There is much confusion as to how divorce settlements in England and Wales are calculated. To clarify matters, The Matrimonial Causes Act 1973 as amended is the first point a practitioner should bear in mind when advising a client on how their settlement will be calculated. By way of clarification all parties to a divorce have potential claims against their spouse for the following, namely: –
Maintenance Pending Suit
This is the potential for a court to make an order for maintenance pending the final outcome of a financial dispute. The parties should not apply for maintenance pending suit if they are already receiving maintenance, or they have not yet had sufficient disclosure from the other side to see whether an application for this is warranted. Going in too soon for an order for maintenance pending suit can be disastrous and end up with the applying party receiving an order for costs. A sensible lawyer will discuss the issue of whether you are receiving or paying too little or too much maintenance from the outset. Further, if you have a large capital pot available to you of monies, then the court will not make an order for maintenance pending suit.
Orders for ongoing maintenance
If one party is earning considerably more than the other then the court will consider whether there should be an ongoing maintenance provision for the lesser earning party. This however, cannot be taken in isolation and will be taken in conjunction with for example, how the proceeds of sale from the home are going to be dealt with or lump sums and other assets. Sometimes there will be a trade- off of maintenance for more monies from the home upfront or capitalised provision for maintenance. Orders for maintenance can be for a set period ie for two years, five years, ten years or for joint lives. A joint lives order which means for the rest of the receiving party’s life are very unusual, and will only be granted in rare cases. The basic principles of the Court now applied, are that parties should learn to stand on their own two feet and work towards a clean break settlement.
A Property Adjustment Order
This is an order for the provision of a home in which the parties can live with children of the family or on their own.
A Lump Sum Order
This can be either an additional payment over and above the provision of a home, or towards the cost of purchasing a home, or be an additional capital payment from other capital assets.
Pension Sharing or Adjustment Orders
On divorce the court will sensibly and fairly divide any pension pot. Both parties’ pensions will be taken into account and adjusted. If has been a long marriage, the pension sharing orders will normally order an equalisation of the pensions. This can relate both to a capital element and income. Pension sharing orders are effective on divorce itself with a percentage of the pension being transferred either within the same fund or out of the fund to the receiving party. Great care should be taken with the timing of such orders so that the receiving party does not lose out from any delay in the transfer. Pension adjustment orders are delayed until the retirement of the other party. Most people opt for a pension sharing order but if there are any multiple pensions involved, a pensions actuary should be consulted to advise on which is the best to be transferred and the most affective for both parties.
The parties can agree a provision for child maintenance to be placed into an order through the court, but after one year any such order can be varied by an application to the Child Maintenance Service who use a special calculation in assessing the amount that should be paid in child maintenance. The Child Maintenance Service runs an online service so that calculations can be clearly seen from their online calculator. The parties can reach a child maintenance agreement between them which is not placed into an order. The issue of child maintenance which effectively was transferred to the Child Maintenance Service some years ago. Sometimes a [arty can apply to the court for a top up of child maintenance where the other party is a very high earner and above the child maintenance assessment.
- The manner in which all of the claims of the parties should be dealt with is clearly set out in the Matrimonial Causes Act.
Section 21A deals with the pension sharing issue.
Section 22 deals with maintenance pending suit.
Section 22ZA deals for parties’ ability to apply to the court in respect of legal services. In other words, how it is possible to apply to the court for legal fees to be met by the other party in certain circumstances. Please note that the court will only allow these applications if there is no other resource from which a party can meet their legal fees ie no ability to take out any legal loans based on a potential share of ownership in property or assets or from their own resources.
Section 23 provides as to how financial provision orders should be made in connection with divorce.
Section 24 deals with property adjustment orders and how they should be considered.
Section 24A deals with the ability of the courts to make orders for sale of properties.
Section 24B deals with pension sharing orders.
The most referred to paragraph of the Matrimonial Causes Act is Section 25 when seeking advice from a solicitor which deals with the matters that the court will have regard to in deciding how to exercise its powers. The most important aspect is that it is the duty of the court in deciding to exercise its powers is to have regard to all the circumstances of the case, the first consideration being given to the welfare of any minor or any child of the family who has not attained the age of 18. When exercising the power, the court shall have regard to:
- The income and capacity and other financial resources which each of the parties to the marriage has, or is likely to have, in the foreseeable future including in the case of earning capacity any increase in that capacity which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire.
