22 October 2015

Fraud unravels all

The recent Supreme Court judgement leaves nowhere to hide for spouses who fail to disclose their assets, says Ed Floyd of Penningtons Manches.

By Ed Floyd

Dishonesty in divorce hearings will not be tolerated by the Supreme Court Bacho

Family lawyers across England and Wales have hailed the importance of the Supreme Court’s decision in the cases of Sharland and Gohil. James Stewart of Penningtons Manches described the result in Sharland as 'a ground-breaking judgment which looks set to secure London’s reputation as the divorce capital of the world for its even-handedness.' In allowing both appeals, the court sent a clear message that it will not tolerate fraudulent behaviour by those seeking to hide assets from their spouses on divorce.  

Financial proceedings

The case involved Mr and Mrs Sharland, who separated in 2010 after a 17 year marriage in which they had three children. The most significant asset was Mr Sharland’s shares in his software company. In the financial proceedings at first instance, valuations were obtained on the basis that there were no plans for the company to be floated on the stock market. At the final hearing, Mr Sharland gave evidence confirming that there were no plans to offer the company for sale ‘on the cards today’. Before the conclusion of the hearing, Mrs Sharland agreed to settle her claims on the basis that she would receive 30 per cent of the net proceeds of sale of the shares, whenever that took place. However, before the consent order incorporating that agreement could be sealed, Mrs Sharland discovered that the company was in fact actively being prepared for public offering and at a far higher value than the valuations that were before the court.   

Mrs Sharland immediately asked the court not to approve the draft consent order and to resume the final hearing. At the hearing of her application, the judge found that Mr Sharland had indeed been deliberately dishonest about the public offering and that, had he been upfront, the hearing would have been adjourned to see if the flotation went ahead. In fact, by the time of the hearing, the IPO was no longer a prospect. The court held (in a decision that was upheld by the Court of Appeal) that, even if Mr Sharland had been truthful in his evidence, it would not have had a material effect on the order made.

The decision of the Supreme Court 

The court (with Lady Hale giving the sole judgment) allowed Mrs Sharland’s appeal and returned the case to the High Court for further directions. The most important aspect of the judgment is the court's endorsement of the principle that 'fraud unravels all'. Once fraud has been established, the starting point will be that a consent order procured by that fraud should be set aside. The burden now falls on the perpetrator of the fraud to show that knowledge of the fraud would not have influenced a reasonable person to agree to the proposed consent order. Nor, had it known then what it knows now, would the court have made a significantly different order, whether or not the parties had agreed to it. This is a change of emphasis, as the onus previously fell on the victim of the fraud to show that there would have been a substantially different outcome had the truth been known.   

Timing is key

The court also provided helpful clarification as to the point in time when the court looks at whether non-disclosure or fraud is sufficient to undermine an order. Had the IPO proceeded as intended at the date of the hearing (and Mr Sharland had misled the court), there is no question that the court would have found it material and set aside the order. It was because the lower court looked at the circumstances at the time of Mrs Sharland’s application, by which time the IPO was no longer in prospect, that it found that it was not material to the outcome. The Supreme Court clarified that the court should look at whether the fraud or non-disclosure would have affected the outcome at the date of the order itself. Again, this change of emphasis redresses the balance in favour of victims of fraudulent behaviour or misleading disclosure.

Impact of the decision

The decisions in Gohil and Sharland have generally been welcomed by practitioners as 'common sense' results and, in many ways, a victory for often vulnerable wives. It will profoundly affect the advice that family practitioners will give those who believe that they have been victims of misrepresentation or non-disclosure. Clients who previously faced the uphill struggle of showing that a significantly different result would have been ordered will no longer be on the back foot.  

Email your news and story ideas to: news@globallegalpost.com

Also read...

Global firms from DLA Piper to Dentons see big jump in pro bono partners, report finds

Cuts to legal aid partly behind increase in number of dedicated pro bono lawyers