Financial Misconduct and Add Back in Financial Remedy Proceedings

In a recent article, my colleague Lindsay Davies considered the recent case of WK v HN and the risks of running a conduct argument in financial remedy proceedings. Following separation, individuals can often find themselves in a situation where their former partner has taken steps to spend significant sums from joint funds, diminishing the assets to be divided and plunging both parties into a far more difficult future. Understandably, when faced with these circumstances, the party who has suffered the financial loss expects the court to intervene to either prevent the dissipation of assets or financially ‘punish’ the other party when deciding the overall division of assets.

Financial Misconduct

A party’s conduct is one of the many factors the court must consider under Section 25 of the Matrimonial Causes Act 1973. For conduct to be taken into account, it must amount to conduct such that “it would in the opinion of the court be inequitable to ignore it”. This presents a difficult threshold for many litigants and we are reliant on case law to better understand how the court applies this guidance.

In the case of financial misconduct, i.e. the dissipation of matrimonial assets, the judicial principles from Martin v Martin, Norris v Norris and Vaughan v Vaughan have established that it is necessary for the a party’s conduct to not only serve to dissipate the matrimonial assets but there must be a wanton and reckless element to their actions. The wanton element is often difficult to demonstrate and is dependent on the character of the individual dissipating the asset. The recklessness of this wanton dissipation must be clear and obvious, making the application of the principle rare.

Anyone new to litigation may consider it inevitable that an individual who spent significant sums on drugs and prostitution would likely be subject to some kind of financial consequence on the division of the matrimonial assets, however the court held in MAP v MFP that where the husband’s behaviour was well known, long established and his actions were not designed to dissipate the matrimonial assets, then his behaviour would not amount to deliberate or wanton dissipation.

In WK v HN the wife sought to argue that her husband has wantonly and recklessly dissipated matrimonial assets with the goal of depriving her of them. The husband had made a number of business decisions with respect to a jointly held pharmacy business. She sought that the lost value was ‘added-back’ into the matrimonial pot. The court, relying on many of the authorities above, concluded that the wife had not sufficiently pleaded her case to establish that the husband had behaved fraudulently or sought to deliberate conceal his action. The wife’s position was significantly undermined by the fact that the parties had the benefit of expert valuation evidence for the business which made her pursuit of the conduct argument unreasonable at the point of the hearing. The court was clear that the husband’s unsuccessful decisions and reliance on third parties to his detriment did not amount to misconduct.

Add back

In the event a party can demonstrate that their former partner’s dissipation of assets was deliberate and wanton, the court will weigh this factor against the other Section 25 factors when contemplating a substantive award. As judge’s seek to divide assets, they will take a view of the picture as a whole and assign weight to each factor to produce a fair outcome.

As part of this process, in the event the court deems a party’s conduct sufficiently serious, it will seek to ‘add-back’ the dissipated sums where possible. What this means in practice is that the dissipated amounts are effectively deemed to still be held by the party who dissipated them and they will be ascribed to them on division.

The court is not, however, bound to add back all sums and in Vaughan the Court of Appeal made clear that re-attribution must be conducted very cautiously as the process does re-create the funds which are now gone. It is, as the court observed more of a “process of penalisation”. Therefore, where needs must be met, one cannot simply assume that the funds ‘added-back’ are available to a party, limiting the scope of its use.

Conclusions

It is not at all uncommon for solicitors to be asked to advise on the prospects of success for an argument of this kind and given the thresholds to meet, it is usually the case that a client is advised against running the arguments due to the possibility of increasing the costs and raising temperatures with very little prospect of success. However, every conduct argument must be viewed on its individual merits.

Regularly, following separation, a party finds themselves cutting their cloth, either to be able to fund two separate households, to meet outgoings when reduced to a single outcome or to meet their legal fees. Where their former partner is continuing to live a normal life, sometimes spending lavishly outside of their means and diminishing the matrimonial pot, resentment unavoidably builds and people turn to the courts to balance this behaviour out. However, in reality, the court deliberately sets a high or exceptional level for these arguments and even if this threshold is met, the court will still consider the picture as a whole.

Importantly, where an entirely untenable case on conduct is run with the goal of attributing moral blame with no relevance to the outcome of the proceedings, it is within the court’s powers to make a costs order, departing from the general principle of no order as to costs within proceedings (HO v TL).

If you need expert guidance tailored to your situation, please contact Duncan Lomax: duncan.lomax@fsp-law.com or contact our Family & Matrimonial Team.