Today’s Family Lawyer podcast: Potanina v Potanin and the lessons for the profession

DO: Hello and welcome along to the latest Today’s Family Lawyer Podcast. Today we are talking about Potanina v Potanin; the recent Supreme Court case that is potentially going to have an impact on the family law community, and potentially have an impact on the moniker of London being the ‘divorce capital of the world’.

With me today is Richard Kershaw. Richard is a partner at Hunters Law LLP. Thank you very much indeed for joining the podcast today.

RK: My pleasure, David.  

DO: You’ve been on the podcast before, I know, talking about something quite different. Today it’s Part III of the Matrimonial and Family Proceedings Act 1984, and, as I say, Potanina v Potanin. So, I thought it would be worthwhile, just initially - it’s a bit of a trek through the last 10 years of litigation - but if we can give a brief outline of what this case is about please, Richard.

RK: Yes, sure. I think if you’re a fan of classical Russian literature then this story is very much along those lines. It’s a long book with lots of unhappiness and a cast of many characters, and lots of interwoven strands. I’ll try to do it justice and sort of split it down into the Russian bit first.  

So, Russian family; married in 1983; three grownup children; lived in Russia and divorced in Russia. 2014; so far, so uncontroversial. Modest beginnings, during the marriage the husband amassed a fortune – not quite sure how much that is, but it’s said to be around $USD 20bn. And that’s a well-known story of an oligarch amassing money as one of Putin’s mates who’s done well out of the collapse of the old USSR and the privatisation of old state assets.

No surprise to anyone who deals with cases like this in whichever jurisdiction, that that $20bn’s not just sitting in a bank account in one place. It’s spread over many different companies and many different trusts. And that wasn’t the controversial point. It wasn’t as though the husband was said to be hiding any of this money. It’s all sitting in structures, albeit that they’re ones in which he’s not the legal owner, but he’s got a beneficial interest and none of that was controversial.

In the Russian proceedings, there is a dispute about when they’d separated. We often find that, and that’s often to do with when they money’s been amassed during the marital period. The wife said that they separated in 2013. Husband said: “no, no, it was earlier; it was 2007” ... probably because a lot of money was built up during that period.  

The wife is, by no means, a pauper in any of this. Okay, so, in 2007 the husband had transferred to her about $71mn, and then given her a further $5.1mn at the point that the marriage then broke down. 2013/2014 there was then what’s being referred to as a ‘blizzard of litigation’; someone had calculated that there was about 43 separate hearings in Russia alone, and they’d gone up and down the court system: Supreme Court to the Constitutional Court, up and down. And at the end of that litigation, the wife was awarded about $41mn. We say ‘about’ because there’s some dispute about the translation of the FX-rate [foreign exchange rate] of the roubles to dollars at the time that was done.  

So, there’s been a bit of reflection on that in these proceedings. But, anyway, let’s have in our mind that by the end of 2018, she had in excess of USD $100mn. That wasn’t the end of it. So, in 2014 – and about that time – she got an investor visa in London and bought a property in London later that year. She already has properties in Russia and in New York as well, so you immediately start thinking about the bit of clever placement of properties, bit of forum shopping going on and that sort of thing. And certainly, there was some criticism of that later on. She said that London became her main home from 2017 onwards.  

So that’s chapter one. That’s Dostoyevsky, we’ve done 700 pages. We’ve got to the end of the first bit, which is not really the meat of it as far as we’re concerned. And then we go onto the English side of it, which started in 2017.  

DO: So, if that’s the start of the story, as you say, it’s quite a long-winded epic, almost. Let’s just quickly drill into: why is the Part III of the Matrimonial and Family Proceedings Act 1984 important in all of this? What is it and what does it do?

RK: The main matrimonial legislation in this country is the Matrimonial Causes Act 1973, and that follows Law Commission reports in the late 60s. We’ve still got that statute, obviously, and there’s lots of talk at the moment about whether that should be overhauled or not.  

We’re talking today about the 1984 statute, Matrimonial and Family Proceedings Act, and that was brought in following consultation, Law Commission, early 80s, which identified an increasing amount of international movement of individuals and, also at the same time, the fact that many countries where there was a divorce, there was little or no provision for a wife, particularly.  

So, it’s a public policy decision emerging out of, a sort of, macro-economic factors and a lack of divorce provisions for wives in different jurisdictions. And so, the aim of Part III, is to alleviate adverse consequences of no or no adequate financial provision having been made by foreign court where there’s a substantial connection with England.  

