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Fraudulent non-disclosure: the latest Chapter

Sarah Foreman, a solicitor at Vardags, analyses the Court of Appeal judgment in Sharland v. Sharland













Sarah Foreman, solicitor, Vardags

The recent Court of Appeal judgment in Sharland v. Sharland [2014] EWCA Civ 95, concerns a controversial non-disclosure case that has divided opinion, not least amongst the Court of Appeal judges themselves. As a result, we have learnt that non-disclosure, even if it is fraudulent in nature, will not lead to a financial provision order being set aside unless the court has been led into making a substantially different order from that which it would have made had there been full and  proper disclosure.

Background
The parties married in 1993 and separated in 2010. They have three children. Sir Hugh Bennett, who heard the wife's application for financial provision between 9 and 13 July 2012, described it as a "big money" case. This hearing was due to continue on 16 July but the parties reached a settlement agreement which provided for the wife to receive approximately £10.35 million comprised of cash and properties and the husband approximately £5.64 million of the same. The largest asset in this case was the husband's shareholding in a company called AppSense, which he founded and of which he owned 63%. Under the terms of the agreement, the husband was to pay the wife a deferred lump sum within 14 days of receipt by him of the cash proceeds of any disposal of his shareholding, after deducting costs of sale and CGT, then £4 million in trust for one of the children, £1,714,286 to the wife absolutely and 30% of the remaining balance to the wife.

The terms of the draft order had been approved by Sir Hugh Bennett by 25 July 2012. However, on 30 August, , the wife's solicitors made an urgent request for the order not to be sealed by the court. The wife then made an application to resume the hearing of her claim for financial provision on the grounds that she had agreed to the proposed order as a result of fraudulent non-disclosure by the husband. At the hearing in July, the value of the husband's shares in AppSense was a contested issue. This depended in part on when and how he would be able to sell them. One of the ways in which this could occur was through an IPO. The husband had said, at the July hearing, that it was most unlikely that there would be an IPO, or any other method of disposing of his shares, in less than three years' time and probably not until five to seven years had passed. However, the wife had discovered, that the husband had, in fact, been holding discussions with investment bankers in early 2012 as part of active preparations for an IPO.

The husband was given permission to file an affidavit explaining his opposition to the wife's application and to argue that, as the order was made but not sealed, Sir Hugh Bennett had no jurisdiction to hear the wife's application. The husband then made a cross application for an order that the wife show cause why the original order should not be sealed.

In December 2012, Sir Hugh Bennett held that until the order had been sealed, he retained jurisdiction. There was no appeal allowed in respect of that part of his judgment. He determined that the wife's evidence supported a prima facie inference that the husband had met investment bankers to discuss an IPO of AppSense before the settlement agreement was reached. Sir Hugh considered that, because an early IPO might have a substantial impact on the value of the husband's shares and when he could realise them, such non-disclosure was material and could have affected the wife's award. He needed evidence from the husband in this regard and so ordered him to produce an affidavit detailing his discussions with the investment bankers. The husband filed this affidavit in January 2013.

In February 2013, the wife formally issued an application for an order for directions to enable her claim for financial relief to be resumed. She wanted an equal division of the net proceeds of sale of the husband's shares in AppSense. At the end of April 2013, Sir Hugh Bennett delivered his judgment in response to this application. He found that the husband's evidence in the July hearing had been dishonest because active planning for an IPO was taking place, and for an IPO in early 2013, not years away. The judge considered that the non-disclosure was not trivial and that the dishonest evidence and suppression of related documents must indicate "some materiality as at July 2012".

Sir Hugh considered Lord Brandon's speech in the leading non-disclosure case of Livesey v. Jenkins [1985] AC 424, specifically the following extract:

"it will only be in cases when the absence of full and frank disclosure has led to the court making, either in contested proceedings or by consent, an order which is substantially different from the order which it would have made if such disclosure had taken place that a case for setting aside can possibly be made good."

Considering himself bound by Lord Brandon's comments, the judge asked whether the order he had made or, rather, approved, was substantially different from the order he would have made had the husband's disclosure been proper. He was of the view that, had he known of the IPO discussions, he would have had to progress the July 2012 hearing as far as he could and then adjourn to wait and see whether an IPO did take place in early 2013 and what the terms and consequences of this would be.

He regarded proceeding with the hearing and attempting to judge the likelihood of an IPO occurring in early 2013 to be "perilous" as it would have run the risk of an order being made upon a false premise. Had he adjourned the proceedings, it would have become clear that no IPO took place, regardless of the apparent intention for this to occur. He then turned to consideration of the agreement which was reached between the parties and noted that the wife (a) had by far the greater share of the liquid assets; (b) contributed far less to the aforementioned child's trust than the husband did; and (c) was entitled to a further lump sum upon the husband's disposal of his shareholding and, more importantly, to 30% of the balance of the net proceeds. Sir Hugh noted that if the husband did not dispose of his shares for several years, then they would become less and less of a matrimonial asset, due to the work that the husband would put in to the company during this period, and yet the wife still stood to get 30%. This was a generous award. Sir Hugh concluded that any order which would have been made had he benefited from proper disclosure would not have been substantially different from that which the parties agreed on in July 2013. As such, the husband's non-disclosure was viewed as not material and the wife's application was dismissed.

