Interveners (or Third Parties) & Setting Aside Dispositions – Cautionary Tales

Divorce & Matrimonial Finance

11 May 2016

An amended version of a paper originally presented at the Becket Chambers’ Family Finance Seminar at Eastbourne, Dartford & Canterbury on the 8th, 9th & 11th February 2016.

Bringing third parties into financial remedy proceedings is an extremely risky and potentially costly business.  The two tales are cautionary in very different ways; the first being an example of a disastrous failure on behalf of the claimant not to effectively litigate the third party issue and, the second involving third parties being brought into the proceedings in a peremptory manner with almost equally disastrous consequences for them.  They are both, in effect, about setting aside a disposition to a third party and, they have both also been chosen because they also illustrate a rather bizarre friction between two ways of dealing with the issue, S.37 MCA on the one hand and rule 9.26B FPR on the other, and those two route’s seemingly disparate effects on costs.

Of course anonymity has been observed and details have been changed to protect the innocent – and the not so innocent.

The First Tale,

1.       Mrs A came to me some time after final orders had been made but, the Judgment revealed the following:

(i) The children and financial disputes had been highly acrimonious and extremely long running and the financial proceedings had involved multiple hearings, largely due to H’s non-disclosure.

(ii)     W & children remained in the FMH and W sought transfer into her name.

(iii)    The FMH was subject to a charge for a sum that was over two-thirds of the net equity.  The charge was in favour of a company owned by and controlled by H’s relatives.

(iv)      On all factual issues, the court believed everything that W said and almost nothing that H said.

(v)     H was ordered to transfer the FMH into W’s sole name.

(vi)    Nonetheless, the company still had the charge and, whilst the court clearly wanted to help W, neither the company nor the issue of the charge was effectively before the court. All the court could do, and did do, was to order that H indemnify W in respect of any sum owing to the company.

2.       The problem of course is that the indemnity does not protect W from a situation in which H succeeds in making himself appear to be impecunious and, as he had already succeeded in getting a nil child maintenance assessment and was clearly not someone the court considered to be honest or straight forward, that was on the cards.

3.       This need not have been the result:  It seems that at some point W had made an application that the company be invited to intervene but, the court had taken the entirely logical view that the company had no reason to wish to intervene (clearly, why would they?) and therefore the application was dismissed.  Arguably, the court might have made the company a party against its will pursuant to Rule 9.26B (please see the Second Tale) but that application was not made.  But there is a much better way:  Although it appears to be little known and, certainly was not done in this case, it is perfectly possible to set aside a charge in the same way as any other “disposition” under S. 37 of the Matrimonial Causes Act 1973.

4.       The authority is Kremen -v- Agrest & Fishman [2010] EWHC 2571 (Fam) [2011] 2 FLR 478.  Whilst the application in that case was made under S. 23 of the Matrimonial and Family Proceedings Act 1984 and argued alternatively under the doctrine of “sham” (which argument did not succeed – it is not easy to succeed on sham as you have to prove dishonesty on both sides of the deal) the fact is that S. 23 MFPA mirrors S.37 MCA – the parties were both Russian and divorced in Israel so hence the MFPA.  H was, as he is rather colourfully described in the Judgment, “a fugitive from English justice”.   He was also clearly a man of some persuasive talents because, in order to make the charge effective, he had to persuade W to transfer the FMH into his sole name; in which he succeeded by giving her £1m but, he then also persuaded her to “lend” him the £1m back and, unsurprisingly perhaps, never repaid it.     The charge was in favour of a friend and had the effect of wiping out W’s claim entirely.  And as a result there is a mildly entertaining account in Mostyn J’s judgment in which His Lordship recalls, with some relish I suspect, catching the intervener out with a bit of judicial cross-examination about the fact that such a valuable asset had not been insured: “I asked him what was going to happen  if H died in the meantime he paused, laughed nervously, and stated that that was a very good question” [para 19] (clearly someone else who Mostyn considers really ought to be a ‘fugitive from English justice’).  Mostyn J had no hesitation in setting aside the charge.

