Non-Matrimonial Assets

Alexander Chandler, 22 April 2021

A short recap

The concept of ‘matrimonial property’ was introduced into English law by Lord Nicholls in White [2001] 1 AC 596 at 610C-E, and developed in Miller; McFarlane [2006] UKHL 24 with the introduction of the ‘sharing principle’, ‘marital acquest’ and ‘(non) matrimonial asset’. For all the twists and turns in case law, over time a generally well understood rule of thumb has emerged:

“…in an ordinary case the proper approach is to apply the sharing principle to the matrimonial property and then to ask whether…the result of so doing represents an appropriate overall disposal. In particular, it should ask whether the principles of need and/or of compensation…require additional adjustment in the form of transfer to one party of further property, even of non-matrimonial property, held by the other.” Lord Wilson, sitting as part of the Privy Council, in Scatliffe v Scatliffe [2016] UKPC 36 at [25.x]

The extent to which matrimonial assets can or should be distinguished from non-matrimonial assets has involved a tug of war between two different approaches: the formulaic, mathematical approach advanced by Mostyn J in N v F [2011] EWHC 586 (Fam), and the more traditional and discretionary approach adopted by Moylan J, e.g. in H v H [2008] EWHC 935 (Fam)– also see Wall LJ in B v B [2008] EWCA Civ 543.

The elevation of Moylan LJ to the Court of Appeal in May 2017 signalled the law tilting in favour of the more discretionary approach. Hart v Hart [2017] EWCA Civ 1306, contains a comprehensive review of the law by Moylan LJ between [55] and [87], which concludes with the following observations:

“[84] … the court is not required to adopt a formulaic approach either when determining whether the parties’ wealth comprises both matrimonial and non-matrimonial property or when the court is deciding what award to make. This is not necessary in order to achieve “an acceptable degree of consistency”… or to achieve a fair outcome. Indeed, I consider that the present case demonstrates the difficulties which can arise if a court strives to adopt a formulaic approach in circumstances where that is not likely to be easily achieved because of the nature of the financial history.

[85] It is, perhaps, worth reflecting that the concept of property being either matrimonial or non-matrimonial property is a legal construct. Moreover, it is a construct which is not always capable of clear identification. An asset can, of course, be entirely the former, as in many cases, or entirely the latter, as in K v L [2012] 1 WLR 306 . However, it is also worth repeating that an asset can be comprise both, in the sense that it can be partly the product, or reflective, of marital endeavour and partly the product, or reflective, of a source external to the marriage… When property is a combination, it can be artificial even to seek to identify a sharp division because the weight to be given to each type of contribution will not be susceptible of clear reflection in the asset’s value. The exercise is more of an art than a science

[86] It can… be artificial to attempt to draw a “sharp dividing line”. Valuations are a matter of opinion on which experts can differ significantly. Investigation can be “extremely expensive and of doubtful utility”. The costs involved can quickly become disproportionate. Proportionality is critical both because it underpins the overriding objective and because, to quote Lord Nicholls again, at para 26, “Fairness has a broad horizon”.

Between [88] and [97], Moylan LJ sets out the following three stage approach:
the case management stage: whether, and if so what, factual investigation is required into the question of if assets are ‘non-matrimonial’;

“[90] …if the facts clearly demonstrate the existence of a “sharp dividing line” the court will use that line for the purposes of determining what award to make. If, on the other hand, the inquiry would require an account to be undertaken of the marriage and/or some other expensive investigation and/or would be of “doubtful utility”, the court could be expected to decide that such an inquiry was neither proportionate nor required to enable the court to achieve a fair outcome. If some further inquiry is warranted, the court will have to determine what “degree of particularity or generality” is required. Where, in the spectrum, any particular case lies is for the court to decide.

the court will then make factual findings (disapproving Mostyn J’s view that ‘clear documentary evidence’ would be required); which

will have to be fit into the exercise of the court’s discretion, applying S.25 and the overarching objective.

