SS v IS  EWHC 1544 (Fam)14 June 2023
Published: 15/09/2023 09:02
Roberts J. Final hearing in financial remedy proceedings with issues around spousal maintenance, offshore trusts and non-matrimonial assets.
The parties met as students in 2003 in Russia and married in 2004. They had essentially no assets at the time of their marriage. They have two children, now aged 19 and 10, and separated in 2020. The W had not worked since the parties relocated to London in 2012 but she practised as a lawyer in Russia for six years before becoming a full time mother.
The H is an entrepreneur in the restaurant business. His first commercial enterprise was in partnership with a friend (‘MP’), in Moscow. The business grew and they expanded to London with another friend (‘TA’) who joined the partnership. The three partners started another successful business, following which, the H and MP relocated to London. By the end of 2012, MP’s brother had also joined the business venture (‘the P brothers’).
The value of the FMH is £5m with an interest only mortgage of £3m. Following separation, the W and the children remained living in the FMH and the H rented in central London.
The assets in the case amounted to c.£9m using the SJE’s valuation of the business interests. Save for the equity the FMH nearly all of the assets were held in offshore trusts. The parties agreed that this was not a case for a clean break and that there should be spousal maintenance for a ten year term, but they did not agree on the quantum of maintenance and whether the term should be extendable.
The business interests/ issues
Since 2018/19, there had been formal attempts to terminate the business partnership with the P brothers. Most recently, MP, who gave evidence, offered to purchase the shares (in companies known as POHL and GCG) held by a trust of which the W and H were the only beneficiaries, in addition to buying the shares held by TA. The offer exceeded the valuation provided by the SJE but she considered the P brothers to be special purchasers given they are existing shareholders.
The H is also the sole beneficiary of another trust which held a 40% interest in AI Limited, with the other 60% owned or controlled through the P brothers’ trusts. AI was a vehicle to provide loans to restaurant businesses, its only income was the interest on those loans. Between March 2014 and June 2020, approx. £4.95m had been distributed to the H through this trust. The majority of AI’s net assets were reflected in a loan to another company (PLTL) which was also a corporate financier and had advanced loans to companies owned by GCG. It appeared that PLTL was controlled in its entirety by the P brothers and therefore, the H only had an interest in AI limited.
However, six weeks prior to the final hearing, the H asserted that there was a binding but undocumented agreement that he should be entitled to recover 40% of the entire sums owed by PLTL. The judge found from H’s oral evidence that he was prepared to litigate with the P brothers in relation to his alleged entitlement. At the current value, this would produce a further £1.016m–£1.32m for the H. H’s counsel invited the court to consider that the prospects of H recovering any part of that loan were very low but, given H’s oral evidence, the judge was not persuaded.
The judge found that the prospect of litigation over the PLTL loan had informed the H’s approach to the matrimonial litigation, as he sought to buy out the W’s interest in POHL and GCG in order to retain the parties’ full interest and provide leverage for any litigation on the PLTL loan.
Non-matrimonial assets – the H’s case
The trust of which the W and the H were the sole beneficiaries also held 46.66% of a further corporate entity, FSHL. FSHL was incorporated two years before the marriage ended and was a vehicle through which the H and TA ran a restaurant and a wine bar. The SJE valued the 46.66% interest at £4m. The H’s case was that £4m was too high and that, in any event, the value represents an unmatched contribution by him post-separation. The restaurant began trading 9-10 months prior to separation and the wine bar commenced trading post-separation. The venture was funded initially by loans from the H and TA. It is accepted that the H’s initial loan represented an investment of matrimonial assets, but the restaurant then closed in lockdown and the H secured external investment which repaid the original loans from H and TA. The H and TA both gave personal guarantees to the investor that their investment would be returned and agreed that they would not be entitled to draw any dividends until the loans had been repaid to the investor.
The judge considered the case of C v C (Post-Separation Accrual)  1 FLR 939 and did not accept the H’s argument that any value accrued after the external investment (and the repayment of the matrimonial investment) must be considered entirely non-matrimonial. The judge stated that the ‘footprint’ of the original investment is not erased completely because of its reflection in the initial start up costs. In any event, the W did not seek to share in FSHL but to offset the value of it against her retention of the FMH.