5.       S. 37 MCA  is familiar as the injunctive route to preventing a disposition of matrimonial assets but, it is worth noting the extent to which it also fits so well the setting aside of a charge (or other disposition come to that) in circumstances such as those arising in this cautionary tale:

(i)      If, on a S. 37 application in financial remedy proceedings the court is satisfied that H (let’s call him H because, let’s face it, he so often is) made a “reviewable disposition” with the intention of defeating W’s claim and the effect of setting aside that disposition would be that W would receive financial relief or different financial relief then the court can (and likely will) set it aside.

(ii)     Note that an application must  be made – it sounds obvious but of course that did not happen in my cautionary tale and, much less obviously, also note that the S.37 applicant must also be applying for a financial remedy so Respondents to the financial suit must do so, if they have not already.

(iii)    A “disposition” includes any conveyance, assurance or gift (except by will) of property of any description and a “reviewable disposition” is any disposition made by a party to financial remedy proceedings (before or after commencement) unless it was made for valuable consideration to someone acting in good faith and without notice of the intention to defeat W’s claim.

(iv)    And, if the disposition took place less than three years before the application and would have the effect of defeating W’s claim, then the necessary intention to defeat W’s claim will be presumed, unless the contrary is shown: so there is even a presumption to assist.

6.       So, S. 37 would have solved Mrs A’s problems (and, she may even have got a costs order, see below).

7.       However, issues start to arise when consideration is given to questions about the need to involve the third party, whether he needs to be made a party, the overlap between S. 37 and other routes and potential consequences in costs.

8.       Involving the third party: Principles of natural justice, Article 6 etc and equally, the need to bind the third party, obviously dictate that the recipient/beneficiary of the charge (or other disposition) be given an opportunity to be heard at the very least and, arguably, that he be made a party.  The recipient of the charge in Kremen -v- Agrest & Fishman was made a party. So, is it safe to simply make an order in which the third party is given 28 days or so to intervene as sometimes happens; is that binding?  No, is the short answer.  If the Order spells out that the Court is likely to determine their interest then they may have difficulty challenging it later but by far the safer route is to get them to court, to make an application to make them a party.   Fisher Meredith -v- JH & PH [2012] EWHC 408 (Fam) [2012] 2 FLR 536 was not a S. 37 case and, although the failure to join interveners resulting in a wasted costs order at first instance was reversed on appeal, nonetheless,  the court emphasised that where a claimant is saying that a property held in the name of a third party is the property of the respondent (as is effectively the case with a disposition) there is a clear obligation on the claimant to apply to join the third party at an early stage.  So why would it be acceptable, or safe, to avoid that obligation by simply making a S.37 application?   Logically, it would not.

9.       But, once joining a third party comes into the equation and costs are being considered, the costs provisions relating to S. 37 and interveners generally reveal themselves to be an incredible tangle:

10.     The injunctive part of S. 37, i.e. S 37 (2) (a), is not a “financial order” as defined in r. 2.3 and therefore does not fall within the definition of “financial remedy proceedings” in r. 28.3 (4) (b) but rather falls under “family proceedings” generally, so that the starting point of no costs orders under r. 28.3 does not apply and the discretion under CPR r. 44.2 does (see further, para. 9 below).  But, the part with which we are concerned here, setting aside dispositions under S. 37 (2) (b) & (c) is, by reason of the combination of r. 9.3 with 2.3 defined as “an avoidance of disposition order” and therefore an application for a “financial order” that does fall within the definition of “financial remedy proceedings” in r. 28.3 (4) (b) (i), and so the starting point is no order for costs.  If that distinction is not odd enough, then carry on:

