Supreme Court remits family law appeal regarding company asset valuation and tax extraction mechanisms to High Court.

[2004] IESC 101

THE SUPREME COURT

185/04

Denham J

Hardiman J.

Kearns J.

IN THE MATTER OF THE JUDICIAL SEPARATION AND FAMILY LAW REFORM ACT, 1989 And IN THE MATTER OF THE FAMILY LAW

ACT, 1995

Between:

B.D.

Applicant

and

J.D.

Respondent

JUDGMENT of Mr. Justice Hardiman delivered the 8th day of December, 2004.

1. This is the appeal of the respondent (hereafter called the husband) against paragraphs (ii) and paragraph (viii) of the order of the

High Court (McKechnie J.) on the 11th December, 2003. The substantive order, against which there is no appeal, granted a decree of

judicial separation of the parties. The two paragraphs in question were ancillary orders. By the first of them it was ordered that the

husband pay the wife a total sum of €4 million between 2004 and 2006. The other order the subject of appeal provided for the

payment by the husband to the wife of a contribution to costs in the amount of €100,000.

2. The grounds of appeal are quite confined. By the far largest asset in the case was what the learned trial judge described as “the

business conducted through the group of companies mentioned above”. It was on the basis of a valuation of these companies in the

sum of 10 million euro, and certain other findings, that the learned trial judge made the orders impugned. It is said that the valuation

of 10 million euro is too large and that the learned trial judge’s approach to the question of valuation is erroneous. Even apart from

this, however, it is said that the learned trial judge erred in “failing to take into account the taxation implications and other relevant

factors relating to the [husband’s] ability to extract such sum from the group of companies as would enable him to pay the said sum

of €4 million to the [wife]”.

3. It must firstly be said that the learned trial judge’s judgment is an immensely detailed and meticulous one. He was dealing not only

with the claim to matrimonial reliefs but to a claim, referred to in argument in this court by way of abbreviation as the “partnership

claim”, that the wife was, quite independently of the family law legislation, entitled to a beneficial interest of 50% in the group of

companies. This claim was rejected after an exhaustive and transparent examination of the history of the companies which from small

beginnings, and after grave difficulties, have achieved their present prosperous state. The learned trial judge then proceeded to

consider the wife’s claims to the judicial separation (which is not contested) and to the ancillary orders, with the result set out

above. Certain other orders are not the subject of appeal.

The High Court judgment.

4. The penultimate paragraph of the High Court judgment, which occurs after the sums ordered to be paid have been fixed, referred

to the realisation costs and taxation issues as follows:

“As a result of the orders which I have made in this case, it is evident that Mr. D. will have a period of over two years to

discharge his full liability to Mrs. D. and that for the entire duration of this time he will be solely in charge of this group of

companies. With such position, he will have maximum flexibility to structure his resources in a most advantageous way

possible from a taxation point of view. During the hearing of this case evidence was given, largely by Mr. Grant, as to how

any lump sum payment could be extracted from the company. Such evidence touched upon a number of possibilities

including the obtaining of money by way of dividend, by way of director’s salary and by way of sale share to a third party.

This evidence was, as it had to be, vague uncertain and unclear in that there were no concrete circumstances

surrounding the issue. Given the manner in which I have approached the granting of relief to Mrs. D., which as a result

confers fully ownership on and gives total flexibility to Mr. D., I do not believe that it would be correct or appropriate for

this Court to stand in the shoes of a taxation adviser to the respondent in the post litigation situation. It becomes

entirely a matter for him as to how he discharges these financial obligations, which obligations have been deliberately

staggered and which, of course, subsume all monies and other benefits which the applicant previously has been in receipt

of from this group of companies.”

Taxation.

Appellants submissions.

5. It was trenchantly argued for the husband that the learned trial judge had erred in failing to make any findings as to the financial

incidents of the extraction of sufficient monies from the company to discharge the lump sums ordered to be paid to the wife. There

was no dispute that extraction from the company was the only feasible source of these monies. Equally, there was no dispute that

the sums would fall to be paid to the wife net of taxation and that the burden of paying the sums, and paying them net, would fall on

the companies and the husband who is the controlling shareholder in the companies.

