AT v BT: The Return of Compensation

Published: 20/06/2024 19:41

In AT v BT [2023] EWHC 3531 Francis J considered what he described (at [4]) as ‘the proper approach of the court to the sharing principle and to the principle of compensation’ given that ‘the husband maintains that this is a pure needs case and the wife asserts that this is a full sharing case’. This led H to offer a lump sum of £3.545m and W to seek a lump sum of £9.145m (with W to retain a property with an agreed value of £195,000 (£190,000 net of notional costs of sale)).

W’s case was that significant sums held in trust were in reality assets to which H had access, and that they should form part of the computation of the parties’ assets of which W was entitled to an equal share. Although W accepted that some of the assets were non-matrimonial in character she contended that (i) these pre-marital assets (some of which were held in trust) had become ‘matrimonialised’; and/or (ii) to the extent to which the doctrine of pre-acquired assets might usually justify a departure from equality, that departure was rebutted by the application of the doctrine of compensation. By contrast H asserted the sums were non-matrimonial (with a significant part of the portfolio having been pre-acquired by him) and should not form part of the court’s computation and, in any event, it was a needs case and that the wife’s claim should be approached on that basis.

Before AT v BT the position in relation to compensation was (it was thought) relatively well-settled. Yes, Lord Nicholls of Birkenhead in Miller/McFarlane [2006] 1 FLR 1186 had espoused three guiding principles for the determination of financial remedy claims but whereas needs and sharing were readily understood and applied compensation was rarely so. In RP v RP [2007] 1 FLR 2105 Coleridge J went so far as to suggest at [62] that compensation represented a ‘blind alley at the mouth of which a “no entry” sign should be firmly placed’.

The high-water mark was SA v PA (Pre-marital Agreement: Compensation) [2014] 2 FLR 1028 per Mostyn J. He stated at [24] that he found the concept to be ‘extremely problematic and challenging both conceptually and legally’ and gave five reasons for this. At [35] he stated that ‘[i]t is hard to identify any case where compensation has been separately reflected as a premium or additional element’. However, despite his reservations Mostyn J acknowledged at [36] he was bound by the House of Lords’ decision and expressed the principles concerning a compensation claim as follows:

(i) It will only be in a very rare and exceptional case where the principles will be capable of being successfully invoked.

(ii) Such a case will be one where the court can say without any speculation, i.e. with almost near certainty, that the claimant gave up a very high earning career which had it not been foregone would have led to earnings at least equivalent to that presently enjoyed by the respondent.

(iii) Such a high earning career will have been practised by the claimant over an appreciable period during the marriage. Proof of this track-record is key.

(iv) Once these findings have been made compensation will be reflected by fixing the periodical payments award (or the multiplicand if this aspect is being capitalised by Duxbury) towards the top end of the discretionary bracket applicable for a needs assessment on the facts of the case. Compensation ought not to be reflected by a premium or additional element on top of needs-based award.

No doubt this was a deliberately high threshold that would be all but impossible to satisfy.

Compensation suffered a further blow with Waggott v Waggott [2018] 2 FLR 406 where Moylan LJ stated at [139]:

I next deal with the compensation principle. I do not accept Mr Turner’s submission that the compensation principle is to be applied not only when the applicant has sustained a financial disadvantage in his or her prospective career but also when the respondent has sustained a financial benefit. In my view it is clear from Miller that compensation is for the ‘disadvantage’ sustained by the party who has given up a career. I appreciate that it is based in part on the other party’s career having benefited but I regard that as an assumption rather than an evidential issue which has to be determined, in part because of the difficulty of undertaking any such exercise. In practice it is a claim which appears very rarely to have been established and I do not intend to encourage any more extensive or expensive exploration of the issue. However, as a necessary factual foundation the court would have to determine, on a balance of probabilities, that the applicant’s career would have resulted in them having resources greater than those which they will be awarded by application of either the need principle or the sharing principle. Further, the court must separately determine whether, and if so how, this factor should be reflected in the award so as to ensure that it is fair to both parties.

And so the principle remained in abeyance save for brief flourishes in (i) RC v JC [2020] EWHC 466 per Moor J where prior to the marriage the wife had been on a clear path to becoming a partner in a magic circle law firm and it was found that she was highly likely to have had very high earning capabilities and having applied the sharing principle which was sufficient to meet both the wife’s housing and income needs the judge made a compensation award of £400,000 by way of lump sum; and (ii) TM v KM [2022] EWFC 155 per His Honour Judge Hess where there was clear evidence that the wife had a highly successful career in investment banking prior to devoting herself to the childcare role and supporting the husband’s career choices and she was awarded an additional £500,000 by way of lump sum. However even in RC v JC Moor J gave a warning to litigants who would consider pursuing claims for relationship-generated disadvantage, stressing at [72] that ‘they should not take this judgment as any sort of “green light” to do so unless the circumstances are truly exceptional’.