Aside from the FMH, the parties agree that the W should retain the proceeds of a holiday home in Cyprus. H had sold an apartment in Moscow which he inherited from his mother for £100,000. A further property in Russia was held in the W’s sole name and occupied by her parents. The judge ignored it for purposes of computation on the basis that the prospect of the W realising any value was sufficiently remote.
Neither party had any savings. The H was due to receive £350,000 from TA by way of repayment of a loan, but that depended on the sale of TA’s flat.
The parties’ positions on the disputed issues
|W’s Position||H’s Position|
|Shares held in the trust||50% of the shares in POHL and GCG to be transferred into a separate trust for W|
(the W to receive none of the shares in FSHL)
|H to retain all shares held by the trust and buy out W’s interest|
*In his final offer, H included that, if all or any of the shares were sold in the next 5 years, W would be paid 10% of the net proceeds but she would be responsible for any tax incurred by her upon her receipt.
|Lump Sum||N/A||1st offer||2nd offer||3rd offer|
|£500k to W||£1.66m to W||c.£1.72m to W*|
|Spousal PPs||£144,000 (index linked) p.a. for ten years with extendable term||£36,000 p.a. (index linked) for ten years, with s 28(1A) bar|
|Child PPs||£30,000 p.a. to each child||£24,000 p.a. to W for their daughter – to be paid directly to their daughter once she reaches 18. Payments from H for their son to be arranged directly with their son|
The H’s open position appeared for the first time in his counsel’s skeleton argument. During the hearing, the H increased the lump sum payable by him to the W, essentially to a balancing lump sum which would give the W 50% of the value of the total of the FMH and the net value of the offer to purchase the shares (in POHL and GCG).
The judge found that, with the W’s claims compromised, the H would not immediately relinquish his shares without further negotiation and MP’s evidence was that he had not closed his mind to further negotiation. Any increase in value as a result of future years trading would represent genuine post-separation accrual to which the W would have no entitlement, but there was a reasonable prospect that the W could achieve more for her 50% interest than the value reflected in the H’s current proposal.
The judge considered the benefits to the W in not having to be involved in any further litigation by realising her interest by way of a lump sum from the H, it also removed potential tax implications of repatriating funds which the W would need to meet her needs going forwards. The W challenged the structure on the basis that it failed to meet her needs and represented a shortfall in terms of her 50% entitlement.
The judge was persuaded that it would be unfair to fix the value of the W’s 50% interest by reference to the offer from the P brothers. In addition, there was insufficient evidence before the court to support a finding that the variation of the trust would unreasonably prejudice the H’s position in terms of the dilution of his own shareholding.
The judge started from the position that the court was entitled to proceed on an assumption that the H’s ability to access funds to meet his own and the W’s ongoing expenses was not limited to the ‘black letter’ of the figures in his financial disclosure, as he had shown an ability to borrow and access significant funds through third party sources.
The judge ordered the FMH to be transferred to the W or sold with the W retaining 100% of the net proceeds. The W also to retain the net proceeds of sale from the Cypriot property and the Russian property. The H was to retain the proceeds of his late mother’s property and the £350,000 owed to him. The H will provide the W with an indemnity in relation to any unbilled/ outstanding fees to the trustees and any tax on historic distributions.
The trust was to be varied to transfer 50% of the shares to a separate settlement of which the W will be the sole beneficiary, the W to be responsible for all and any costs incurred.
The H to pay to the W periodical payments at a rate of £60,000 p.a. for ten years, with a s 28(1A) bar. The H will meet the costs of their son’s tertiary education and their daughter’s secondary and tertiary education, in addition the H will pay to the W £24,000 per annum for the benefit of their daughter until she completes tertiary education to first degree with only 1/3 being paid to the W during their daughter’s tertiary education and the rest directly to their daughter. In the event their son returns to live with the W whilst at university, the H will pay 1/3 of £24,000 p.a. to the W and other 2/3s to their son directly.