6. For the husband, Mr. Gerard Durcan S.C. made the obvious point that what may be fair and reasonable in a case where one of the

parties had ten million euro in a bank account might not be fair and reasonable where, instead, the assets are shareholdings in a

trading company. Not only does the liability to tax have to be taken into account, but so also does the commercial effect of

extracting this money from the companies.

7. Mr. Durcan then advanced a number of separate arguments. Firstly, (and this was not disputed) he submitted that the concept of

“proper provision” within the meaning of s.16 of the Family Law Act, 1995 means a provision which is proper for each spouse.

Pursuant to s.1025 and s.1030 of the Taxes (Consolidation) Act, 1997, the tax burden will fall entirely on the husband, it is simply not

possible to form a view as to whether proper provision has been made for each spouse without considering the effect of that liability

and the consequences of meeting it on the husband. This, in turn, cannot be done without making certain findings in relation to the

liability to tax.

8. Secondly, Mr. Durcan referred to the provisions of s.16(5) of the Act which provides that “the Court shall not make an order [of

the kind in question here] unless it would be in the interests of justice to do so.” By analogy with his first argument he says that the

interests of justice cannot properly be ascertained without making certain findings in relation to the liability to taxation and

associated matters.

9. Thirdly, Mr. Durcan draws attention to the fact that the order under appeal may not be the final adjustment between the parties.

Even though this is an ample resources case either of the parties may have reason to make further application to the Court. In

particular, it is not unlikely that one or other of the parties will apply for a decree of divorce. In that event the financial terms may be

revisited. If there is no finding as to the view of the tax liability and consequential matters which actuated the learned trial judge to

make the orders which he did, it will not be possible to ground a submission that the present orders were made under a view of what

would be possible from a point of view of tax efficiency or commerciality which was not borne out by the facts.

10. Mr. Durcan submitted, specifically, that the learned trial judge should have considered and made findings on the following matters:

(a) Whether it was possible to remove the sums of money in question from the company over a two year period.

(b) What mechanism could be used for extracting such funds,

(c) What would the commercial effects of the extraction of the funds on the viability and future of the business and

(d) What would be the tax effects of the extraction of the funds.

11. He stressed that he was not submitting that the learned trial judge should have made a determination as to the most

commercially and fiscally effective method of extraction and enforced that on the husband and the companies. But he said that the

relevant taxation and commercial matters should have been addressed to the extent set out under the four headings above. Such a

course, he said, would have rendered it more likely that a sum which would represent proper provision for the husband as well as the

wife would have emerged, and would also have facilitated any future adjustment necessary.

12. Mr. Durcan particularly emphasised that both parties were agreed, and the learned trial judge found, that the husband would

continue to run the business. Indeed, in no other way could he confidently have made the payments ordered, or provided for himself

and (so far as necessary) for the couple’s now adult children, in the standard to which the parties have become accustomed.

Respondent’s submissions.

13. For the wife, Mr. David Hegarty S.C. firstly pointed out that the learned trial judge had in fact heard considerable evidence on the

taxation and the commercial consequences of extraction of large sums of money from the company. There was a considerable

measure of conflict in this evidence. Mr. Hegarty conceded that it would have been “ideal” if the learned trial judge had said what

view he took of those matters. He conceded that the learned trial judge appeared to “jump” from the topic of how the money was to

be extracted (without making any finding on it) to the amount of money he actually ordered. Mr. Hegarty said, however, that the

learned trial judge simply left it up to the husband to perform the extraction in the most fiscally and commercially effective fashion.

14. Mr. Hegarty submitted that the learned trial judge had been right to give no consideration to the tax implications of the provision.

