Supreme Court allows divorce proper provision appeal, adjusting lump sum based on 2001 settlement terms.

THE SUPREME COURT

Appeal No. 94/2007

IN THE MATTER OF THE FAMILY LAW ACT 1995

AND IN THE MATTER OF THE FAMILY LAW (DIVORCE) ACT 1996

Denham J.

Fennelly J.

Finnegan J.

BETWEEN:

S. N.

APPLICANT/APPELLANT

and

P. O’D.

RESPONDENT/RESPONDENT

JUDGMENT of Mr. Justice Fennelly delivered the 28th day of July, 2009.

1. This is an appeal from the judgment of the High Court (Abbott J) dated 29th November 2006. It concerns the proper

provision to be made on the divorce of the parties pursuant to the Family Law (Divorce) Act 1996.

2. The appellant and the respondent were married on the 14th of May 1994 in England. The appellant (“the wife”) is a U.K.

National aged about 39 years of age; the respondent (“the husband”) is an Irish citizen aged about 53; both have lived at all

material times within the jurisdiction. There are two children of the marriage: a girl born in 1995 and a boy born in 1996.

They are in the wife’s custody. No issue concerning their care arises on the appeal, save for a peripheral question on the

amount of maintenance. The parties can be described as being well off. The wife in particular has been very successful in

business; but the husband, though significantly less wealthy, has sufficient means.

3. The parties have lived separate and apart from one another since August of 1999. Judicial separation proceedings in the

High Court were compromised. A decree of judicial separation was granted based on the terms of a consent dated 16th

November 2001 received and filed in court. The principal issue in the present divorce proceedings concerns the extent to

which the High Court was bound to have regard to the terms of that settlement.

4. Provisions in respect of the children, though they have been contentious in the past, are not relevant to the present

dispute. The key provisions of the consent of November 2001 were as follows:

· the husband was to pay to the wife the sum of IR£300,000, in consideration for which the wife would transferred to him

all her interest in the family home (then held in joint names) in Co Dublin and in a commercial office also in Co Dublin;

· any other property held in the sole name of either party was to remain his or her sole property;

· an order was to be made pursuant to section 10 (1) (b) of the Family Law Act, 1995 declaring the wife to be 100%

beneficially and legally entitled to her shareholding in four companies whereby she carried on a tourist-related business; the

husband was to release the entirety of his interest in those companies and resigned as a director;

· an order was to be made pursuant to the same provisions declaring the respondent to be 100% beneficially and legally

entitled to in a company whereby he transacted a meat business;

· the husband was to pay to the wife the sum of IR£10,000 per annum, subject to adjustment by reference to the consumer

price index, by equal monthly instalments, in respect of maintenance of the children of the marriage.

5. The consent then contained the normal provision for full and final settlement:

“The parties mutually agree and intend that the within provisions are in full and final settlement of all issues

and claims between them and they are intended to be relied upon as constituting proper provision for the

purposes of any divorce proceedings instituted by either party, pursuant to the Family Law (Divorce) Act,

1996, subject to the approval of the Court. Further, each party agrees not to institute any proceedings for

ancillary relief under the Family Law Act, 1995, or the Family Law (Divorce) Act, 1996, and any amending

legislation, save for periodic payments.”

6. On the 11th of September 2003 following the expiration of the period of four years physical separation of the parties, the

wife instituted divorce proceedings in the Circuit Family Court. She relied upon the terms of the Consent Order and Terms

of Settlement of the 16th of November 2001 and did not otherwise seek any ancillary relief.

7. The husband entered a Defence and Counterclaim in which he alleged, inter alia, that the Consent Order and settlement

terms of the Judicial Separation did not constitute “proper provision.” He sought ancillary relief in the form of property

adjustment and/or lump sum payments. He did not, however, seek that the consent be set aside.

8. The proceedings were transferred by consent to the High Court. The wife had, in the meantime, disposed of her interest

in her group of companies. The case came on for trial before Mr. Justice Abbott on the 10th day of July 2006 and was

heard over a period of 5 days. A written judgment was delivered on the 29th of November 2006.

9. The husband, in the High Court, sought substantial additional financial provision, based on essentially two propositions:

· that the wife had not fully disclosed her financial circumstances and those of her companies at the time of the settlement

of 2001;

· that the wife, subsequently, sold her interests in her companies for a very substantial sum.

