The wide-reaching arm of the Family Court: how are ‘wider family resources’ considered within financial remedy proceedings?

It is well known that the family court has wide discretionary powers to re-distribute the assets of spouses. The Court can be broad in its definition of an asset, including potentially those available from family members or businesses. In the key case on this topic, Thomas v. Thomas Lord Justice Waite described these powers as ‘almost limitless’. The court is not obliged to limit any order to the existing capital or income to which the parties have a direct and legal entitlement. This can result in the court taking into account third-party trusts and wider family support. The Court cannot mandate those third parties to pay a certain amount but can make orders in such a way as to imply or ‘judiciously encourage’ that resource be made available. Further information on the background and decision in the case of Thomas v Thomas is available further down this page. The crucial impact is for spouses considering divorce to be aware of how this decision has been applied in subsequent cases and what this means for third parties.

The Court will factor in the assets that are shown to actually exist, and the availability of unidentified wealth can be inferred. These inferences can be drawn from a spouse’s expenditure, style of living, or even their refusal to provide full and frank disclosure. The court will not directly invade the rights or assume discretion is exercisable by a third party in cases where a spouse enjoys access to wealth but has no absolute entitlement to it. Subsequent cases have considered these issues, including discretionary trusts, family trusts, family wealth, and overseas business interests. The Court will not apply undue pressure but can and will look at the reality of each situation as well as the risks of ignoring such assets completely.

Each case will be fact-specific, and specialist legal advice from a member of BDB’s family team should be sought if these matters are or may become relevant.

Background

The husband was a prosperous businessman and was a joint managing director of a family car sales company. His shareholding in the company was worth £600,000, and his salary was £2,791 per month. It was the policy of the company to pay low salaries and plough profits back into the business. The family home was worth £250,000 and had a mortgage of £78,000. The husband was a member of Lloyds and had a bank guarantee that committed the equity in the family home as security of contingent liability up to £100,000 and a Lloyds losses loan of £43,000. The value of his pension was £394,000.

The Wife had no capital assets and had no independent source of income at the time of the proceedings; however, she was engaged in training to become a nurse.

In the initial proceedings, the judge held the home could be sold as it was likely the husband could find alternative security for the Lloyds guarantee, which was secured against the equity in the family home and the Lloyds losses loan. An order for the sale of the family home was made, and the wife was awarded a lump-sum payment of £158,000. The wife was also awarded a periodic payment of £1,500 per month, and the husband had to pay the two children’s school fees. The judge suggested the husband’s salary could be increased by a change in company policy towards the payment of dividends and / or remuneration of its management. The husband argued he would be in an income deficit once he had paid the periodic payment and his children’s school fees.

The husband appealed against this order on the basis that it exceeded the proper bounds of discretion within which the court normally acts when exercising its matrimonial jurisdiction, particularly where third parties were affected.

Decision

It was held that the husband had substantial means, although he faced liquidity problems. The periodic payments to his wife did not leave the husband destitute; his deficiency of income was after the expense of the luxury of private education for his sons. Lord Justice Waite was of the view the husband could forgo independent school education for his sons if his circumstances were as dire as he suggested, or else he could seek help from his brother or mother.

It was further held that although the husband would likely require the help of his brother or mother during the transitional period, this fell short of an order placing undue pressure on third parties. The order encouraged the third parties, the mother and brother, to make the resources available to the husband so that he could meet the terms of the order. This has become known as judicious encouragement by third parties.

In this case, Lord Justice Waite concisely set out the principles that should guide any wider resource argument. One such principle is that the court is not obliged to limit its orders exclusively to resources of capital and income that are shown to actually exist, and the availability of unidentified wealth can be inferred from a spouse’s expenditure, style of living, or even refusal to provide full and frank disclosure.

A further guiding principle is that the court will not directly invade the rights or assume the discretion exercisable by a third party in cases where a spouse enjoys access to wealth but has no absolute entitlement to it. This includes beneficiaries under a discretionary trust and a spouse who receives income / capital from a relative, and Lord Justice Waite made clear that the court will not put a third party under undue pressure to provide resources to a spouse. However, the court will not completely disregard the availability of wealth from sources owned or administered by others and, on occasion, will consider it appropriate to judicially encourage third parties to provide spouses with the means to comply with an order.

Subsequent cases

Judicial encouragement has been considered in many subsequent cases that uphold the principle established in Thomas v Thomas. In the case of Daga v Bangur [2018] EWFC 91, the judge directed that two discretionary trust funds of which the wife was the sole beneficiary were not an available resource to the wife. The wife had signed a letter of wishes declaring herself a nominee settlor and that the trustees should act on her father’s advice in relation to all matters regarding the trust. The court concluded they must not put undue pressure on third parties, and in any event, the court was not satisfied the trustees would respond to judicial encouragement, and evidence suggested they were highly unlikely to make funds available to the wife.

In Wodehouse v Wodehouse [2018] EWCA Civ 3009, the husband was the beneficiary of a family trust, and in the first instance, the final lump sum order was drafted to include a liability on the part of the trust to pay the lump sum if the husband failed to pay. In the Court of Appeal, the court overturned the two previous courts’ decisions and ruled that the lump sum order was procedurally unfair and that the court had no jurisdiction to order lump sum payments against third parties.

In RM and TM [2020] EWFC 41, the judge rejected a Thomas v Thomas type order for the wife’s parents and brother to be judiciously encouraged to extract funds from a family business and associated business property. The judge thought it unlikely the family would respond to judicial encouragement, and in any event, there was no meaningful liquidity in the business. However, the judge found the wife’s family would be willing to assist the wife from their own personal wealth and factored this into consideration. He directed that where the evidence shows, to the requisite standard of proof, that third-party family members will likely provide financial support to one or both of the spouses, that constitutes a resource the court can take into account. Although the judge did make it clear they would not place pressure on a third party who is perfectly entitled to decline to provide support.