Full and Frank Disclosure in Divorce Proceedings

Full and Frank Disclosure in Divorce Proceedings

Full and Frank Disclosure in Divorce Proceedings 1080 810 Raphael Wong
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In a divorce, assets deemed as matrimonial assets are divided between spouses. There is a general duty for parties to provide full and frank disclosure of information within his/her knowledge, which is particularly relevant when determining the matrimonial assets and their division.

What does it imply?

Before the Court can proceed to divide the parties’ assets, the first step is to ascertain the net financial resources of each party. The Court will consider the income, earning capacity, property and other financial resources which each party has (or is likely to have) in the foreseeable future.

The duty of full and frank disclosure is necessary to ensure that the Court has sufficient information about their assets. Parties are required to complete a comprehensive financial disclosure form known as “Form E” at least 28 days before the first appointment hearing. This includes disclosure of assets located outside of Hong Kong, together with supporting documents such as bank statements, credit card statements, tax statements, mortgage/loan documents and any other relevant financial documents. Subsequently, if necessary, either party may request additional and more precise details from the other party. This will be done by seeking further disclosure and clarifications on the other party’s disclosure in the form of questionnaires.

In L v L (HCMC 1/2003), the Judge stated in paragraph 198 of the Judgement that “It is high time that litigants in matrimonial proceedings and those advising them should appreciate that affirmation of means and answer to questionnaire are not a game of hide and seek. Too much legal costs and judicial time had been spent on such wasteful exercise. As stressed by Mr Mostyn, the onus falls squarely and fairly on a party to give full and frank disclosure of his or her own means. To adopt a wait and see approach with a hope that the opponent might fail to ask the right question is a tactic to be deplored. That by itself is a breach of the positive duty to give disclosure. As Coleridge J put it in J v V [2004] 1 FLR 1042, ‘all cards must be put on the table face up at the earliest stage if huge costs bills are to be avoided.”

Duty to disclose is an ongoing obligation.  The parties should inform the Court and the other party of any material change in circumstances as soon as possible.

The goal of achieving a fair outcome

The overall aim is to find a solution that is fair to both spouses considering their financial needs in the most cost efficient manner, in particular if children are involved. Obviously, there’s not a one-size-fits-all solution which can be used to guarantee a fair outcome.

When lawyers and their clients look at proposed settlements and consider whether they are fair, or at least realistic, circumstances are often unique and there are many factors that come into play. To start with, these elements ought to consider the needs of the parties and the wellbeing of the children of the family, and also the principle of sharing the financial fruits of a marriage (including the prospect of rewarding a spouse who may have brought specific assets and/or capabilities to the marriage which have created a substantial financial benefit to the couple).

The importance of full and frank disclosure is that, without it, the Courts and the lawyers are unable to carry out any real assessment of fairness. If the financial picture presented to the Court is not accurate, then any settlement concluded on the basis of that financial situation cannot be fair. However, in reality these principles often fall on deaf ears.

Consequences of failing to provide frank and full disclosure

There are considerable effects if it is later found that a disclosure is false, including that any order and/or settlement made may be set aside, and proceedings for contempt of Court can be brought against that spouse. This can even result in imprisonment or a fine. A spouse can be ordered to pay some of the legal costs of the other spouse.

As mentioned, at the ancillary stage, parties are required to file Form Es. This relates to not only assets acquired during the course of marriage, but also includes assets acquired prior to the marriage. Parties are required to provide supporting documentary proof to substantiate the assets and liabilities declared in the proceedings. In the absence of full and frank disclosure, the Court is entitled to draw inferences against the party who failed to make the disclosure.

