Balancing the Scales – Issues of Conduct and Non-Disclosure

An image of Lady Justice - from a blog on balancing the scales by a divorce lawyers in london

Updated October 2019

The division of assets in a divorce is often the most complicated stage and requires plenty of negotiating. In this post, Elizabeth Simos looks at issues of conduct and non-disclosure and the impact where adverse inferences are drawn in needs cases. 

This article was first published in the March 2019 edition of the Family Law Journal.

Much to the dismay of “wronged” spouses in England and Wales, the courts are often hesitant to “punish” parties for their bad behaviour during a marriage when making financial orders on divorce. Case law has long established that the court will only consider the conduct of a spouse in exceptional circumstances, where it is “gross and obvious”, and usually only in sharing cases where the assets are surplus to the needs of the parties.

The decision in A v A [2018], however, serves as a useful (and cautionary) reminder that financial misconduct and non-disclosure can be relevant in needs cases too, irrespective of the relative modesty of the net value of assets, and with severe and measurable consequences for a party against whom there are findings regarding their conduct.

Background

At the time of the judgment in A v A, both parties were 50 years old with three children, aged 20, 18 and 8. The parties separated in 2015 after a 21-year marriage. During the marriage, the parties had built up a portfolio of some 30 properties, yielding a healthy rental income of approximately £125,870 on average per annum. The family enjoyed a high-net-worth lifestyle, with a large home in an affluent area of Manchester and numerous luxury holidays, while the children had been privately educated. Their property portfolio primarily serviced the student market, and a number of the properties had multiple occupants. The property business grew during the marriage, and the parties had reinvested some of their profits.

The vast majority of the property purchases had been facilitated through borrowing. The borrowing had, on occasion, been consolidated, with umbrella loans covering several different properties, and the parties had been able to offset the interest charges on borrowed money against the profit they made from rental income before the assessment of tax.

The capital value of the property portfolio was a matter of contention during proceedings. An amount had previously been agreed in 2016 for the litigation based on the parties’ knowledge of the property market.

The borrowings were substantial and the net value of the portfolio at the agreed value, after deduction of the mortgage finance, the costs of sale and capital gains tax, was the modest sum of £75,074.

The former matrimonial home was a large five-bedroom house occupied by the wife and the children. 

The parties had agreed on the value of the former matrimonial home at £900,000, minus a mortgage of £580,000, resulting in a net value of £301,000. The cost of servicing the mortgage was £36,000 a year. 

The husband had some pension provision, while the wife had none. The matter was assessed as a needs case; such needs including housing as well as current and future income.

The husband contended that since the separation, the wife had helped herself to funds from the parties’ joint account to which she was not entitled and, therefore, this should be considered when calculating the value of what she was to receive. He also said that some of the wife’s assets had disappeared, namely cash and contents from a safe deposit box together with jewellery.

In turn, it was the wife’s position that the husband had dissipated, hidden or gambled substantial sums. The husband’s response to this was that he had invested over £1 million in spread betting, losing a considerable proportion in the process.

In A v A, both parties wanted to “add back” assets that each said the other had dissipated or hidden in another account to justify a departure from equality.

Applicable Law

The relevant law to be applied was helpfully summarised in the judgment that, in deciding what, if any, financial orders to make under the Matrimonial Causes Act 1973 (under ss23, 24, 24A, 24B and 24E, MCA 1973), the courts must have regard to all the circumstances of the case and the factors under s25, MCA 1973, with primary consideration given to the welfare of any minor children of the family. Further, in the pursuit of a fair and reasonable outcome, the following factors, supported by case law and applicable to the facts of this particular case, were set out as follows:

  • The analysis must be gender-neutral and non-discriminatory (White v White [2000]).
  • The starting point in every enquiry is a two-stage process: first computation, then distribution (Charman v Charman [2007]).
  • In considering s25, MCA 1973, there are three main distributive principles: needs, compensation and sharing, shaped by the overarching requirement of fairness (Miller v Miller; Macfarlane v Macfarlane [2006]).
  • The objective of financial orders is to meet the needs of the parties to enable a transition to independence to the extent that it is possible.

