Third Party Control of Resources

Professor Gareth Miller

Address: The Norwich Law School, University of East Anglia, Norwich, NR4 7TJ.

Email : gareth.miller@uea.ac.uk

1996 P.C.B 190

It is well established that in making orders for financial provision following divorce the court will not be deterred by difficulty in ascertaining or identifying the precise extent of a spouse's resources. In Robinson v. Robinson⁽¹⁾ Scarman L.J. said that a man is not to be criticised because he carries on his business by making use of capital and borrowing but that the

"courts must keep their common sense and they must look to the standard of life that the man nevertheless maintains - in fact, at his whole life-style - and one does not need any very great research into the authorities to observe that the courts have consistently refused to be blinded by arithmetical science in determining the ability of a rich man to make provision for his wife and children."

In the recent case of Thomas v. Thomas⁽²⁾ Waite L.J. said that

"the court is not obliged to limit its orders exclusively to resources of capital or income which are shown actually to exist. The availability of unidentified resources may, for example, be inferred from a spouse's expenditure or style of living, or from his inability or unwillingness to allow the complexity of his affairs to be penetrated with the precision necessary to ascertain his actual wealth or the degree of liquidity of his assets."

One reason why a spouse may be able to enjoy a standard of living higher than that which seems justified by the resources actually vested in him or her is that he or she enjoys access to resources to which he or she has no absolute entitlement. Thus he or she may benefit from, indeed he dependent upon, the generosity of a relative, or be a beneficiary under a discretionary trust. In Thomas v. Thomas the court was concerned with the extent to which the husband could be regarded as having access to funds controlled by the family company. The court turned to cases involving trusts and applied the principles to the family company as if it were a trust and the shareholders the trustees.

Interests under discretionary trusts

In considering the extent to which the interest of a beneficiary under a discretionary trust can be taken into account, the court should in the first instance have regard to the payments made by the trustees in the past and the policy, if any, underlying such payments. In Howard v. Howard⁽³⁾ Lord Greene M.R. said that if the court finds that the husband is, in fact, receiving regular payments under a discretionary trust it is perfectly entitled to make an order against him on the footing that those payments will in all probability continue, leaving it to the husband to come back to the court and seek a variation if at some future date they are stopped or reduced. Where there has been no payment the court may consider, in so far as it can, the reason or reasons for this and in particular any statements of policy made by the trustees. The trustees may have understandably made no payments in order to preserve capital for a child beneficiary when he or she attains the age of majority. If it seems possible that the trustees have been influenced by the claim for financial provision which might be made by or against the potential beneficiary the court cannot make an order for financial provision which is designed to bring pressure on the trustees to make a payment in favour of a party to the marriage or a child of the family. In Howard v. Howard an order for maintenance had been made against the husband which left him with only 500 a year on which to live and although he was a beneficiary under a discretionary trust, the trustees had exercised their discretion so that the husband received nothing under the trust. In the Court of Appeal Lord Greene M. R. said that if the object of the Judge's order was to put pressure on the trustees that was wrong in principle.⁽⁴⁾

However, the court is not limited to a consideration of the prospects of change of view on the part of the trustees. While the court cannot interfere with the exercise of the trustees' discretion, it is entitled to look at the practical realities of life and consider reasonable expectations. In O'D v. O'D,⁽⁵⁾ where the court was concerned with the ability of the husband to pay a lump sum having regard to his interest in the family business, Ormrod L.J. said that "the court was concerned with the reality of the husband's resources using that word in a broad sense to include not only what he is shown to have, but also what could reasonably be made available to him if he so wished." This has been the approach adopted in relation to trusts.

In B v. B (Financial Provision)⁽⁶⁾ the wife was a beneficiary under a settlement made by her father in 1951 under which the trustees had the power at their absolute discretion to vest the whole or any part of the capital in the wife absolutely. In 1965 the wife had herself created a settlement under which she could withdraw all or any part or parts of the trust fund with the consent of the trustees. The Court of Appeal held that both settlements were potential sources of capital for the wife for the purposes of the Matrimonial Causes Act 1973, s.25(l)(a) even though not under her absolute control⁽⁷⁾. In looking at the practical realities, the potential of the 1951 settlement might be small, but that of the 1965 settlement was great. Ormrod L.J. said that it was "not to be supposed that the trustees would refuse their consent if the wife wished to free capital for any reasonable purpose more especially as the other beneficiaries [were] already amply provided for."⁽⁸⁾ The Court of Appeal rejected the argument that the effect of the judge's order for the payment of a lump sum by the wife was to put pressure on the trustees to exercise their discretion in such a way that they would not have exercised it even if the marriage had continued. The decision in Howard v. Howard was distinguished.

