Often our clients report to us that, following separation, their ex-partner or spouse has spent some, or all, of joint funds, before property settlement has been finalised, or that the other party has disposed of an asset that existed before separation and has used the proceeds for his/her sole benefit.
Often the funds are spent on paying solicitor’s fees. In other instances, they can be used to set up a new home (after moving out from the family home), to pay for children’s school fees or to go on a holiday, or pay for a cosmetic procedure. The examples are limitless.
How will the Court deal with those expended funds or assets and will the “innocent” party be “compensated” through property settlement?
It would of course be the preference of the innocent party that such dissipated assets be notionally added back to the pool, to be allocated to the other party at property settlement, thus reducing the overall amount of other matrimonial assets the other party will receive at settlement. In the past, it was not unusual for the court, in appropriate circumstances, to treat such dissipated assets as “add-backs”.
However, in recent cases, the court has shown much more caution about notionally adding back property which is not in existence at the time of trial, because, strictly speaking, the parties have no existing interest in such property and, for this reason, it cannot be a subject of a court order for property settlement. In many instances, such property is now simply disregarded by the Court, especially if the “guilty” party can account for the expended funds and show that they have been used for reasonable, but not necessarily family-related, expenses. It has been stated that the court does not expect the parties to ‘go into a state of suspended economic animation’ after separation pending the resolution of their financial arrangements.
If the innocent party can prove that the guilty party’s conduct amounted to “waste”, the Court may take this property into account and make an adjustment, in percentage terms, to the entitlements of the parties to the assets to be allocated at property settlement in favour of the innocent party. It will not, however, be by way of a direct dollar adjustment equivalent to the amount of the alleged dissipation of the pool, except in situations where the funds or assets have been dissipated as a result of a sham transaction or where it can be established that the property in question is held on trust by another for the disposing party.
However, the court is still prepared to deal with joint funds spent on legal fees as add-backs, but only if it is just and equitable to do so in the particular circumstances of the case. The reason for such an approach is that the general rule under the Family Law Act is that each party must bear their own costs, so not adding back paid legal costs offends this rule. Ultimately, the assessment of the circumstances is a matter of the court’s discretion.
In light of the court’s approach, some parties may now feel encouraged to dissipate assets prior to resolving their property settlement because, if such assets are taken into account at all, it will be by way of a percentage adjustment which is unlikely to match the dollar amount they remove from the pool.
To prevent such behaviour, it may be advisable for the other party to seek injunctions at the early stages of the court proceedings, if they can show that such dissipation is imminent or possible, or seek interim property orders for access to joint funds, with such distribution of funds to be taken into account as part of property settlement at the final hearing.
We encourage clients to seek legal advice as early as possible following their separation, or even when they start contemplating it. This will enable clients to take informed steps to preserve their matrimonial assets intact until they can be dealt with in a formal manner at property settlement and to minimise the risk of their premature informal distribution or dissipation.