The wife appealed this decision and the Court of Appeal's judgment is considered in detail below:

The Court of Appeal's judgment
The wife's appeal was heard by Moore-Bick LJ, Macur LJ and Briggs LJ. The appeal was dismissed. Moore-Bick LJ and Macur LJ were in agreement whilst Briggs LJ dissented.

Moore-Bick LJ
Moore-Bick LJ provided the principal judgment. Patrick Chamberlayne QC acted for the wife and his main argument was that she should not be held to the settlement agreement because the husband had tricked her into agreeing to it. He submitted that Sir Hugh Bennett should have re-opened the hearing and enabled the wife to investigate the position by cross-examination of the husband. Nicholas Francis QC, counsel for the husband, countered that the learned judge had applied the law properly and was entitled to determine that the order he would have made with proper disclosure was not substantially different from that made pursuant to the agreement the parties had reached.

Moore-Bick LJ agreed with Sir Hugh that the "starting point for any discussion of this question" is Lord Brandon's judgment in Livesey v. Jenkins.  In that case, the parties had settled the wife's claim for financial provision but before the consent order was made, the wife became engaged to another man who she then married just weeks later. As a result, the House of Lords granted the husband's application to set aside the consent order. Lord Brandon considered that the wife's engagement undermined the entire basis on which the consent order was agreed. Moore-Bick LJ commented, however, in consideration of Lord Brandon's judgment, that this would not always be the case. As Sir Hugh Bennett noted, Lord Brandon stated that an order obtained without full and frank disclosure should only be set aside if the court has been led into making an order substantially different from that which it would have made if the disclosure was complete. Mr Chamberlayne QC submitted that the court should set aside the order when it considered that proper disclosure might have resulted in a different award, unless the respondent can convince the court that no purpose would be served by this. Moore-Bick LJ, however, dismissed this as being inconsistent with the passage in Lord Brandon's speech.

It did not go unnoticed by Moore-Bick LJ that this case could be distinguished from Livesey v. Jenkins, not just on the facts but because here the husband did not merely fail to disclose information; he "deliberately and dishonestly concealed" it. He did not, however, consider that this made a difference as both parties are under a duty to provide full and frank disclosure and anything that falls short of this is a serious abuse of process, "whether innocent, negligent or deliberate". Failure to disclose does, therefore, have the same effect in relation to any order to which it is relevant, despite not being equally culpable. Moore-Bick LJ's rationale for such a position was that Lord Brandon cannot have failed to consider that non-disclosure will, often, involve the deliberate withholding of information. This is especially the case where parties have legal representation and, as a result, inadvertent non-disclosure should be infrequent. Moore-Bick LJ did not think that Lord Brandon would have intended to confine his position to such rare cases. Put simply, Moore-Bick LJ did not believe "that the husband's dishonesty adds anything of significance to this case".

As one can probably predict from the above analysis, Moore-Bick LJ regarded Sir Hugh Bennett to be correct in asking himself whether the husband's non-disclosure led to an order substantially different from that which he would otherwise have made. Mr Chamberlayne QC submitted that the wife would have "raised her sights" (as per Thorpe LJ in Bokor-Ingram v. Bokor-Ingram [2009] EWCA Civ 412), but this was found not to be a persuasive argument given that the real question was what proportion of the husband's shareholding should the wife receive. Accordingly, Moore-Bick LJ noted, the concept of the wife raising her sights amounts to "little more than saying that the parties might have compromised the claim on terms more favourable to her." They may have done but, equally, they may well have not. Moore-Bick LJ thought that Sir Hugh Bennett could not have determined what position each party would have taken and what the resultant outcome would have been, had the disclosure been proper. What he had to do, and could do was determine whether he would have made a substantially different order had he been in possession of all of the facts. In essence, "the wife was not entitled to resume the hearing simply to have the opportunity of negotiating a better settlement in the light of the additional disclosure".

Moore-Bick LJ countered Mr Chamberlayne QC's claim that the wife was prevented from challenging the husband in cross-examination by the refusal to resume the hearing by stating that the wife should have applied to cross-examine him on his affidavit there and then.

Moore-Bick LJ acknowledged that it may be "unusual for a judge to conclude that despite a deliberate failure by one party to give full and frank disclosure the resulting order should not be set aside", but that "ultimately that must depend on the nature of the non-disclosure and its effect on the outcome of the proceedings". Accordingly, in his view, Sir Hugh Bennett was entitled to believe that the wife did not have sufficient grounds to re-open the hearing and so her appeal should be dismissed.