The primary needs, in this case, were identified as housing and present and future income, including income in retirement. Needs are measured by assessing available financial resources and assessing the standard of living during the relationship and the length of the relationship. Reference was made to the judgment of Mostyn J in FF v KF [2017] (at para 18) in that:

The main drivers in the discretionary exercise are the scale of the payer’s wealth, the length of the marriage, the applicant’s age and health and the standard of living, although the latter factor cannot be allowed to dominate the exercise.

HHJ Booth underlined that the age and health of both the parties may be equally relevant, as assessed in this case, and that children and their dependence change everything (per Murphy v Murphy [2014]).

Case law theme, scales in a court library

Add-Backs

The court turned its attention to the approach to add-backs, and HHJ Booth highlighted the relevant case law in this regard.

In MAP v MFP [2015], Moor J identified that arguments as to add-backs essentially come down to issues of conduct — as defined in s25(2)(g), MCA 1973 — namely, conduct that would, in the opinion of the court, be inequitable to disregard. As Lady Hale previously made clear, such conduct has to be “gross and obvious”. It was further underlined that for the court to add back assets that have been spent, it must be satisfied that there has been a “wanton dissipation” of assets.

In Martin v Martin [1976], Cairns LJ said:

A spouse could not be allowed to fritter away the assets by extravagant living or reckless speculation and then to claim as significant a share of what was left as he would have been entitled to if he had behaved reasonably.

In Norris v Norris [2003], Bennet J described the position regarding conduct and add-backs, asking the question in that case, “Why should the wife be disadvantaged in the division of assets in divorce by the husband’s reckless expenditure?”, adding (at para 77):

A spouse can, of course, spend his or her money as he or she chooses but it is only fair to add back into that spouse’s assets the amount by which he or she recklessly depletes the assets and thus potentially disadvantages the other spouse within the ancillary relief proceedings.

In Vaughan v Vaughan [2007], Wilson LJ concluded that (para 14):

The only apparent caveats are that a notional reattribution has to be conducted very cautiously, by reference only to clear evidence of dissipation (in which there is a wanton element) and that the fiction does not extend to treatment of the sums reattributed to a spouse as cash which he can deploy in meeting his needs, for example in the purchase of accommodation.

Adverse Inferences

In considering the adverse inferences to be drawn from a party’s lack of transparency in their disclosure, the decision of Mostyn J in NG v SG (Appeal: Non-Disclosure) [2011] was highlighted, when he said that where the court is satisfied that the disclosure given by one party has been materially deficient, then:

  • The court is duty-bound to consider, by the process of drawing adverse inferences, whether funds have been hidden.
  • Such inferences must be drawn appropriately and reasonably, and it would be wrong to draw conclusions that a party has assets that, on an assessment of the evidence, the court is satisfied that they have not got.
  • Where the court concludes that funds have been hidden, it should attempt “a realistic and reasonable quantification of those funds”, even in the broadest terms.
  • In making its judgment as to quantification, “the court will first look to direct evidence such as documentation and observations made by the other party”, and then look to the “scale of business activities and lifestyle”.
  • Vague evidence of reputation, or the opinions or beliefs of third parties, is inadmissible in the court’s exercise.
  • The technique of concluding that a non-discloser must have assets of at least twice what the claimant is seeking (per Al-Khatib v Masry [2004]) should not be used as the sole metric of quantification.
  • The court must ensure that a non-discloser is not able to procure a result from their non-disclosure that is better than would be ordered if the truth were told. 
  • If the result is an order that is unfair to the non-discloser, it is “better that the court should be drawn into making an order that is unfair to the claimant”.

Insufficient Assets

Crucially, the court in A v A considered the situation where there are insufficient assets to meet the needs of the parties as a result of one party’s conduct. The view of Moor J in R v B [2017] was referred to, in which he said that whereas counsel for the applicant in that case argued that conduct can only be relevant in a sharing case, and that it cannot reduce a party’s needs, he was “not persuaded” by the argument’.

