Goddard-Watts – The Second Sequel: Fraud Unravels All, Sometimes

Published: 03/07/2023 08:00

The words ‘Goddard-Watts’ may cause a feeling of déjà vu for financial remedy practitioners. After their separation and divorce (in 2009 and 2010, respectively) the parties settled by consent the financial relief claims arising from their divorce in 2010. Subsequently, it was found on two separate occasions that the husband had, first, misrepresented his assets and, second, after the substantive rehearing in 2016,1 failed to make appropriate disclosure of likely significant capital accumulations in the foreseeable future. Consequently, two ‘final’ financial relief orders were set aside on the basis of his fraudulent non-disclosure in 2015 and 2019, respectively.2

Sir Jonathan Cohen heard the third determination of the wife’s claims in January 2022.3 He adopted what has come to be conventionally described as ‘the Kingdon approach’.4 That is, CohenJ relied upon the determination made by Moylan J (as he then was) in the first rehearing of the wife’s financial relief application in 2016 that she had received an appropriate share of the husband’s company, known as ‘CBA’, in 2010.

The wife appealed this approach arguing that she could not receive a ‘fair’ resolution of her financial claim without an investigation of all financial matters de novo; to do otherwise, she argued, would have meant that the husband had benefitted from the fraud he perpetrated.5

In Kingdon v Kingdon [2010] EWCA Civ 1251, Wilson LJ (as he then was) giving the leading judgment, with which the other members of the Court of Appeal agreed, concluded that the first-instance judge was entitled to proceed to repair the defect by providing an additional lump sum award referable to the husband’s non-disclosed shares, subject to the husband’s ability to pay. The judge had a discretion how best to proceed; in the exercise of that discretion, he was required to seek to deal with the case justly and in a way proportionate to the complexity of the issues and which would save expense and ensure expedition. The husband’s net gain could be precisely quantified and the appropriate percentage to be awarded to the wife able to be readily expressed.

In Sharland v Sharland [2015] UKSC 60, Baroness Hale of Richmond at [43] emphasised that the fact that there had been misrepresentation or non-disclosure justifying the setting aside of an order did not mean that the renewed financial remedy proceedings must necessarily start from scratch. She noted that Kingdon v Kingdon provided a good example of how it had been possible to isolate the issues to which the non-disclosure related and deal only with those. There was ‘enormous flexibility’ to enable the procedure to fit the case.

The original consent order in Goddard-Watts, approved on 1 June 2010 by Deputy District Judge Marco, provided that the wife received £7.6m in money or moneys-worth, of which £1m was to be paid in instalments over 8 years. On the assets then disclosed, which did not include the husband’s later disclosed trust interests, the husband received the equivalent of approximately £9m.

In 2014, the wife discovered that the husband was considered by their trustees to be the principal beneficiary of two trusts. She applied to set aside the consent order. Moor J heard the application in July 2015. He found that the husband had engaged in deliberate and material non-disclosure, set aside the consent order, and gave directions for re-hearing.

The case next came before Moylan J (as he then was) for rehearing in June 2016 with a final judgment handed down in November 2016. The trusts were found to have total assets of £12.67m, including liquid assets of £8.4m. The husband’s current capital resources, excluding the trust assets, totalled £22.8m/£24.2m. The wife’s assets amounted to £4.5 million. Moylan J concluded that at least 65% of the trusts’ assets should be treated as available ‘marital’ resources, and the wife should be awarded 32.5% of the trusts’ assets, by way of lump sums payable on realisation. No discount was necessary to reflect the fact that the husband was retaining illiquid assets (namely his business shares), since this had already been considered in the unequal division of the company’s worth effected in 2010. Consequently, he awarded the wife an additional lump sum of £6.42m.

Moylan J therefore determined the case by isolating the resources which were not disclosed and dealt only with those subject to accelerating the outstanding payment of £1m lump sum previously payable over a period of 8 years. He did not agree with the wife’s submission that the only way of achieving a fair outcome was to give the wife an award based on current values of the assets. Instead, he:

‘must determine what is fair now and [he] must do so by reference to all the circumstances in the case. These include the current resources available to the parties but also the division which was effected in 2010 and the fact that this was procured by non-disclosure … as referred to by the Supreme Court, the court has “enormous flexibility” in deciding how to determine the claim and, in [his] view, it would not be helpful for the flexibility to become subject to sub-principles or overlain with other asserted overarching considerations’ (at [88] and [89])

However, the premise upon which Moylan J proceeded in respect of the 2016 valuation of the husband’s business (CBA) proved to be unsound and the husband’s evidence in relation thereto disingenuous. In January 2018, 25% of the total shares in CBA were sold. The husband received £20.45m and the children’s settlement worth £4.45m. The sale contract provided the purchaser with an option exercisable in or before January 2021 to buy the residue of the shares for £75m, which would result in the husband receiving a further £61.3m and the children’s trust its proportionate share. The husband had an option for 2 years, beginning in January 2021, to buy back the shares at the sale price of £25m.

The wife came to know of the sale and applied to set aside Moylan J’s order. The set aside application came before Holman J who was ‘driven to conclude’ that the husband’s evidence on the ‘crunch issue’ was ‘evasive’ and ‘untrue’. Holman J therefore set aside the 2016 order, finding that if Moylan J had known the true facts he would have withheld the handing down of judgment and adjourned the proceedings while the full and true facts were ascertained; the non-disclosure had deprived the wife ‘of a real prospect of doing better at a full hearing’, per Sharland v Sharland at [35].