11.     Rule  28.3 (4) (b) (i) is stated not to apply to any application for an interim order and the Court of Appeal decided, in a case where the S.37 application was to set aside a disposition, that nonetheless where a S. 37 application is an interim application then r. 28.3 does not apply, that CPR  r. 44 applies and (applying Gojkovic –v- Gojkovic, below) that the starting point is that costs follow the event: Solomon -v- Solomon [2013] EWCA Civ 1095.  In that case the S. 37 application was, it seems, regarded at an interim stage as ill-founded and all but formally withdrawn, so presumably that is the basis for the decision but, that is worrying:  Does it mean that any application under S. 37 (2) (b) & (c), if rejected at an interim stage (for instance at a preliminary issue hearing) is liable to the civil costs rules (and the starting point that costs follow the event) despite the fact that it started life as an application for “a financial order” falling within r. 28.3?  I suspect that it will be said at some stage that Solomon turned on its own peculiar facts but, it is an added risk in this type of case and not the only one:

12.     If S. 37 ‘setting aside disposition applications’ can so easily find themselves subject to ‘costs follow the event’ principles as Solomon suggests then, what of the situation where an intervener comes in as a result?  There is a well-respected line of authority that “intervener proceedings” fall within “family proceedings” for costs purposes: Baker -v- Rowe [2010] 1 FLR 761, Judge –v- Judge [2009] 1 FLR 1287.   Although rules 28.1 & 28.2 dictate that  in “family proceedings”  the court may make such costs order as it thinks just and that part 44 of the CPR is applicable nonetheless, on the one hand, the rules specifically disapply the  general rule that costs follow the event but, on the other hand, both Gojkovic –v- Gojkovic [1991] 2 FLR 233 CA and Baker –v- Rowe (above) emphasise that the court needs to start somewhere and that that somewhere is “costs follow the event” (or, as it is put in Baker –v- Rowe, the fact that one party has been unsuccessful means that he must usually be regarded as responsible for the generation of the other side’s costs).  So, ultimately the respected authorities say, in effect, that, in intervener proceedings, costs will usually follow the event.

13.     But, does that mean that the involvement of an intervener removes this type of S. 37 application from r. 28.3 or, alternatively, that the applicable costs principle depends entirely on whether the application was made under S.37 or under rule 9.26B, as in the Second Cautionary Tale?

The Second Tale,

14.     The relevant facts can be stated briefly:

(i)      It was a fairly typical case of one party (yes H again) saying that the matrimonial assets (which were liquid in this case) belonged to his relatives, not him, and that that is why he had returned the assets to them.

(ii)     At FDA, without making any application (a part 18 application is the prescribed method) W invited the court to join the relatives under rule 9.26B.

(iii)    On the day listed for FDR, the court took the view that, because ownership of most of the assets was disputed, the matter should simply be set down for a final hearing, without any consideration of whether there should be a preliminary hearing of the intervener issue.

(iv)    At the final hearing, the court found for W, declaring that the assets were owned by H not his relatives and made costs orders against H and the interveners but, belatedly, accepted that the hearing should have been a preliminary issue hearing and listed an FDR.  The Court failed to deal properly, or at all, with the points that follow below but, the costs of an appeal and likely rehearing were too big a risk for H or the interveners to take.

15.     Rule 9.26B is very wide: a party can be added to financial remedy proceedings “if it is desirable” so that the court can resolve all matters including any relevant issue between an existing party and the new party.   Goldstone -v- Goldstone [2011] EWCA Civ 39, [2011] 1 FLR 1926 CA is the relevant authority: W was claiming that assets legally owned by a company with which H was associated were matrimonial assets in respect of which she sought a property transfer order and argued that an agreement between H and the company was a sham, as well as applying under S.37.  The court joined the company on the basis of general principles and the Supreme Court Rules (the case was decided prior to r.9.26B FPR).   In summary, the Court of Appeal held:

(i)      There must be a preliminary trial of the issue of ownership to establish the extent of the assets over which the court would exercise its discretion.

(ii)     The family court had jurisdiction to decide that issue.

(iii)    The court must decide the third party dispute as if it were in the civil jurisdiction.