The talks this morning consider the application of the law relating to matrimonial and non-matrimonial assets to three, hopefully practical, areas:

Firstly, the family home;

Secondly, companies;

Thirdly (which will be covered by Max Turnell), pensions.

Family Homes and Unequal Sharing

We all know that a family home/ FMH is ‘normally’ regarded as matrimonial property, regardless of its origin, and therefore subject to the presumption of equal sharing, subject to needs. Per Lord Nicholls in Miller; McFarlane

“[20] …The parties’ matrimonial home, even if this was brought into the marriage at the outset by one of the parties, usually has a central place in any marriage. So it should normally be treated as matrimonial property for this purpose. As already noted, in principle the entitlement of each party to a share of the matrimonial property is the same however long or short the marriage may have been

We also know that in many cases, the fact that the family home was brought into the marriage by one party is unlikely to be relevant to outcome, because of the financial needs of the parties and, where they exist, the children of the marriage.

But where the assets comfortably exceed needs, or in cases where otherwise this might be a relevant argument, what different approaches can be taken to the family home. In what circumstances will the court adopt the unusual proposition that a family home should either not be regarded as fully matrimonial, or should be shared unequally?

Bear in mind the following:
The term used by Lord Nicholls in Miller; McFarlane was ‘normally’; not ‘invariably’ or ‘presumptively’. Elsewhere, Lord Nicholls underlines the importance of flexibility in the court’s approach;

There is a risk, especially prevalent in family law, or over-analysing what has been said in a judgment:

“[66] …I would question whether such a detailed scrutiny is apt and properly reflects the differences between the drafting process for a judgment and that for a statute and their different roles in the administration of justice. I would also mention that, even in the interpretation of statutes, the court can take a broad purposive approach…

[67] in the context of financial remedy applications, the court is giving guidance. Guidance can, of course, be given with a degree of specificity but, it is perhaps obvious to say that, one cannot expect judgments to be written in the expectation that they will be analysed as though they were statutes.” Waggott v Waggott [2018] EWCA Civ 727, per Moylan LJ

There are several cases which contain dicta that, just because an asset is ‘matrimonial’, that does not mean the division will be an equal one. In S v AG (cited above), Mostyn J observes at [9]

“…even the matrimonial home is not necessarily divided equally under the sharing principle; an unequal division may be justified if unequal contributions to its acquisition can be demonstrated. In Vaughan v Vaughan [2008] 1 FLR 1108 Wilson LJ stated at para 49… ‘I consider that the husband’s prior ownership of the home carried somewhat greater significance than either the district or circuit judge appears to have ascribed to it’

However, neither S v AG, nor Vaughan[1] address this issue head-on, in terms of considering the circumstances in which the value of a matrimonial home should be divided unequally as part of the sharing exercise (as opposed to being divided unequally to meet financial needs).

The case to have in mind is FB v PS (Financial Remedies) [2015] EWHC 2797 (Fam) involved parties aged 42 and 44. They had set up a telecommunications business in 1995 and had married in 1998. By the time of the divorce (2015), the assets were worth £19m. The family home had been owned by H’s father through an offshore trust structure, which was transferred to the legal ownership of the parties in 2006, after which F paid for substantial renovations. Moor J accepted that the business was a matrimonial asset but that in relation to the matrimonial home there were significant unmatched contributions:

[78] I remind myself that, just because an asset is matrimonial property, it does not automatically lead to equal sharing of that asset.

…

[120] Given the dicta of Lord Nicholls of Birkenhead, I can only find that it is matrimonial property but I do not accept that this means that it is to be shared between the parties. AR was not acquired by the parties themselves during the marriage. It had been a matrimonial home of TS and his wife, since 1982. The husband and his siblings were brought up there. The transfer itself is a very significant unmatched contribution, now worth some £3.5m gross.

[121] In exactly the same way, the cost of the refurbishment works was a large unmatched contribution…

[125] There are, of course, two ways in which a court can approach the matter. The first is to allow a discount to equal sharing to reflect this unmatched contribution. The second is to remove an appropriate share of the value of AR from the matrimonial assets to reflect the unmatched contribution and then divide the figure that is left equally. I propose to approach the matter on the second basis and then check it by undertaking the first exercise.