This was so, he said, because the wife had lost her case to an equity in the company. Accordingly, said Mr. Hegarty, to fix the lump

sum to which she was entitled, wholly or partly, with reference to the tax liabilities of the husband or the company would deprive her

of the benefit of having lost the partnership claim. In any event, he submitted, the process of forming a view about the tax and

commercial consequences of extraction is simply too complicated. It would ask too much of trial judges. They would be compelled, in

effect to take commercial decisions. This is antipathetic to the fundamental principles of family law which, Mr. Hegarty submitted,

come down to value judgments. Mr. Hegarty did not conceal that he was contending for a “broad brush” approach to the matters

which, by virtue of s.16 of the Act of 1995, the Court must have regard. It would be particularly inequitable in this case to adopt a

more precise approach. Since the wife had lost her claim to equity in the company she should not be troubled by any consideration of

the husband’s or the companies’ tax or commercial risks and liabilities. All these, said Mr. Hegarty, were the husband’s problem.

Decision on tax and associated issues.

15. I entirely agree with the learned trial judge that it is not for the Court “to stand in the shoes of a taxation adviser to the

[husband] in the post litigation situation.” Indeed, on this appeal it is not submitted that the Court should do so, but merely that it

should, for the reason set out above, make findings of the sort proposed by the appellant husband. I note that a considerable amount

of evidence was heard on this topic. From this it emerged that the likely tax payable on the payment of the lump sums could vary

between 20% and 42% i.e. a sum of between €800,000 and €1,680,000. These are clearly very substantial sums in the context of the

total worth of the parties. Moreover, they make no account of the commercial costs of realising them, on top of the basic sum of €4

million on which they are computed.

16. In my view, these sums are simply too significant to be dealt with simply by according the husband total flexibility in raising them.

This indeed, might be more aptly described as simply imposing no additional constraint on him in doing so.

17. If one envisages that, instead of a possible tax liability of up to €1,680,000 there were some other liability in that maximum

amount, it would plainly be unjust for the Court not to take it into account. If either the husband or the company had personal or

commercial debt which might amount to that sum there is no conceivable basis in which it could be excluded from consideration

having regard, for example, to the terms of s.16(i) which requires the Court to consider, inter alia,:

(a) The income, earning capacity, property and other financial resources which each of the spouses concerned has or is

likely to have in the foreseeable future,

(b) The financial needs, obligations and responsibilities which each of the spouses has or is likely to have in the

foreseeable future (whether in the case of remarriage of the spouse or otherwise)…”.

18. In T. v. T. [2002] 3 IR 334 at 415, Fennelly J. said:

“The parties accept also that, in order to make provision in the form of a lump sum for the wife in accordance with the

law, assets will have to be realised. This, in turn, necessarily entails the incurring of realisation costs and expenses in the

form of legal and other professional expenses and tax liability, in particular capital taxes. On this last basis, it is accepted

that the relevant value of the assets is reduced”.

19. Accordingly it appears that both statute and case law positively require realisation costs (in this case, tax liability), to be taken

into account, in a specific way.

Position of the company.

20. In the present case, no question arose as to the propriety of equating the value of the companies with the assets of the parties

or one or other of them or of the making of provision for the wife, in principle, from the assets or earnings of the company. In those

circumstances it was no doubt quite proper to proceed in the manner indicated. There was no question, on the evidence, of prejudice

to any third party in so doing. But lest the case be regarded as a precedent for proceeding in this way in other, quite different,

circumstances, I would remark that the interests of the company itself and of other persons interested in it in any capacity might, in

a proper case, require consideration. It must not be forgotten that the company is, in law, a person distinct from its shareholders. A

case will no doubt arise where this will be the basis of a submission to the Court.

Valuation.

21. The appeal also extended to a challenge to the learned trial judge’s valuation of the company in the sum of 10 million euro. This

was a topic on which the learned trial judge heard a considerable volume of evidence from three accountants. He was presented with

sharply varying estimates of which 6 million euro was the lowest and 15 million euro the highest. This latter valuation was, however,

substantially qualified in the course of the hearing as different aspects of the companies’ commercial context were discussed.

22. There is no doubt that there was support in the evidence before the High Court for the valuation favoured by the learned trial

judge. On the figures available it was, perhaps, a high valuation but was supported by evidence and represents a view which the

learned trial judge (who saw and heard the experts) was entitled to take. The Court does not see any basis on which it would be

proper to interfere with his decision in this regard.