It’s not just a matter of saying: “I didn’t do very well in Russia, Germany or wherever. I’ll go and have a bite in London”. There are qualifying steps, hoops, hurdles – whatever you want to call them – that you’ve got to get through. You’ve got to establish jurisdiction; so, there are jurisdictional issues about domicile, habitual residence or the former matrimonial home being in this jurisdiction, and you’ve got to get over that.  

And then there’s a further point, which is really where we start to get onto the jurisprudential meat of this case, which is the whole issue of applying for leave, permission from the court under Section 13 of the Act.  

So, it’s – how do I explain it – if you’re applying for appeal in this country, you’ve got to apply for permission to appeal. And then if you get permission you can proceed with your appeal. It’s not directly analogous but have that as a similar framework in mind.  

The rules say that the application for leave has got to be made ex parte – without notice – but the court can then direct an on notice hearing and say “I don’t just want to hear from one of you, I want to hear from both of you”. But typically, let’s say for the past 10 years, or so – and, in particular, since the other Supreme Court case in this area, Agbaje in 2010 – the way it’s run is that a client comes in, you then spend weeks or months doing the forensic work, the due diligence, getting the witness statements ready, you make the application for leave ex parte, and it’s at that point that the respondent – typically the husband – finds out about it for the first time when you get leave. Of course, if you don’t get leave, you just slink away into the shadows. If you get leave, that’s your ‘ah-ha’ moment, and that’s when you serve it. The court’s got case management powers then to decide when it wants to do it.  

So, we’ve had the Russian application, we’ve had the Russian divorce. That’s the background to the English framework under Part III, and that’s what then happened in 2018 when she made her application for leave.  

DO: London has sometimes been accused of being divorce tourism, which is an interesting phrase. Perhaps we can use that here. This is a little tenuous, this is a lady that has had no connection to the UK prior to the divorce, but suddenly – as you say – gets some properties, perhaps strategically located, well-advised, and suddenly it opens up the doors to coming and putting a petition in, in London.  

RK: Yes, and there was some criticism in the proceedings as I’ll come onto in a minute, that she had had some legal advice three or four years earlier from a well-known firm of lawyers. We don’t know what that advice was, David, because privilege hasn’t been waived, obviously. But it could have been that they said: “well you need to get a proper toehold in this jurisdiction and there are various ways in which you can go about that. And if you don’t have that then you’ll never be able to make the application for leave”.  

Some years go by, and an application for leave is then made. One could be quite cynical about it, or you could say: “well, that was just good advice being given at the time by lawyers who knew what they were talking about.”

DO: We move to London and there’s an application for leave from Mrs Potanina. What happens next?

RK: She applied for leave and that was heard by Jonathan Cohen – a very respected and very well-known family judge. He was particularly troubled by what he was being told about the Russian courts not acknowledging the concept of beneficial interests; they divided personal assets but had ignored beneficial and trust interests. He gave her permission. He gave her leave, although he did say several times during the course of the case and the judgment that he was wondering whether it should be an on-notice application.  

The husband is then told about this for the first time. He’s entitled to apply to set aside the grant of leave to his former wife. That hearing is then heard over a couple of days in 2019, and the end result was that the judge set aside the granting of the leave and had said he’d been misled by the wife about facts in the case, the application of Russian law.  

He found there was insufficient connection with England – I think one of the silks acting for Mr Potanin said, casually: “this is the fourth place she’s tried to litigate”, and obviously that sort of thing resonates with the judge, and that goes back to your London forum shopping point.  

So, that’s the High Court. The wife then applies to the Court of Appeal, appealing Jonathan Cohen’s refusal to give her leave. And the Court of Appeal then said that – slightly balancing on the head of a pin to an extent – that Jonathan Cohen had been a bit too elaborate in allowing a two-day set aside application; but hadn’t been quite elaborate enough because he hadn’t heard Russian evidence or expert evidence about what a court would have done in Russia, etc. etc.  

The end result of the Court of Appeal was that the wife had leave again. So, the husband’s application to set aside was overturned and the wife emerged from that with leave again.

Then, we’re brought up to date. We’re brought up to November 2023. The husband then applied to the Supreme Court, and he applied to appeal the Court of Appeal decision, and Lord Leggatt – giving a very meticulous judgment, said two main things as a reminder of the rigorous threshold for applications for leave, it’s not just a very low hurdle.

