Some couples divorce amicably. They realise that the best solution is to end their marriage, and they work to come to a fair resolution as soon as possible so they can move on with their lives. For other couples, divorcing is far more complicated. In these cases, greed, anger, and vindictiveness are main purposes, and the process turns into a war, with battles fought over every penny.
Each spouse must disclose all assets – including income, expenses and debts. Unfortunately, it seems that there are indeed spouses who use just about every dirty trick in the book to keep from having to divide assets with their counterparts. One of the most common ways is to “dissipate,” or waste, marital assets. When a spouse tries to dissipate assets, it means he/she’s intentionally squandering marital property to prevent the other spouse from getting his/her fair share of it in the divorce financial settlement. On another level, it can translate in the more calculated act of “hiding” assets – sometimes simply by transferring an asset to another person or placing funds in foreign accounts or in the names of third parties and proxies. This is particularly common in respect of intangible assets as gold jewellery, artwork and other valuables being purchased to “deplete” or “hide” large values from the matrimonial pot. In such situations, it might become rather hard to prove the position as often, there is no evidence available.
Many spouses are surprised to learn just how commonplace it is for the counterpart to hide assets before or during divorce proceedings. Some of the most common tricks may include hiding, understating or undervaluing specific marital property; overstating debts; reporting lower than actual income; reporting higher than actual expenses. It’s a strategy that’s foolish, deceitful, unacceptable and – most of all – totally illegal. Still, similar situations and despicable behaviours keep happening time and time again.
Unusual spending patterns and investment vehicles
We have already highlighted the issue related to blockchain and cryptocurrency assets with its disclosure and valuation in our previous article “Cryptocurrencies and Family Law”, as well as the meaning of artistic assets valuation in the article “The Importance of Artworks Valuation in Tax and Estate Planning or in Divorce Proceedings”. There are situations where extravagant spending is directed to wine futures, which is a method of purchasing wines early while the wine (a vintage) is still in the barrel. This offers the customer the opportunity to invest before the wine is bottled. Payment is made at an early stage, a year or 18 months prior to the official release of a vintage, hence giving a way to hide assets and then benefit of the upside only after a divorce financial settlement has been reached. Other situations have seen the creation of companies in order to hide assets.
A person is deemed to be dissipating assets by wasting the asset. For example, if your spouse is gambling or funding an addiction, the funds can decrease rather fast. It can also be hard to make the distinction between expenditure due to lifestyle and expenditure to thwart a financial claim. It is significant when a divorce commences to pay attention to any suspicious behaviour. Unusual spending such as frequent travels or sudden purchases of luxury items are good indicators.
Application for a Court Order
If you suspect that your spouse is transferring assets or funds out of his/her sole name to thwart your claim, you must act fast. You can apply to the Court to freeze your spouse’s assets. The extent of the Court Order depends on the severity of the conduct and the evidence that has been gathered to support your application. When dealing with properties and transfers to third parties, the Court also has the power at an interim stage to order a transfer to be set aside provided that you can prove that the transfer has been completed with the intention of defeating a financial settlement arising from a marriage. However, the Court cannot order a transaction to be set aside if someone bought the asset from your spouse in good faith without knowing their motive. A further difficulty is proving that the transfer was intended to frustrate your financial claim. This is especially difficult if the transfer took place years before the breakdown of the marriage.
Given the serious nature of the Order – i.e. locking an individual out of their funds or setting aside a property transfer – the Courts require a lot of evidence. Simply having a suspicion is not enough. You cannot use a freezing injunction as a means of obtaining disclosure to support your suspicions and your application must be supported with evidence.
In some instances, the Courts will look at the overall value of the matrimonial assets and will consider whether, despite the wrongdoing, there is enough in the matrimonial pot to provide a fair outcome without the necessity of any interim application. In cases where assets have been hidden or dissipated, a judge can take a strong approach and provide a larger proportion of the matrimonial pot to the injured spouse.
The role of experts
A forensic accountant is an expert at evaluating suspected fraud schemes, and, by using a combination of accounting knowledge and investigative skills, can perform a detailed examination of the financial records to determine if any misconduct has occurred. A forensic accountant will present his/her findings to the client, attorney, and if necessary, the Court, through a written report or testimony.
There are some factors to keep in mind when making a claim of dissipation of assets. First, the amount in dispute needs to be substantial enough to make a difference to the Court when dividing the marital assets. Second, the spending needs to be frivolous and unusual, meaning it has no serious purpose and it started occurring once a separation was obvious among the parties. Therefore, an expensive hobby or poor spending habits that existed throughout the marriage would probably not meet the test for a fraudulent dissipation. Dissipation of assets can be difficult to prove, so it’s important to weigh the potential benefit against the cost of a forensic investigation.
The effects of uncovering dissipated assets, however, can be significant. In such cases, the Court would most likely consider the foregone assets as if they still existed when dividing the marital property. Further, such evidence of misconduct, disparaging the reputation and credibility of the opposing spouse, could prove to be a valuable tool in negotiating a settlement, either in or out of court.
Our team at Hugill & Ip has extensive experience in dealing with Family Law issues – so kindly get in touch with us to find out how we can help.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.