When looking at matrimonial finances on divorce, the overall aim of the Court (and therefore of the lawyers in arguing before the Court) is to find a solution that is fair to both of the parties, taking into account the needs of any children of the family.
‘Fairness’ is, granted, a rather elusive concept. You cannot set a formula to apply to each case that will automatically have a fair outcome. Each case turns on its own facts, and there are a lot of elements that come into play when lawyers look at whether or not a proposed settlement is likely to be thought fair. These include primarily the needs of the parties and the welfare of the children, and secondary the principle of sharing the fruits of a marriage and also the possibility of compensating one party who may have brought extraordinary assets or skills to the marriage which have resulted in financial gain.
The concept of a party’s ‘needs’ can also be difficult to pin down. When looking at this aspect the Courts will consider a variety of factors, including:
- Income and earning capacity, including any reasonable increase in earning capacity that could be expected of a party;
- Financial needs, obligations and responsibilities;
- The standard of living enjoyed by the family before the relationship breakdown;
- The ages of the parties and the duration of the marriage;
- Any physical or mental disability of the parties or the children;
- The contributions that each party has made to the relationship (including non-financial contributions, such as raising children);
- Any very serious misconduct by one party (usually limited to severe violence or sexual abuse, significant financial misconduct, or litigation misconduct); and
- Any benefits (usually pension benefits) that one party might lose when a divorce is granted.
If there are insufficient assets for both parties’ needs to be met, the Court will try to first meet the needs of the party caring for the children, and then try to be as fair as possible to the other party.
‘Full and frank disclosure’ is the process by which both parties exchange full details of their financial positions. Both parties have a duty to the Court to give a full, frank, clear and accurate disclosure of all their financial and other relevant circumstances. This is so important that – if an Order is made – the parties have to sign statements confirming that their disclosure is true. There are significant consequences if it is later found that the disclosure is false, including that any Order made may be set aside, and proceedings for contempt of Court could be brought against that person, which could lead to a term of imprisonment or to a fine. A party is also open to being penalised in costs (i.e. being ordered to pay some of the legal costs of the other party). If a person is deliberately untruthful in the process of full and frank disclosure, criminal proceedings may be brought against that person under the Fraud Act 2006.
This all seems very intimidating, but it is in place because full and frank disclosure is so very important in matrimonial finance matters. The importance of full and frank disclosure is that without it the Courts and the lawyers are not able to carry out any real assessment of fairness. If the financial picture before the Court is not accurate, then any settlement ‘built’ on that financial picture is not going to be fair and will not hold up.
Think of the wise and the foolish builders. The wise man built his house upon the rock. With strong, solid and true foundations, his house stands up to storms and floods. However, the foolish man built his house upon the sand. Because the sand is fluid and changeable, not solid and strong, then the foolish man’s house – no matter how magnificently constructed – falls down when put under pressure. The same is true of a financial settlement. A settlement agreement, even one most carefully built and internally strong, will collapse completely if the financial foundation it is built on is not true.
A recent example of the potential pitfalls with inadequate disclosure is the case of KG -v- LG. In this case, the parties had been married for a long period. Their financial position was complicated and included trusts that benefited the husband and the children, as well as shares and other investments. The parties divorced in 2010, and a Consent Order was made after disclosure by both parties and negotiations. The asset level was significant, with the husband disclosing capital resources of £14,262,143.00 together with a net income of £166,650.00 and a pension with a value of £431,522.00. The husband also disclosed some trust interests (including the settlement of shares), but said that these were primarily for the benefit of the parties’ children. The Consent Order itself was relatively straightforward; the wife received the former matrimonial home (valued at £3.25 million), a lump sum of £4 million payable in installments and child maintenance of £10,000.00 per child per year. The total award (of £7.25 million) was therefore very close to one-half of the disclosed assets.
However as time went on, the wife asked questions about the trusts for the children, including the shares. She wanted to know how the children could access the trusts and what was in them. After a variety of letters, and one of the children instructing a lawyer himself, the wife finally learned in 2014 that in fact the trusts considered that the husband had always been the primary beneficiary.
The wife promptly appealed the original Consent Order on the basis of the husband’s non-disclosure. The husband made a number of arguments, including that the wife should have known to ask more questions at the beginning (and was therefore to some degree the author of her own misfortune), and also that she had waited too long to appeal.
The appeal came before Moor J. He determined that the wife had not waited too long to appeal, and that even though there were usually strict timescales to appeal in this case the wife acted promptly in issuing the appeal as soon as she became aware that there was a problem with the husband’s initial disclosure. The Court found that the trusts contained £4.2 million in cash and £3 million in shares that the husband had failed to disclose.
The judge said that the husband’s disclosure regarding the trusts was “woeful”, “clearly not full and frank” and “materially inaccurate”. He came to the “clear conclusion that there was a breach of the duty of full and frank disclosure”, and it was not for the wife to keep asking questions if the husband had provided misleading and inaccurate answers. The judge also found that when the husband was giving evidence in Court he was “evasive and at times misleading”, and at other times “did not tell… the truth”. The appeal was allowed and the case has now been sent back for rehearing.
This case is a clear example that a failure to provide full and frank disclosure, if that failure was material, will not be ignored by the Courts. Unfortunately for the wife in the case, she is now going to have to go through another long set of financial proceedings, and the costs associated with that. She is likely to have a strong case for the husband to be ordered to pay some of her legal costs in doing so, due to his financial and litigation misconduct. As far as relates to the husband, if he had disclosed these assets from the beginning, it is possible that given the broad settlement of one half-share to each party, had he agreed to give one-half to the wife on settlement matters would have swiftly concluded. Now however, not only has he been ‘found out’ for trying to hide these assets, he will have to go through another set of proceedings and will likely lose some if not most of these assets and be penalised by the Court in costs.
Full and frank disclosure, therefore, benefits not only the financially-weaker party but also the financially-stronger party. It is in everybody’s interest for a financial settlement to be final and unassailable. Those tempted to siphon away or shield assets should take heed from the husband’s situation in this case, and be aware of the serious consequences of being untruthful in their disclosure.