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Paramount v Rix: Court of Appeal upholds decision on financial dependency

  • 9 August 2021 9 August 2021
  • UK & Europe

  • Insurance & Reinsurance

Paramount v Rix: Court of Appeal upholds decision on financial dependency

Paramount Shopfitting Company Ltd v Rix (widow and executrix of the estate of Rix (deceased)) [2021] EWCA Civ 1172

The Defendant had appealed an award under the Fatal Accidents Act made to the Claimant widow of a former employee following a successful claim for his exposure to asbestos.  The High Court had held that income the Claimant continued to receive from her late husband’s business was irrelevant to her claim. 

The Court of Appeal upheld the High Court decision, finding that the profit available was earned income, and therefore part of the financial dependency claim.  As the profit available for distribution was a direct product of the deceased’s management of the company, the continued development of the business since his death was irrelevant for the purposes of calculating the dependency claim.

It is likely that the Appellant company, and their insurer, may look to further the appeal to the Supreme Court, given the Claimant's financial dependency claim was successful despite the business in question being more profitable since her husband died and her shareholding being greater.

Background

Mr Rix died in April 2016 from mesothelioma contracted as a result of exposure to asbestos whilst working for the Appellant company. When he left the company in the 1970s he built up his own business, MRER Ltd.

Following Mr Rix’s death, his widow brought a financial dependency claim under the Fatal Accidents Act 1976 (FAA), submitting this should be calculated by reference to her share of the annual income which she and her husband would have received from the business had Mr Rix lived (Basis 1). Alternatively, it should be quantified by reference to the annual value of Mr Rix’s services to the business as managing director, calculated by reference to the cost of employing a replacement (Basis 2). The Appellant argued there was no financial dependency claim because the family business had been profitable since Mr Rix’s death.

The High Court ruled that Mrs Rix had suffered a loss of financial dependency, quantified per Basis 1.

Mrs Rix was a major shareholder in MRER Ltd and drew a salary though she never worked in the business. It was found by the High Court judge that this did not reflect her contribution to the business but was done for tax efficiency purposes. Mr Rix had been the “main breadwinner” and Mrs Rix was found to be financially dependent upon him. Mrs Rix inherited her husband’s shareholding meaning she now owns 80% of the shares with the remaining 20% being equally split between their two sons.

Appellant’s case

The Appellant submitted that the High Court was incorrect to rule that the income Mrs Rix continued to enjoy from the company after Mr Rix’s death was irrelevant as the business continued to thrive and provide an income for her. The Appellant appealed on three grounds:

  1. The judge erred in treating all of the profits generated by MRER as providing the basis for the calculation of a loss of dependency without regard to whether profits survived Mr Rix’s death and continued to accrue to Mrs Rix.

The Appellant referred to previous cases of Wood, O’Loughlin and Williams submitting these did not support the High Court judge’s approach of adopting Basis 1.

MRER Ltd “had a substantial value and income producing capacity even without Mr Rix’s continued involvement”. His role was managerial not operational “which could have provided the justification for a claim based upon Mr Rix’s death having a presumed impact upon the overall profitability of the company”. But it does “not provide the basis for a conclusion that without him there was no business at all.”

The Appellant concluded that “The identification and value of annual losses of financial dependency on Basis 1 was founded upon a material misdirection and error of law” and that if a dependency was properly found this should have been quantified per Basis 2.

  1. The judge erred in law in treating Mrs Rix’s entitlement to a share of the profits of MRER based on her own shareholding in the company as if it had belonged to the deceased.

The Appellant argued that Mrs Rix’s shareholding and salary were designed to minimise tax and should not have been treated as Mr Rix’s income because she took no part in the business.

  1. The judge erred in law in only including rental income and state pension as surviving income and failed to take account of surviving income in the form of a share of profits in MRER and Mrs Rix’s director’s salary.

Mrs Rix’s surviving income after tax should have been deducted when assessing the net annual loss.

Judgment

Ground 1

The Court of Appeal ruled that in cases of this nature it “is critical to distinguish between the loss of the income derived from the services of the deceased and the loss of income derived from the capital asset” and the “loss for the dependent relates to the contribution or services of the deceased in creating wealth.” The Court found that the authorities of Wood, O’Loughlin and Williamsdo not establish a principle that a business such as MRER should be treated as a capital asset, which will continue to produce a flow of income regardless of the death of its prime mover and driving force.”

On the facts of this case, there was no identifiable element of the profits which was not touched by the management of Mr Rix. The High Court had described MRER as not being a “money generating beast” which would generate money whoever was in charge. Therefore, the loss for the purposes of the FAA “is the loss of the income generated by Mr Rix's services to the business, irrespective of the fact that the business employs or owns the capital assets.”

It is therefore “logical to treat the whole of the profit available to Mr and Mrs Rix as earned income and therefore part of the financial dependency.” The profit available for distribution is a direct product of Mr Rix’s management of the company. The fact that the company has thrived since Mr Rix died is “irrelevant for the purpose of the calculation of Mrs Rix’s dependency.”

Ground 2

The High Court judge’s approach was deemed to be consistent with authorities and reflected the reality of the case. The High Court found that the practical reality in relation to financial dependence should be looked at, and not the corporate, financial or tax structures that are used in family arrangements. It was clear that the income Mrs Rix received as director and shareholder was “entirely” the result of Mr Rix’s work.

Ground 3

As the Court had found the salary, dividends and profits generated by MRER is “wholly attributable to Mr Rix’s endeavours and earning capacity” no portion of Mrs Rix’s post-death income could be independent of Mr Rix and unaffected by his death. Therefore, there could be no deduction of monies received from MRER by Mrs Rix post-death.

The Court of Appeal found the appeal failed on all grounds and it was dismissed.

What can we learn?

  • We understand that permission is being sought to appeal the finding in Head v Culver which we reported on here previously.  This, and the expected appeal in Rix, indicates that additional clarity on these issues will be provided by the highest court in the near future, even if any further appeals are dismissed.
  • The Court of Appeal stated that “each case has to turn on its own facts and there is nothing in Williams to suggest that an assessment on Basis 2 is wrong in principle or to be preferred to Basis 1.”
  • Although the business remained profitable following Mr Rix’s death the Court of Appeal has confirmed that financial dependency is fixed at death and per the case of Williams which stated “the existence of, and value of, a dependant's financial dependency is not affected by any increase in profitability in the business”.
  • Following this decision insurers can expect to see claimants pursuing claims on the basis of the company’s profits, and not the cost of replacing the deceased in a management role. Where a salary has been provided to the claimant for tax purposes and the deceased has been the driving force behind the company, claimants will no longer credit any salary against a claim for financial dependency.

End

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