Discretionary bonus payments and divorce

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Discretionary bonus payments and divorce

05 Feb 2014

In the event of divorce or dissolution of civil partnership, one of many financial Orders that the court is entitled to make is a Spousal Periodical Payment Order (more commonly known as “spousal maintenance”).  In more straightforward cases, the assessment of spousal maintenance is made primarily by reference to the recipient party’s needs and by assessment of each party’s income and earning capacity.  But what happens when the parties’ lifestyle during the marriage is funded primarily by one party’s discretionary bonus payments, rather than their salary?  Until recently, there was very little guidance on how the court should approach bonus payments for the purposes of spousal maintenance.  The recent High Court case of H v W [2014] EWHC 4105 (Fam) has however provided some welcome clarity.

Facts

Husband (“H”) and Wife (“W”) had enjoyed a very comfortable lifestyle as man and wife, thanks to H’s position as managing director of a bank.  His income was £250,000 gross and in April 2012 he also earned a bonus and cash deferral award of £195,750, as well as £18,000 in shares.  W had not worked for the preceding 15 years.

At first instance, the District Judge made an order on capital, pensions and income.  In relation to income, he made a Periodical Payments Order of £3,750 per month plus 25% of H’s annual bonus payments, in favour of W on a joint lives basis.

The Order was designed to meet W’s “basic maintenance needs” by reference to the lifestyle enjoyed by the parties during the marriage.  It was not the court’s intention to allow W to “share” in H’s bonus beyond her basic needs.

Decision

On appeal, the High Court accepted that it was necessary to pay part of the Periodical Payments Order from H’s bonus income.  However, it also imposed a cap of £20,000 per year, beyond which H would not have to pay W 25% of his bonus.  For example, if H’s bonus one year was £20,000, W would receive 25% or £5,000 of that bonus.  If the next year his bonus was £100,000, W would receive £20,000 and the remaining £5,000 of that 25% would not be paid to her.

The rationale behind this is that while it was necessary to include the bonus payments for the purposes of spousal maintenance, the Order was intended to be based on “needs” rather than “sharing”.  Therefore, in order to avoid a potentially unfair situation or a “sharing” situation – for example where H received an unexpected and substantial bonus payment – a cap on maintenance to meet only W’s basic needs was essential.

Conclusion

Where bonus payments represent a significant proportion of family income, the court will be entitled to provide for part of any spousal maintenance to be paid out of such bonus.

Given the inherent uncertainty of bonus payments, an award for maintenance made from bonuses can only ever be expressed by the court as a percentage.  However, the uncertainty of bonus payments also leads to the possibility of unfairness in the event that an unanticipated substantial bonus is paid to the paying party.  As such, the decision in H v W provides a strong indication that the court will be required to consider a cap in order to achieve a fair order for maintenance.

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