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The Blame Game: Conduct in Financial Proceedings

Rachel Nicholl highlights the courts’ approach when dealing with financial conduct and litigation conduct. This article was first published in the November 2014 edition of the Family Law Journal. 

The decision in US v SR [2014] addresses at length the law on notional re-attribution and the burden of proof regarding non-disclosure of assets. Much of the judgment is fact-specific however it serves as a useful reminder of the applicable principles regarding allegations of financial misconduct and the rules of evidence on the drawing of adverse inferences.

Background 

The parties met in Russia, when the wife was then 26 years of age. They married on 4 August 2000, having lived together for five years prior to their marriage. The wife (48) is a Russian national and the husband (63) is a British national. There are three children of the relationship, aged 19, 17 and 14. At the time the parties met, the husband was in his early 40s and, having been divorced from his first wife, had residual maintenance obligations to her, but had been able to rebuild his capital base. The husband’s first wife died in January 2013 which brought to an end his obligation to meet a joint lives periodical payments order. The husband had failed to disclose his first wife’s death until shortly before a ten-day fact-finding hearing in October 2013.

The husband was a successful businessman and was financially established before he met his wife. He had spent many years of the relationship working overseas as a senior executive in the oil and gas industry. Due to the parties’ comfortable wealth and the husband’s high income, the family were able to enjoy a high standard of living throughout the relationship. They had built up a small portfolio of investment properties in Moscow, had homes in both Moscow and England and were able to send their three daughters to private school. On the wife’s case, they enjoyed three holidays per year in luxurious five-star resorts and their children also had horses.

The wife contended that the catalyst that lead to their separation was the husband’s decision to pursue a relationship with another woman, whom he later went on to marry as his third wife and have a child with, who at the time of the hearing was aged three years old. The husband’s case was that that relationship was not the sole cause of the relationship breakdown.  In December 2010 the wife’s solicitors served a draft petition on the husband. The husband issued his own petition in March 2011. The commencement of the proceedings was characterised by hostility and allegations on both sides, in relation to the disposal of property assets and a failure to provide full and frank disclosure. Significant sums of money were spent by both sides in funding the litigation, which took place not only in this jurisdiction but also in Russia.  The legal costs were in excess of £1m. Considering the amount of money spent on legal fees by both parties, one would have thought there were very substantial assets. However, as will become clearer, this was not the case.

The above is a brief précis of the background to a case that spawned two lengthy judgments in relation to an exceptionally long fact-finding hearing and a final hearing. The husband issued his financial application in May 2011 and the wife issued a cross-application in April 2012. Prior to the hearing in October 2013, the decree nisi had been made absolute in February 2013. The matter was listed for a final hearing of the cross-applications by the husband and the wife. Extensive allegations were made by both parties as to financial misconduct, unauthorised property dealings and material non-disclosure. The parties were producing fresh evidence on a constant basis prior to the trial and on an almost daily basis during the trial itself. As a consequence, both parties’ counsel submitted that the hearing should be restricted to an OS v DS [2004] fact-finding exercise. Jennifer Roberts QC, sitting as a deputy High Court judge, agreed.

Fact-finding hearing

After the ten-day fact-finding hearing a lengthy judgment was handed down. As with hearings of a similar nature, the facts and issues in dispute are specific to the case, but the principles that were applied may assist practitioners.

The husband asserted that the wife had sold matrimonial properties at a significant undervalue, including one to her sister which the husband invited the court to consider a ‘sham’, or that they were unauthorised, or that the transactions represented an irresponsible dissipation of assets and on that basis sought. The wife’s position was that the following were in issue in relation to the husband’s evidence:

  • that there was non-disclosure of assets, in particular in relation to an offshore bank account with a balance of circa $873,652 and shares in the husband’s name;
  • that the husband had failed to disclose the death of the first wife;
  • whether the husband was still in receipt of income from employment; and
  • that, with the help of his new wife, the husband had used computer software to redact bank statements and credit card statements that were then disclosed within the proceedings to hide numerous transactions;

Both parties submitted that where the evidence was unclear the court should draw adverse inferences.

Law

Burden of proof and non-disclosure

In setting out the law in relation to adverse inferences and on whom the burden should lie, the judge had regard to a number of authorities including M v M (Financial provision: party incurring excessive costs) [1995], NG v SG (appeal: non-disclosure) [2011], Prest v Petrodel Resources Ltd [2013] and Young v Young [2013]. The court emphasised (at para 50), the need for positive evidence in support of an assertion of hidden funds:

… it is clear that, before the court moves to a finding that there are undisclosed assets, there must be some admissible evidence of hidden funds, even if the estimate of the value of such funds is by its nature very broad.  Sometimes there may be evidence of the existence of hidden assets revealed by documents improperly obtained; sometimes a wife is able to give direct evidence of observations made by her or of things said to her by the husband… In the absence of such direct evidence, the court may need to look to the husband’s lifestyle; it may need to consider the scale of any ongoing business activities in which he is involved.  But it seems clear that what is required is some form of cross-check which supports the reasonableness of the court’s conclusions in relation to adverse inferences.