10. The learned High Court Judge found as a fact that there was information “which in hindsight could and should have

been disclosed by the wife to the husband in the course of the Judicial Separation hearings prior to the settlement of the

16th November 2001”, but that “the non-disclosure was not due to any mala fides or concealment on the part of the

wife…” The learned judge described this as an “information deficit loss,” for which he awarded a lump sum of €500,000 to

the husband.

11. In addition, he awarded a total sum of €1,648,800 to the husband based on the sale of the wife's business in 2006,

derived essentially from a view that the husband should be compensated for his comparative lack of success in business

compared with the wife and his consequent loss of self-esteem.

12. In total, therefore, the learned judge awarded to the husband an additional sum of €2,148,800. All of these sums were

awarded pursuant to section 13 (1) (c) of the Act of 1996. More detailed consideration of the legal basis for these provisions

requires an account to be given of the facts and the reasoning of the learned trial judge.

13. In addition, the learned judge reduced to €7000 per annum the sum to be paid by the husband to the wife in respect of

the dependent children. A decree of divorce was granted. It is not in issue on the appeal.

14. The wife originally, by her notice of appeal, contested every aspect of the financial provision made in the order of the

High Court. However, she has withdrawn her appeal in respect of the award of €500,000 in respect of the information

deficit loss. On the other hand, she claims that the remaining sums amounting to €1,648,000 were not properly awarded.

The reasons given by the learned judge for awarding these sums did not come within the scope of the Act of 1996. She

claimed that, in effect, they amounted to discrimination in favour of the husband on the grounds of gender. This latter

argument was not pressed at the hearing, in my view, correctly so. The ground upon which the learned judge awarded these

sums could equally apply to either husband or wife.

15. The husband, by way of notice to vary, and in argument on the appeal contests, in particular, the adequacy of the sum

of €500,000 awarded in respect of information deficit loss. Mr John Rogers, Senior Counsel, for the husband argued that

the learned judge erred in law. Once he had correctly decided that the wife had not fully or properly disclosed the real state

of her finances, the learned judge should not have had regard to the terms of the settlement of November 2001. The sum of

€500,000 was, in all the circumstances, inadequate. On the other hand, Mr Rogers did not go so far as to ask that the Court

remit the entire matter for hearing to the High Court. Rather, he submitted that this court could determine the amount for

itself. This stance on behalf of the husband is a matter of considerable importance for the determination of the appeal and I

will return to it.

16. The sums awarded by the learned High Court judge fall into two quite distinct parts. Firstly, he awarded the sum of

€500,000 in respect of the information deficit loss. Essentially, this part of the case relates to the finances of the wife as they

were at the time of the judicial separation and consent of November 2001, the adequacy of her disclosure of her assets at

that time and the husband's entitlement to be compensated in this respect. By reason of the withdrawal of the wife's appeal

from the award of that sum, there is no contest as to the right of the husband to some amount. The question before this

Court is how much that should be. In any event, this aspect of the case has to be viewed as of November 2001. The second

and larger part of the High Court award relates to the very successful realisation by the wife of her interest in the business in

2006. It, therefore, raises questions concerning the right of the husband to participate in that success and as to the legal basis

upon which the High Court made the award.

17. It is first necessary to describe the nature of the wife's business, in order to understand the issues in the case. There

were four companies whose business was in arranging hotel accommodation for travellers. The wife was the major

shareholder (65 to 75%) in all the companies, though she had brought management and accounting experts into the

companies. Two companies, one from an office in the UK, provided the service to travel agents. A third provided such a

service to airline customers by telephone. The fourth and much the most successful company provided the service to airline

passengers online via an internet link. The husband had a 10% shareholding in the third company and a 1% shareholding in

at least one of the others.

18. At the time of the judicial-separation negotiations in November 2001, only management accounts of the companies up to

31st August 2001 were available to the husband. These showed total sales at approximately IR£10,500,000 for the year and

a profit of IR£98,825. The audited accounts did not become available until early in 2002, that is after the settlement.

19. There was much contention between the parties right up to the November 2001 proceedings as to the adequacy of

disclosure on the part of the wife. What is important is the extent to which the husband was at a disadvantage in not having

access to information which might have affected the negotiations in his favour.

20. Mr Rogers pointed out that, during the High Court hearing of the present divorce proceedings, Mr David Hegarty,

Senior Counsel, on behalf of the wife, quite properly and helpfully intervened to concede that there were material facts of

which the husband had not been aware and of which he complained in evidence. While Mr Hegarty contended, at the same

time, that the wife did not know "how good things were going to be," all this amounted to an acceptance that, at the time of

the 2001 negotiation of the settlement, the parties were not in possession of equal information.

