News and Insights
28 September 2016
What effect can these have on the outcome of divorce proceedings?
In recent months there appear to have been a number of cases both in Jersey and England where conduct during the divorce proceedings has become an issue.
In these cases, one party’s approach to the court proceedings has been characterised by particularly bad behaviour, such as a failure to disclose assets, excessive expenditure or attempts to move assets out of the reach of the courts.
There are a number of questions that arise from such behaviour:
- How can the family court deal with these issues and what will the effect be on the division of the assets?
- What type of behaviour is considered by the family courts to be ‘bad enough’?
- Can the family court penalise the party who is behaving badly by making costs orders against him or her?
Before the English family court, there are the recent examples of the cases of Prest v Petrodel Resources Ltd  and M v M . In the Prest case, the conduct of the husband was described by the Supreme Court as ‘characterised by persistent obstruction, obfuscation and deceit…’ and in M v M the court stated that the husband was ‘a shady puppet master in the background’.
Apart from contempt of court proceedings (which are generally available where court orders are breached or ignored), within matrimonial proceedings, the court can deal with these issues either by making what are called adverse inferences or ‘add-backs’.
This allows the court to make orders by assuming that assets do exist and making financial orders that reflect this finding. Again, the Prest and M v M cases are good examples of this. In both cases, the court concluded that the husbands were beneficially entitled to properties where the legal title had been vested in corporate bodies. Lord Sumption in Prest stated that ‘…judges exercising family jurisdiction are entitled to call on their experience and to take notice of inherent probabilities when deciding what an uncommunicative husband is likely to be concealing’. However, the court does need to be very careful to ensure that there has been material non-disclosure by the husband or the wife and not to simply jump to an adverse finding. At the same time, the judge must ensure that the non-discloser does not get a better result than they would have done had they properly disclosed all of their assets. This can be a very difficult balance for the court to get right. However, there is now plenty of case law to guide the family courts and it has become more and more unlikely that non-disclosure or hiding of assets behind structures will be tolerated in divorce proceedings.
This is a remedy available to the court to mitigate or compensate one of the parties for the effects of the other party’s financial misconduct during the proceedings. Most usually, it takes effect through a reattribution of (some or all of) the funds to the party who is responsible for reducing the assets. Where money or assets have been spent/dissipated or disappeared, the question that the court has to ask is whether the spending is reckless or wanton. An example of this is the case of Vaughan v Vaughan . In this case the wife claimed that during the 18 months since separation the husband had either hidden or recklessly spent over £196,000. The court held that it was essential that there was clear evidence of the dissipation but at the same time ‘a spouse cannot be allowed to fritter away the assets by extravagant living or reckless speculation and then claim as great a share of what was left as he would have been entitled to if he had behaved reasonably’.
What can constitute an add-back?
The golden rule is that the court has to decide if the asset remains within the court’s reach. A good example of this is that the purchase of a fast car is not prima facie wanton or reckless expenditure. It can be included in an asset schedule and it can therefore be sold or transferred to the other party. However, the car may well have depreciated and this would be an argument for an add-back in respect of the lost value.
Other cases where add-backs have been argued include:
- Expensive new partners - it will then depend on whether or not the new partner is being given a better lifestyle than was enjoyed during the marriage.
- Gambling - this will depend on the facts of the case.
- Plastic surgery - again this will depend on the facts of the case.
In a number of cases there can also be an issue as to whether or not the financial misconduct complained of took place during the separation or during the marriage. On the face of it there is no distinction between the two. However, it is clearly the case that if the conduct complained of took place during the marriage, it will depend on whether the other party had knowledge of it. For example, it may be very difficult (as was recently alleged in a case in Jersey) that an add-back was applicable where a wife had spent many thousands of pounds on clothing, as it was apparent that the husband was aware of this and accepted the spending. The add-back argument during the marriage is also weakened if the spending was a long time ago and the marriage continued in spite of it.
When considering add-backs, the court may also take into account the length of the marriage. In the much publicised case of McCartney v Mills McCartney , which was a short marriage of just four years, the wife could not expect that an extravagant standard of living would be continued. The judge took the view that the wife had a mind-set of spending in order to inflate her budget up to £3m p.a. and that she felt she was justified in doing this. The judge added back £500,000 to represent completely unreasonable expenditure during a 15 month period.
Caution does need to be taken, however, before either party embarks on arguments in respect of financial misconduct. Putting these arguments before the court will hugely increase the parties’ legal costs. In cases that involve substantial assets, such arguments may well be worthwhile and, in some cases, essential in order to establish what are the true assets of the marriage. However, in smaller money cases, alarm bells need to ring as ‘needs’ will almost certainly trump any ‘add-back’ argument, particularly where the asset no longer exists. This does mean of course that where there is less money, the injured party is less well protected from their spouse’s reckless spending, than in cases involving wealth. This will be so even though the impact of that overspending may be very severe on the injured party and often the children.
Every divorcing party must therefore bear in mind the ways in which the court may deal with bad behaviour. Finally, if such behaviour is found by the court, it will inevitably lead to additional costs orders being made against the offending party.
In conclusion, divorce is of course a stressful time for all involved, but the lesson to be learnt from this article is that although fast cars and extravagant spending may feel wonderful at the time, they could make the end result even more stressful and more expensive for all involved.