Myerson's market confidence
Date: 30 April 2009
Authors: Catherine Costley
Issue: Vol 159, Issue 7367
Categories: Features, Family
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With the credit crunch biting hard and the global economy in decline, the Court of Appeal's judgment in the case of Myerson v Myerson [2009] EWCA Civ 282, [2009] All ER (D) 05 (Apr) failed to bring relief for divorcing clients who, in more settled times, had agreed settlements involving risky assets. There are no easy solutions for clients returning to question the validity of agreements which now look like very bad deals as it is highly unlikely that the falling value of assets will be considered a Barder event (see below) which changes the basis of a financial order. Although the court may have a certain amount of sympathy for those who have lost out because of fluctuations in value, the principle of certainty and finality of capital orders will generally be upheld even in these troubled times.
Background
The original order which was made by consent after agreement was reached at the financial dispute resolution (FDR) hearing saw the total marital assets of c£25m divided by a 57%:43% split in favour of the husband. He retained £14.5m and the wife was to receive £11m of the total assets. The husband's assets were largely constituted by his shareholding in his AIM listed company, whereas the wife's settlement was to be constituted of £9.5m cash and a transfer of a property valued at £1.5m. The lump sum for the wife was due to be paid in four instalments; £7m in April 2008; and for the three subsequent years thereafter, £625,000 each year.
At the time of the agreement which was reached at the FDR, the husband's shares in the company were at a value of £2.99 and his shareholding worth c£15m. When the order was made by the court on 19 March 2008, the share value was £2.77½. By September 2008 the shares had a value of £1.62, by November 2008 they had slipped to £1.40 and the decline continued until, at the time of the husband's appeal on 11 March 2009, they were valued at only 27.5p. Half of the value of the assets had disappeared from the asset schedule, leaving total assets worth only £12.7m.
Despite the continuing reduction in the share price, the husband did not take action until November 2008 (and a share price of £1.40) when he issued an application for the variation of the orders for payment of the lump sum by instalments and also in relation to the transfer of the property which was due to the wife. That application was listed to be heard in July 2009. However, on 23 December 2008 the husband made a further application to appeal the order of 19 March 2008 on the basis that the global financial crisis and the collapse of his company share price left the original order unfair and unworkable. He argued that the events of financial decline were sufficiently dramatic to be considered as a Barder event (Barder v Calouri (1988) AC 20, [1987] 2 All ER 440).
The Court of Appeal decision
Thorpe LJ rejected the husband's appeal because the natural processes of price fluctuation should not constitute a Barder event. In addition he identified the following factors which he considered relevant to his decision:
● The husband had agreed to the compromise and had done so with all the knowledge and experience as a businessman holding the most senior position in the company.
● In attempting to vary the order and to give the wife shares instead he was seeking to relieve himself of the consequences of the risk he had taken by retaining his shareholding in the original order.
● Opportunities to make money were still available to the husband.
● He had already set in motion an application to vary the instalments of the lump sum payable.
By the time Thorpe LJ heard the appeal the husband's shareholding had fallen so far in value that to implement the order of 19 March would put the husband's net position at minus £539,000 and the wife's share of the total assets under that order would be 105.2%. The husband's case was that such an extreme change in circumstances and the fact that he could not actually perform the obligations under the order was sufficient basis to give the terms of the order a fundamental review. In support of the application the husband's counsel produced a table showing the previous reported cases where the asset position had changed by varying degrees owing to a supervening event. Despite being able to show that the instant case had a percentage change in the net asset position far higher than previously reported cases where the application had been allowed, Thorpe LJ was not persuaded.
Barder events
While the decline in the value of the husband's shareholding is severe and its effect is quite dramatic it was not accepted as a Barder event, so the decision serves to bring the Barder test itself into focus for practitioners. There is a tendency for a “Barder event” to be used by family lawyers as shorthand for a supervening event which changes the basis of an order made and more importantly opens the door for review of the terms of the order. However, we must remember that the serious and fundamental nature of the facts of Barder (being that shortly after the order was made the wife unlawfully killed the parties' two children and then committed suicide) mean that for a supervening event to be considered “a Barder event” it must go to the very fundamentals of the basis for the order. In Barder it was decided that the order had been vitiated by the common mistake to all parties that the wife and children would continue to live for a substantial period of time after the order was made and would need a home in doing so.
In the judgment of Lord Brandon in Barder, practitioners were provided with the three strand test to apply when considering whether a court might properly exercise its discretion to grant leave to appeal out of time on the grounds of new events.
