23 March 2018
Fraud unravels all: Supreme Court in Sharland and Gohil holds that intentional non-disclosure will be material and the presumption is that a final financial order based on fraudulent dishonesty will be set aside.
Mrs Sharland and Mrs Gohil headed to the Supreme Court in June to find out whether their ex-husbands' fraudulent non-disclosure was significant enough to result in the final financial court order in their divorces being revoked. Mr Sharland had a two thirds shareholding in AppSense Ltd, a company which his expert valued at £50m and Mrs Sharland's expert valued at £75m on the basis that there was not a plan for a public sale. The couple reached an agreement in July 2012. Mrs Sharland was to receive just over £10m in cash and properties and a further lump sum of £1.7m and a large percentage of the proceeds of sale of Mr Sharland's shares in AppSense when sold. Mr Sharland was to receive about £5.5m of the marital assets and was to retain the remaining proceeds of sale of the shares. The agreement was subsequently made into a final court order, following a contested trial, even after it was discovered that the husband had intentionally failed to disclose that he had been actively preparing to float his company prior to the agreement, reportedly with a value of $750m – $1bn.
Mrs Sharland applied to overturn the financial order, arguing that she would not have settled on the terms she had agreed, had she known of the IPO. When making the order, the first instance judge ruled that despite Mr Sharland's dishonesty, he would not have made an order different from the agreement, as under its terms, Mrs Sharland received by far the greater share of the liquid assets.
An important distinction between the two cases heard together by the Supreme Court, is that Mrs Gohil's appeal related to a final financial order which was made despite her having concerns prior to reaching the agreement about whether her husband had fully disclosed his assets. Mr Gohil had disclosed that his assets were worth just over £300,000. Mrs Gohil went ahead and compromised her claims in order to achieve finality, settling for £270,000. The financial order recorded as a recital that Mrs Gohil believed that Mr Gohil had not provided full and frank disclosure. Three years later Mr Gohil was convicted of fraud and money laundering to the tune of £25m and sentenced to 10 years' imprisonment. Mrs Gohil then applied to set aside the financial order.
The principal legal consideration for the Supreme Court in both cases was whether an order made in the absence of full and frank disclosure should only be set aside in cases where the court would have made a substantially different order if proper disclosure had in fact taken place.
The Supreme Court has ruled in favour of both wives, overturning the Court of Appeal decisions and has remitted both cases back for re-trials because in each case the husband's disclosure was fraudulently dishonest.
The principle of full and frank disclosure was at stake in these cases. These judgments recognise the importance of the legal maxim that 'fraud unravels all', whilst still preserving the possibility that honest misrepresentation can also result in final financial orders being overturned. However, not all instances of non-disclosure in divorce will result in such orders being set aside. It will depend upon whether the non-disclosure is material to the decision of the court. In cases involving fraud, the victim will nearly always have a right to redress and the burden of proof will be with the perpetrator to show that a reasonable person would not have been influenced by the lies, or that the court would not have made a different order. Conversely, in cases involving inadvertent non-disclosure no such presumption will apply and the burden will be on the party seeking to overturn the order.
Whilst emphasising that in family cases the Court must carry out its statutory obligations to consider whether an agreement is fair, the Supreme Court also recognises that the court now encourages parties to enter into agreements to resolve their financial issues on divorce. Lady Hale said in Sharland that the family court will be influenced by such agreements. However, she emphasised that 'a court cannot make a consent order without valid consent of the parties. If there is a reason which vitiates a party's consent, then there may also be good reason to set aside the order'. One vitiating circumstance is that the agreement was reached on the basis of false information, as in these cases.
There are a number of cases involving non-disclosure waiting in the wings for these judgments. The Supreme Court may have fired the starting gun for those cases and a flood of other re-trials may follow where one party has deliberately withheld or hidden financial and other information in their divorce. This may be especially so for some ex-spouses who may have been pressurised into signing a waiver to disclosure as the Supreme Court in Gohil said that one spouse cannot exonerate another spouse from the duty to give full and honest financial information. Furthermore, the route to setting aside financial orders on divorce may now become easier. Clear guidance (and the recommendation for statutory reform) has been given in Gohil that set aside applications should be made to the first instance court, rather than by way of an appeal.
With both cases being sent back for re-hearing, it will be interesting to see what Mrs Sharland and Mrs Gohil can achieve, second time around, but this time, knowing the full facts.