Most common circumstances

As often seen in Court cases, one spouse (or in some cases both) may refuse to provide full and frank disclosure of his/her assets with an aim to avoid these assets being attributed to the matrimonial pot liable for division with the other spouse. Some common examples are:

  • Under-declaring income and assets
  • Claiming liabilities or debt owed to third parties
  • Failure to disclose other sources of income, other than employment
  • Reporting higher than actual living expenses
  • Transfers to overseas bank accounts or Trusts
  • Transfer of gifts to other family members and/or close friends
  • Transfer of shares in companies in order to preclude the other spouse from laying a rightful claim

As we have previously discussed in our article “Consequences Related to Hiding or Dissipating Assets in Matrimonial Proceedings“, the role of forensic accountants and experts can be of great help as they are able to perform a detailed examination of the financial records to determine if any misconduct has occurred. Forensic accountants will present their conclusions to the client and his/her solicitors, and if necessary, the Court, through a written report or testimony.

Relevant cases

The wife’s position was that the husband possessed an extraordinary amount of assets which he was hiding from the Court and his trustee in bankruptcy. The husband claimed that he was in a financial meltdown and bankrupt, hence he argued that, as he had no assets, the wife’s claims should have been dismissed. A colossal battle followed thereafter to attempt to secure full and frank disclosure from the husband. The wife’s legal advisers drafted detailed and lengthy questionnaires with the help of forensic accountants. The Court made orders for the husband to answer these questionnaires and produce all relevant documents. He had inadequate answers, and often no answer at all.

In the final judgment the husband was found not to have given full and frank disclosure and that he is “hiding the truth”.  He was ordered to pay a lumpsum to the wife of GB£20 million (half of the matrimonial pot) within 28 days and his application to vary the maintenance pending suit (MPS) order was dismissed. The order to pay the wife the lumpsum was made on the basis that there would be no further backdating or continuation of that order.

Although these cases were heard together, separate judgments were given dealing with Mrs Sharland’s and Mrs Gohil’s leave to appeal to the Court on the grounds that the financial settlements which they had reached had been impacted by their husband’s fraudulent non-disclosure.

In Gohil case, the parties had divorced in 2002 and reached a settlement in 2004, even though the wife believed that the husband had significant undisclosed assets. Following the divorce and during a criminal investigation involving the husband, it became clear that during the divorce proceedings he had not disclosed a large part of his assets. The wife appealed the decision to the Supreme Court. In a joint judgment with the Sharland case, the Court held that the husband was guilty of fraudulent non-disclosure and that the wife was entitled to have her case reheard.

As part of these combined judgments, the Court departed from previous case law and made it easier to challenge an order where there had been fraudulent non-disclosure. The burden indeed lies on the dishonest party to show that their deceitful conduct and non-disclosure makes no difference to the outcome of proceedings, hence it becomes much easier to reopen proceedings when one party has been dishonest.

At first instance, the judges recognised that there should be an equal division of the matrimonial pot as the marriage was considerably long and lasted for more than 47 years. The wealth accumulated over the duration of the marriage was from a contribution of both parties. The hearing, at first instance, lasted for 13 days as both parties had failed to perform their fundamental obligation to make full and frank disclosure of their assets. The judges agreed with the submission by the wife’s counsel, that the extent of the adverse inferences to be applied depended on the nature of non-disclosure.

Consequently, the Court drew adverse inference based on the particulars of the case. The judge at first instance found that the wife failed to disclose a sum amounting to HK$5.5 million from share purchases and monies withdrawn from her account. It was found that the husband had undisclosed business assets which amounted to HK$25 million.

LKF v LCYY was a Court of Appeal case concerning a cross-appeal. The wife appealed in relation to the value of business to be transferred to her husband. The husband also cross-appealed due to undisclosed assets and the division of assets.

Both parties owned a company holding commercial property, Benix Limited (“Benix”), in equal shares. Upon application of the equal division principle, the judge ordered the wife to transfer her entire shareholding in Benix to the husband. At appeal, the judge found that the judge at first instance erred mathematically in the valuation of Benix and reduced the payment from HK$17 million to HK$14 million in favour of the wife.