On the facts of the case, Moor J removed £2.9m from the schedule (to reflect the unmatched contribution of the family home) whereby W received overall 42% of the assets.

FB v PS does not purport to create new law or set out guidance as to the circumstances in which a FMH will be shared unequally, or part of its value will be excluded. This argument will not arise (successfully) in many cases, although this is not quite so rare as Mostyn’s ‘white leopard’[2]. But it is an example of a case – a highly fact-specific case – where the court has put into effect the acknowledgment that a FMH is not inevitably shared equally.

Companies

The treatment of private companies in financial remedies cases involves a series of challenges in terms of valuation, sharing of risk and interaction with maintenance. This talk addresses an issue which will arise in cases which involve a company which was incorporated before the marriage, which is to some extent a hybrid (part non-matrimonial; part matrimonial). To what extent should its value be shared?

Martin

The key authority to have regard to is the Court of Appeal’s decision in Martin v Martin [2018] EWCA Civ 2866, which (like Hart) contains a comprehensive review of the law, and which takes into account earlier CA decisions including Versteegh [2018] EWCA Civ 1050.

Like all good ‘big money’ cases (£182m), the issue can be summarised quite shortly: the main asset was ‘Dextra’, a company founded by H before the parties’ relationship began. The trial judge (Mostyn J) decided that 80% of Dextra was matrimonial property and 20% non-matrimonial. He arrived at that division by applying a straight line apportionment to the total value of the company from the date when it was first incorporated. In so doing, Mostyn J did not follow the SJE’s calculations of the value of the company at the date of marriage (which involved a lower figure). W appealed.

Several useful points arise from Moylan LJ’s judgment in Martin:

Firstly, that in distributing assets the court should take into account different levels of risk, between cash in the bank and (e.g.) shareholdings in private companies. Even in a case where neither party seeks ‘Wells sharing[3]’ (i.e. neither seeking a transfer of shares in a private company), the court should bear this factor in mind: Martin, per Moylan LJ at [85]:

“… I consider (a) that, contrary to Mr Pointer’s general submission, assets have different levels of risk; and (b) that, as a matter of principle, the court must take this into account when applying the sharing principle”

Secondly, that there is an ‘obvious’ difference in quality between cash in the bank, and the value of shares in a private company assessed on an EBITDA: see Martin at [91], which quotes from Versteegh v Versteegh [2018] 2 FLR 1417, per Lewison LJ at [185]:

‘…The valuation of private companies is a matter of no little difficulty. In H v H [2008] EWHC 935 (Fam), [2008] 2 FLR 2092 Moylan J said at [5] that “valuations of shares in private companies are among the most fragile valuations which can be obtained.” The reasons for this are many. In the first place there is likely to be no obvious market for a private company. Second, even where valuers use the same method of valuation they are likely to produce widely differing results. Third, the profitability of private companies may be volatile, such that a snap shot valuation at a particular date may give an unfair picture. Fourth, the difference in quality between a value attributed to a private company on the basis of opinion evidence and a sum in hard cash is obvious. Fifth, the acid test of any valuation is exposure to the real market, which is simply not possible in the case of a private company where no one suggests that it should be sold. Moylan J is not a lone voice in this respect: see A v A [2004] EWHC 2818 (Fam), [2006] 2 FLR 115 at [61] – [62]; D v D [2007] EWHC 278 (Fam) (both decisions of Charles J).

Thirdly, ‘how is this to be applied in practice?

“[93] …As referred to by both King LJ and Lewison LJ, the broad choices are (i) “fix” a value; (ii) order the asset to be sold; and (iii) divide the asset in specie: at [134] and [195]. However, to repeat, even when the court is able to fix a value this does not mean that that value has the same weight as the value of other assets such as, say, the matrimonial home. The court has to assess the weight which can be placed on the value even when using a fixed value for the purposes of determining what award to make. This applies both to the amount and to the structure of the award, issues which are interconnected, so that the overall allocation of the parties’ assets by application of the sharing principle also effects a fair balance of risk and illiquidity between the parties. Again, I emphasise, this is not to mandate a particular structure but to draw attention to the need to address this issue when the court is deciding how to exercise its discretionary powers so as to achieve an outcome that is fair to both parties. I would also add that the assessment of the weight which can be placed on a valuation is not a mathematical exercise but a broad evaluative exercise to be undertaken by the judge.