In AT v BT W’s compensation case was predicated on the fact that she had qualified as an accountant and was recruited into a top private equity house (‘FTO’) at the beginning of 1997. At this point, W was 27. The parties met when they were both working for FTO. It was W’s case that, by the end of 2002, she was already engaged in a serious relationship with H and then commenced cohabitation in 2003. H agreed W was a very successful member of the FTO team. At the time she was the youngest ever partner and the highest paid woman ever in the company. It was common ground that W was required to give up her position in 2007 because the partners at FTO were concerned about the conflict of interests arising from her engagement to H, who, by this time, was working as a senior executive at a rival private equity business called BTI.

The parties married in December 2007 with their two children born in March 2008 and March 2010. In 2011 the family relocated to England.

W therefore highlighted three key events as far as the cessation of her career was concerned: leaving FTO because of her relationship with H, the birth of the parties’ two children, and the family’s relocation to England.

At [35] Francis J observed that it was ‘an important feature of this case that the wife’s career, which had been on an immensely successful trajectory, was brought to a halt in 2007’, at [36] ‘any analysis of this case must conclude that the wife terminated what was already a glittering career at the age of only thirty-seven, for reasons directly connected with her relationship with the husband’ and at [37] this was not an asserted compensation case where one is faced with ‘frankly, speculative assertions’ of ‘somebody having had a good school career and a good degree, with good prospects’ but was ‘a case of somebody with a proven track record of excellence and achievements where her career was brought to a grinding halt for reasons entirely connected with the marriage’. This led him to state that:

‘In my judgement if this is not marriage-generated disadvantage, then that concept has no place in our law. Given that this concept was identified by Lord Nicholls in Miller and McFarlane, to ignore compensation in this case would, in my judgement, be an affront to the proper application of the compensation principle.’

At [39] Francis J therefore stated:

‘I have no difficulty in finding that it is more likely than not that, but for the sacrifices referred to above, the wife would now have very substantial wealth held in her own name. This, as I have said, is not speculation.’

At [101] Francis J said that he would bring ‘on schedule’ all of the assets in the case including the pre-acquired wealth. Whether or not it has been ‘matrimonialised’, bringing ‘on schedule’ H’s pre-marital monies and the trust monies was ‘a proper way of dealing with the compensation principle’. However to balance this ‘which would appear to be unduly generous [W’s] presentation’ he put in all of the tax in relation to the trust (i.e. it was all notionally taxed at 45%) on the basis that this was the tax that will be due if this trust was wound up. This brought onto the schedule the c.£7m that the trust was worth, but also the c.£3.15m of tax if it was wound up. This led to a net asset figure of £13,789,582. At [104] it was said that this worked in H’s favour because much of the tax would probably not be due and in W’s favour as it brought on all schedule money that might otherwise have been left off schedule to recognise that compensation. Thereafter the court adopted a straightforward fifty/fifty division leaving £6,894,791 (before adjustments to reflect W keeping the property worth £190,000 net and her costs). On a cross-check this was sufficient to meet W’s needs.

It is of note that Francis J did not expressly engage with the principles set out in SA v PA (Pre-Marital Agreement) per Mostyn J nor the observations made in Waggott per Moylan LJ that as a necessary factual foundation the court has to determine that the applicant’s career would have resulted in them having resources greater than those which they will be awarded by application of either the need principle or the sharing principle (with the same point having been made in RC v JC per Moor J, namely that the reason for the historic lack of successful compensation claims in so called ‘big-money’ cases was because the financially weaker party had suffered no overall loss, as the amount they would have received by way of compensation was reflected in the amount received under the sharing award).

There is also no detailed consideration of the principle of ‘matrimonialisation’. Although AT v BT was determined prior to Standish v Standish [2024] EWCA 567 it is clear (if it was not before) that this principle (per Moylan LJ at [162]) ‘is a derogation from the principle that sharing applies to matrimonial property and does not apply to non-matrimonial property’ and as such at [163] that ‘it would be helpful to make clear, expressly, that the concept of matrimonialisation should be applied narrowly’.

Likewise there is no detailed consideration of the various decisions as to whether to deduct tax particularly if assets are held offshore (which include K v L (Ancillary Relief: Inherited Wealth) [2010] 2 FLR 1467 per Bodey J (in relation to latent CGT), BJ v MJ (Financial Remedy: Overseas Trusts) [2012] 1 FLR 667, DR v GR & Others (Financial Remedy: Variation of Overseas Trust) [2013] 2 FLR 153 per Mostyn J, and Collardeau-Fuchs v Fuchs [2022] 2 FLR 345 per Mostyn J (latent US capital gains tax)). The conclusion from these cases would appear to be that the latent tax will be deducted in the computation exercise unless it would be ‘unreal’ to do so but at least in part Francis J seemed to consider that it may be unreal in this case.

The analysis in AT v BT has the advantage of relative simplicity and fairness is of course ‘a broad horizon’. However, whether (in particular post-Standish) the use of ‘matrimonialisation’ as a way to give effect to the compensation principle (where properly engaged) with this then balanced by taking into account notional tax that may not be paid is an approach that finds favour in other cases is yet to be seen.

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