Family: Lack of resources no longer a trump card

In Foster v Foster [2023] CSIH 35 the Inner House upheld the reclaiming motion of the wife pursuer for financial provision in respect of the value of her minority shareholding in her husband’s housebuilding limited company, RRR Holdings Ltd (“RRR”), where he had not sought transfer of her shareholding.

The husband held 70% of the shares in RRR, worth £2,003,275 at the relevant date; the wife’s shareholding was valued at £858,547. The values had increased by the date of proof. In evidence the wife stated that she would release her shareholding to the husband in return for a capital sum, which could be paid in instalments.

The Lord Ordinary considered and rejected the following remedies to realise the wife’s shares: 

• Full sale of RRR. Neither party wanted this, the wife proposing it as a last resort only.
• Transfer of the wife’s shareholding to the husband. 
• Purchase of the wife’s shareholding by RRR. This was not within the power of the court, as RRR was not party to the proceedings.
• The creation of a new company to purchase the shares. This was rejected as again not within the power of the court.

Instead, she considered that the wife had two potential reliefs, as a minority shareholder in RRR under the Companies Act 2006 or to petition the court for relief under s 994 of the Act should the husband engage in conduct that was prejudicial towards her. This was against a background of evidence that the husband had sought to remove her as a director without her knowledge or consent and without following the statutory process. The considerable expense (which would be borne by the wife) and complexity of such proceedings was acknowledged.

The Lord Ordinary also considered s 8(2) of the Family Law (Scotland) Act 1985 (reasonableness having regard to the resources of the parties) in considering whether the husband could afford to acquire the shares from the wife. She deemed the present and future resources available to the husband insufficient to make the capital payment sought.

The wife was left with a large portion of her matrimonial property as a minority shareholding that she had very limited capacity to realise. She would also have to continue to engage with the husband to a degree on financial and business matters relating to her shareholding. This was of specific concern as she had required a non-harassment order against the husband.

Achieving a clean break

On her appeal, the husband was ordered by ancillary order to pay a capital sum in four annual instalments in exchange for the wife transferring her shareholding to him.

Lady Wise, delivering the Inner House opinion, said it was desirable to achieve a clean break, even though this might mean providing for payment from the husband’s future earnings. While the 1985 Act was designed to separate issues of conduct from the assessment of financial provision and to leave a party’s behaviour out of account in relation to the latter, apart from very limited exceptions in s 11(7), “The relevance of the respondent’s conduct in this case is not in the assessment of the level of financial provision for the reclaimer that would be fair; it is in the desirability in the circumstances outlined, of securing an outcome that avoids the parties having to engage with each other in future in relation to business and financial matters”.

The Act gave the courts a level of flexibility to make orders that resulted in a share realisation. The court could be flexible in dealing with issues of resource and should always consider whether payment by instalments was practicable. Despite the Lord Ordinary having acknowledged the (obvious) solution of the husband paying this way, which was the wife’s original proposal, she did not include it in her reasoning.

The onus should have been on the husband to prove a lack of resource to pay the capital sum requested. There was no basis for the Lord Ordinary’s conclusion that RRR could not foreseeably declare a dividend sufficient to allow him to pay the capital sum, as evidence had been led that there were substantial upcoming profits in the business. The husband had not led direct evidence to prove a lack of resource.

There was also criticism of the Lord Ordinary’s use of relevant date rather than current valuations of the shareholdings. The latter would form the basis of realisation for an order transferring property from one spouse to the other. The tax implication of the transfer would be mitigated to a degree by amendments made in the period between proof and appeal to the Taxation of Chargeable Gains Act 1992. Lady Wise disapproved of Lady Carmichael’s assessment of the difficulty in raising Companies Act proceedings leading her to avoid making any orders whatsoever in relation to the parties’ shares in RRR.  

Commentary

Overall, the Inner House judgment is helpful in setting out both the ability and need for courts in family matters to take a practical and flexible approach to financial provision on divorce. If a purported outcome does not accord with the general clean break principles of the 1985 Act, and is reached without proper consideration of the parties’ present and future resources, the court should and does have alternatives open to it.