In Browne v. Browne⁽⁹⁾ the wife was a beneficiary under two trusts the assets of which were derived from her mother. The wife was sole beneficiary under a trust which had been established in Jersey shortly before her mother's death to enable the assets to be distributed in such a way as not to attract tax in the United Kingdom. The assets were worth some 430,000. She was also a beneficiary, perhaps the sole beneficiary, under a trust set up in Switzerland and taking effect in Lichtenstein the assets of which were worth between 100,000 and 145,000. The Court of Appeal rejected an argument that an order that the wife make a lump sum payment of 175,000 to the husband placed improper pressure on the trustees. It also found that the Judge had been entirely justified in concluding that the wife had exercised "effective control" over the trust or, as Butler-Sloss L.J. said, "perhaps more appropriately" had "immediate access to the [trust] funds."⁽¹⁰⁾ Butler-Sloss L.J. said it was relevant to note that prior to the separation and divorce, every application by the wife for funds for herself and her husband for any of the pursuits that they wished to engage in, pleasure as well as the buying of property, was met and the sums asked for were advanced at the request of the wife. The judge was justified in concluding that the wife was in a position to ask for money and to have it paid and nothing to show that the trustees would not do so. Moreover, the position had not changed as a result of the separation. It was apparent from the views expressed by the trustees in correspondence shown to the court that their view of the husband had been coloured by the way in which the wife had expressed her views of him. The objection of the trustees of both trusts to paying out money to pay off the judgment made at first instance was that they did not wish this money to go to the husband. Butler-Sloss L.J. concluded that the necessary funds "would be paid today if the trustees were satisfied that the wife had to have the money."⁽¹¹⁾

In Thomas v. Thomas⁽¹²⁾ Glidewell L.J. derived the following principles from the authorities:

(1) Where a husband can only raise further capital, or additional income, as the result of a decision made at the discretion of trustees, the court should not put improper pressure on the trustees to exercise that discretion for the benefit of the wife.

(2) The court should not, however, be "misled by appearances"; it should "look at the reality of the situation".

(3) If on the balance of probability the evidence shows that, if trustees exercised their discretion to release more capital or income to a husband, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response. In that situation if the court decides that it would be reasonable for a husband to seek to persuade trustees to release more capital or income to him to enable him to make proper financial provision for his children and his former wife, the court would not in so deciding be putting improper pressure on the trustees.

The family company

In Thomas v. Thomas the court went on to apply these principles to the family company as if it were a trust. The husband had at all material times worked for the successful family car sales company founded by his father and uncle, of which he was now joint-managing director with his brother. He received only a relatively modest income as a director and only one dividend had been paid, after pressure from the Inland Revenue, though substantial payments had been made to the pension funds of the brothers. The judge had found that the husband and his brother had effective control of the day-to-day management of the company and could take decisions on the future direction of the company. He was also a member of Lloyds though this did not at present yield an income and there was some liability. The matrimonial home had been purchased in the husband's name and the equity was valued at f 170,000 though subject to charges to support Lloyd's liabilities. The judge had ordered the sale of the matrimonial home and the payment to the wife of a lump sum of 158,000. All capital claims would then be extinguished, but periodical payments were ordered in favour of the wife and children.⁽¹³⁾

The award of the lump sum was attacked as being improper in that it assumed that the husband could find alternative security for the Lloyd's liability or because it unfair pressure on him to throw himself on the charity of third parties such as his mother and/or brother.⁽¹⁴⁾ It was also wrong to make orders for periodical payments which resulted in a deficiency in the hands of the husband after he had paid for his children's education. In reply it was argued, inter alia, that it was legitimate to expect the husband to improve his financial position by arrangements which he could very easily make with his brother and mother. It was entirely proper to take account of the fact that an increase in the husband's' income could readily be achieved at minimal cost to the company and without involving any substantial departure from its policy of self-financed expansion.

