order the husband to pay the wife global maintenance for herself and the children of £2,750 per month. This left the husband with no capital, because it was the conclusion of expert accountant that the husband’s interests in the partnership and associated businesses have no value. So the husband, under the order, has been left with no significant capital assets, but a continued liability for his debts.

In respect of maintenance, as I have indicated, the District Judge awarded the wife £2,750 per month. As she sets out in para. 50 of her judgment, on the basis of drawings of £5,700 per month and after deduction of rental income of £1,750 per month (because the husband is living in rented accommodation) and the deduction of the maintenance order of £2,750, the husband would retain a net income from his monthly drawings of £1,200 a month, an annual total of £14,400.

The District Judge analyses the wife’s position as follows. To her net income of £2,157 must be added the maintenance figure of £2,750, giving a total of £4,907 a month. From that is to be deducted the mortgage payments, excluding the arrears, of £2,170, giving a net monthly amount of just over £2,700, or just under £33,000 a year. The maintenance order for the wife was an open-ended maintenance order.

For the purposes of determining this application, counsel for both parties have made written and oral submissions. Mr. Collins on behalf of the husband submits, putting it colloquially, that the wife did “too well”. He submits that this is clearly seen from the effect of the judgment, namely that the wife received all the capital, leaving the husband merely with liabilities and, in addition, there is a significant imbalance, even on the District Judge’s findings, in their respective income positions. He submits, and I quote from his written submissions, that:

“Even if the judge was correct to order that the wife should receive, by transfer of the former matrimonial home, all the capital, she should have given consideration for some form of Mesher order, whereby the husband could recover some of the capital value of the former matrimonial home in the future”.

Mr Collins submits that no consideration appears to have been given by the District Judge to the husband’s ability and/or need to re-establish his capital position in the future. He drew my attention to the overdrawn capital account of £300,000 and the company’s significant debts, as well as the husband’s liability for credit cards and school fees. He submitted that the credit card debts require payment of £800 per month, which, if correct, would leave the husband with approximately £400 per month.

He asked how, on the District Judge’s order, the husband’s future capital needs are going to be met and how he is going to be able to accumulate capital, given his current capital position and his liability for maintenance. So, he submits:

“No consideration has been made of the husband’s ability to re-establish his capital position in the future, which, in the current climate and given the husband’s age, runs contrary to the concept of fairness, on any view, after a relatively long marriage to which both parties have made a full contribution”.

He also questions the basis on which the District Judge decided to make a joint lives maintenance order in favour of the wife. He points to the fact that it leaves open to her the option of seeking to capitalise her maintenance claim at some point in the future. He submits that the judge appears not to have given sufficient consideration to whether or not an immediate or deferred clean break should be ordered. He submits that the District Judge does not justify in her judgment either the joint lives order or the lack of capital security for the husband in the future, and that such an evaluation was essential in light of the disparity between the parties consequent on the orders made by the District Judge.

Mr Collins has referred me to Moor J.’s decision of A v. L (Departure from Equality: Needs) [2012] 1FLR 985. In the course of his judgment, Moor J. said at para. 48:

“I have, however, reluctantly come to the conclusion that the Husband is right in saying that the judgment is subject to justified criticism in three respects:-

(a)

It does not sufficiently reason the very significant departure from equality that is the effect of the order. Indeed, the judgment does not mention the need to justify a departure from equality.

(b)

In so far as there is a needs justification for departure, it does not explain how the resulting capital order will fairly meet the needs of both parties, as opposed to the Wife alone.

(c)

It does not adequately explain the interplay between the periodical payments order and the capital order”.

In para. 50, Moor J. said:

“I entirely accept that needs can justify a departure from equality but, if the court is to do so, it is necessary to consider the needs of both parties. I equally accept that disparity in earning capacity can justify departure, but again this has to be considered in the context of the needs of both parties not just the wife. In particular, there has to be consideration of how such a departure can be justified if there is also a substantive periodical payments order. With the greatest of respect to a very experienced judge, I do not consider that the judgment sufficiently did so”.

The conclusion of Moor J. in that case was that there should be a dismissal of the liability to pay maintenance.

Mr. Fee on behalf of the wife submits that the District Judge’s judgment is a comprehensive, balanced and fair judgment, and there is accordingly no real prospect of the appeal succeeding. He submits that the District Judge clearly and fully addressed the s.25 criteria, that she clearly and fully addressed, in particular, the parties’ respective housing needs, their incomes and their income needs. He points to the fact that District Judge has seen and heard the parties, and seen and heard the jointly instructed expert.

