BP (Petitioner) v KP NI (1st Intervener) OI (2nd Intervener)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Mostyn |
| Judgment Date | 26 October 2012 |
| Neutral Citation | [2012] EWHC 2995 (Fam) |
| Date | 26 October 2012 |
| Docket Number | Case No: FD10D03361 |
| Court | Family Division |
[2012] EWHC 2995 (Fam)
IN THE HIGH COURT OF JUSTICE
FAMILY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Mostyn
Case No: FD10D03361
Nicholas Cusworth QC & Alexander Thorpe (instructed by Kay Georgiou Solicitors) for the Petitioner
Martin Pointer QC & Simon Webster (instructed by Schillings) for the Respondent
Deborah Bangay QC & David Blayney (instructed by Goldkorn Mathias Gentle Page Solicitors) for the 1 st & 2 nd Interveners
Hearing dates: 22 – 26 October 2012
This judgment is being handed down in private on 26 October 2012. It consists of 40 paragraphs and has been signed and dated by the judge. The judge hereby gives leave for it to be reported in this anonymised form as BP v KP and NI (Financial Remedy Proceedings: Res Judicata)
The judgment is being distributed on the strict understanding that in any report no person other than the advocates or the solicitors instructing them (and other persons identified by name in the judgment itself) may be identified by name or location and that in particular the anonymity of the children and the adult members of their family must be strictly preserved.
This is my judgment on two preliminary issues. Mr Pointer QC, who represents the husband ("H") argues that:
i) The wife ("W") is barred by operation of the doctrine of res judicata from asserting in the financial remedy proceedings (which will be heard on 18 March 2013) that an agreement said by H to have been formed in early March 2008 was either the product of collusive fraud between him and Mr I ("NI"), or, if not actually fraudulent, was in fact formed in 2010; and
ii) At the final hearing W is also barred from running a case of " add-back" in relation to the losses suffered by him, and therefore to the family, arising from enforcement of that agreement by NI.
The facts
I will endeavour to express the relevant facts as shortly as I can. H and W were married in 2003. At that time H was with ED the owner of an investment management company called XYZ. This had been established in 1998. The business was very successful, but in 2006 a financial regulatory authority ("Regulator") served notice of an investigation by them into alleged market abuses. Notwithstanding that bad news the fund continued to trade and was very successful both for its investors and its managers.
NI was an investor in the fund and a friend of H's. He says that in 2007 he decided to withdraw into academic studies and wished to convert his investments into securities which were less exposed to risk. He and H say that in November 2007 they discussed entering into what has been described in a "Phantom Swap Agreement" or a "Cap and Collar Agreement". Essentially the idea was that NI would buy 2,465.177 shares in the A B C Fund for £7,766,959. If the value of the fund went up NI would receive the first 5%, and any profit above that would be shared equally by H and NI. But if the fund went down H would guarantee all the losses apart from £100,000.
NI and H say that they signed the agreement in the early part of March 2008, even though it states that its "effective date" is 8 February 2008.
In the latter part of March 2008 the Regulator announced that it had concluded its investigations and would file a complaint against XYZ imminently. H says this news came out of the blue. Other than the notices served in 2006 he had no inkling that this step would be taken. As a result the funds were suspended. The complaint was filed in early April 2008 and very heavy litigation ensued. Eventually the Court in the Regulator's country gave judgment in early 2012. It found the complaint partly proved and ordered XYZ and ED to disgorge their illegitimate pecuniary gains of over $30m and imposed a civil penalty in the same amount. XYZ was then placed into administration a few months later in 2012.
The combination of these events and the global financial crisis caused the value of NI's funds to collapse. In April 2011 he sued H under the agreement in the Chancery Division claiming £6,501,915 calculated as follows:
| Purchase Price | 7,766,959 |
| current market value agreed with H | (1,165,044) |
| less sum to be borne by NI | (100,000) |
| 6,501,915 |
H did not defend the suit and in May 2011 judgment was entered in default in the sum of £6,540,767 to cover the claim, interest and costs. H's position is (or rather, was, until recent events took a different turn) that this is an unimpeachable liability of his which must be satisfied out of the family assets.