The Court of Appeal found the judge's orders to have been justified. In relation to capital Waite L.J. said⁽¹⁵⁾:

"The court was confronted by a husband with immediate liquidity problems but possessing substantial means. He was proposing that the court should make a capital order which would extinguish for ever all claims by the wife to capital relief from him or his estate. The order that he was suggesting was paltry when measured against his total resources and expectations, assessed in broad terms. ... On such a husband a heavy onus lay to satisfy the court that all means of access to liquid funds to support suitable outright provision for his wife had been thoroughly explored and found to be impossible. If he failed to demonstrate that, he ran the risk of having the inference drawn against him that ways and means could be found of funding suitable provision for the wife's capital needs."

The judge had been justified in drawing inferences as to the availability of funds to provide alternative security for the obligations attached to the home and thus to liberate the primary equity in the home to provide an appropriate lump sum.

In relation to the periodic payments Waite L.J. said⁽¹⁶⁾:

"The judge's order certainly involved a powerful inducement to the extended family to come to the husband's assistance, but the provision of that incentive fell ... within the bounds of judicious encouragement and lay well short of the kind of order that is condemned in the authorities as placing improper or undue pressure on third parties."

The judge had acted within the proper limits of his discretion and his decision was not one with which the court could interfere.

Encouragement without improper pressure

In cases where a spouse enjoys access to wealth but no absolute entitlement, the court cannot, and will not, act in direct invasion of the rights of, usurp the discretion exercisable by a third party or put undue pressure on that party. However, there "will be occasions when it becomes permissible for a judge deliberately to frame his orders in a form which affords judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court's view of the justice of the case."⁽¹⁷⁾ Waite L.J. acknowledged that there are bound to be instances where the boundary between improper pressure and judicious encouragement proves to be a fine one, and it will require attention to the particular circumstances of each case to see whether it has been crossed.⁽¹⁸⁾

1. (1981) 2 F.L.R.1 at p. 14. See also J v. J [1955] P.215; Schlesinger v. Schlesinger [1960] P.191; Newton v. Newton [1990] 1 F.L.R. 33 and E v.E [1990] 2 F.L.R. 233.

2. [1995] 2 F.L.R. 668.

3. [1945] P.1.

4. Ibid., at p.4.

5. [1976] Fam.83.

6. (1982) 3 F.L.R. 298.

7. This is now s.25(2)(a) of the 1973 Act.

8. ibid., at p.303.

9. [1989] 1 F.L.R. 291.

10. ibid., at p.293.

11. ibid., at p.294.

12. [1995] 2 F.L.R. at p.678.

13. The husband was also to pay the school fees for the children. Both spouses were agreed in wishing their sons to attend fee-paying schools though this had the effect of leaving the husband with a deficiency of income. However, the Court of Appeal found that the judge "was fully entitled to regard independent school fees as a luxury which the husband would either have to forgo altogether if his circumstances [were] induced as constricted as he claimed, or else achieve with help from his brother and mother." (ibid., fit pp. 676-677).

14. It was also attacked as premature, in that the husband had merely failed to prove a negative, i.e. failed to satisfy the court that alternative assets were not available to support the security. It was argued that the judge should have adjourned the application to enable the feasibility of alternatives to be explored further. This was restricted by the Court of Appeal which distinguished the position in O'D v. O'D [1976] Fam. 83 where it was suggested that where a husband might have difficulty in raising a lump sum he should be given every opportunity of putting forward a scheme to comply with the order.

15. [1995] 2 F.L.R. 668 at p.676.

16. ibid., at p.677.

17. ibid., per Waite L.J. at pp.670-671.

18. Glidewell L.J. (at p. 678) also pointed out that since the husband and his brother were trustees of a trust for the benefit of the children which owned one-quarter of the shares in the company, they would be obliged, as trustees, to use their vote in the interests of the children, e.g. when considering whether to declare a dividend which would put the trust in funds to pay for the children's education.

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