He submits that the decision reached by the District Judge, both in respect of capital and in respect of income, was well within her discretion. He submits that the finding that the husband’s likely drawings are £5,700 per month is a finding of fact, which it would be very difficult for the husband to succeed in overturning at an appeal hearing. He also submits that the capital order was not plainly wrong.

Mr Fee has referred me to a number of paragraphs in the District Judge’s judgment in the course of his submissions, including, in particular, para. 47, in which the District Judge records her conclusions that the wife cannot sensibly move to a rented property; that any sale of the property would not release capital sufficient to enable either party to rehouse appropriately; that, even if the proceeds of sale were used to pay the parties’ debts, as the husband proposed, the wife and children would still need a home suitable for three children and herself; that the cost of moving and setting up a new home would diminish any remaining capital; and that she had no evidence that a suitable property could be rented for a figure lower than the mortgage payments.

He also draws my attention to para. 48, in which the District Judge says that, given the nature of the husband's business and the level of reward he has been able in the past to earn from it; the confidence expressed by the husband regarding such things as school fees; and the expert evidence, she is satisfied on balance that it is not necessary nor indeed beneficial to the family for the family home to be sold. Mr. Fee also points to the fact that the District Judge addressed the wife’s future earning potential.

Turning then to the issue I have to address, namely whether the husband’s appeal against the District Judge’s order has a real prospect of success. In my judgment, the appeal does have a real prospect of success.

I referred at the outset of this judgment to the fact that these parties have been ill able to afford litigation and are ill able to afford yet more litigation. But, subject to any issue of proportionality, I must decide this case on the basis of whether or not I consider, on the information available to me and having taken into account all the matters raised by counsel, the appeal has a real prospect of success. In my view, the husband does have a real prospect of success; he has a real prospect of establishing that the current orders, in particular in combination, are outside the bracket of reasonable orders in that they do not reach a balanced outcome.

There are significant similarities between this case and Moor J.’s decision of A v. L. The effect of the District Judge’s order in this case is that the wife receives all the capital of the parties and, even on the basis of assumed drawings of £5,700 per month, there is a significant imbalance in her favour in their income positions.

I fully accept and take on board, to use a colloquial phrase, Mr. Fee’s submission that the drawings were in respect of estimated profits at a higher level. But, and this is why I have emphasised the word “may”, it is clear from the accountancy evidence (and this does not appear to have altered during the course of the oral evidence) that the selected growth rates were rates which he considered may be achievable.

Clearly, when the court is making orders based on estimates of future income, there needs to be, in my judgment, a reasonable degree of caution exercised to make sure that the order which is made is (a) affordable, and (b) does not result in an imbalance or an undue imbalance between the parties’ respective future financial positions. There is on that point, in addition in my judgment, a reasonable prospect of the husband satisfying a judge on appeal that the District Judge’s order in respect, in particular, of maintenance is based too heavily on estimates of future income, which may, in fact, turn out not to be achieved.

It is clear from the partnership agreement that, subject to any other agreement between the parties, the profit earned in each year will be distributed between them. One can see, going forward, why there might be some justification for all the profits not being distributed, having regard to the fact that the husband’s capital account is overdrawn by £300,000. But, subject to that, once the accounts are drawn and the profit is identified, both partners are entitled to draw all of their profits. So it might be more prudent to await the receipt of the accounts for each year before deciding precisely what amount should be awarded. What I have in mind, and is done in some cases, is that the court identifies an annual amount to be paid during the course of the year and a top-up at the end of the year - although whether that is an order which the judge on appeal, if he/she decides that the appeal is justified, finds attractive is, of course, a matter for him/her, not me.

However, to summarise, in my judgment the husband has a reasonable prospect of success in that he has a reasonable prospect of demonstrating that the effect of the orders made by the District Judge places them outside the bracket of reasonable orders.

I should perhaps also deal with the issue of expert evidence. The husband sought permission to adduce additional expert evidence. That application was rejected, on the basis that he should first ask questions of jointly instructed expert. He renewed his application for permission to adduce evidence from another expert. Having, in fact, obtained another report and exhibited it to his s.25 statement, he renewed his application to the District Judge. Understandably, given the late nature of that application, she rejected it.

In my view, it is not appropriate or necessary for additional evidence to be adduced for the purposes of this appeal. In my judgment, the judge will be able fairly to dispose of the appeal, on the basis of the District Judge’s judgment and on the basis of the other evidence available to the court, which will include the accountant’s report of 25^th June 2012.

I am going to list this appeal for hearing but I would urge the parties, in the meantime and with the assistance of their legal advisors, to see whether it is possible to resolve the matter by agreement before that hearing takes place.