Briggs LJ
As stated above, Briggs LJ disagreed with the other two justices. His reasoning centered on the fact that the husband's non-disclosure was fraudulent, which he considered to be a "cardinal aspect of this appeal". In his view, Sir Hugh Bennett's decision involved three errors of law or principle namely: (a) it underrated the significance of the fact that the non-disclosure was fraudulent; (b) he wrongly derived a special rule from Lord Brandon's speech in Livesey v. Jenkins; and (c) he overrode the wife's right to a fair hearing of her claim on the basis of the husband's affidavit.

Taking this first point, Briggs LJ considered that the principle that "fraud unravels all" should have been applicable here. He regarded the fraudulent non-disclosure to be relevant not just to materiality but to mean that there was a serious abuse of process which should not be allowed. His Lordship considered that, fraudulent non-disclosure should have been the end of the matter and negated the order.

In respect of his second point, Briggs LJ said that the relevant passage from Lord Brandon's judgment in Livesey v. Jenkins, quoted extensively above, was simply "delivering a warning against the use of trivial non-disclosure for seeking to set aside orders for financial provision" and "proposing a single comparison between triviality and materiality". Briggs LJ continued that Lord Brandon was not concerned with fraud or the unusual situation in this case where "a non-disclosure which was unquestionably material rather than trivial at the time when the order was made is alleged to have passed its shelf-life because of changes in circumstances which had occurred between that date and the determination of the application to have the order set aside". He did acknowledge that the need to consider the interests of economy and finality, as well as the interests of justice, may result in an application of Lord Brandon's materiality threshold as at the time of the hearing, not the making of the order, requiring careful consideration in a case not involving fraud.

Briggs LJ elaborated on his third point by alleging that Sir Hugh decided "on an essentially summary basis" that the circumstances had changed since the date of the order and rendered the non-disclosure no longer material. He conceded that he had "considerable sympathy" with Sir Hugh in doing so as he had four days of trial and then considerable time to form views about an appropriate order. Briggs LJ maintained, however, that someone who has given up her right to a full hearing by being fraudulently induced into a settlement should not lightly be deprived of a hearing.

To conclude, Briggs LJ suggested that, where an order has been made by consent and there is fraudulent non-disclosure, it should be "a fortiori the rule" that "the applicant need only show that the non-disclosure has deprived her of a real (rather than fanciful) prospect of doing better at a full hearing".

Macur LJ
Macur LJ was in agreement with Moore-Bick LJ and, as a result of his lengthy judgment, did not deem it necessary to write a substantive judgment of her own. She felt obliged, however, to respond to some of the points raised by Briggs LJ, and her judgment covers some interesting points.

Macur LJ noted firstly that the husband had apparently perjured himself and that he may be subjected to criminal prosecution, civil contempt proceedings and/or a costs penalty as a result. As such, she considered the abuse of the court process to be penalised and deterrent measures achieved.

Macur LJ concurred with Moore-Bick LJ in respect of the significance of dishonesty and its interplay with materiality, noting that "the audacity and extensive practice of a deceit cannot be determinative of the degree of its materiality to the substance of an order of the Court".

Briggs LJ's label of Sir Hugh Bennett's procedure as "summary" was challenged by Macur LJ because Sir Hugh had invited leading Counsel for the wife to cross examine the husband upon his affidavit, having found the husband to be dishonest. It was unclear why, but this invitation was refused.

Sir Hugh's conclusion as to the materiality of the husband's fraud was expressed by Macur LJ to be unsurprising in light of both the passage of time which had permitted verification of the state of affairs and the fact that the division of the proceeds of sale of the shares was by percentage, rather than by a specified amount. She thought that his findings in this regard were correct.

Finally, Macur LJ expressed concern about Brigg LJ's proposal that an applicant need only show that non-disclosure has deprived him or her of a real prospect of doing better at a full hearing, if the non-disclosure was fraudulent, noting that this is to "erroneously assume relevance to outcome in every case." Her Ladyship considered such an approach "necessarily spawns either 'satellite' litigation in the event of one party denying fraud as opposed to negligence or innocent oversight or otherwise the temptation for disappointed litigants and those who have thought better of their settlement to attempt a second bite at the cherry where no ground of appeal exists".

So, there we have it. In this case, the facts of which are undoubtedly unusual, fraudulent non-disclosure was not enough to set aside a consent order because it did not render the order substantially different from that which would have been made had all the facts been available. As can be seen from the conflicting judgments, the determination of this issue is not straightforward and one can, probably, empathise, at least in part, with both sides. On the one hand, it seems unfair and unjust to enable a fraudulent husband to succeed in his appeal despite having deliberately concealed financial information from his wife because as Mostyn J once said, non-disclosure is a "bane which strikes at the very integrity of the adjudicative process".  On the other hand, courts must follow decisions which are binding upon them and arguably, even if it is fraudulent, non-disclosure is irrelevant if the order made would not have been substantially different had all the information been known. As Macur LJ made clear, altering the present approach may well simply open orders up to more challenges and make our already overloaded court system "grind increasingly slowly".