W strongly disputes this. Her position is (or rather, again, was) that while she does not dispute that NI purchased the shares, the agreement is a fraudulent construct. It was not entered into in 2008, when the parties were reasonably happily married, but rather in 2010, when the marriage had broken down. She petitioned for divorce in July 2010. She says that the H and NI have conspired to create this construct which will have the effect of removing the great majority (about three-quarters) of their fortune from the powers of the court. When the dust has settled she says that NI will return all or most of the money to H.
In order to test the veracity of H's case W would like to examine the originals of the agreement, assuming, not unreasonably, that each of H and NI would have a counterpart. It is possible forensically to examine paper and to discover when it was manufactured. But H says that his original version has disappeared from some papers kept in his bedroom and accuses W of having taken it. NI says that he sent the original to his solicitors but it was lost in the post. Faced with such a striking coincidence W has asked to examine NI's computer on which the agreement was prepared, as the file would be on the hard drive embedded with its date of creation. But NI says that he threw the computer away last summer as it was outdated.
W not only relies on the total absence of any original paper or electronic documents but also the complete absence of any surrounding letters or emails at the time of the alleged formation of this agreement. She points to the fact that there is no reference to this agreement anywhere in any medium before 2010.
Therefore late in the day W applied in the Chancery Division to set aside the default judgment. That application has not yet been heard. She had earlier succeeded in preventing Final Charging orders being made here in relation to H's share of the former matrimonial home and in the Isle of Man over certain assets held there by H. In her application W clearly alleged fraud against H and NI, and explicitly alleged that the agreement had been made in 2010.
This week (22—26 October 2012) I had expected to conduct an OS v DS hearing. That is a form of oral discovery designed to test the strengths and weaknesses of the parties' cases under cross-examination, so that an effective FDR can take place. The parties' position statements were polarised. H asserted that the judgment debt was completely valid and the money irretrievably lost. W asserted that the judgment debt was a fraudulent sham. By then the judgment debt had risen with interest to £7,302,005. Given that the assets of the parties comprise about £10m it can be seen that a lot rode on their respective positions.
But events took an unexpected turn. As things stood at the end of last week NI had not in fact suffered a loss of £6,501,915. That loss calculation was based on a figure for the value of the shares agreed between H and NI of 15% of the purchase price or £1,165,044. However after the judgment NI had 1,068 of his shares compulsorily redeemed at £2,179.61 per share, giving him £2,326,910. At that redemption figure his remaining 1,178 shares would be worth £2,567,709.
I was therefore both unsurprised and pleased to read in Miss Bangay QC's position statement that:
"Mr and Mrs I did not intend or expect to receive a gain of that kind, and they were prepared (as part of a settlement in which they obtain payment and have no need to engage in further litigation) for that benefit, less their costs of these proceedings, to be returned to the "matrimonial pot" to be contested between Mr and Mrs P. They were also prepared to waive their right to 8% interest on the judgment. They made that position clear by way of an open offer contained in a letter from their solicitors dated 18th October 2012"
I do not need to recount the manoeuvrings that subsequently took place. Suffice to say that agreement was reached between the parties along the lines of this proposal, although much bad-tempered wrangling has taken place over the terms of the order. The compromise agreement provides for the following essential terms:
i) NI will keep the sum received on compulsory redemption in March 2012.
ii) NI will receive £3,826,640 in respect of his judgment debt.
iii) NI will sell his remaining 1,178 shares to H for £1m (or £848.90 per share), who will then put them in the joint names of him and W.
iv) The aggregate sum of £4,826,640 will be collected first via the charging order over H's share of the matrimonial home, second via the third party debt order against Hs ISAs (about £70,000) and third via the charging order against H's assets obtained in the Isle of Man.
v) W's application to set aside the judgment in the Chancery Division will be dismissed.
The effect of this compromise is as follows. NI will recover £4,826,640 of his judgment debt of £7,302,005. This is 66p in the £. That "restores" £2,475,365 to H and W. In addition they will receive NI's 1,178 shares. At the last redemption figure they are worth £2,567,709. At their purchase price they are worth £1,000,000. Therefore W would argue that instead of she and H suffering a loss of...
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