He also said that the obiter points that had come out of Agbaje about the need for a knockout blow were wrong. It doesn’t need to be a knockout blow.  

So, husband comes out of this largely successful. I say ‘largely’ because two issues on the wife’s appeal to the Court of Appeal weren’t dealt with by the Court of Appeal. Those are going back to the Court of Appeal so it really is the…

DO: The next part of the saga?

RK: Yes, you would think they’re playing Monopoly, but actually it’s Snakes and Ladders. You know, one of them wins and then they’re sent right back down, and you hit a snake. They must be in hearing 50-plus in all of this.  

DO: We said at the outset that this has been going for about 10 years. There’s all sorts, as you say, 50 proceedings that kind of thing. And in fact, the judge in their judgment – we’ll talk about that in a second – called this a rather “dystopian” scenario. What, ultimately, are we going to take away from what’s been decided last week?

RK: I think as family lawyers, we’ve got into the habit of seeing sides during this position and saying: “well if the jurisdictional point is set aside then leave is not so difficult to obtain”. That’s a generalisation, but probably the position that the profession had got to. I think it’s clear from what Lord Leggatt said that that is now going to be a more difficult exercise.

What it probably means is that this is now much more of a front-loaded exercise. And so, the applying for leave to bring these claims under Section 13 is going to be more difficult and the application to set aside leave where it’s been granted is probably going to get a bit easier. So, the ‘knockout blow’ has been ‘knocked out’ if you like. That’s gone. The Agbaje obiter comments about the knockout blow – take those off the table.  

So, if I’m a judge - I’m not - and I’ve got one of these applications before me, I’m probably going to be a bit more circumspect now about my case management decisions, about how I deal with this.  

I’m going to probably want to list it for a longer period of time to consider the leave application. Some of these are dealt with very, very short – you can’t do justice to them, to be fair. And, you know, that’s not the court’s fault – that’s a systemic fault with the courts that we’ve got. Or a court would say: “I’m just going to list this to be heard with both of you here”. And Lord Leggatt said it’s a fundamental tenet of justice – of course - that if you’re making a decision that’s only based on hearing one party, that’s not as good as a decision that’s made where you’ve heard from both parties. You know, that’s got to be right.  

I think these are going to be more front-end loaded, and David, we’re finding that across the whole panoply of the complex financial remedy work that we do, with the thought and attention that we’re putting into preparation of Forms E and direction of first appointment and should the parties be joined. I think this is a continuation of the trend of that, that’s absolutely fine.

I don’t think it will discourage applications like this. It might get rid of some of the more drossy ones. But, typically the litigants, the clients we speak to are talking about this sort of application, there’s no real concern about immediate proportionality of the costs they’re about to spend and the end product because they are ultra-high net worth; they are multi-jurisdictional and there’s often a sense of injustice that drives these applications.  

DO: You’ve kind of touched on it there in what you’ve said with regard to the impact, or potential impact, on the wider profession. Because we can sit here and talk about this case, but as you say, this is the sort of one that hits the headlines. It will have been in The Times and The Telegraph over the weekend, and it relates to a section of the population that – to be fair to many, many family lawyers – they simply don’t deal with, and certainly don’t deal with on a regular basis.  

But, more broadly, what you’re saying is that this is a continuation of a theme in terms of the level of detail that now needs to be provided in order for judges to take cases forward.  

RK: Yes, absolutely. Absolutely. Obviously in family proceedings we don’t have formal pleadings as our civil brethren do under the CPR [civil procedure rules], which are all carefully pleaded out line by line.  

What we have, the Form E - which is a replacement of the old affidavit of means – my view, and the view of my team is that we treat Form E very, very carefully. We treat it as though it’s a pleading that’s got to be gone through very carefully and very forensically.  

We work on the basis that whatever the ADR [alternative dispute resolution] options are that are open to us, there’s a possibility that Form E might end up before a judge – so we’ve got to get it right and we’ve got to do our due diligence and be very careful about it. And that’s expensive but it’s the right way to go about it, in my view.  

DO: If we take a quick sideway step. We’ve very quickly talked about Part III of the Matrimonial and Family Proceedings Act, and its application in this particular case. But it can be described as a controversial tool, Richard. Could you just expand on that a touch because I think that, you know, beyond this case it’s got wider application as well.  