- The financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future.
- The standard of living enjoyed by the family before the breakdown of the marriage.
- The age of each party to the marriage and the duration of the marriage.
- Any physical or mental disability of either of the parties to the marriage.
- Contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family.
- The conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it.
- In the case of proceedings for divorce (or indeed the nullity of marriage), the value to each of the parties to the marriage of any benefit which by reason of the dissolution or annulment of the marriage that the party will lose the chance of acquiring.
- Further, paragraph 3 goes on to state that courts in particular shall have regard to the financial needs of the child, the income earning capacity if any, property and financial resources of the child, any physical or mental disability of the child, the manner in which he or she was being and in which the parties to the marriage expected him to be educated or trained.
Section 28 of the Matrimonial Causes Act 1973 deals with the duration or continuing financial provision in favour of a party and the effect of remarriage or formation of a Civil Partnership.
Section 29 deals with how long the financial provision in favour of children should continue. Section 21 deals with the ability to vary, discharge certain orders. Section 32 deals with arrears of maintenance etc.
Financial matters can be dealt with in a variety of ways
- Parties can submit to mediation from the outset and agree all matters in that procedure. If there has been an abusive or controlling form of marriage, mediation may not be the suitable approach from the outset until there has been proper formal disclosure so that the parties are on an even playing field. Even if the parties submit to mediation the mediator will always suggest that the parties should take independent legal advice on what should be discussed in mediation and/or after the mediated agreement has been reached it is for the lawyers to draw up the ultimate agreement for the court.
- (a) If mediation is not the proper route forward then the parties can either undertake what is known as voluntary disclosure on documents known as Form E that sets out the parties’ details and finances. The parties much attach to that document bank statements, pension details, building society books etc to build up a full picture of each party’s financial position, as well as the valuations of any property or assets.
- After there has been mutual exchange of the Form Es and documents between solicitors, a solicitor will advise the client to take into the account provisions of the Matrimonial Causes Act which allows there to be a fair distribution of the parties’ assets. Normally an asset schedule is drawn up to show what assets are available to the parties for division. Often the parties also draw up a schedule of income and liabilities. In a voluntary situation, cases can often be dealt with by either by either the solicitors writing and making offers to each other which can be accepted and turned into consent orders, ratified by the court, or alternatively, by solicitors meeting to have a roundtable meeting to discuss what would be an appropriate settlement and then reaching agreement between them.
Application to the Court
If there is an obstruction by the other side in cooperating and giving disclosure or mistrust on one side or another, then one party or the other will make an application to the court in what is known as a Form E for the Court to deal with the financial provision. There is a specific procedure on application. After the Form A has been received by the court, the court will set a date approximately 12 weeks for the parties to exchange Form E documents of disclosure under court order. The parties will then be directed to attend the First Directions hearing known as a First Appointment. In anticipation of this the parties will be ordered to file a Chronology, a Questionnaire and a Schedule of Issues ie what the case involves. At the First Appointment he court will determine what questions should be answered on the Questionnaire, order the valuation of any properties or assets if they are not agreed, and give directions to ensure that there can be a proper valuation and assessment of the parties assets. They will then set the matter down for a further hearing known as a Financial Dispute Resolution hearing or FDR.
The intention being the parties will answer all questions and provide all financial information and valuations in the interim and make offers to each other. Many cases settle before this, but if they do not, the parties will proceed to the Financial Dispute Resolution hearing which is a without prejudice hearing where the judge will try to help the parties to come to an overall settlement. If the parties cannot agree then the judge will give directions for the matter to be set down for a final hearing. In anticipation of this the court will the parties to set out their cases properly on what is known as a Section 25 Statement and to give updating disclosure and to prepare bundles for final hearing.
