02nd Jun 2016

Financial Relief after an Overseas Divorce

In this blog Family Law in Partnership consultant Ann Northover unravels the complexities in the international big money divorce case of Z v Z [2016] EWHC 911 (Fam) and the hurdles to be overcome on an application under Part III of the Matrimonial and Family Proceedings Act 1984.

What is the background to this case?

Z v Z concerned an application for financial relief after an overseas (Russian) divorce, brought by a former wife (the applicant) under Part III of the Matrimonial and Family Proceedings Act 1984 (MFPA 1984). It engaged a consideration of MFPA 1984, s16, for the court to determine if it would be appropriate for the English court to make an order for financial relief. Roberts J decided it would be appropriate, but “by the narrowest of margins“, so avoiding a dismissal of the application. This is a first instance decision in a complex case that, if not settled, will proceed to a final hearing to determine the applicant’s substantive claims. The leading authority for MFPA 1984, Pt III cases remains the Supreme Court decision of Agbaje v Agbaje [2010] UKSC 13, [2010] All ER (D) 92 (Mar).

Z v Z is of interest given the particular factors that are common in international big money cases. The case concerned an 11 year marriage of Russian nationals who married in Moscow in 1997, and agreed that by 1 September 2008 they had separated. At the time of the hearing, the applicant was aged 45, the respondent 47, and the children aged 18, 17 and 16.

The family moved to London in 2004. In September 2008, after a year of renovations, the applicant and children moved into a substantial property in Kensington (which had a complex ownership structure—see below), but not the respondent. At the time of the hearing that occupation by the applicant and the children continued. The respondent had remarried and had two further children and was living in Cyprus and Bulgaria.

There had been rival Russian and English divorce proceedings, the respondent ultimately being successful by pursuing his Russian proceedings from November 2008 through to the grant of divorce on 21 January 2009. A financial agreement was approved by the Russian court, and turned into an order on 11 August 2009, providing the applicant with US$10m, of which she had £4.7m remaining at the time of the hearing. By the time of the hearing before Roberts J, the respondent had assets of approximately £40m, of which £35m was in trust, the vast majority of which had emanated from his father, following various trust restructurings after the Russian order.

The applicant had issued English divorce and financial proceedings that included in her Form A a claim in respect of the trust interests and variation of two trusts as being nuptial settlements. The English proceedings were dismissed by consent on April 2009. After a five-and-a-half year delay, the matter was resurrected by the applicant in July 2014 by her MFPA 1984 application. She made claim to the Kensington property plus a further London apartment, both now owned via corporate and Bermudan trust structures, plus a fund of £8m to meet her future needs.

What were the key issues before the court?

Stage one was to decide under MFPA 1984, s 16 whether this jurisdiction should be engaged with making orders for financial relief, bearing in mind all the circumstances of the case. Stage two would take place at a later hearing, to decide what orders to make pursuant to MFPA 1984, ss 17 and 18, which enable the English court to make any financial order it might have made in English divorce proceedings in a case that follows a foreign divorce.

The respondent’s position was that this was a ‘second bite of the cherry’ application, the Russian financial order having been understood to be an income and capital clean break in all jurisdictions. The applicant’s position was that this was a necessary addressing of matters she felt had not been covered by the Russian agreement, namely:

  • the English-based assets including the London properties held through trust and corporate structures
  • housing arrangements for her and the children; and
  • long-term income needs, for herself and the children, which she placed at just under £500,000, excluding rent per annum

Roberts J followed the approach set out by Lord Collins in Agbaje, that MFPA 1984, s16 and MFPA 1984, s18 may overlap and therefore may be considered at the same time, along with all the circumstances of the case. Inevitably, there is a tension between what Roberts J described as the twin objectives of achieving finality in litigation and fairness of outcome. In Agbaje, it was clarified that the purpose of MFPA 1984, Pt III was not merely to allow a spouse to take advantage of a more generous English approach than the foreign court. Hardship or injustice are not preconditions to the making of English orders, and the amount awarded is not restricted to overcoming any injustice. Roberts J stated that:

‘…even if the terms of the agreement were fair in the light of the then prevailing circumstances, that fact, of itself, is not necessarily a bar to an effective Part III claim…’

The three-stage approach under MFPA 1984 s16, as elucidated by Lord Collins in Agbaje, is that under the first leg, primary consideration should be given to the welfare of the children of the marriage. Second, it will never be appropriate to make an order that gives the claimant more than they would have been awarded had all the proceedings taken place in this jurisdiction, and third, where possible the order should have the result that provision is made for the reasonable needs of each spouse. On the second limb, Roberts J held that she was not confined in terms to a consideration of what an English court would have done in 2009 (para [120]).

The respondent argued for the dismissal of the applicant’s claim and for there to be no further financial relief. A good summary of the respondent’s position is set out at para [77] of the judgment, and many of these factors are likely to feature in due course at stage two. The respondent’s arguments included:

  •  the inherited nature of the wealth, and
  •  that the applicant had the greater share of the wealth available at the time of the Russian order

The respondent also argued that the Russian order was preceded by a post-nuptial agreement that should be fully respected and upheld in accordance with the principles of Radmacher (formerly Granatino) v Granatino (pre-nuptial contract) [2010] UKSC 42, [2010] All ER (D) 186 (Oct). Further, the Russian order was a final settlement and made with legal support in Russia and England and should be upheld in the absence of undue influence. The respondent also highlighted the applicant’s five and a half year delay before making her claim under MFPA 1984 and argued that that should prevent her further claims.