21. Three aspects of the business of the companies and the income of the wife have been shown to have been significantly

at variance with the information available to the husband. Mr Rogers explained these matters at the hearing of the appeal by

referring to the documents in the case. Mr Hegarty did not contest that these matters had not been disclosed.

22. Firstly, it emerged from the audited accounts (in 2002) that the management accounts had overstated the expenses of

the companies by a sum for the full year of IR£1,210,579, which resulted, in turn, in an understatement of the gross profit

of the companies by IR£1,218,169. The expert report of Mr Des Peelo, produced on behalf of the wife, at the time of the

negotiations, attributed “no value to the companies in any open market sense.” It showed net losses to the end of April 2001

of IR£90,000 although it went on to note a gross profit of IR£230,000 for the eight months to 1st September 2001.That

report painted a hopeless future for the companies. In a context where expert valuations were being based on a multiple of

five-times annual profits, the reduction of annual expenses by more than £1.2 million represented an extremely significant

difference in the value of the companies.

23. Secondly, important new and positive information about the progress of the companies was presented at a meeting of

the principals of the companies held 22nd October 2001 attended by the wife. This may or may not have been a board

meeting and whether it was matters little. It involved the principals of the companies including the wife. The point is that

contemporary records show that the turnover of the companies for September 2001 had been IR£1,331,000 and that the

October forecast was of a turnover of IR£1,500,000. These figures represented very significant increases on the known

turnover for the year to 31st August 2001. The annual turnover for that entire year appears to have been of the order of

IR£10,500,000. The wife was aware of these figures, but the husband was not.

24. These very positive signs for the future of the companies were emerging at about the time of the meeting of 22nd

October 2001. Contemporaneously, the wife’s solicitors and financial advisers were vigorously resisting any and all attempts

by the husband to have access to further financial records. The husband’s financial advisers asked on 4th October 2001,

inter alia, for monthly turnover figures for each month to 30th September. The accountants insisted as late as 30th October

2001 that they had been instructed that there would be no further discovery. The solicitors for the wife regarded the

requests for further discovery as totally unreasonable. As late as 8th November 2001, they offered to furnish the monthly

turnover figures “for the months of May and June bringing this matter up to July 2001.” As is clear from the meeting of

22nd October 2001, however, the wife was, at that time, in possession of turnover figures up to and including September

2001 and a forecast for October. It has not been suggested that either the accountant or the solicitors were aware of the

discrepancies. There may have been a failure to communicate. There was, however, considered objectively, a significant

failure of disclosure.

25. Two further events followed from these indications of the success of the wife’s companies. At or about the time of the

meeting of 22nd October 2001, the shareholders in the companies (other than the husband) were considering what was

called a “restructuring.” For similar reasons, consideration was being given to the award of increased salaries to the

directors, including the wife. The restructuring consisted in the sale of the shares in three of the companies to the fourth. It

is described in a letter dated 7th March 2002 from the auditors to the companies. That letter shows the wife receiving

€1,225,297, with a further €634,869 of deferred consideration. These sums were to be subject to capital gains tax at 20%,

then estimated at €371,779. At about the same time, the wife received a salary of IR£239,000 in respect of the year ended

31st December 2001, compared with a salary of IR75,000 as shown in her affidavit of means sworn in November 2000.

26. The second and major part of the award made to the husband by the High Court arose from the sale by the wife in 2006

of her interests in the business. That was a complex transaction. The learned judge assessed the value to the wife of the sale

of her interest at €13,300,000. The sale agreement provided in addition for the retention of a sum in escrow (apparently to

cover possible liabilities of the companies) and another element called the "earn out." The learned judge made a deduction of

€1 million from the first figure, for a reason to which I will return. He awarded 10% or €1,230,000 to the husband. He

made him an award of €318,800 in respect of the escrow element. Finally, having made a pessimistic assessment of the

prospects of the wife recovering any significant sums under the third heading, he awarded the husband €100,000. These

three sums give a total of €1,648,000.

27. The learned judge calculated the sum of €500,000 in respect of the information deficit loss by making adjustments to the

November 2001 report of Mr Brown, the husband's financial adviser at the time of the settlement negotiations. Mr Brown’s

report contained his opinion that the companies had a valuation in a range between IR£831,255 and IR£2,324,820 and then

concluded that they were likely to have a value in excess of IR£1,000,000. In fact, it appears from his notes that Mr Brown

was prepared to consider a value of IR£750,000 at that time.

