Dealing with non-disclosure

Ros Bever and Hayley Trim look at how the courts are dealing with the increasingly prevalent issue of non-disclosure in divorce battles

Alison Sharland was recently granted permission to take her divorce case to the Supreme Court, following the revelation that her husband had managed to mislead both herself and the High Court as to the real value of his company. This case is the latest in a long line of high-profile divorce battles involving non-disclosure, which have recently been on the rise. From Prest to Young and Sharland to Gohil, the higher courts have had to decide how to deal with cases where things may not be as they appear, or once appeared.

Some of the cases involve a battle to obtain information during the course of proceedings - Young v Young [2013] EWHC 3637 (Fam) being the prime example, with Scot Young failing to produce the required disclosure despite
a prison sentence and the confiscation
of his passport. Ultimately the court could only piece together a tiny part of the jigsaw (largely by using guesswork) and since he is technically bankrupt and no concrete assets have actually been found, Michelle Young has not seen a penny of the £20m she was awarded following their divorce and her legal team remain unpaid.

Sometimes a party will claim that assets do not belong to him or her.
Mr Prest had sought to protect his assets through trusts and corporate structures.
A significant award had been made by the judge but the issue was enforcement - the assets were held by companies rather than the husband himself. The Court of Appeal refused to pierce the corporate veil and made strident comments about the family court's attitude towards company assets (despite Thorpe LJ's protests of providing the non-discloser with an open road and a fast car). But the Supreme Court found that the company assets belonged to the husband under resulting trusts, so the wife's claims might be enforced (Prest v Petrodel [2013] UKSC 34).

The Supreme Court will hear Alison Sharland's appeal in June 2015. The question that divided the Court of Appeal in February 2014 was whether the husband's non-disclosure warranted (or indeed required) the setting aside of the court-approved agreement reached during the proceedings. Two Court of Appeal judges upheld Sir Hugh Bennett's decision that the husband's non-disclosure would not have resulted in a different decision, and therefore the consent order should stand. Briggs LJ disagreed, voicing serious public policy concerns as to the court's attitude to fraud and those that perpetrate it.

The Sharland case is slightly different from the classic ‘hiding of assets’ case. The assets themselves were disclosed and valued by experts. The issue was the husband’s failure to disclose the planned initial public offering (IPO) for the company in which he had a 63 per cent shareholding, and the arrangements that had been secretly put in place. An IPO would have a dramatic impact on the value of the company and the timing of the availability of proceeds for distribution.

The draft order agreed in July 2012 provided for the wife to receive £10.3m in cash and properties, while the husband received £5.64m in cash and properties. On disposal of his shares (the value of which was in dispute at £31.5m or £47.25m) the husband would pay a deferred lump sum of 30 per cent of the balance of the net proceeds of sale, after he had paid £4m into a trust fund for the parties' disabled son, and a further £1.7m to the wife absolutely. As the figures were understood at the time, this would give both parties a broadly equal share of their jointly acquired assets.

Mr Sharland had said in evidence that it was highly unlikely that there would be an IPO within three years and probably not for five to seven years. However media reports in July and August 2012 indicated that preparations for an IPO were well underway and put the value of the company at between US$750m and US$1bn. Mrs Sharland therefore applied to set aside the draft order (and as yet unsealed) since her decision to compromise her claims was made without knowing that the company was probably worth several times what both she and the experts had thought, and in the belief that a sale was a few years off.

However by the time the application to set aside the draft order came for consideration, the proposed IPO was no longer a possibility according to the husband and therefore, despite finding that the non-disclosure was deliberate and material, and that the husband's
duty of disclosure continued until the order was sealed, Sir Hugh Bennett decided that he would not have made
a significantly different order.

The rule in Livesey v Jenkins provides that an order may be set aside if there was non-disclosure and if that non-disclosure was material, such that had the court known the true position, it would have made a substantially different order. In the case of Sharland, the Court of Appeal confirmed that it is not enough to show that there has been non-disclosure, no matter how deliberate; it is the effect of the non-disclosure that matters.

Briggs LJ however took the view that the husband's fraudulent misrepresentation had undermined the basis upon which the shares had been valued, and therefore the wife's ability to weigh up the pros and cons of a proposed agreement. Essentially her consent to a settlement had been vitiated by fraud and she had been denied a fair trial. He referred to the general principle that 'fraud unravels all'. He said: "Once it is established that a judgment or order has been procured by a process involving material fraud, then the interests of justice require that the judgment be set aside."

Fraud would be a vitiating factor in the context of a contract, and the same will apply to pre-nuptial agreements if the Law Commission's recommendations in its recent report, Matrimonial Property, Needs and Agreements are followed. However there is a distinction to be drawn between a typical agreement and one which has been approved by the court and made into an order. The legal effect of a consent order derives from the order and not from the parties' agreement, therefore it has a different character in comparison to a contract and a different test applies, despite this arguably being a fine line in many cases.

One of the concerns of the majority of the Court of Appeal was pragmatism - if every single case where there had been some minor non-disclosure was open to an application to set aside, it would cause endless delays, increase costs and the court system would grind to a halt. There is also an interest in finality - cases being closed and parties being able to move on without concern that they will be reopened. The Livesey v Jenkins test encapsulates this: "An order will only be set aside if the non-disclosure really made a difference." However Briggs LJ thought that the public interest in the protection of the court's processes from fraud should transcend considerations of finality, economy and speed.

Of course it’s no surprise that the reported cases on non-disclosure tend to involve eye-wateringly large sums of money. The more money that is involved, the greater means the party choosing not to disclose has to hide it through mechanisms such as complex off shore structures. For the ordinary couple, despite the fact that non-disclosure could have a much more significant impact in terms of meeting basic needs, there simply are no funds to pursue an investigation, seek repeated inspection appointments, Anton Piller and, or freezing orders. Further, if evidence of non-disclosure emerges after an order has been made, the test for setting aside that order requires more than proof of non-disclosure.

There was no question in Sharland that there was significant and deliberate non-disclosure – the judge made those findings. But the judge and the Court of Appeal found that the second limb of the test was not satisfied. In this circumstance you might ask, what is the sanction for dishonesty?

Macur LJ observed that Mr Sharland may find himself subject to criminal prosecution, civil contempt proceedings or costs orders. However there is currently no sign of any of those penalties, and indeed an award of costs was made against Mrs Sharland following the Court of Appeal judgment.

So pending the Supreme Court’s decision next June, where does this leave us?

The cases demonstrate the importance of gathering as much information as possible during the course of proceedings. The family court will take a dim view of fishing expeditions, but where there is evidence that undisclosed assets exist, the court will generally assist in uncovering them. However if non-disclosure is discovered after an order has been made, a party seeking to set aside that order will be faced with an uphill battle.

Ros Bever is a partner at Irwin Mitchell and Hayley Trim is a personal support lawyer at the firm