Parties can, if they so choose together with their legal advisers, undertake what is known as a collaborative process where specially trained collaborative lawyers sign up together with their clients that they will never go to court. They will have as many sessions as is necessary to reach agreement on all aspects of the matter and draw up an order to submit to the court. The only downside of the collaborative process is that if agreement cannot be reached both lawyers have to withdraw from the case and new lawyers have to be appointed. The take up of the collaborative process has not been great and the numbers have fallen from those expected.
Parties can if they so wish submit to arbitration that the matter can be decided by sole arbitrator, but there is no appeal against the decision. Again, there has been a very small take up of those getting to arbitration.
How to determine the settlement
(a)The amount of settlement and the way that it is calculated will depend very much on the structure of the parties’ assets. The court can decide the division of assets based on the parties’ needs. If there is a massive of surplus above the parties’ needs, then the court will apply what is known as the sharing principle. If, however, one party built up the majority of the assets prior to the marriage those assets can be ringfenced as premarital assets and will not be brought into the settlement. Similarly, if the needs of the parties cannot be met from the existing resources, then the court will bring in premarital assets to meet the parties’ needs.
Effectively, if this has been a short marriage, and the parties have not mingled their assets, the court could simply put the parties back to the position they were prior to the marriage. If, however, there are children and there has been a mingling of assets, the court will look to meeting the parties needs for housing and in particular take into account the needs of the children. If there is one asset, namely the matrimonial home and perhaps a small pension, the court will inevitably if the children are living with the wife award a greater share of the proceeds to the wife, or orders can be made so that the children can remain in the house until they are 18 with a charge in favour of the husband (this of course can be the other way round) known as a Mesher Order or Martin Order that when the children reach the age of 18 the house can be sold and divided in whatever proportion can be agreed.
- If there are considerable assets then there will have to be very full and detailed disclosure. This is particular so if there are multiple companies or properties. In some complex cases of high worth, there will also have to be forensic evaluation by an independent forensic accountant for example to value the company or ascertain the current flow from the company or to trace through assets. If there are complex pension provisions a pensions actuary will be invited to advise on the most cost-efficient way of dealing with the split of the pensions. The overall starting point if it has been a medium or long marriage will be a 50:50 split of the assets unless any of those assets can be ringfenced as they are pre-marital.
- If there are sufficient monies to clean break i.e. a one-off payment to meet housing needs and living costs, then the court will encourage this. If there is insufficient monies for there to be a one off capital settlement then the court will order what is known as a split settlement, part capital to pay for a home and part income i.e. ongoing maintenance.
- As to the amount of maintenance to be ordered, this will depend on the financial position of say the husband and the potential earning capacity of the wife. If she has worked throughout the marriage, then she likely to obtain little maintenance or for a shorter period. However, if she has never worked and can never be in a position to provide for her own needs, a court will likely order maintenance in addition to any lump sums or housing provision. In days gone by, a woman of 50 divorcing would certainly receive ongoing maintenance if her settlement couldn’t be capitalised. Nowadays, they will be expected to find employment and contribute towards the future
How does the Court decide
- In any matrimonial financial case the assets should be looked at to decide which assets are matrimonial and which are premarital i.e. those that could potentially be ignored either in negotiations or by the court. Once the full extent of the matrimonial pot is established, then whilst the starting point is 50:50, this can be departed from taking into account:
- a) a much greater contribution by one of the parties
- b) special contribution by one of the parties
- c) needs of the parties and the children of the family
- d) premarital assets
- e) any pre-nuptial agreement
- The first matter that the court will look at is where prospective parties and children are intended to live and how much should fairly be set aside for this. They will look at the mortgage capacities of both parties ie what they can contribute towards any purchase.
- They will look at earnings of each of the parties and if they are not working any potential benefits that any of the parties are entitled to.
- Having established this, the court will then ensure there is sufficient monies for both parties to fairly rehouse, taking into account that both parties will normally have the children for some periods of time. If both parties are earning similar amounts, the court will make no orders for maintenance of one to the other. As to child maintenance this is covered by the Child Support Act and can either be agreed between the parties or for the Child Maintenance Service to make a proper assessment.
