In the latest of no fewer than three judgements in complex and high-value divorce proceedings, the High Court established that a created trust was a sham and awarded the wife a lump sum of £15m.
Facts:
Ms. Stalo Michael, the wife, and Mr. Mario Michael, the husband, are of Greek-Cypriot heritage, but have lived in England for most, if not all of their lives. They met in January 1999, began cohabitating in 2000, and were married on April 29, 2006. The former couple have two children. From circa 2010, the family all lived together at their shared property in North London, the family home, which was purchased in joint names in 2005.
On 21st April 2022, the wife formally informed the husband of her decision to divorce, and on 9th May 2022, her divorce application was issued. The Judge described the husband as being “determined, at that moment, as he is now, that the wife should not receive her fair share of the fruits of a long marriage and it appears to me that he has unfortunately done everything in his power to achieve that aim”. The Judge's previous rulings, which remain unchanged, established that the husband is a "fundamentally dishonest man". The Judge found he was willing to create false documents and forge signatures to suit his purposes.
The central dispute in the case concerns a number of assets the husband claimed he did not own. The husband's claim that his £7.5m share in Michael Bros Ltd. was held on trust for his sisters. The husband further asserted that assets worth circa £38m were held in a trust for others. The husband’s case was that the vast majority of the assets under deliberation were held within a trust that was established and resident in Cyprus. He produced a deed of settlement purporting to have established a trust on 16 July 2007, naming his father as the settlor, in which their two children were the stated beneficiaries. The wife, however, did not accept the existence of the trust.
The case has been an exceptionally expensive and contentious legal battle, with the couple having spent nearly £5m on legal fees. This judgement is the culmination of multiple hearings over the course of a year, and the Judge has referenced prior rulings that inform the current decision.
Decision:
His Honour Judge Hess ruled in favour of the wife, ordering the husband to pay a total of £15m in a series of lump sums after finding that the trust, as set up by the husband to hold the majority of his assets, was simply a "sham" and that he remained the true beneficial owner. The Court's reasoning in this case is built upon several key principles of English family law, with the central theme being a determined effort to achieve a fair outcome in the face of the husband's pervasive dishonesty and systematic attempts to obfuscate assets.
The Judge's starting point was the "sharing principle," which holds that in a long marriage, assets built up through the joint efforts of both parties should be divided equally. This is a core tenet of UK family law, which treats marriage as an equal partnership. The Judge accepted that this justified a departure from a strict equal division in the husband's favour, acknowledging that not all assets were created during the "joint endeavour" of the marriage.
The Court rejected the husband’s evidence and that of his numerous witnesses who asserted that the trust was a conventional discretionary trust which had been set up by his father.
The Judge reasoned that the husband was the "principal cause" of the potential tax liability by creating the sham structure and defending it in Court. While acknowledging that the wife was a beneficiary of the structure during the marriage, the Judge decided it would be unfair for her to bear the full risk of the substantial tax bill. The Judge's solution of a capped, reverse contingent lump sum was a creative remedy to ensure a fair balance, reflecting his view on the parties' respective responsibilities for the problem.
The Judge provided clear reasoning for his valuation decisions, demonstrating an "art and not a science" approach to business valuation in divorce cases. The Judge rejected a minority discount on the husband's MBL shares because the company was a "quasi-partnership". This legal concept applies to companies formed and run by individuals with close personal relationships, where the normal rules of corporate governance are secondary to those of mutual trust. The Judge found that the husband, as a co-founder with his brother, would never be forced to sell his shares as a simple minority interest. In contrast, the Judge applied a minority discount to the Hartsfield assets. The reasoning here was that the husband had a different relationship with the business partner in this case, and a potential buyer would face a real risk of deadlock or disagreement, thereby justifying a lower valuation.
The Judge "added back" a £646,988 dividend to the husband's assets as it was an asset "lost" to the ‘matrimonial pot’ through a tax avoidance scheme, from which the husband was benefiting.
Implications:
The finding of a sham trust is extremely rare in divorce proceedings. The case serves as a stark warning that the Court will not tolerate dishonesty in financial disclosure. The Judge's finding that the husband's trust was a "sham" demonstrates that legal structures designed to conceal assets from a spouse can be "looked through". This ruling underscores that the true beneficial owner of an asset, and not just the legal titleholder, will be held accountable. The outcome also shows that, while courts acknowledge the illiquid nature of business assets and may apply a discount, this principle does not apply when an individual has effective control over the asset.
The Court's use of a "reverse contingent lump sum" to handle uncertain tax liability provides an innovative model for resolving complex cases involving future financial risks. This mechanism ensures fairness by linking the final financial award to an unknown event, rather than speculating on a figure that could later prove to be wildly unfair.