The husband’s cross appeal had a wider scope. At first instance, the judge found that the husband had undisclosed business assets of HK$25 million and made findings against the husband on the basis that he failed to make full and frank disclosure. At appeal, the judge noted that “[a]n equal division of assets does not entail a division of equal amount in the real value of real properties. It is entirely within the discretion of the judge how best to achieve an equal division of assets. On the established principles, there is no ground to interfere with this exercise of discretion.” The judge dismissed the husband’s cross appeal on the grounds that his argument had no merit.

  • TCP v KLS [2020] HKCU 675 (paras 44-52)

The Court noted the principles in NG v SG (Non-Disclosure) [2012] 1 FLR 1211 regarding non-disclosure but commented that there has been some recent development in the English Court in Moher v Moher [2019] EWCA Civ 1482.

At para 16 of NG v SG (Non-Disclosure), Mostyn J summarized the principles as follows:

  1. The Court is duty bound to consider by the process of drawing adverse inferences whether funds have been hidden.
  2. But such inferences must be properly drawn and reasonable. It would be wrong to draw inferences that a party has assets which, on an assessment of the evidence, the Court is satisfied he has not got.
  3. If the Court concludes that funds have been hidden then it should attempt a realistic and reasonable quantification of those funds, even in the broadest terms.
  4. In making its judgment as to quantification the Court will first look to direct evidence, such as documentation and observations made by the other party.
  5. The Court will then look to the scale of business activities and at lifestyle.
  6. Vague evidence of reputation or the opinions or beliefs of third parties is inadmissible in the exercise.
  7. The Al-Khatib v Masry technique, of concluding that the non-discloser must have assets of at least twice what the Claimant is seeking, should not be used as the sole metric of quantification.
  8. The Court must be astute to ensure that a non-discloser should not be able to procure a result from his non-disclosure better than that which would be ordered if the truth were told. If the result is an order that is unfair to the non-discloser, it is better that than the Court making an order which is unfair to the Claimant.

In Moher v Moher, the Court held that in the event of non-disclosure of a party’s financial resources, the Court was not obliged to give a precise figure or bracket for the undisclosed resources before making an order. Instead, it should

  1. seek to determine the extent of the undisclosed resources;
  2. draw such adverse inferences as were justified; and
  3. where appropriate, infer that resources were sufficient that the proposed award represented a fair outcome.

This has altered the position of (iii) and (vii) in NG v SG (Non-Disclosure).

The husband and wife, upon divorce, consented that no financial payment or support would be provided by the husband, and the wife would be solely responsible for paying off the mortgage loan of the matrimonial home. The wife agreed to these terms because the husband had represented to her that he was impecunious, jobless, and with no place to live. The wife later found out from the Form E that these representations were inaccurate and therefore applied to set aside the consent order for breaching the duty to make full and frank disclosure.

The Court noted that the duty of full and frank disclosure is not limited to the submissions in Form E but extended to exchange of information between the parties leading to consent orders without further inquiry by the Court. The Court restated the principle that where the non-disclosure is inadvertent, there is no presumption that it is material. It is for the party claiming to prove the materiality. Yet, if the non-disclosure is intentional, it is deemed to be material and the burden is shifted to the other party to prove the contrary. In the end, the Court set aside the consent order because of the non-disclosure, with costs of the set aside application to be paid by the husband to the wife.  The wife’s application of ancillary relief was to be heard de novo (from the beginning) at the Family Court.

Key takeaways

Full and frank disclosure not only benefits the financially-weaker spouse, but both. It is indeed in everyone’s interest that a financial settlement is final and undeniable. Spouses attempting to hide or shield assets do so at their peril and will likely face serious consequences for being untruthful in their disclosure. In most circumstances, the Court will consider the omitted assets as if they still existed when splitting the matrimonial pot. Moreover, such evidence of misconduct, will disparage the reputation/credibility of the misleading spouse and could prove to be a significant tool in agreeing 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.

Raphael Wong

Raphael specializes in Family and Private Client practice, including matrimonial, Probate & Trusts – both contentious and non-contentious.

All articles by : Raphael Wong
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