Smith v Smith

In ancillary-relief proceedings, equal division is not an automatic starting point where the principal assets were brought into the marriage by one spouse, particularly where the marriage was comparatively short. The court must avoid double counting a company’s capital value and the income it generates, and must distinguish paper valuations from readily realisable assets. Debts, indemnities, tax liabilities and sale costs require proper consideration. Transferring trading premises to one spouse while the other retains the business can create unacceptable financial entanglement, save in exceptional cases. Where practicable, the court should pursue a clean break, crystallising liability and allowing payment over time. On a second appeal, failure to address specific grounds may itself constitute a compelling reason under the Administration of Justice Act.

The parties’ ten-year marriage was dissolved in August 2005. Following cross-applications for ancillary relief, a District Judge divided the net assets broadly equally. The husband retained South Coast Bearings Ltd, while the wife received the Spanish property, shares in Kerala Ltd, which owned the company’s premises, and periodical payments.

The Circuit Judge dismissed the husband’s appeal, applying the plainly-wrong or error-of-law standard. The husband brought a second appeal, challenging the failure to address his specific grounds and the substance of the capital and income provision. The Court of Appeal had to decide whether the second-appeal threshold was met and whether the financial orders were sustainable.

Per Mr Justice Coleridge, with Lord Justice Thorpe agreeing, the appeal from the Circuit Judge was allowed and the District Judge’s order was varied.

1. The statutory threshold for a second appeal was satisfied. The Circuit Judge had not addressed the husband’s specific criticisms of the District Judge’s order. That failure itself provided a compelling reason under the Administration of Justice Act for the appeal to be heard. At the parties’ invitation, the Court of Appeal determined the underlying appeal instead of remitting it.
2. The District Judge had adopted the wrong starting point by treating equal division as appropriate despite the principal assets having originated with the husband, including a company established before the marriage, and the marriage having lasted about ten years.
3. The unconditional transfer of the premises from which the company traded, while the husband retained the trading company, was highly unusual and likely erroneous except in the most exceptional case. It risked leaving the parties financially entangled as landlord and tenant.
4. Including the company at full value for the husband and then awarding the wife periodical payments based on income generated by that company amounted to double counting, particularly because the premises were also expected to generate income for the wife.
5. The assessment failed properly to distinguish paper company value from the value of real property available for sale. It also failed adequately to account for debts transferred to the husband, indemnities, capital gains tax, corporation tax liabilities and sale costs. The resulting capital and lifetime periodical-payment provision was excessive and plainly wrong.
6. The case justified a clean break. Splitting the business was contraindicated, except as a security mechanism for further capital. The husband’s liability could be crystallised at once and paid over time. The replacement order transferred the Kerala shares to the wife subject to a possible retransfer on payment of £180,000 by 1 January 2009, with specified default, bankruptcy and enforcement triggers. Periodical payments were reduced to £18,000 per annum from 15 May 2007, arrears were remitted save for £10,000, and the remaining terms stood.

• Court of Appeal (Civil Division): The appeal from the Circuit Judge was allowed. The District Judge’s order was varied to provide a clean-break mechanism and reduced periodical payments: [2007] EWCA Civ 454.
• Portsmouth County Court, Circuit Judge: The husband’s appeal from the District Judge’s order, including the enforcement-related appeal, was dismissed on 17 January 2007.
• Salisbury County Court, District Judge: Following cross-applications for ancillary relief, orders were made on 13 October 2006 concerning capital provision, share transfer, periodical payments, arrears and school fees.