And generally approved the approach of Mostyn J in an earlier case in which he had said that:

“….. it is essential in every instance where a dispute arises about the ownership of property in ancillary relief proceedings between a spouse and a third party, that the following things happen:

(a)     The third party should be joined to the proceedings at the earliest opportunity.

(b)     Directions should be given for the issue to be fully pleaded by points of claim and         points of defence.

(c)     Separate witness statements should be directed in relation to the dispute.

(d)     The dispute should be directed to be heard separately as a preliminary issue, before the financial dispute resolution (FDR).”

16.     It follows that the interveners in this secondary cautionary tale were let down by the court in a number of ways but also, why was this not dealt with as an application under S.37?  After all, it seems clear that, in giving the liquid assets to his relatives, H had made a disposition.  When this point was aired, it was said on behalf of W that there was no need for an application under s. 37 because the interveners had undertaken to hold the assets until the conclusion of the proceedings but, that is to focus only on the injunctive part of S. 37 not the set aside provision and, the court did not properly grapple with the issue.  But it does seem, from all that has been said so far, that the choice of route is the Applicant’s.

17.     It must logically follow that, if a party goes down the route of rule 9.26B to set aside a disposition and the matter is dealt with as if it were a civil dispute with the procedural rules set out above, the costs rules set out in Rowe -v- Baker (above) apply i.e. a theoretical clean slate but a likelihood of costs following the event.

18.     But what if the party instead makes an application under S. 37 (2) (b) to set aside the disposition?  For the reasons set out above at paragraph 10, above, the proceedings are “financial remedy proceedings” and r. 28.3 (5) applies with the result (subject to litigation conduct) that “the general rule in financial remedy proceedings is that the court will not make an order requiring one party to pay the costs of another party”.  It must follow that,  at least so long as the application is just between H and W, the general rule of no order for costs will continue to apply.

19.     But, what if a third party joins the s. 37 dispute (of his own volition or because the court considers that necessary) does that alter the applicable costs rules?  One view (seemingly that expressed in the Red Book) is that that makes the proceedings “intervener proceedings” and that therefore Baker –v- Rowe applies.  But, firstly, Baker -v- Rowe was not a S. 37 case (the intervener had been given leave to assert a beneficial interest) and secondly, it (and Judge –v- Judge which it followed) turned on the fact that an application to set aside was not “an application for ancillary relief” based upon a narrow interpretation of  what was described as an “unfocused reference” to “for ancillary relief” as opposed to “in connection with ancillary relief” applying the 1991 Rules.  Whereas, an application to set aside under S. 37 (2) (b) does fall within the definition of “proceedings for a financial order” and therefore “financial remedy proceedings” in the 2010 Rules because r. 2.3 provides that “financial order” means (inter alia) “an avoidance of disposition order” which in turn by r. 9.3, means (inter alia) “ in proceedings under the 1973 Act, an order under section 37 (2) (b) or (c) of that Act” and, there is nothing “unfocused” about that (convoluted yes but, not unfocused).  Although the Court of Appeal also gave reasons relating to its interpretation of Parliament’s intention of course, if the newer Rules are clear, that interpretation cannot stand.  And, it must surely be right that an application made under S. 37 (2) (b) does not cease to be an application under S. 37 (2) (b) just because a third party is joined in that application.  Whilst theoretically there could be an argument that r. 28.3(5) only applies as between spouses, it does not say that, it talks about costs against a “party” and, if you bring someone in to an application to decide an issue relating to them, you make them a party, as the wording of r.9.26B itself illustrates.

A Conclusion of Sorts,

20.     So, it seems that a claimant can choose which route to take to set aside a disposition, S.37 or r.9.26.  And, it seems that the result of that choice may well determine which costs regime is applicable in the same financial remedy proceedings.  If that is right, an applicant very confident of success would be well advised to take the r. 9.26B route and an applicant uncertain of her chances would be better advised to take the S. 37 route and either take the risk of not joining the third party (if it can be safely avoided) or argue that the r. 28.3 applies.  And, that is a rather odd state of affairs.


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