Getting Blood Out of a Stone – Handling the Uncooperative Ex-Spouse

Published: 06/07/2022 07:11

Sadly, what follows is not an uncommon scenario. Hotly contested divorce proceedings result in an order being made that requires one spouse to make financial payments to the other over a period of months or years.

Everyone breathes a sigh of relief that the worst is behind them, that they have achieved ‘closure’ and the parties can start to build their new lives.

But then the first payment does not materialise, legal advisers are re-engaged and strongly worded letters are sent. These are met with one (or a sometimes all) of the following:

(1) denial;

(2) claims of impecuniosity;

(3) attempts to challenge the original order (outside any permissible timescale); or

(4) a paltry part-payment.

Discussions are then held amongst the legal team representing the party that has not been paid what was ordered about what steps can be taken to force or coerce the defaulting party to comply. Clients typically express righteous indignation. After all, they reasonably ask, the court made an order – how can it be ignored?

Often, the affairs of the defaulting party can be complex, sometimes even purposefully opaque. After all, if the only asset was a large pile of cash in a bank account there would have been no need for the court to have ordered deferred, staged payments. In most cases in which I am instructed, the defaulting spouse will have an interest in a privately owned and operated business to which a significant value will have been ascribed by a single joint accountancy expert in the divorce proceedings. The million-dollar question is how that value can be ‘unlocked’ and realised without cooperation from the defaulting party.

This is where a court appointed receiver can help. Section 37(1) of the Senior Courts Act 1981 states that:

‘The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.’

Sub-section 6 goes on explicitly to state:

‘This section applies in relation to the family court as it applies in relation to the High Court.’

This sub-section was added by the Crime and Courts Act 2013, which also made available to the Family Court a number of powers that had previously been the sole preserve of the High Court.

Appointing a receiver over someone’s assets (whether in family proceedings or otherwise) is clearly a draconian step. The court recognises this by making such appointments only where it is satisfied that to do so will not cause disproportionate damage to the person against whom the order is made or to any other stakeholders.

As a consequence, it is rarely appropriate to use this form of application as a first step to recover funds and other more traditional remedies should be explored first. In most instances, an order to appoint a receiver will not be granted at the first application. Instead, the court will typically give the defaulting party a period of time to comply and make good any shortfalls, on the basis that failure to do so within the prescribed timescale will result in the receivership appointment being made.

Often the mere threat of a receiver’s appointment is sufficient to make the defaulting party ‘see the light’ and comply. However, sometimes it is necessary to go further.

So, if one can satisfy the court that a receivership is a proportional remedy and the defaulting party is sufficiently intransigent that the threat of an appointment has been insufficient, one needs to consider how a receivership can be implemented in practice.

The key advantage of a court appointed receivership is flexibility. The two short statutory provisions quoted above comprise a significant proportion of all the legislation that exists on the subject. Unlike collective insolvency regimes such as bankruptcy and administration, there is very little by way of a prescriptive framework of complex statutory regulation.

This means that, when considering applying for the appointment of a receiver and preparing the draft order, careful consideration needs to be given as to what strategy the receiver should be encouraged to adopt, what assets can be most easily realised and what powers the receiver will need to achieve these realisations. It is therefore crucial for the legal team to liaise with the prospective appointee at an early stage and to select an insolvency practitioner experienced in court appointed receiverships. This will ensure that the order by which the receiver is appointed is drafted so as to provide the relevant provisions to allow an efficient implementation.

Often, the assumption is that the asset with the biggest value attributed to it is the most important. While one would never want to exclude the big-ticket items, it is important not to be too blinkered in selecting the assets over which the receiver is to be appointed. In my personal experience, there are a couple of things I have found it important bear in mind when considering what assets to include within the terms of the order.

First, one should not be limited simply to those assets listed in the original matrimonial order. Just because the court might have originally stated that a particular asset was to be retained by the defaulting party or transferred to the other party as part of the financial settlement, that should not restrict what assets are listed as those over which the receiver is to be appointed. Consideration should also be given to the possibility that new assets exist at the time of the appointment of the receiver that did not exist at the time of the original court order, perhaps because they have been acquired subsequently.

Secondly, sentimental value should never be overlooked. The threat of the loss of an asset to which the defaulting party attaches significant emotional value can sometimes be more persuasive than the threat of losing an asset of greater financial value. It is important to bear in mind that the purpose of the receivership application is primarily to coerce the defaulting party into compliance with the terms of the original court order rather than to achieve a realisation of assets per se. The receiver may be given wide-ranging powers by the court, but sometimes the best outcome can be one in which they never have to use them because the threat of doing so is sufficient. If, ultimately, they do have to implement the terms of the order by which they are appointed, things can get costly, complicated and, depending on the nature of the assets that are being realised, prolonged. For that reason, the threat of the loss of assets of high emotional value (even if, in the grand scheme of things, they are of relatively low financial value) can be dramatic, encouraging the defaulting party miraculously to ‘find’ the money that was previously said to have been unavailable.

Examples of assets to which I have found defaulting parties tend to have emotional attachments include yachts, classic car collections and even antique shotguns. The proceeds from their realisation may be insufficient to make a huge dent in the amount outstanding, but they are capable of being sold far more quickly than some other categories of asset such as shares in privately owned businesses or assets in foreign jurisdictions. If the receiver’s first step is to realise the assets with the greatest sentimental value, this also ‘brings home’ to the defaulting party the reality of the receivership and the futility of continued default.