28. The learned judge then proceeded: “I find that on the basis of Mr Brown's thinking…... and the likely lower figure

above zero of Mr Peelo which might have been offered in both circumstances, I consider that the median value of the

group would have been £2 million instead of one million as postulated by Mr Brown.” He then made reference to the cash

payment of IR£300,000 made by the husband under the settlement. In this way the learned judge arrived at the figure of

€500,000. It appears that this represented one half of the increased value (£1 million) which he had attributed to the

company over and above Mr Brown's 2001 valuation.

29. The above passage is puzzling since it does not explain the figures from which the "median value" was taken. It cannot

have been right, in any event, to take account at all of Mr Peelo’s suggested value of zero, which must have been entirely

discredited both by the disclosure of the greatly increased profits and turnover of the companies during 2001 and the very

large linked benefits in the form of both capital and income received by the wife so soon after the settlement. For the same

reasons, it cannot have been right to take into account Mr Murphy’s 2001 valuation, which was made in ignorance of these

figures. To be fair to the learned judge, he was engaged in an exercise of compensation of the husband for the information

deficit loss. It was not, however, consistent with that objective to make assumptions based on the truth of the figures

disclosed in November 2001.

30. The more relevant figures were those contained in Mr Murphy's report of 7 July 2006 (produced for the hearing of the

present case in the High Court), where he identified a valuation range as of November 2001 of from €4,952,000 and

€12,711,745 before settling on "a value in excess of €5,000,000.” The report of Mr William Scorer, an accountant, of 3 July

2006 suggests a value for the wife's share of €4,554,484. A median taking account of these figures would certainly have

been significantly greater than the IR£2 million found by the learned trial judge.

31. A principal, indeed a central, theme of the High Court judgment is the very considerable weight which the learned judge

gave to the 2001 settlement. He found that it was still in full force and effect, noting in particular that the parties had acted

and relied upon it. The division of physical assets still continued and had supported property transactions in the meantime.

The business and commercial arrangements of the parties had been conducted independently and the parties were, in effect,

seeking a full and final settlement of their problems.

32. It was in this context that the learned judge identified the information deficit loss and arrived at the figure of €500,000 to

compensate for it.

33. The award of the remaining three sums adding up to €1,648,000 is far more controversial and is the central focus of the

wife's attack on the High Court judgment.

The learned judge conducted a careful and balanced examination of all elements of the finances of each of the parties. He

considered the financial position of the parties under each of the headings in section 20 (2) of the Act of 1996.

34. On the one hand, the learned trial judge made findings on the following general lines. The resources of the wife would

be likely to be sufficient and more than ample. The husband's income and assets, especially when augmented by the sum of

€500,000 would be sufficient for him to look after himself. Both parties are in a position to maintain the standard of living

which they enjoyed prior to the proceedings.

35. On the other hand, the learned judge, at several points in his judgment, expressed concern that there would be a gap of

assets and income between the husband and wife, that the husband was lagging behind and that the husband was at risk of

suffering a lack of self-esteem. There are numerous references to this element of self-esteem throughout the judgment. At

one possibly crucial point, the learned judge said:

“However, with the children and their day to day care on the husband's side giving rise to an equality of self-

esteem issue I consider that the husband requires further assets if they cannot be justified under any other

criterion.”

At a later point the learned judge explained:

“ I consider that the extent to which this approach should take away from the weight being given to the full

and final settlement clause should be dictated by the need to ensure by way of ancillary relief provisions that

the husband in this case when dealing with the children when in his care or while on holidays, is not shown

up by an embarrassing gap in wealth when compared with the children's mother. Such a gap in wealth in my

view could easily result in the husband suffering such loss of self esteem, grieving or obsession with the

litigation that he would easily lose the capacity to celebrate, enjoy, and be bubbly with his children as a father

should."

36. The judge said that he had "endeavoured to ensure that there is no loss of esteem in this area of business activity in

respect of either husband or wife…” Referring to the husband's comparatively small shareholding in the companies, he

suggested that "a person in a more calculating mood than a newlywed husband and cooperating in an ordinary arm's-

length commercial context would have secured a shareholding in the group on a formal basis to reflect a contribution of

between 5 and 10%."

37. I propose now to consider the judgment in the two distinct respects which I have already mentioned, namely, and in the

first place, the basis for the provision made for information deficit loss and, secondly, the basis for the award of the sums

totalling €1,648,000 to compensate more generally for the reasons described by the learned judge.

38. I am quite satisfied that the learned judge acted correctly in accordance with the provisions of section 20 (3) of the Act.