RK: I think you’re right; it is seen as slightly controversial and I think some of that is borne out of a lack of understanding of what it entails, and the qualifying factors and the need for the jurisdictional attachment and the leave stage.  

I think some of it’s borne out of “overseas, foreign litigants who have got a lot of money, who are clogging up our courts”, slightly pejorative spin that can sometimes be put on it. And you see that generally, with the – let’s say – Berezovsky litigation, where people are trooping in and out of court. It’s quite an easy target for some sections of the press to say they’re soaking up lots of time.  

Do these cases clog up the family court? I don’t think they do in all honesty. I think that the clogging up of the family courts comes below this High Court level, and I think we see day in, day out, real problems for our clients in children cases, or in cases listing First Appointments where people are having to wait months and months and months for urgent matters to be disposed of.  

It’s easy, or slightly lazy to align those two and say: “well this is going on and therefore this is causing a problem at the top level of the court system. And therefore, that must be the thing that’s causing a problem lower down”. I don’t think there is actually any connection, but these cases are ripe for the Daily Telegraph, The Times or whatever coverage where there’s lots of money involved – they’re quite exotic and I think that’s why they’re seen as controversial.  

I think they’re generative of a good narrative, as we talked about earlier on. The sort of Dostoyevsky Russian novel element to these. That is very much there.

DO: I must admit, I find in these ultra-high net worth cases, the concept of fairness gets distorted just by the sheer scale of the numbers. But this Part III element, and – in particular - this case, it just seems so tenuous that somebody could turn up in London and try again. “I didn’t get my billion in Russia, so I’ll try in London”.  

RK: I understand that. I’ll give you one example; I’ll change a bit of the facts.  

We’ve had clients in the past who have had a connection with another country. And if you think of European countries, in particular, have automatic nuptial agreement regime in place, but they’ve been living in London for, say, 10 years.  

They have children at schools here, but for whatever jurisdictional reason, one of the parties – typically the husband – has been able to run a divorce in the foreign jurisdiction based on the prenuptial agreement, which is automatically binding in that foreign jurisdiction, and which provides an addendum in this judgment.  

The wife, who may not have participated very much in those proceedings, has a foreign judgment and a foreign divorce, is living in London and is generally connected with London. Quite a few of the cases that we see, you see there is a genuine out-manoeuvring by one of the parties to the manifest disadvantage of the economically weaker party.  

I’ve got to say this: I think it is typically, the tooled-up, financially-savvy, professional husband with a network of advisors, bankers, lawyers – bring in the lawyers again – accountants, trust advisors, or whatever, who have got their clever legal structure and their beneficial structures… they’ve got their knowledge of portability of money and jurisdictions. And we do see genuine cases of people being properly stitched up.  

And yes, I take the point of “you’ve got a million, or three million… that’s plenty”.  

Of course, it is. But the court is blind to the general objective test about whether they can live off three million. That’s not the point. The point is: is that a fair outcome within the context of this marriage? And the courts at all the levels of this case – and there have been many, many levels – they’ve all empathised that.  

Jonathan Cohen, right at the start, said that it’s an eye-watering amount of money, but it doesn’t meet her needs. You read the print again and think “well, how does that work? How can it not meet her needs?”, but it’s her needs in the context of this marriage, and if you think for a moment that the other side of the coin is that the husband may have pocketed $19.9bn of matrimonial money and she’s come away with one percent of that. That’s where the fairness rubric comes in, and you think that it’s not actually about the pounds, shillings and pence; it’s about the wider justice point. And that brings us back to why Part III came into life in the first place – it’s our paternalistic system of having a safety net. It’s not expressed as a safety net and it’s not designed to be top up, it’s designed to be where there is no, or no adequate, financial provision for someone who’s got a proper connection with this jurisdiction.  

DO: I think that like, much of law, there are always two sides to this coin, aren’t there? And this particular Part III element, is there to protect as much as it is to be taken advantage of.  

I think, as you say, it’s quite easy at times to look at the personal situation of a case and think to yourself “this is ridiculous, how are they still warring over this amount of money”, but it’s the proportionality that you highlight that is really important in the context of the law.  

This particular case has been interesting, it’s been really interesting to hear you go through it as well, Richard. So, I really, really appreciate you taking the time to share some of your insight on it as well - thank you.