- Pensions in long marriages will normally be divided equally. However, pensions can be traded off for upfront a greater share of say the matrimonial home or its proceeds. Maintenance will sometimes be paid until the children reach the age of 18 or cease fulltime secondary education. At that time the maintenance will stop. Sometimes orders can be obtained that if the wife is still not in a position to be self-sufficient and it is reasonable, the court may order an extension of the maintenance if an application is made before the end of the set period. If the party wants to ensure that the set time for maintenance cannot be extended, they need to apply for what is known as a Section 28 1A Bar to be put into the Court Order.
- In relation to very complex cases in which the parties may have company shares in let’s say a family company, it is sometimes necessary to involve company solicitors or accountants to work out which of the parties will retain the company, or whether the parties can continue to hold their shares without any disruption to the ongoing company. Procedures should be put in place to make sure that the shareholding cannot be watered down by the provision of the C or D shares in the company. Sometimes the parties can agree that holiday homes should either be sold and the proceeds divided as part of the settlement, or that they will share the use of a holiday home but very careful consideration should be given to the drafting of any agreement so there is no misunderstandings as to who should pay for the outgoings.
- If the parties are holding all the society accounts or savings bonds for children, again the provision in relation to this can be fully agreed on divorce. Either the parties will continue to hold the monies on behalf of the children with an end date in sight to give the monies to the children perhaps for their future housing, or that those monies be given to one party to hold on the understanding that they will provide them to the children in due course. Sometimes the court will consider those monies are actually those of the parties and are needed for their rehousing.
- As to the contents of the home and items such as cars, bikes, boats, collections etc, the parties can agree the division or ownership without the intervention of their lawyers or the court. If they cannot agree then it is possible to apply to the court for a decision to be made as to who should keep what. As to pets, these should be agreed i.e. who should keep what pet and whether the other party must make a contribution towards their upkeep. Pets are considered to be chattels in divorce proceedings and if there is a divorce dispute the court will firstly decide who has paid for the pet. The court can however decide pets dispute but it is a costly process.
- Sometimes it will be necessary to join a third party to the proceedings, perhaps a parent who may have contributed monies towards the purchase if they are now asserting that they still have an interest in the same, or friends or business partners who say that monies or assets are being held on their behalf. It is important if parties have been loaned monies that there are loan agreements in place or an evidential trail to be used in proceedings.
- If a party has transferred assets to family members immediately before or at the beginning of divorce proceedings, the court will decide whether those assets should be considered as part of the overall pot or whether there was a legitimate reason for making the transfer. Unless there is sustainable reason it is inadvisable to make such transfers.
- The manner in which maintenance if maintenance is appropriate to be paid is calculated, will depend on the earnings or bonuses of the parties concerned. Court lawyers calculate this based on the needs of the parties. There is no automatic 50:50 division of paying parties income and in most cases the court will not make maintenance orders for more than 50% of the income.
- As to the costs of the proceedings, both parties will be expected to meet their own costs. In the first instance if one party has no assets in their own name and no access to the ability to pay from savings or immediate family borrowings, then an application can be made for the payment in respect of legal services as set out above in paragraph 22ZA of the Matrimonial Causes Act. If one of the parties is able to take out what is known as a litigation loan i.e. borrowing on their share of matrimonial assets i.e. by severing the joint tenancy on the matrimonial home or other properties obtaining a loan in that way, the court will not make a Legal Services Order. If monies are being borrowed from family members to pay legal fees these can sometimes be regarded as soft loans and potentially not taken too seriously in matrimonial proceedings. If, however, proof can be produced of loan agreements formally drawn up then they will have to be deducted from the asset pot.
- Wending your way through the complexity of caselaw surrounding this particular area of law is complex and it is advisable to take legal advice before entering into any financial settlement. Please note that simply agreeing a financial agreement with your spouse and failing to have this stamped by the court, could lead to applications being made years later for a financial provision from you. In a recent case before the court, even though the parties had had no monies at the time of the settlement, when the husband went on to earn substantial millions as a result of his endeavours, the court made orders to the wife in order to meet her needs. Always ensure that any agreement is put into a Consent Order for the court to approve to avoid any problems at a later date.