Fourthly, in relation to computing the element of ‘non-marital’ property within a business; per Moylan LJ in Martin

[112] In Hart v Hart I concluded that there is no single route to determining what assets are marital: see [93] to [96]. That conclusion is, in my view, supported by the other cases referred to above.

[113] In conclusion, a judge has an obligation to ensure that the method he or she selects to determine this issue leads to an award which, to quote Lord Nicholls in Miller ; McFarlane , at [27], the judge considers gives “to the contribution made by one party’s non-matrimonial property the weight he considers just … with such generality or particularity as he considers appropriate in the circumstances of the case”. This provides the same perspective as Wilson LJ’s observation in Jones v Jones about “fair overall allowance”, at [34]. This was why Holman J was entitled in Robertson v Robertson to reject the “accountancy” approach, not only because it seemed unfair to the husband, but because he did not consider that this fairly reflected the relevant considerations in the “overall exercise of (his) discretion”, at [59]. Both of the latter cases concerned the development of trading companies and, in my view, these observations apply with particular force in such circumstances.

…

[122] Although, as I have said, it is not necessary to determine whether the answer to this issue is an evaluative or a discretionary exercise or a combination of the two, it is worth repeating that the concept of marital property is a legal construct which has been crafted to assist the court in achieving a fair outcome when exercising its discretionary powers: Hart , at [85]. The question is, where in the course of the journey does the discretionary nature of the exercise impact on the court’s determination? Is it, as Lord Wilson appears to suggest in Scatliffe v Scatliffe, after the court has applied “the sharing principle to the matrimonial property”, at [25(x)], or is it, as Holman J decided in Robertson, when the court is deciding how to “treat the … pre-existing shares”, at [63]?

[123] The answer, as so often in this field, is that it depends. As Holman J said in Robertson , the methodology adopted by the court “is a tool and not a rule”, at [34]. In many cases the identification of what property is marital will be a simple factual determination: see Hart at [91] and [93]. However, there may be a more “complicated continuum”; in such a situation, at [94]:

“the court will undertake a broad evidential assessment and leave the specific determination of how the parties’ wealth should be divided to the next stage.”

[124] Was the judge wrong to take a straight-line apportionment?

…

[126] The judge adopted the straight-line approach for the clear reasons expressed in his judgment. As he said in paragraph 14: “the evidence is certainly not confined to a strict black-letter accountancy exercise. It involves a holistic, necessarily retrospective, appraisal of all the facts and then the application of a subjective conception of fairness, overlaid by a legal analysis”. I would also agree, as did Mr Pointer, with Mostyn J’s analysis of the exercise in which he was engaged, at paragraph 21, which, in my view, mirrors the “fair overall allowance” test referred to in Jones v Jones :

“… my evaluative assessment of what element of the present value of the business should be treated as existing at the time the relationship started and which is therefore certainly to be characterised as non-matrimonial.”

This approach seems to me to be entirely consistent with the principles I have referred to above.

IX v IY (Financial Remedies: Unmatched Contributions)

The next case to consider (albeit a first instance decision) is William J’s characteristically turgid (78 page) judgment in IX v IY [2018] EWHC 3053 (Fam). The topic of why are judgments have to be so long is for another time, but one has to ask why it is that a case like Wachtel took 7,000 words, while IX v IY is five times as long 36,000 words. See recent CA cases in Neumans LLP v Andrew Andronikou & Ors [2013] EWCA Civ 916 and BS (Congo) v The Secretary of State for the Home Department [2017] EWCA Civ 53 which encourage shorter judgments.

