Judges have a wide discretion to decide how to divide assets on divorce. This can inject a degree of unpredictability into disputed financial settlement cases. Where there are high value assets at stake the repercussions can be significant. This is one reason why we try to help our clients agree financial settlements. But if agreement proves impossible and you have to go to court it’s essential to understand the principles the courts apply when deciding how to distribute assets on divorce.
What Is The Sharing Principle?
One of the key principles is the ‘sharing principle’. This means that matrimonial assets – those built up over the course of a marriage – will be divided or shared equally on divorce provided there is no good reason to depart from the principle.
The idea of sharing assets equally is relatively straightforward to apply when we are considering property like land, buildings, furniture or stocks and shares. Things are less clear when one spouse develops an earning capacity or income stream during the marriage, for example from a business that the other spouse has helped secure. Should that future income stream also be shared?
It seems not. Just last year the courts ruled in Waggott v Waggott that earning capacity or an income stream was not capable of being a matrimonial asset to which the sharing principle applies. According to the judge in the case the wife would only be entitled to a share in the husband’s future earnings if it were necessary to meet her reasonable needs.
Can Future Income Be Shared After Divorce? The O’Dwyer Case
The Waggott approach has just been reiterated by the High Court in the case of O’Dwyer v O’Dwyer.
Mr. and Mrs. O’Dwyer split up in 2016 and the marital assets were valued at approximately £6 million. This included an interest in an extremely successful McDonalds franchise business with an agreed value of £2.4 million. The husband ran and managed the franchise and received an income of around £1million a year from it.
Because this was a lengthy marriage (28 years) and because both parties had contributed equally to produce the existing assets the Central Family Court decided that this was a typical ‘sharing’ case where the marital assets should be divided equally. However the judge in the lower court also took the view that the husband’s projected £1million a year from the McDonalds business was a matrimonial asset capable of benefitting the wife into the future. With this in mind he ordered that the husband should pay the wife £150,000 in maintenance.
Relying on the decision in Waggott that we mentioned above, the husband appealed against the maintenance order. In the High Court the judge rejected the wife’s attempts to differentiate her claim from Waggott and ruled that the lower court judge had been wrong to treat the future McDonalds income as a joint asset.
The High Court judge proceeded to calculate that the wife’s annual financial needs were £120,000 and by using income from her capital she could generate £52,000. The result was that the wife’s maintenance order was more than halved – from £150,000 to £68,000.
Comment
Following the decision in Waggott a lot of legal insiders suggested it heralded the end if the so-called meal ticket for life for spouses in contested financial settlement cases. After all, the rationale for the decision in Waggott was made clear by the judge in the following terms:
“any extension of the sharing principle to post-separation earnings would fundamentally undermine the court’s ability to effect a clean break”
The belief was that the case indicated a trend of less generous settlements for financially weaker spouses. And the decision in O’Dwyer seems to confirm that joint lives maintenance orders will be less common in future.
While many welcome these decisions because they facilitate clean break divorce in complex cases, critics argue that they are unfair to the financially weaker spouse. In the O’Dwyer case, for example, the wife is expected to use her capital immediately to produce an income that will shore up her level of maintenance. The husband on the other hand can leave his capital untouched while relying on the income from a business that was arguably built up by both spouses during the course of the marriage.
For advice on financial settlements and how assets may be divided call Brookman Solicitors in London on + 44 (0) 20 7430 8470 or contact us online.