He was obliged to “have regard to the terms of any separation agreement which has been entered into by the spouses and

is still in force.” The husband made no application to have the settlement set aside. While Mr Rogers submitted that the

learned judge was in error in adopting the procedure of assessing compensation for the information deficit loss, there was an

air of unreality about this submission. The settlement of 2001 had divided very substantial assets between the parties. These

included the family home and other residential property and the separate businesses of the two parties. Nobody on either

side was seriously contemplating that these arrangements would or could be unscrambled. Subsection 3 merely requires the

court to "have regard" to the terms of the settlement. That is an expression of a very broad discretion. Its exercise will

depend on a review of all the circumstances. The two predominating circumstances were, firstly, the fact that the agreement

had, in general terms been carried into effect and had governed the parties and, secondly, the demonstrable deficiencies in

disclosure. These deficiencies did not, however, undermine the fundamentals of the agreement. Having regard to the

resources of the wife they were such as to be remediable by the payment of a lump sum. In my view, it was well within the

discretion of the learned judge to decide to remedy the information deficit which undoubtedly existed by making additional

provision for the husband. Only the question of amount remains, a subject to which I will return.

39. On the other hand, I do not agree with the approach adopted by the learned trial judge in deciding to award the second

element of lump sum amounting to a total sum of €1,648,000. The overriding task of the court pursuant to section 20 (1) of

the Act is to "ensure that such provision as the court considers proper having regard to the circumstances exists or will

be made for the spouses and any dependent member of the family concerned." In the context of the present case, the task

of the judge was to ensure that there are was proper provision for the husband. Having had full and proper regard to the

terms of the settlement and to the sum of €500,000 awarded by reason of the deficit in information, the learned judge found

as a fact that the income and assets of the husband would be sufficient for his own purposes. He also found, pursuant to

section 20(2)(c) that the parties were in a position to maintain the standard of living which they had enjoyed prior to the

proceedings. He arrived at these conclusions following a careful analysis of the capital and income of the husband. The

award was made under section 13(1)(c)(i) of the Act which merely empowers the court to order either spouse to make a

lump sum payment to the other. I do not find any basis in section 20 or in the notion of "proper provision" for an award

designed to compensate one party for loss of self-esteem. I would not, therefore, uphold the award of the sum of

€1,648,000 on the basis upon which it was in fact awarded.

40. I must, however, return to the correctness of the judge's calculation of the sum of €500,000 in respect of information

deficit loss. For the reasons stated above, this sum is necessarily inadequate. The learned judge sought to identify a "median

value." This was a reasonable way in which to exercise his discretion. As I have pointed out, however, he used at least two

figures (Mr Peelo’s zero figure and Mr Brown's figure of £1 million) which were necessarily rendered false by the

inadequate information on which they were based. If he had taken account of the valuation estimates from the reports of Mr

Brown and Mr Scorer of 2006, he would have been considering estimates in the region of €5 million. Taking half of that

figure, which the learned judge appears to have done in the case of the figure of €2 million, one would arrive at a figure of

between €2 million and €2.5 million.

41. It would, of course, be possible and more technically correct to remit the entire matter to the High Court. The purpose

would be to enable that court to reassess the compensation for information deficit loss in the light of this judgment. Quite

reasonably, neither party wishes to have the litigation continue in that way. It is in the interests of both parties that finality be

brought, so far as possible, to this litigation. Although this is in the nature of a pragmatic decision, I would treat the entire

award amounting to €2,148,000 as relating to proper provision by reference to the necessary adjustment to the settlement of

November 2001 and substitute it for the sum of €500,000 in paragraph 4(a) of the order. I would set aside the award of the

sums totalling €1,648,000 in paragraph 4(b).

42. The wife has also appealed against the reduction of the maintenance payable by the husband to the sum of €7,000 per

annum for the benefit of the children of the marriage. The husband has not sought to vary it. The settlement provided for

payments of IR£10,000 per annum, subject to adjustment. The written submissions on behalf of the wife claimed that the

learned judge had insufficient regard to the means of the husband. The children are, of course, with the wife and she pays

for their education and care generally. In this context the annual payment of €7000 is modest. It is well within the husband’s

means. On the other hand, the wife is a person of very considerable wealth. She could not and did not suggest that she was

seriously in need of increased payments. It was suggested in the High Court that some maintenance should be paid for

reasons of morale. I do not see any reason to interfere with the judgment of the High Court. I would affirm the order in that

respect.