23. The valuation and the lump sum award, together with the cost of buying the wife out of the family home, transaction costs and

tax liability, is such that the costs to the husband of making the provision ordered substantially exceeds one half of the value of the

company. Whether this is appropriate in the circumstances, and if not what sum would be appropriate, can only be addressed after a

view has been taken on two of the four points mentioned in a previous section of this judgment. The tax consequences must be

considered. The complexity and unpredictability of the effect on the company, in all the circumstances of the case, must be set

against the simplicity and certainty of the award of a sum certain in cash to one of the parties. We therefore consider it necessary

that the Court should address two of the four points proposed by Mr. Durcan that is the mechanism to be used for the extraction of

funds from the company and the tax effects of such extraction. We do not, in the circumstance of this case, consider it necessary to

address the other two points proposed by Mr. Durcan, viz whether it is possible to remove the sums of money in question from the

company over a two year period and the commercial effects of such extraction. These must be regarded as having been resolved by

the trial judge. Of course, in another case with different circumstances these points might be determinative.

Costs.

24. This is an ample resources cases. The wife was unsuccessful in the primary claim which she urged, to a 50% equity in the

companies. In all the circumstances and bearing in mind that it is a family law action I do not see any cogent reason why either party

should contribute to the other’s costs and would set aside the order for the payment of €100,000 as a contribution to costs.

25. In the course of the hearing the Court heard of an estimate given to the High Court of one side’s costs in this action (far in

excess of the contribution to the wife’s costs ordered) which caused me surprise and disquiet. It appears that the case may actually

have run somewhat more cheaply and the total sum mentioned not actually disbursed.

26. We make no comment as to the amounts of the costs in this particular case, which was one of some, but not extreme,

complexity. But we would observe that the cost figures mentioned or deposed to affidavits of means in family law actions are

sometimes very high, out of proportion it would appear to what is involved even in an ample resources case. They can be very

burdensome, especially but not exclusively in less prosperous circumstances. Those charging instruction fees or brief fees, must bear

in mind that they are to be related to the work done and not directly to the asset value in a case. Obviously the latter will affect the

complexity and the level of responsibility involved in the case but these are not the sole determining factors. One bears in mind, of

course, that the solicitor’s fee in particular will reflect outlay and that the costs of professional witnesses may be a very substantial

factor in this. These costs, too, require to be kept within bounds. The assets in family law cases often extend to valuable house

property, commercial property and other items whose value may have increased very rapidly in recent times. It is not to be assumed

that this rate of price inflation is to be applied automatically to legal costs inflation. These observations are not made with particular

regard to the present case.

27. Because this is a family case, and because one must look to the detailed result of the case and the overall propriety of the

provision for both parties and because in such circumstances an award of costs may itself have an skewing effect or be a cause of

bitterness, I would not consider it appropriate to make any order in respect of the costs of the High Court action. Each solicitor will

accordingly look to his or her own client for agreed or reasonable remuneration.

Conclusion.

28. The Court will, for the reasons set out above, set aside paragraphs (ii) and (viii) of the order of the High Court. The appellant

urged us, in that event, to substitute our own award for that of that of the learned High Court judge whereas the respondent urged

that the case be remitted if the appeal was successful in whole or in part.

29. I quite appreciate the considerations of economy and speed which makes the husband wish to have a sum substituted in this

Court. However, I do not believe that we can do this. Firstly, the relevant factors, isolated in the four paragraphs quoted elsewhere

in this judgment, were not addressed at all by the learned High Court judge by way of finding: each party is entitled to a decision in

the High Court on these issues and, if desired, an appeal from it. The position in this case cannot be compared to an alteration in a

personal injuries award, where the issues have been fully addressed in the Court of trial. Furthermore, insofar as the relevant matters

were covered in evidence, it was on oral evidence with cross-examination and this, separately, disinclines us to make a decision on

the transcript.

30. I would accordingly remit the case to the High Court so that that Court may consider and make such findings as it considers

appropriate in the issues of:

What mechanisms could be used for the extraction from the company of any funds ordered to be paid to the wife.

The tax effects on the companies or the husband of the extraction of the relevant funds.