Thus, in appropriate circumstances, adverse inferences can be drawn, but they must be reasonable inferences based on admissible evidence. There is a duty on both parties to a financial application to make full and frank disclosure, but the burden of proof is on the applicant to prove that alleged resources are available to meet their claim.

This case was relatively unusual in that both the husband and the wife asked the court to draw adverse inferences against the other. The wife relied on omissions by the husband in relation to existing funds as the basis for the existence of further funds. The judge said (at para 55) that this scenario was likely to result in findings that:

  • either the assets do exist and are available for distribution or they don’t; and
  • depending on the conclusion reached by the court as to the existence of assets, the non-disclosing party will then either be presumed to have access to those assets or they won’t.

The manner in which the husband asked the court to draw adverse inferences was different. His position was that the wife had squandered away a marital asset at an undervalue and should be presumed to still have that asset. The judge described this as the notional reattribution, ie the court was asked to conduct an exercise on the assumption that a party be treated as still holding an asset that technically no longer existed.

Final hearing

Following the ten-day fact-finding hearing there was a five-day final hearing, the primary focus of which was to determine how the assets, which totalled around £5m, were to be distributed. £1.76m of the assets were tied up in the husband’s pension funds. It was agreed that these should remain with the husband, who was now retired, and that the wife should receive two investment properties, while a third would be sold to release capital for the parties. It was also accepted that this was a needs-based case and that neither the parties nor their children would be able to enjoy the same standard of living they had enjoyed during the relationship.

Issues for determination

There were two main issues for determination:

  • the impact of the wife’s conduct following the dissipation of a property in Russia sold at an undervalue and how this would impact on the distribution of assets; and
  • the husband’s litigation conduct and whether a cost order should be made against him.

At the fact-finding hearing the judge had found that the wife had disposed of one of the parties’ investment properties at a significant undervalue and that she had spent the proceeds. The wife had done so in the full knowledge that the ‘net’ proceeds would be part of the assets subject to the financial claims. It was found that her conduct could not be ignored and a notional £1m was reattributed to her account to represent the approximate capital loss from the sale of the property.

In relation to costs, the general rule in financial order proceedings is that the court will make no order for costs. However, r28.1, Family Procedure Rules 2010 provides that ‘the court may at any time make such orders as to costs as it thinks just’. The court may have regard to a party’s conduct when deciding the issue of costs. The judge had said in relation to the husband at the fact-finding hearing:

Inevitably, his litigation conduct in presenting the court with a false and fraudulently manufactured financial presentation has the potential to sound in an order for costs at the end of the day.

In the final hearing judgment she duly made an order for costs against the husband on the basis that:

… this was not simply an attempt by him to conceal assets.  This was a deliberate and sustained concealment compounded thereafter by a fraudulent presentation advanced on the basis of fabricated evidence.  He misled the court, his former wife, her advisers and his own legal team.  Conduct on that scale has to be reflected in a punitive costs order. 

The husband’s behaviour had included:

  • lying in his sworn Forms E including failing to disclose the sum of $845,065 in an offshore bank account;
  • failing to disclose the offshore account until after the financial dispute resolution appointment; and
  • wasting court time due to the untimely manner of his disclosure.

The husband duly was ordered to pay 70% of the wife’s costs. In determining the figure of 70% the judge said (at para 74) that there is:

… no formulaic or accurate weighing mechanism for determining how the respective misconduct of the parties should be reflected in any order for costs.

The wife had also behaved in an inappropriate manner in relation to the sale of the property at an undervalue. The judge did consider the wife’s conduct in her judgment, with the wife’s actions in part resulting in her receiving a discounted financial award of less than 50% of the overall assets.

Outcome 

In total the wife retained 45.78% of the total assets and the husband retained 54.22%. The difference in the respective shares was a reflection of the misappropriation of the husband’s half share of the £1m which he had lost from the sale of the Russian property.

Conclusions 

US v SR serves as a salutary lesson in how not to conduct litigation. While the marital assets were substantial by most standards, the level of costs incurred by the parties in these lengthy and acrimonious proceedings was disproportionate to the value of the assets in dispute.  Of particular interest from a legal perspective is the distinction to be drawn between ‘financial conduct’ and ‘litigation conduct’, the wife and the husband in this case providing classic examples of both, but with the husband’s litigation conduct leading to him bearing the brunt of substantial legal costs.

 

Cases

M v M (Financial provision: party incurring excessive costs) [1995] 3 FCR 321

 NG v SG (appeal: non-disclosure) [2011] EWHC 3270 (Fam)

OS v DS [2004] EWHC 2376 (Fam)

 Prest v Petrodel Resources Ltd & ors [2013] UKSC 34

US v SR [2014] EWHC 175 (Fam); [2014] EWFC 24

Young v Young [2013] EWHC 3637 (Fam)

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