“Cheats’ Charter” Swept Aside As Supreme Court Tells Divorcing Couples: “Fraud Unravels All”.

Thu, 15 Oct 2015

The Supreme Court yesterday handed down its hotly anticipated Judgments in the cases of Sharland v Sharland [2015] UKSC 60 and Gohil v Gohil [2015] UKSC 61 and in doing so, gave a clear message to all those involved in matrimonial finance proceedings:  litigants who intentionally fail to provide full and frank disclosure or who mislead the Court will have the burden of demonstrating why any consent order to compromise the proceedings should not be set aside on an application by the other party.

This comes as welcome news for many matrimonial finance lawyers, for whom the Court of Appeal decisions in both Sharland and Gohil had struck a wrong note. The outcomes just seemed, somehow, “unfair”, notwithstanding the apparently well-reasoned, technical, decisions of the Court of Appeal in each matter.

A difficulty for the Supreme Court in deciding these appeals was that the balance to be struck was likely in part to be policy-driven: the need on the one hand to send a strong message to those who would use dishonesty and non-disclosure as a means of influencing the outcome of matrimonial proceedings in their favour, and on the other hand, the need to avoid “opening the floodgates” and giving what might be interpreted by some as an open invitation to apply to set aside consent orders on the basis of the most flimsy issue of non-disclosure.

Whilst each of the decisions handed down yesterday was determined in the context of its own technical point of law, unsurprisingly the Supreme Court’s approach to these issues, with leading Judgments given by Lady Hale in Sharland and Lord Wilson in Gohil, strikes the right balance between these two competing policy aims.

Sharland involved a husband and wife separating after a 17-year marriage and three children, one of whom had severe autism and would remain dependant on the wife for life. The husband was a computer software entrepreneur and the principal asset in issue in the proceedings was his 33.5% shareholding in his software business. The wife contended that the husband’s shareholding in the company was likely to be worth in the region of US$ 132m. The husband disputed this. Each party instructed their own expert valuer, both of whom approached their task on the basis that there were no plans for an Initial Public Offering (IPO). The wife’s expert valued the husband’s shareholding in the range £22.24m to £31.9m. The husband’s expert valued his shareholding at £6.674m to £8.085m. In his written evidence and again in his oral evidence at trial, the husband asserted that he was unlikely to realise the value of his shareholding for another three to seven years. He said, “one thing is for sure – that there’s nothing on the cards today.”

Mid–trial, after giving their own evidence, the parties reached an agreement to settle the case. The agreement was explained to the judge, who approved it and a draft consent order was drawn up. Before it was sealed, news reports emerged indicating that the company was being prepared for an IPO which was expected to value the company at between US$750m to 1000m. The wife invited the court not to seal the consent order and applied to resume the hearing. The judge at a subsequent hearing made findings that the husband had knowingly misled both expert valuers and that his oral evidence at the hearing had been false and dishonest, given “in the hope that this would lessen his exposure to the court’s discretionary powers”.  Surprisingly therefore, notwithstanding these findings,  the judge at first instance then went on to accede to the husband’s application for the draft Consent Order to be perfected, on the basis that the order was not substantially different from the order which he would have made had there been full disclosure at the outset: i.e. he found that the non-disclosure was not material in the Livesey v Jenkins sense.

The Court of Appeal dismissed the wife’s appeal by a majority, on the basis that in matrimonial financial remedy proceedings the court’s authority derives from its statutory powers under the Matrimonial Causes Act 1973 and not from the consent of the parties, and therefore a misrepresentation that would normally entitle a wife to rescind a contract did not necessarily entitle her to renounce the agreement and resume the proceedings, and that in accordance with Livesey v Jenkins it would only be in cases where the wife could satisfy the court that the absence of full and frank disclosure had led to the making of an order “substantially  different from the order which it would have made if such disclosure had taken place” that the order would be set aside.

The Supreme Court strongly disapproved this reasoning in allowing the wife’s appeal, carefully analysing the ratio of Livesey v Jenkins and distinguishing it on the basis that that was not a case of fraud and drawing an analogy instead with the remedies for misrepresentation and non-disclosure in contract at common law (see para 31). Ultimately, the Supreme Court found that whilst it is clear from Livesey v Jenkins that the misrepresentation or non-disclosure must be “material”, in a case of fraud, there will be a presumption that the misrepresentation was material and it will be for the party who committed the fraud to satisfy the court that at the time it made the consent order, the fraud would not have influenced a reasonable person to agree to it and that nor would the court have made a significantly different order, whether or not the parties had agreed to it. This presumption of materiality shifts the burden onto the perpetrator of the fraud since the Supreme Court considered to was not right to place the burden on the victim of showing that disclosure of the non-disclosed matters would have made a difference to the order.

