A Stern Warning from the Supreme Court in England to Spouses who Hide their Assets

On 14 October 2015, the Supreme Court of England (“SC”) gave judgments in two different cases that have been making headlines. The facts and legal arguments were different, but the takeaway was the same – where a party has been wronged by the material non-disclosure of the other in reaching a financial settlement, the court will find a way to have the order overturned, whether by appeal or by an application to the lower court that decided the original action (within the divorce proceedings or by way of fresh action).

Gohil v Gohil

In Gohil v Gohil [2015] UKSC 61, W successfully appealed the Court of Appeal’s (“CA”) decision ([2014] EWCA Civ 274) to overturn Moylan J’s order to set aside.

The Facts

The couple married in 1990, had three children and divorced in 2004.

H was a partner in a law firm but told the court and W he was impecunious. In light of this, the parties agreed, with the court’s approval, that H would pay W a lump sum of GBP 270,000, plus GBP 6,000 per annum spousal maintenance. By 2007, W had fresh evidence and made an application in the divorce proceedings to set aside the order on the ground of H’s fraudulent non-disclosure, which was ultimately successful. Meanwhile, H was convicted of money-laundering offences.

H appealed Moylan J’s order to set aside, citing lack of jurisdiction and relying on Ladd v Marshall [1954] 1 WLR 1489 regarding the admissibility of new evidence on appeal.

Jurisdiction

Before the CA, H contended that MoylanJ had no jurisdiction as a high court judge to set aside the order, saying the application should have been brought by appeal. The CA side-stepped the issue by treating W’s application as a fresh action per de Lasala v de Lasala [1980] AC 546, which says that where a consent order has finally disposed of the issues raised between the parties, the only means to have it set aside on grounds of fraud or mistake is by way of appeal or a fresh action.

The SC lifted that roadblock by saying that in relation to financial orders in divorce proceedings, an application can be made within those proceedings (endorsed by the SC in Sharland v Sharland [2015] UKSC 60).
In so doing, the SC endorsed proposals of the Family Procedure Rule Committee (tasked with reviewing this issue) insofar as they have said that (i) there should be a power for the High Court and the family court to set aside its own orders in relation to financial remedies; (ii) such applications should be made to the level of judge that made the original order; and (iii) where such application can be made, permission to appeal is to be refused.

Applicability of Ladd

The SC also gave a crystal clear ruling that Ladd does not provide the criteria that must be proved in an application to set aside – it merely provides the evidential benchmark for what material can be relied upon. The correct exercise to undertake, is that mandated in Livesey v Jenkins [1985] AC 424 – W must establish material non-disclosure by H.

Moylan J, after a full fact-finding hearing, had properly found that H was guilty of material non-disclosure and the SC reinstated his September 2012 order.

Lord Neuberger added (citing Lord Brandon in Livesey) that if the non-disclosure was accidental or negligent, W would also need to establish that the effect was such that the original order was substantially different from that which would have been made if H had made proper disclosure. However, if the non-disclosure was intentional (fraudulent), the order should be set aside, unless H could satisfy the court that it would have been made in any event (per Lady Hale in Sharland ). As such, the onus of proof shifted from W to H where the non-disclosure was intentional.

Sharland v Sharland

In Sharland v Sharland [2015] UKSC 60, the SC found for W, overturning the CA’s decision and ordering that the draft order should not be perfected.

The Facts

The couple married in 1993, had three children, and separated 2010 with divorce proceedings ongoing.

H developed a highly successful software business (“AppSense”), in which he holds a substantial shareholding. H said that there were no plans to IPO AppSense and it was valued on that basis. W’s valuer put it at GBP 88.3 million and H’s at GBP 60 million. W wanted half of the value of the liquid assets (ie, GBP 8.5 million) plus half the value of H’s shares once sold, but instead she accepted GBP 10 million in liquid assets and 30 percent of the future net proceeds of sale of the shares. Sir Hugh Bennett approved this agreement and a draft consent order was drawn up.

However, before the order was sealed, press reports indicated that AppSense was being actively prepared for IPO, valuing the company between US$750 and 1000 million, making the 20 percent W had forfeited, potentially massively valuable. The hearing was reopened and the judge found that H had lied. Had the judge known the true facts, it was inconceivable that he would not have regarded them as relevant to the exercise of his discretion.

But rather than direct that the case be reheard, the judge made the order in the original terms. Per Livesey, he satisfied himself that the order was not substantially different from that which he would have made had there been full disclosure originally. H had now given evidence (which he accepted) that there was no longer an IPO in contemplation, meaning the original non-disclosure was now not material.

The CA upheld the decision 2:1, relying again on Livesey, even though that decision had not dealt with a case of fraud.

Briggs LJ vigorously dissented on the basis that the fraud was material to the valuation of H’s shareholding and therefore W’s assessment of the offer to settle; and once the judge had decided that H’s fraud had undermined this agreement, that should have been the end of the matter because (i) H’s conduct was fraudulent and “fraud unravels all”; (ii) only truly trivial matters of non-disclosure (per Livesey) will not give rise to a right to set aside; and (iii) W had a right to a fair hearing of her claim.

Setting Aside in Cases of Fraud

Upholding Briggs LJ’s dissent, the SC made clear that if the consent of a party to a consent order has been vitiated, there may be good reason to set it aside. Where setting aside has been ordered in cases concerning innocent non-disclosure of a material fact in divorce proceedings and fraudulent misrepresentation in an ordinary contract case, it would be extraordinary if W was left in a worse position in the case of fraudulent non-disclosure in divorce proceedings. H cannot be allowed to deny the materiality of his deception.

The only exception is where the court is satisfied that, at the time when it made the consent order, the fraud would not have influenced a reasonable person to agree to it, nor, had it known then what it knows now, would the court have made a significantly different order, whether the parties had agreed to it or not. This was a burden for H to discharge, as the perpetrator of the fraud.

Implications for Hong Kong?

Recent Court of Final Appeal judgments demonstrate that Hong Kong is heavily influenced by developments in England, so the courts here may well endorse the findings of these two SC cases (see LKW v DD (2010) 13 HKCFAR 582 and SPH v SA (2014) 17 HKCFAR 364).

Until such time, we rely on the leading authority of the Hong Kong Court of Appeal in Lui Sik Kuen v Lee Suk Ling [1992] 2 HKLR 371 (endorsed by the Family court in WTM v LNCA [2012] HKFLR 159), which says there is no jurisdiction to order a re-hearing before the same judge and the only available options are to appeal or bring a fresh action. If the consent order is set aside, then the aggrieved party can restore the case to the original matrimonial proceedings.

Hong Kong is currently reviewing the Family Procedure Rules with the aim of preparing a set of clear rules similar to those in England. It is hoped that, given these SC cases, rules will be included to address the setting aside of consent orders, as the current procedure is cumbersome and often expensive.

Meanwhile, Sharland has helpfully documented the ability of victims of fraudulent misrepresentation or non-disclosure to set aside orders in matrimonial proceedings, leaving no doubt that in cases of fraud, the interests of justice will almost invariably require some form of redress.

While the English press has glamorised these judgments as paving the way for wronged spouses to reopen their financial settlements, we are not convinced there has been a carte blanche opening of the flood gates. Indeed, the availability of the remedy to set aside always existed, what was up for debate was the procedural route by which such remedy could be achieved – what helpfully does now exist in England, is the possibility of bringing an application within existing matrimonial proceedings.

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Associate, Withers

Regional Professional Support Lawyer, Withers