Nothing to hide: disclosure of assets on divorce

“A lie can travel half way round the world while the truth is putting ?on its shoes,” once said Charles Spurgeon, Baptist preacher.

At the end of June there was a fair amount of publicity given to a dispute between Wall Street millionaire hedge fund manager Daniel Shak and ?his professional poker playing former wife, Beth.

Daniel claimed that during their divorce Beth hid from him a collection of roughly 1,200 designer shoes worth around US$1m that he said she had kept in a secret room in their home. He was looking to reopen their divorce settlement to claim a share of the value. She said that it was ridiculous to say that he did not know about the shoes and that the “secret room” was ?just the closet in the master bedroom.

Unreasonable behaviour

The emotional and financial pressure that people come under during divorce proceedings can often result in behaviour that in any other situation in their personal or professional lives would not be expected of them or that they themselves would never countenance. While an argument about Louboutins, Jimmy Choos and Yves St Laurents might be rather unusual, failure to give full disclosure of rather less glamorous assets, or income, unfortunately is not.

The annual Grant Thornton matrimonial survey in 2011 reported that 30 per cent of family lawyers felt that their clients did not get what they were entitled to because assets had been hidden and 94 per cent said that in three out of ten cases assets that had not been disclosed were found.

However, while these statistics seem to show that many of those going through a divorce are tempted to play dirty, the likelihood of the non-discloser being found out is high and the consequences for him or her can be serious. Trust will be destroyed, acrimony and costs will increase, the prospects of a negotiated outcome will be reduced and cases that were finished perhaps many years before can be re-opened along with old wounds.

In financial proceedings on divorce there is an absolute duty on the parties to give full, frank and clear disclosure of their present and likely future financial resources. Without full disclosure the court cannot do its job, which is to exercise its discretion and to come up with a result which is as fair as possible.

The court has this responsibility whether it is approving a consent order reflecting an agreement negotiated by the couple, or imposing a decision following a contested trial. If the court does not have the full facts it will either be approving a consent order on the wrong basis or, in contested proceedings, will be relying on inference and guesswork. Either way non-disclosure is likely to lead to a result that is unjust for one or other of the parties.

At the end of 2011, in the case of NG v SG, experienced High Court judge Mr Justice Nicolas Mostyn helpfully summarised this area of law. As the judge said, non-disclosure is “a bane which strikes at the very integrity of the adjudicative process”.

The case was not in itself unusual. It was an appeal by the husband in a case involving maintenance, arrears and whether those maintenance payments should be capitalised.

The original judge had made various findings against the husband about his disclosure. For reasons explained below, Mostyn J actually allowed the appeal and directed a re-trial, but in the course of doing so set out in his judgment the approach to be taken where there were allegations of non-disclosure.

Family business

Non-disclosure can take different forms. It might be by omission (not declaring a bank account, for example) or by commission, which was the position in this particular case where there was a conspiracy within the family to protect the family business, resulting in the presentation to the court of forged and back-dated documents.

The consequences for the non-discloser will depend on the nature, extent and seriousness of his or her failure to give an honest account of the financial position. In most cases there are, at the very least, likely to be costs orders made against the guilty party, departing from the normal principle that applies in most financial divorce applications, which is that each side bears their ?own costs.

In more serious cases, the court will have to consider drawing adverse inferences. Lying in court forms or in evidence is also a criminal offence ?that in extreme cases could result ?in imprisonment.

Mostyn J sets out in his judgment an eight-point approach for the courts to follow if the disclosure given by one of the parties has been materially deficient:

1. The court is duty bound to consider drawing adverse inferences where funds have been hidden.

2. Such inferences must be properly founded and reasonable. The court cannot punish the non-discloser by attributing to him assets that probably do not actually exist. There has to be evidence.

3. If the court concludes that funds have been hidden then it should attempt a realistic and reasonable quantification of them, even in the broadest terms.

4. In making its judgment on this, the court will look first at direct evidence such as documentation and observations made by the other party.

5. The court will then look to the scale of business activities and lifestyle.

6. Vague evidence of reputation or the opinions or beliefs of third parties is not admissible in this exercise.

7. The technique of concluding that the non-discloser must have assets of at least twice what the other party is seeking (which came from an earlier case called Al Khatib v Masry) should not be used as the sole approach.

8. The court needs to try to ensure ?that the non-discloser does not ?do better from his non-disclosure than he would do if the truth were told. However, it is better that an order ends up being unfair to the non-discloser than being unfair to ?the claimant.

?Applying this checklist to the facts of the actual case, Mostyn J concluded that, while the husband had, through “a combination of bloody mindedness and incompetence”, made a proper investigation of his affairs very difficult, the conclusions reached by the original trial judge about his actual net worth could not be justified on the evidence. ?It was for this reason that he ordered ?a re-trial.

Whole truth

“Seldom, very seldom, does complete truth belong to any human disclosure; seldom can it happen that something is not a little disguised or a little mistaken,” wrote Jane Austen, in Emma.

As the research and experience shows, non-disclosure by one or both of the parties to a divorce is, sadly, commonplace. Most of it is fairly low level but this can still cause real problems in practice.

We have a professional duty as family lawyers to ensure that our clients have sufficient information about the other side’s finances to make informed decisions about settlement. It may well be that the information that is not disclosed would not actually make any or very much difference to the outcome, but even a seemingly minor breach of the duty of disclosure fuels mistrust. The non-discloser’s integrity is damaged and inevitably the other party will think there might be something more fundamental being hidden. That in turn will result in a more detailed forensic examination of what there is, driving ?up costs.

Disclosure is not about absolutely every detail being provided and verified. When investigating the financial position we have to keep in mind the need for enquiries to be proportionate and relevant to the issues in the case. The court process involves each side preparing a financial pro forma ?called Form E, which sets out the information required.

This form, or a variation of it, will often also be used to gather together the financial information in mediation, collaborative law cases, family arbitration or negotiation between the parties and their legal team. In more straightforward cases, the information on the form will be sufficient. In more complex and higher value cases, further explanation and valuation evidence will be required, but the court retains the responsibility for ruling on whether particular requests for information and documentation should be allowed.

The person giving the disclosure is often tempted not to reveal something because he or she thinks that it will not be relevant, but that is the wrong approach. The right way to proceed is to give the information to the lawyer who can advise on whether it is disclosable. There may well be very good reasons for arguing that an asset should not be included in the sharing exercise, but the other side has the right to challenge that argument and cannot do that if they do not know that the asset exists.

Most cases settle without a judge having to impose a decision. Non-disclosure is one of the main reasons for a case ending up with a contested hearing. It is also probably the most common reason for cases being re-opened at a later date.

Honesty generally pays when it comes to sorting out the finances ?on divorce.