The applicant’s arguments included that:

  • the Russian order did not meet her real needs for income and housing and that the Kensington property could be dealt with by characterising it as a nuptial settlement and varying it
  • the English court would not have made the Russian order in 2009—as essentially it failed to address all of her needs and those of the children
  • she had been under undue pressure from the respondent to enter into the agreement
  • she had agreed to the Russian order due partly to the threat of a Russian tax investigation, and
  • she had fragile health

The medical evidence and undue pressure arguments were raised late in the day in February 2016.

What were the challenges involved in this case?

In respect of the MFPA 1984, s 16 appropriateness test, one of the main hurdles for the applicant was her delay post the Russian order in bringing the proceedings, which is required to be considered under MFPA 1984, s 16(2)(i). The five-and-a half years delay was not fatal in this case but Roberts J said (at para [156]) that:

‘Any order made will be based on the applicant’s needs and those needs must, in my judgment, be restricted to reflect the delay there has been in bringing her claim.’

A future challenge for the applicant in stage two (regarding which there was a fairly detailed consideration at stage one) will be her claims in respect of the trust interests, especially given that the vast majority of wealth originally emanates from the respondent’s father—a further complication being that significant rearrangements occurred post-separation and divorce, in December 2014, on the respondent’s case, due to changes in Russian tax legislation and not motivated by the present proceedings. The BMT Trust (a Bermudan trust holding the shares in the company owning the Kensington home) was settled by the respondent’s father during the parties’ marriage, in 2005. The respondent maintained that it was not a nuptial settlement, and that he had not become a beneficiary until long after the Russian order, in December 2014, and then only being entitled on the death of his father. During the marriage, the life tenant and only living beneficiary had been his father. The applicant maintained that their family expenditure had been supported by the trusts and/or the respondent’s father and that this represented a ‘resource’ which could support a spousal maintenance award.

Roberts J found it to be relevant to the overall fairness of the Russian agreement that the applicant had relied upon the respondent’s assurances that she and the children would continue to occupy the Kensington home until they ceased to be minors.

What are the practical implications of this decision?

Delay in bringing an application under MFPA 1984, Pt III can be fatal to obtaining permission under MFPA 1984, s 16, and though the applicant’s delay was not fatal in this case, it was described as the most troubling factor, and a warning note has been sounded by the judge as to the effect of delay on potentially depressing the stage two orders. Also of importance in such cases is that the financial circumstances will also most likely have changed, and it cannot be that the applicant will end up with more under MFPA 1984, Pt III than would have been provided had the application proceeded here in its entirety. In the statutory consideration of ‘all the circumstances of the case’, the circumstances are not limited to those existing at the time of the foreign order. The court may therefore consider the change in the respondent’s financial circumstances.

For international cases, very careful consideration must be given to the entering of marriage contracts and pre and post-nuptial settlements and their effect in other jurisdictions. Often a pragmatic approach may be taken due to considerations of enforcement of agreements and orders or tax concerns, but a reliance on a ‘top up’ under Part III would be unwise, particularly bearing in mind the second round of legal costs.

Does the judgment indicate any trends emerging in the law in this area?

Stage two of the proceedings in this case will have to resolve the tension between litigating finality and fairness of outcome. The ability of individuals to enjoy autonomy by entering freely into binding agreements per Radmacher is also of interest in the consideration of fairness.

The alteration of the trust structures post the Russian agreement and order is of particular interest, as is the line of argument seeking to characterise housing arrangements held through offshore corporate and trust structures as nuptial settlements capable of variation under section 24(1)(c) of the Matrimonial Causes Act 1973. These trust issues will fall to be considered at stage two, and will take account of the recent decision in NR v AB [2016] EWHC 277, [2016] All ER (D) 79 (Mar).

If hardship and injustice are not preconditions to making an order, though a relevant factor in the discretionary process, then once the applicant has passed the MFPA 1984, s 16 appropriateness test, the award will depend on all the circumstances of the case, and the connection of the parties with England. Per Agbaje, it is clearly wrong to seek to simply provide the minimum to remedy the perceived injustice flowing from the overseas award, but equally, neither is it appropriate to allow a simple ‘top-up’ of the foreign award so as to equate with an English award. The connection of the parties to England, as per Agbaje, is crucial. Per Collins LJ:

‘Where the English connections of the case are very strong there may be no reason why the application should not be treated as if it were made in purely English proceedings.’

Other factors falling to be considered under ‘all the circumstances of the case’, such as delay, may make the most significant impact.

Ann Northover is a leading family law specialist with expertise in the financial and children aspects of complex separation, pre-nuptial and divorce matters. She has particular experience in dealing with trusts, pension funds and business assets. Contact Ann at: T: 020 7420 5000 or E: an@flip.co.uk.

Ann Northover was interviewed by Kate Beaumont.

This article was first published on Lexis®PSL Family analysis on 26 May 2016. Click for a free trial of Lexis®PSL.