Clean break: can bonuses snooker financial settlements?

Bonuses have been in the spotlight in recent times and they are certainly not disappearing under the radar of the divorce courts. In the High Court appeal of P v P (also known as H v W [2013] EWHC 4105 (Fam), Mrs Justice King set out useful clarification on the appropriate approach for dealing with spousal maintenance orders where the family income is made up of discretionary bonus as well as salary.

At the time of the original hearing before District Judge White, the husband, then 43 and the wife 55, had been cohabiting for about
19 years and married for around 14 years. They had an adult daughter, who was then living with her mother, but the court made it clear that the wife was not entitled to any provision as she was no longer a dependant.

The husband, managing director of a Russian bank, was used to receiving his income by way of a salary plus a discretionary bonus. In the financial year up to April 2011, his income was £250,000 gross plus a bonus of £225,000 gross, of which £67,500 was deferred, giving him a net income of £214,467 for that year, i.e. £17,872 net per month.

In the financial year up to April 2012, the husband‘s income was again £250,000 gross, plus a bonus and deferred cash award of £195,750 plus £18,000 worth of shares, which vested over three years from April 2013.

While the husband was initially pessimistic about the likelihood of his bonuses continuing at this level, his concern was not borne out, and during the proceedings, they were sustained at that level. The wife had been a legal secretary in the 1990s but had not worked for 15 years. In the circumstances, the judge assumed she was able to earn a salary of just £500 per month (if she was minded to) and that figure was therefore assumed to be available to her.

Joint lives

The court had decided that there were sufficient capital assets to achieve a capital “clean break”, i.e. no further financial recourse for either party against the other in terms of capital. The wife was to receive generous capital provision consisting of the majority of the net proceeds of sale from the former matrimonial home, which would enable her to rehouse mortgage free, plus an 81.3 per cent share of the husband‘s pensions.
The husband was to retain an American property, which was in negative equity, and an investment property in the UK.

To start with, District Judge White had determined that an appropriate distribution of finances on divorce would include an order for spousal maintenance to be paid by the husband to the wife on a “joint lives“ basis, i.e. until the husband or wife died, at the rate of £3,750 per month. In addition, the husband was ordered to pay the wife a sum equal to 25 per cent of his annual bonuses each year (net of tax and national insurance) on a “joint lives“ basis. This was significantly lower than what the wife had sought.

The husband appealed the fact that the maintenance was payable on a “joint lives“ basis (instead he wanted it to stop when he turned 60) but the court refused to reopen this. He also sought to exclude the wife having any share of his bonuses going forward and the court allowed this to be re-examined on appeal. Was the judge right to award a share of the future bonuses?

It was argued on behalf of the husband that the court could only share future bonuses where “needs“ justified this, i.e. where, without the bonus, there was insufficient money to meet the basic needs of the wife. This was not the situation, the wife being provided for by the maintenance funded from the husband‘s salary.

The judge at first instance had released a supplementary judgment in which he had made it clear that, had the husband‘s monthly salary been higher, he certainly would have made a higher periodical payments order in favour of the wife. He felt that, while the maintenance order he had made met the wife‘s basic needs, it was far from being a generous interpretation of “needs“.

In circumstances where the judge was forced to order a smaller monthly maintenance payment than he felt the wife was entitled to (with reference to all the factors in the case and in particular the standard of living during the marriage and available income in the foreseeable future), it was appropriate to order a share of future bonuses to the wife.

Fair order

Historically, the family‘s standard of living was dependent on the husband‘s bonus. The judge said that: “Had the proportions been different, (more income less bonus), he would have made the basic maintenance award higher.” He had instead made a “fair“ order of maintenance for the wife, which met her basic needs. As the level of future bonuses was unknown, the “top up“ of the basic maintenance was expressed as a percentage.

However, on appeal King J felt the lower court had been wrong to not place a cap on the wife‘s entitlement from the bonuses. Taking into account all the circumstances of the case including the historical level of bonuses, and without applying a mathematically exact calculation, King J felt that an appropriate maximum amount for the wife to receive from the bonus would be £20,000 per annum. She estimated that this would provide the wife with approximately £1,666 per month on average.
This, together with her regular maintenance of £3,750 per month, would give the wife a total of £5,416 per month (excluding any income that
she could earn herself) which is in the region of £66,000 per annum. This was considered a fair figure, particularly taking into account the fact that the wife would not have a mortgage.

It was considered fair that the wife should receive 25 per cent of the bonus (at the capped level) across the various elements of the bonus. This meant that the wife could not receive her capped “top up“ from the immediately available cash element of the bonus only. It would be unfair for the husband to be left with more of the stock/share options and deferred cash payment for example, than readily available cash. Any deferred or risk element of the bonus had to be shared. This is in line with the court‘s general approach to sharing assets that carry risk, and are not simply “cash in hand“, between parties.

Together with the fact that the wife‘s share of the bonus would be capped, would mean having to agree a method by which the value of the wife‘s share of the bonus would crystallise, so the cash element could be calculated and paid out and the wife‘s share of the risky assets identified (with the wife then bearing the risk of any change in value on her share of any stock/share options). The logistics of implementing this, as well as addressing the way in which the wife‘s share of any stock or share options would be held, would need careful consideration by practitioners.

Court alternatives

Mr Justice Mostyn, who allowed the appeal to proceed, directed that the parties attend mediation to see if they could agree on whether there should be a cap on the wife‘s share of the husband‘s bonus. In fact, the parties were even unable to agree on a mediator. So mediation did not take place, but this reflects the current trend of the courts to endorse alternative means of resolving disputes.

As a mediator does not represent the interests of one party over the other, it is advisable for each party to receive independent legal advice on any settlement that is about to be agreed in mediation. In this way, each party can make an informed decision on how much compromise, if any, is appropriate in the circumstances, having been advised of the legal position and what their entitlement is/may be.

Collaborative law is another option available to couples who want to try to work towards achieving a settlement without court proceedings. It involves a series of meetings with each party having their own collaborative trained solicitor present (so there is support and legal advice throughout) and with everyone working through the areas of dispute and towards a suitable settlement.

Unknown elements

Love or loathe them, bonuses are ubiquitous, in the financial and banking world especially. They are often discretionary and made up of different elements, but these unknown elements pose no obstacle to the divorce court.

The decision in P v P reflects the family court‘s ability to take a pragmatic approach to achieve what it regards as a fair result. The main income provider in a marriage should be aware that their income is available for distribution, not only at the time of the divorce but going forward, and that the courts are willing to be robust, should circumstances justify it and fairness require it, when deciding how to treat that future income.

Of course, it is by no means every divorce case where it is appropriate or justifiable for an ex-spouse to receive a share of future bonuses, not least where there is also a joint-lives maintenance order, a significant share of the pension and generous capital provision in their favour.

However, where bonuses play an instrumental role in funding the family‘s lifestyle during the marriage and where resources are insufficient to achieve a clean break between the parties on divorce, P v P is a helpful reminder of the appropriate way to deal with the discretionary element of any future bonuses.

Nicola Fisher is a solicitor at Forsters