The flexibility of the receivership process comes at a cost. Appointments under the Insolvency Act 1986 are governed by reams of detailed regulation and legislation. By contrast, the lacuna of detailed statutory provisions that govern the appointment of a court receiver means they only have the powers that are specifically and explicitly granted to them by the terms of the court order by which they are appointed.

For that reason, it is vitally important that there is close liaison between the prospective receiver and the legal team that represents the party on whose behalf they will be appointed. The previous experience of the prospective appointee will be crucial. In virtually every receivership that I have ever done, I have learned something new that has been factored into future cases. In my experience, there is no better example of work in which one should expect the unexpected.

A prospective receiver with relevant experience should be able to provide helpful insight as to what provisions should be included in the court order by which they are to be appointed. This will vary depending on the assets and circumstances but, critically, it will need to include the following:

  1. Detail of the assets over which the receiver is to be appointed. While draft orders often include a ‘and all other assets belonging to the debtor’ clause, this is usually hotly contested so it is crucial to be clear as to precisely which assets are to be subject to the receivership.
  2. Explicitly stating that the receiver has the power to deal with, sell, rent or leverage security against those assets.
  3. Where one of the assets is something that confers additional rights or powers, most notably in the case of shares in an unlisted company, explicit provisions which make it clear that the receiver shall also be entitled to exercise those powers.
  4. Provisions as to the basis on which the receiver is to be remunerated. This is obviously of keen interest to me as a matter of self-interest, but receivers are commercial animals and we will generally tend to be more proactive if there is a reasonable prospect that we shall eventually be paid.
  5. Last but by no means least, just because the course of a receivership tends to be uncertain, it is vital to include the power for the receiver to be able apply to the court for directions if they see fit.

I have touched upon the issue of the receivership’s costs above, but it is important to provide more clarity on this issue which is always, quite understandably, a matter of keen interest to the person on whose behalf the receiver is to be appointed. As I have said above, the court has huge discretion in receivership matters generally, and if it has been persuaded that the behaviour of the defaulting party is so egregious that appointing a receiver is a proportionate remedy, then it is typically relatively easy to obtain an order that provides for the defaulting party to bear the costs of the receivership in full. The court will normally expect the receivership application to set out the anticipated costs of the appointment in order to ensure that they are not disproportionate. Needless to say, the issue of costs and who is to be responsible for them should be made explicit in the court order as well.

As I hope the foregoing comments have demonstrated, the appointment of a receiver can be a hugely powerful remedy where the progress of the implementation of a family financial order has stagnated. However, in my experience often its true potential comes not from selling off assets, but from the power of persuasion and incentivisation.

Clearly, having a third-party appointed over one’s assets is not something that anyone would relish and the stark prospect of an imminent loss of control tends to encourage serial defaulters to reappraise their decisions. This is not least because those who ride roughshod over the court process tend to be those who most need to feel in control.

In my experience, this is often crucial. For example, in a recent case, while I was appointed over all of the former husband’s assets, I never actually needed to sell any of them. The mere fact of my appointment and the effect that it would have on his life and business was sufficient to cause him to make payment to the former wife in full settlement of all the outstanding awards, including those for costs and interest.

Another fringe benefit is that the receiver is an officer of the court and therefore has a position of impartiality, which can be tremendously helpful in unlocking even the most intransigent situations of deadlock.

I have mentioned a few times in the paragraphs above the issue of an appointment of a receiver over shares in businesses. In many proceedings in which I am involved these are the most significant asset by value, but they are also the hardest to realise. If a receiver is appointed over the shares, clearly they have the power (assuming a correctly worded order) to sell them. The problem is the pool of people brave enough to buy them, for anything like market value, is naturally limited by the circumstances. Few buyers rush for the chance to acquire a business in the face of opposition from the person who was, until recently, at the helm and who will be hell-bent on doing all they can to sabotage it if they are ousted from it. Matters are typically made worse because few business owners are subject to any sort of restrictive covenant and are therefore free to compete immediately with any buyer without restriction.

In most of these cases the defaulting party is also the managing director of the company over whose shares the receiver has been appointed, if not the sole director. A single joint accountancy expert may well have valued the company at a significant sum, but that valuation will always have been predicated on there having been a willing buyer and a willing seller. In a receivership the seller is typically far from willing and will be very unlikely to assist in the smooth transfer of trade that is assumed in any open market valuation. However, this does not mean that the shares cannot be sold. If necessary, shareholders can exert huge influence over the company and the defaulting party. For example, they can reduce or refuse to approve directors’ remuneration and they can remove directors from office or appoint new ones. All of this can pave the way for taking control of the business ahead of sale should no other outcome be possible.

Lastly, having explained what a powerful remedy receivership is in the family lawyer’s toolbox, it is important to end on a note of caution. Often, when I am dealing with complex high value estates there are assets located outside the United Kingdom. This is not necessarily a problem and often applications can be made for the receivership to be recognised by local courts in the foreign jurisdiction so that they can deal with the overseas assets. However, in some jurisdictions this can be less than straightforward, especially where local courts place significant emphasis on the distinction between a process that is intended to recover funds for one specific creditor and collective recovery actions, such as bankruptcy, which are processes intended to recover funds for a wide class of creditors.

This is yet another reason why the planning stage is vitally important to ensure that receivership is appropriate and can be implemented to best effect.

©2023 Class Legal
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