The case concerned £38m including a company (Zebra) which originated prior to the marriage. W sought £16m on a sharing basis; H offered £5m on a needs basis. Outcome: not quite splitting the difference, but £9.3m.

The first point to note is Williams J’s review of the law concerning duration of marriages. Here the parties’ pre-marital relationship did not fit comfortably into the concept of ‘settled cohabitation moving seamlessly into marriage’.

“[68] …It seems therefore that what the court should be looking for is a relationship of the sort which carries with it sufficient markers which justify being treated as a marriage…What the court must be looking to identify is a time at which the relationship had acquired sufficient mutuality of commitment to equate to marriage. Of course, in very many cases, possibly most cases, this will be very obviously marked by the parties cohabiting, possibly in conjunction with the purchase of a property. However, in other cases, and this may be one of them, it is not so easy to identify. The mere fact that the parties begin to spend time in each other’s homes does not of itself, it seems to me, equate to marriage. In situations such as this, the court must look to an accumulation of markers of marriage which eventually will take the relationship over the threshold into a quasi-marital relationship which may then either be added to the marriage to establish a longer marriage or which becomes a weightier factor as one of the circumstances of the case.”

The second is that, having reviewed the authorities (at length) on pre-marital value within a company, William J concluded that:

[59] The weight of authority would support an approach which seeks to identify and to take into account any latent potential that a business asset had when it was brought into the marriage by a party. The authorities would also support an allowance for the passive growth of that latent potential during the course of the marriage. How that is to be done will depend on the facts of the individual case.

On the facts of IX v IY, the court could not draw a ‘sharp dividing line’ between the matrimonial and non-matrimonial elements of the company: this was “…therefore a mixed asset of non-marital value and marital value and thus a mingled non-marital/ marital asset” (para 96). Since the company could not be reliably valued, the court adopted a broad-brush approach and resolved 60% of the company was marital and 40% non-marital.

XW v XH (Financial Remedy: Non-matrimonial asset) [2019] EWCA Civ 2262

An everyday tale of everyday folk, XW v XH concerned an internet business which had grown during the parties’ 7 year marriage to the extent that upon sale it realised almost ½ billion. The net assets were £530m. At first instance, Baker J (as he then was) awarded W 29%, around £152m. This decision ([2017] EWFC 76 – another magnum opus) involved a substantial departure from the sharing principle, based in part on the latent potential of the business at the point of marriage which led to its phenomenal value, the extent to which the parties had kept their finances separate, and an acceptance that H had made a special contribution.

W appealed, successfully. The Court of Appeal held that a broad assessment (NB) led to the conclusion that 60% of the value of the shares was matrimonial and 40% non-matrimonial, and that the award should be increased to 34.5% or £182m, based on half of the marital wealth.

The judgment of Moylan LJ, which largely is involved in unravelling the approach adopted by Baker J, contains several points of interest:

Firstly, that judgments in financial remedies had to explain with sufficient clarity how they had been calculated (Baker J had failed in this case to determine the extent of the marital property):

[84] In Scheeres v Scheeres [1999] 1 FLR 241 , Thorpe LJ said, at p 243G–H:

“It is very important in these ancillary relief cases, where the court exercises a very broad discretion, that the judge should carry out the section 25 exercise rigorously, in an attempt to inject some sort of clear rationality and principle to what otherwise could be said to be palm tree adjudication.”

This decision, and specifically the need for the exercise to be conducted rigorously, was cited with approval by the Privy Council in Ramnarine v Ramnarine [2013] UKPC 27; [2014] 1 FLR 594 , para 10.

…

[86] As I have said very recently, and since the hearing of this appeal: *14 “Every financial remedy judgment should clearly set out how the award has been calculated”, Moher v Moher [2019] EWCA Civ 1482; [2020] 2 WLR 89 , para 114(iii).