● Have new events occurred since the order was made which invalidate the basis or the fundamental assumption upon which the order was made, so that if leave to appeal out of time were to be given the appeal would be certain or very likely to succeed?
● Have the new events occurred within a relatively short time of the order being made?
● Has the application for leave to appeal out of time been made reasonably promptly in the circumstances of the case?
With proper application of Lord Brandon's test, it is unlikely that the credit crunch can be successfully argued as a Barder event.
Cornick v Cornick
Cornick v Cornick (1994) 2 FLR 530 was the only reported case which relied on a dramatic change in the price of quoted shares available to Thorpe LJ to consider at the time of his judgment. Particular attention was paid by him to the judgment of Mrs Justice Hale (as she then was) as she set out what circumstances will satisfy the Barder criteria when faced with a change in the value of an asset. Given the rise in the number of clients asking practitioners about the circumstances in which the order they have committed to may be varied, Hale J's comments are all the more pertinent to practitioners.
● If an asset which was correctly taken into account and accurately valued at the date of the hearing changes value within a relatively short time due to natural price fluctuations, the power of the court to grant leave to appeal out of time should not be employed as a power of variation. It is therefore clear that despite the dramatic fall in house prices and the financial markets, the principle of certainty and finality of capital orders must be upheld despite the sympathy that may be evoked by the effect such market fluctuations have.
● If the wrong value was ascribed to an asset at the hearing and a different order would have been made had the correct value been known, it is open to the court to give leave for the matter to be reopened. It is important to note that if the incorrect value was the fault of the party alleging the mistake, the same may not be true. The comments of Hale J would suggest that in the current financial climate it might be more important to give parties the benefit of certainty which will arise from a professional valuation rather than informal agreements as to the value of an asset which were more easily reached in the days of more stable market conditions. For comparatively little cost, a formal valuation may provide clients with increased certainty that the matter will be settled on the correct facts.
● If something unforeseen and unforeseeable has happened since the hearing which has altered the value of the assets so dramatically that it substantially changes the balance of assets brought about by the order, then, if the other three criteria provided by Lord Brandon are met, the principle of Barder may be applied. Hale J went further and specifically stated that: “the case law, taken as a whole does not suggest that the natural processes of price fluctuation, whether in houses, shares or any other property, and however dramatic, fall within this principle.”
In light of this, Thorpe LJ dismissed the husband's appeal but his decision was also supported by the four factors noted above. It would seem that the husband's business prowess, his extensive involvement in his company and the confidence he had shown in reaching a settlement in which he retained his shareholding at the cost of more secure assets led Thorpe LJ to consider him as “the captain of a great ship in stormy waters but still steaming on”. On the facts of the case, the husband seemed to seek the reopening of the order so as to enable him to make a better bargain than he had made at the FDR. Quite clearly, this is not the purpose of the court's discretion in granting leave to appeal out of time.
Practice points
It is clear that the certainty and finality of clean-break capital orders has been preserved despite the current recession. If there had been any temptation for practitioners to use the credit crunch as an opportunity to reopen cases, the option of doing so has been removed unless Mr Myerson's appeal to the Supreme Court is successful.
However, one must consider whether the same approach would have been taken by the Court of Appeal if the assets under scrutiny were more modest than those held by Mr and Mrs Myerson. One must also query if the same approach would have been taken by the court if the order had not been reached between the parties by consent and instead had been imposed at a final hearing. From Thorpe LJ's judgment, it would seem that Mr Myerson took a risk based on his insight into the likely future fortunes of his company which then didn't pay off.
Although a court would be unlikely to order such a heavily weighted distribution of the copper-bottomed assets against the riskier investments at a final hearing in the first place, the parties who submit an order by consent to the court for approval must surely be doing so at their own increased risk that the terms may not work out to their advantage?
The appropriate way forward for clients like Mr Myerson where the assets have changed in value significantly is to apply for a variation of the order for a lump sum by instalments so that where possible a delay or alteration to the timing of the implementation may be made to ease the effect of the change in circumstances. Variations to periodical payments or to the timing of property orders may also bring some financial relief to clients who are struggling to meet their obligations under an order.
Now that the possibility of revisiting orders under such circumstances has been closed down (pending Mr Myerson's further appeal), practitioners must continue to give the clearest advice to clients of the implications of a clean-break order and also on the potential consequences of taking the riskier assets in the settlement. The possibility of returning to court for the matter to be reconsidered is clearly only available in the most extreme and unusual of cases.
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