Gohil involved a 12-year marriage which ended in 2002. The husband was a solicitor and a partner in a small Mayfair firm which assisted wealthy clients, often living abroad, to protect their wealth. In financial remedy proceedings issued by the wife, the husband produced a balance sheet in relation to his personal finances, which indicated a net deficit of £311,512. Surprisingly one might think, then, the matter was settled at FDR before Baron J in April 2004 by way of an agreement that the husband would pay the wife a lump sum of £270,000 in final settlement of her claims. The husband claimed he would have to rely on help from his family to enable him to make the lump sum payment to the wife. In 2007 the wife applied for an order setting aside the April 2004 consent order on the ground of the husband’s fraudulent non-disclosure of his resources at the time. The determination of the wife’s application to set aside was significantly delayed by events which intervened: in 2008, the husband was charged with money-laundering to a value of £25m and was found guilty in 2010 following an eight-week trial. He subsequently pleaded guilty to six further counts of money laundering and conspiracy to defraud and was committed to prison for 10 years. The CPS then launched confiscation proceedings against him, which remain ongoing, in which the CPS alleges that the husband has realisable assets of almost £35m.

The wife’s application to set aside was heard by Moylan J as a fact-finding over eight days in February 2012 and was successful at first instance, with findings being made that the husband was guilty of material non-disclosure in 2004.

A complicating factor was that Moylan J had allowed the wife to give evidence of matters that had been presented by the CPS at the husband’s criminal trial, in circumstances where he had previously directed disclosure of many of the documents from the criminal trial but that order was stayed at the time of the hearing pending an appeal by the CPS who argued that many of the documents or their contents had been obtained from sources outside the UK pursuant to requests made by the Crown Court under the Crime (International Co-operation) Act 2003, and that their use for any other purpose outside that specified in the requests was precluded. That appeal by the CPS was ultimately successful and it was held that none of the documents or their contents could be disclosed within the matrimonial proceedings. This led to a significant muddying of the waters in circumstances where Moylan J’s finding of material non-disclosure against the husband appeared on the face of it to have been largely based on that inadmissible material.

On the husband’s appeal of the decision of Moylan J, the Court of Appeal overturned the finding of non-disclosure on the part of the husband and overturned the order by Moylan J setting aside the 2004 consent order.  The Court of Appeal held that not only did the wife need to establish that the husband was guilty of material non-disclosure but also that she could only rely in doing so on evidence that satisfied the Ladd v Marshall test: first, that the evidence could not have been obtained with reasonable diligence for use at the trial; second, that the evidence would probably have an important influence on the result of the case and, third, it was apparently credible. McFarlane LJ in the Court of Appeal held that because all of the evidence given before Moylan J which derived from the criminal trial must be excluded due to the successful appeal by the CPS as to its use outside the criminal proceedings, and the other evidence did not satisfy the Ladd v Marshall test, it “was not open “ to Moylan J to make a finding of material non-disclosure. i.e. the evidence on which Moylan J based his decision was inadmissible.

The Supreme Court disagreed on a number of grounds as set out at paragraph 31 of the Judgment, most powerfully, at (d), that the Court of Appeal’s approach lost sight of the basis of an application to set aside for non-disclosure which is that the respondent failed in his duty to make full and frank disclosure. If the wife had not compromised her application by way of a consent order and had proceeded to a final hearing, at such a hearing it would have been for the husband to produce evidence of his own resources, and not for her to do so. Thus the Ladd v Marshall test is not applicable in an application to set aside for fraudulent non-disclosure.

Wilson J also at paragraph 18 makes observations which will be essential reading for anyone in the position of deciding the more appropriate procedural route as between an appeal and an application to set aside.

Interestingly, at paragraphs 19 – 22  Wilson J also observed that a recital such as that inserted by the husband in this case [“the wife believes that the husband has not provided full and frank disclosure of his financial circumstances but is compromising her claims in the terms set out in this consent order despite this, in order to achieve finality.” ] will not assist a party who fails in their duty of full and frank disclosure in seeking to block an application by the other party to set aside – it has “no legal effect .”

It is likely that Sharland and Gohil will join the lexicon of the most cited authorities in matrimonial finance law. Whilst as lawyers we must guard against over-zealous applications to set aside on the basis of minor issues of non-disclosure, particularly where the cost of the litigation is likely to be disproportionate in the context of the non-disclosed assets, at the same time, these two decisions are to be welcomed as they take the law in this most discretionary of areas in the right direction: towards clarity and, most importantly, fairness.

Article written by No5 Family Barrister Juliet Allen.

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