Secondly, that the trial judge had correctly rejected H’s argument that the business amounted to H’s ‘unliteral asset’ (cf Miller; McFarlane, Baroness Hale at [173]:

[135] …in my view, having regard to the substantial practical experience the courts have acquired of the application of the sharing principle since Miller was decided and to developments in the jurisprudence since that decision, we are able further “to keep the room for application of the concept (of unilateral assets) closely confined” ( Charman [2007] 1 FLR 1246 , para 86) and thereby promote both the “acceptable degree of consistency of decision”, referred to by Lord Nicholls in Miller [2006] 2 AC 618 , para 6, and the application of the sharing principle in a way which supports the overarching principle of “non-discrimination”.

Thirdly, the judge’s finding of special contribution had to be set aside, since the court had failed to balance H’s financial contribution against W’s financial contribution.

Fourthly, rather than remit the case for rehearing, the award could be adjusted to allow W an extra £30m to reflect half of the total marital wealth of £296m.

G v T [2020] EWHC 1613 (Fam)

In G v T, the court was faced with the business having grown in value post-separation, adding £10m to the net assets. The judge (Nicholas Cusworth QC sitting as a DHCJ) reviewed from [45] the leading authorities of Hart, Versteegh, Martin. At [51], the court commented:

“…the ‘Cowan principle’ [i.e. one party trading with the other’s undivided share] is now in practice considered under the general heading of ‘Continuum versus new ventures‘, a phrase coined by Roberts J in Cooper-Hohn v Hohn [2014] EWHC 4122 (Fam), and subsequently taken up by Mostyn J in JL v SL (No.2) [2015] EWHC 360 (Fam). In that case the judge discussed his own summary analysis of the principles relating to post-separation accrual in Rossi v Rossi [2006] EWHC 1482 (Fam), and stated:

34. ‘…the Court of Final Appeal of Hong Kong in its recent decision of Kan v Poon FACV20/2013, (2014) 17 HKCFAR 414 approved my summary. Ribeiro PJ stated at para 133:

“The summary of the principles provided in Rossi v Rossi is broader than Thorpe LJ”s stricter approach [in Cowan] and is, in my view, preferable. It points to various factors relevant to deciding whether a post-separation accrual justifies departure from equality, including the length of the marriage and separation, the nature of the property accruing and the means or efforts by which it was acquired, and so forth.””

35. In that case the attempt by the husband to exclude the post-separation accrual from the marital pool failed. Ribeiro PJ stated at para 134:

“”In my view, the increased Analogue Group profits do not provide a ground for departure from the equal sharing principle in the present case. The parties married in January 1968 and separated in mid-2008, over 40 years later. The period of separation prior to the hearing date was relatively insignificant. The profits accruing to the Analogue Group during the post-separation period arose out of the business which had been built up in the course of the marriage, in respect of which W can legitimately assert an unascertained share on the principles accepted in LKW v DD.“”

On the facts of the case, the court concluded that H had not shown that post-separation accrual related to a new venture, nor that the venture was unconnected to the assets of the partnership, whereby the balance of fairness involved fixing the date to value W’s equal interest at June 2018. W received £19.8m, an equal share of the matrimonial capital (c £40m), around 40% of the total pot.

Conclusion

By way of overview:
In the past four years, since the elevation of Moylan LJ, the Court of Appeal has developed the law on non-matrimonial assets away from the formulaic back towards a more discretionary approach;

While the distinction between matrimonial and non-matrimonial undoubtedly exists, the division can rarely be sharply drawn, and there is no ‘one size fits all’ in terms of how the issue should be case managed: see Hart

With the former matrimonial home, bear in mind that equal sharing is not the inviolable rule. In some, rare cases there may be an argument to divide this matrimonial asset unequally, to reflect unmatched contributions (especially if this derives from a third party’s generosity)

With regards to companies, the holy Trinity of cases is Hart, Versteegh and in my view most usefully Martin;

To see how these concepts work out in practice, see recent cases of IX v IY and G v T

Alexander Chandler

22 April 2021

[1] not to be confused with Vaughan v Vaughan [2010] EWCA Civ 349 which concerned the impact of a second family

[2] per Mostyn J in JL v SL [2015] EWHC 360 (Fam) regarding sharing of non-matrimonial assets

[3] Wells v Wells [2002] 2 FLR 97

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