Cox v Cox & Anor

Informal arrangements made between spouses to divide assets on divorce may fail as contracts where the parties objectively lacked an intention to create immediate legal relations or where essential matters remained open. An agreement to settle financial claims on divorce is not, by itself, a contract enforceable at law: a court order is required to give the settlement final effect. A share transfer executed in the context of such an ineffective arrangement does not independently transfer the shares. Salary payments made to fund an acquisition of a company’s shares may constitute unlawful financial assistance under the Companies Act 1985, but payments unrelated to that acquisition do not. A company acting unanimously through its shareholders may release directors and recipients from liabilities arising from contraventions of sections 151 and 311, provided that solvency, creditors and public policy are protected.

Alice and Dennis Cox were separated but remained married. They sought to arrange their financial affairs without litigation, including the transfer of Alice’s presumed half shareholding in Skan Dansk Design Ltd, property transfers, a lump sum and salary payments. Alice executed a share transfer form and tax return, while Dennis signed documents recording proposed divorce and employment terms. The company made substantial payments to Alice, but the arrangements were later challenged after advice that the payments constituted unlawful financial assistance.

The High Court was asked to determine whether the arrangements created binding agreements, whether Alice had gifted or transferred her shares, whether the company contravened the Companies Act 1985, and the resulting liabilities and possibility of release.

1. Share transfer. The arrangements were analysed as a Divorce Agreement between Alice and Dennis and an Employment Agreement between the company and Alice. Alice’s tax return and signed transfer form were relevant but did not establish a gift. Objectively, she expected valuable consideration as part of an equal division of assets. No interest in the shares passed.
2. Divorce Agreement. It was not intended to create immediate contractual obligations and was too uncertain and incomplete. Important matters remained open, including child maintenance, property valuations, the balancing lump sum and the date of final settlement. It was in substance an agreement to agree. Further, an agreement intended finally to settle financial affairs on divorce required a court order and was subject to the Xydhias flaw.
3. Employment Agreement. Its terms were sufficiently precise to vary an existing informal employment contract. It would otherwise have been binding, but the company’s payments contravened section 151 of the Companies Act 1985, rendering the agreement unenforceable.
4. Financial assistance. Of the payments to Alice, the portion exceeding the payments she would have received as a continuing director, £919,258, was unlawful pre-acquisition financial assistance. It was other financial assistance reducing the company’s net assets materially and related indirectly to Dennis’s proposed acquisition. The increased payments to Dennis were not shown to have been for the purpose of acquiring the shares.
5. Liability and release. Alice and Dennis breached their fiduciary duties by procuring the unlawful payments. Alice was also liable as constructive trustee for the excess payments. The company could, by unanimous shareholder consent, release them from liabilities under sections 151 and 311, provided the release did not jeopardise solvency, prejudice creditors or offend public policy. The arrangements were therefore ineffective to transfer the shares, subject to the company’s power to release the stated liabilities.