When is a clean break not a clean break?
Most people going through a divorce want to achieve future certainty in their financial arrangements.
This can be achieved by what is known as a “clean break”. A full clean break means that neither party has any right to come back to court in the future for any orders for maintenance or capital. A capital clean break is when there is a maintenance order in favour of a husband or wife. In such cases where there is ongoing maintenance a court can only impose a capital clean break so neither party can come back to apply for capital or lump sums in the future, maintenance can be varied upwards or downwards if there is a change of circumstance or sometimes after a lapse of time if the maintenance is not linked to the RPI or CPI.
However, there are a couple of traps that individuals going through a divorce (and their lawyers) need to be aware of.
Firstly, if an application is made to vary a maintenance order in favour of a spouse a court can decide to capitalise the maintenance and so a further lump sum is payable, however the plus point is that maintenance comes to an end. (I wonder how frequently solicitors fail to mention the former point to their clients?)
Another pitfall is that in certain circumstances a lump sum payable by instalments can be varied, both as to the amount of the lump sum and the timing of the payments.
A recent case has highlighted this difficult area.
In the case of Hamilton –v- Hamilton 2013 EWCA CIV the original court order provided that the wife should pay the husband the following lump sums, £150,000 within 7 days, £150,000 by 30 April 2008, £50,000 by 30 April 2009, £50,000 by 30 April 2010 and £50,000 by 30 April 2011. In return the husband had to transfer his interest in the matrimonial home to the wife.
The wife paid the husband £240,000 but her business went into administration and she was unable to pay the remaining amounts.
The husband took enforcement proceedings and served a Statutory Demand (a prelude to commencing bankruptcy proceedings) on the wife. The wife then applied under Section 31 of the Matrimonial Causes Act 1973 (MCA 1973) for a variation of the order arguing it was a lump sum payable by instalments and as such was variable. The Judge agreed with the wife’s argument and varied the order giving the wife until May 2016 to make the payments.
The judge, Mrs Justice Parker, said that in every case where there is to be a staged payment then this is in reality a lump sum by instalments and it is not possible to protect the paying party by drafting the order as a series of lump sums. (Solicitors had frequently avoided this potential pitfall by drafting Orders as a series of lump sums to avoid this problem arising).
The husband appealed against the decision and the Court of Appeal dismissed the husband’s appeal but did not agree entirely with Mrs Justice Parker’s reasoning. The Court of Appeal said the judge was wrong in concluding that any Order for the payment of lump sums is lump sum by instalment. The MCA Section 23(1) (c) gives the Court the power to vary a lump sum or sums. Save for varying the timing of the payments such orders not variable. The Court of Appeal also said that a lump sum payable by instalments was variable under Section 23(3) (c) by virtue of Section 31 MCA and it stands to reason that the power must exist to vary the quantum as well as the timing of such payments.
In this case the court suggested that a recital or clause at the beginning of the order (known as a “preamble”) which sets out the basis of the agreement would avoid disputes of the sort in Hamilton coming before the courts.
In short if you do not want a lump sum payable in several tranches to be variable as to amount then ensure it is drafted as a series of lump sums and ensure your lawyer inserts an agreement in the preamble to the order to make it clear a full clean break is intended.