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Matrimonial proceedings funding: What are the options?

Solicitor, Siân McKernon, looks at the funding options that may be available during matrimonial proceedings in the context of the recent decision in YC v ZC.

It is hard to predict the overall cost of family litigation because there are so many variables. The usual position is costs are paid by the person who incurs them, but this can result in a disadvantage to one party if they do not have the funds readily available. There are some options which may assist, including loans, add backs or a Legal Services Payment Order.  Ultimately, when a financial settlement is reached, any costs incurred from legal proceedings are taken into account and so while each party pays their costs as they incur them, overall, both parties share the liabilities incurred in doing so.

YC v ZC – the importance of proportionate costs and add backs

In the October 2022 case of YC v ZC, the issue of proportionate costs is considered.

The parties had married in 1988 and the wife issued divorced proceedings in July 2022, meaning the marriage was 34 years. There were two adult children of the marriage, who received ad-hoc voluntary financial contributions from the husband. The parties had assumed ‘traditional roles’, with the wife being a homemaker and the husband running his own company. The parties separated when the wife discovered the husband had been visiting prostitutes. She withdrew £450,000 from their joint account and dissipated it.

Unfortunately, the wife approached the litigation in a particularly hostile way, which meant things did not go smoothly. While the wife had experienced health issues, it was not accepted that this excused or explained her complete failure to engage in any meaningful negotiations over a long period of time. The wife pursued ‘combative litigation’ without concern for how this would affect the assets of the parties and the overall financial impact her conduct would have.

Proportionality is key and there is a risk to any party who conducts family litigation in a way which incurs excessive legal fees. The Judge described the costs incurred by the wife as ‘depressingly disproportionate’ and added back £200,000 to her side of the asset schedule to reflect the unnecessary costs incurred. The consequence of this is the wife had to pay the excessive £200,000 from her own settlement, rather than have all costs and loans deducted from the assets before the division.

Any party who takes a loan or borrows money for the purpose of proceedings must be aware there is the option for the sums to be added back into the marital pot if the legal costs are deemed excessive. It would simply be unfair for one party to be able to spend unlimited sums on legal fees with no accountability, with the expectation for both parties to bear the financial burden.

The court can also order an add back if a party spends money recklessly on living expenses. This means if one party tries to deplete the overall pot by spending money recklessly, the Judge can choose to add this back into the asset schedule on their side and this will reduce their overall settlement.

Soft Loans

A family court views a loan as ‘soft’ if they do not consider any loan agreement would ever be enforced. This means loans from family members are often viewed as ‘soft’ loans and any proposed funding from family members needs careful consideration.

In YC v ZC ‘soft’ loans were addressed because the wife had family loans involving her children, her brother and her mother.

In terms of the children, the court was satisfied they would not pursue for return of monies, which had initially been given to them by the wife and they then loaned back as and when she required funds. The court took a different view of the loans from her brother and mother, who provided funds specifically to pay her legal fees and necessary living expenses. The court viewed these loans as requiring repayment and therefore not ‘soft’ loans.

If money is advanced by family members to provide financial assistance during family litigation, the family court will make an assessment as to whether these should be regarded as ‘soft’ loans and therefore do not need repaying, or ‘hard’ loans which do. The decision of the court is important, as if they regard the money as a ‘soft’ loan, the debt will not be taken into account when dividing the assets, which means you may have to repay these loans from your portion of the settlement. A hard loan however, will be deducted from the overall pot before the settlement split.

Litigation Loans

There are companies which offer litigation loans for the purpose of family proceedings, and this results in the loan being considered hard debt. There are criteria which need to be met and not all cases will be appropriate for this type of loan. The lender will allow a sum of money to be released and it is repaid from the settlement achieved at the end. For a party who overall has sufficient assets to pay their legal fees and necessary living expenses, but not the liquid capital to do so, this option allows the freedom to repay the loan from the settlement at the end.

It is key for the assets in a case to be sufficient to repay the loan at the end, which means the availability of this option depends on case. Interest will be charged and this varies between lenders.

It may be that a small sum is required, and this can be borrowed on credit cards or other loan options, again these would be viewed as hard loans from the court. Solicitors are not able to provide financial  advice and any loans or liabilities incurred in the course of legal fees are a matter for the party to determine.

Legal Services Payment Order (LSPO)

In some situations, there is one party who earns more and has large capital reserves; while the other party has negligible capital and surplus expenditure meaning they are not able to secure appropriate representation. In situations such as these, Spouse A can be asked to pay for the reasonable legal costs of Spouse B. If Spouse A does not agree, an application can be made for a Legal Services Payment Order (LSPO) which will order one party to pay the other a figure for the purpose of legal services. This can be a lump sum as a one off, instalments or another interim amount.

The process for obtaining a LSPO can be expensive and long winded, which ultimately means that if Spouse A has the resources to make the payment, it is more cost effective and time efficient to do so rather than wasting time and resources on a LSPO process. These orders are the exception, rather than the rule, and all other funding options will have to be exhausted before the court will consider an application.

Given the current economic climate, there may be a greater consideration on how litigation can be funded. There are options available to clients who require assistance with funding, and the options which may be available can be discussed during your initial meeting.

If you require any further information or advice relating to separation, divorce or family matters and the funding options which may be available to you, the first step should be to seek advice from a specialist family solicitor. Our Family and Matrimonial team would be happy to discuss the options available to you.