Conduct features in section 25(2) [of MCA 1973] without a gloss. The conduct may be so severe that it prevents the court from satisfying both parties’ needs. If this is the case, the court must be entitled to prioritise the party who has not been guilty of such conduct. A court can undoubtedly reduce the award from reasonable requirements generously assessed to something less. 

Outcome

The court in A v A made several adverse inferences against the husband, finding that he had deliberately tried to put money and assets beyond the reach of both the wife and the court. Further to this, he still had investments with his friends and family that would, in due course, be repaid to him, and the value of the funds and assets was assumed to be substantial to reflect the scale of the dishonesty and the lengths he and members of his family were prepared to go to. As to the husband’s alleged debts, such as his gambling losses, these were discounted by adding further weight to the adverse inferences drawn against him.

Attributed to the husband were several hundred thousand pounds to “lie on his side of the balance sheet”, thus inferring substantial funds to which the husband would be entitled. When added to the value to be attributed to his undeclared pension, the result, it was said, would justify the division of assets in divorce being in favour of the wife.

HHJ Booth considered that even if the assessment of the value of the assets attributed to the husband was wrong, that was “entirely [the husband’s] fault” and that the husband “must take the consequences”. If the needs of the parties and the children were to be satisfied, the findings made would “justify an invasion” of the husband’s needs to do justice between the parties.

If all of the assets were to be sold, the wife would be without an income, and she had a limited earning capacity. However, for the wife to be supported financially by the husband was not considered to be something she could rely on. There also could not be a clean break.

Taking the approach that the wife should have the opportunity to provide for herself and the children, if she were unable to make the property portfolio profitable, she would have to sell and establish an alternative means of income and pension provision. The husband’s earning capacity as an accountant and his pension provision provided him with a safety net that the wife could not realistically replicate.

The court finally concluded that the fairest outcome in the circumstances would be to transfer the family home to the wife, together with 18 of the 30 rental properties. The division of assets presented a staggering disparity, with the wife to retain matrimonial assets with a value of £1,469,707 and the husband £160,067.

Conclusion

The courts have a wide discretion to achieve fairness between parties in financial proceedings and will take a dim view of those who seek to hinder the exercise of its discretion, be it through misconduct or non-disclosure.

Even in cases where the parties’ needs may otherwise be the guiding principle in achieving a fair outcome, arguments of misconduct or non-disclosure ought not to readily dismissed, as when successful, such arguments may have a dramatic impact on the result of a case.

If a lack of transparency as to disclosure is found, it is within the court’s power to draw adverse inferences. If a conduct argument is successful, the general approach is to consider whether to add back the assets or reattribute funds to the other party.

The resulting consequences in needs cases can be severe, as seen in A v A. A party against whom there are adverse inferences may find their reasonable needs significantly reduced and receive a far lesser award, where the assets are modest and the other party’s needs are prioritised.

Are you concerned about the financial conduct of your spouse and how it will affect the division of assets in your divorce? KMJ Solicitors specialises in all areas of family law, including divorce, high-net-worth divorce and issues regarding finances and assets. Get in touch today to schedule a FREE no-obligation consultation.  

Cases

A v A [2018] Case No LV15D009589 Lexis Citation 82

White v White [2000] UKHL 54

Charman v Charman [2007] EWCA Civ 503

Miller v Miller; Macfarlane v Macfarlane [2006] UKHL 24

FF v KF [2017] EWHC 1093 (Fam)

Murphy v Murphy [2014] EWHC 2263 (Fam)

MAP v MFP [2015] EWHC 627 (Fam)

Martin v Martin [1976] Fam 335

Norris v Norris [2002] EWHC 2996 (Fam)

Vaughan v Vaughan [2007] EWCA Civ 1085

NG v SG (Appeal: Non-Disclosure) [2011] EWHC 3270 (Fam)

Al-Khatib v Masry [2004] EWCA Civ 1353

R v B and Ors [2017] EWFC 33

Elizabeth has practiced family law exclusively since qualification and received the Award of ‘Young Solicitor of the Year’ at the Family Law Awards 2018.

She advises on all aspects of family law and specialises in divorce, complex family finances involving commercial assets and international elements, disputes over arrangements for children, cohabitation disputes and urgent injunctive applications.