On the (second) rehearing, Sir Jonathan Cohen acknowledged that he was adjudicating upon the wife’s claim de novo ‘albeit against the background of the orders made in the past which have provided her with funds’. Like Holman J, he noted that the husband’s disclosure ‘has deprived [the wife] of the opportunity of being able to consider the resolution of her claims with full knowledge of what the asset base was’. However, unlike Holman J, he chose to adopt the Kingdon approach for (he said) the following reasons:

(1) the case before him had been a single-issue case: solely about the value and realisation of H’s shares in CBA. This was inevitable as W received her fair share of the non-disclosed trusts in 2016 and her share of the other assets in 2010;

(2) Moylan J had adopted the Kingdon approach in 2016 and the fact that one further aspect of non-disclosure has come to light did not lead to a conclusion that he should adopt a different course. There was merit in consistency;

(3) H’s disclosure of the value of CBA in 2010 was in the right region;

(4) it followed inevitably that the wife received her share of the company upon separation. Since then, she has made no contribution to the marital partnership (albeit she had made a significant contribution to the children of the family);

(5) if CBA had gone bust, the husband would not have been able to resuscitate a claim against the wife. He took the shares in the company as part of the settlement and whether the company succeeded or failed would have made no difference to the outcome of the case. This illustrated that the sharing of the company took place in 2010 and there was no cause to revisit. The husband was not trading with the wife’s funds and she was not bearing any of the risk; and

(6) it is well established law that changes in the value of an asset after an order effecting sharing has been made would not justify reopening the capital claims. Each party bears the consequences of the change in the value of their portfolios.

Sir Jonathan Cohen therefore concluded that it would not in general terms be appropriate or fair for the wife to share in the current renaissance of the business after its near recent collapse. However, he did conclude that he could properly consider that the entire burden of the children’s care had fallen on the wife from 2010 and, as it could not have been in the contemplation of either party that this would be the case, he could take that factor into account in his approach to needs.

Sir Jonathan Cohen thereafter stated that he did not accept that this was an all (complete rehearing) or nothing (sharing having already taken place) case. Having assessed the wife’s income needs as £200,000 per annum, the shortfall required to supplement her capital fund from which to draw the income was £1.1m. He therefore made this award which he considered ‘produces a fair outcome in all the circumstances of the case’.

At the root of the appeal before the Court of Appeal was the submission that Sir Jonathan Cohen failed to accord due weight to the husband’s fraud when considering the correct approach to determining the wife’s restored financial relief application. Consequently, in that he wrongly isolated the wife’s interest in CBA by reference to the tainted orders made in 2010 and 2016, the husband benefitted from the fraud he had perpetrated, since the wife was precluded from having her claim fully and fairly determined in 2022 (or previously) based on the actual contemporaneous financial landscape, even if subject to consideration of post-separation accrual. It was ‘inconceivable’ that the endorsement of the Kingdon approach in [43] of Sharland was intended to override the principles which had been identified in [32] and [34] of the judgment, namely to protect the victim of fraud and the integrity of the court process and to prevent the party who perpetrated the fraud benefitting from it.

Macur LJ stated at [51] that:

‘care must be taken not to elevate the exact approach which was adopted by the first instance judge in Kingdon, as approved by Wilson LJ in the Court of Appeal, and as condoned by Baroness Hale in Sharland, into principle. That is, Kingdon is authority for the principle that the court retains a wide flexibility to adapt or “enable the procedure to fit the case”; it may be possible to isolate the issues to which the non-disclosure relates and thereafter to rectify the defect without the need to dismantle the whole order; see Kingdon [37]. The approach which the judge had adopted in Kingdon certainly did “fit the case”, for it took into account that it was the husband who sought to benefit from the fraud he had perpetrated in order to set aside the whole order to his own advantage. The procedure and adjudication reflected his “degree of turpitude”. (See [35] and [37]).’ (emphasis added)

However, Macur LJ concluded that it was not appropriate for Sir Jonathan Cohen to have adopted a Kingdon approach in this case. She disagreed with the husband that the ‘taint’ of non-disclosure merely provided a gateway to review an order at either first instance or in the Court of Appeal. At the most basic level, a previous deception once found, ‘infects’ the fraudulent party in terms of the reliability of their evidence. At another level it raises the equitable principle that a party is not to be allowed to benefit from their fraud by manipulation of the court process to the detriment of the victim of fraud.

Macur LJ found that Sir Jonathan Cohen had not conducted his own assessment of fair division independent of Moylan J’s approach. In any hearing heard de novo, it is inevitable that the court will be faced with arguments of post-separation accrual, as was contemplated by Moylan J in [96] of his judgment, and must deal with them to achieve fairness. The wife did not have the opportunity to make any arguments in this regard in relation to the newly disclosed facts. The husband’s fraud should provide the context against which the judge should make the fresh evaluation.

Macur LJ considered the husband’s fraudulent non-disclosure in 2016, particularly when seen in the context of his previous fraudulent non-disclosure, to be so far-reaching that it positively required the judge to consider ‘the entire financial landscape’ completely anew (see Kingdon at [36]). Consequently, she concluded the judge was wrong to determine the wife’s application by segregation of the capital award agreed in 2010 and confirmed in 2016. This was too blunt a division of the wife’s claim. The unfortunate delay in finalising the wife’s application has been caused entirely by the husband’s fraud; the wife was entitled to have her application considered in toto and in real time. She had not been allowed to air her claim in the full knowledge of the disclosable facts. It was, however, made clear that the wife would not necessarily achieve a greater award.

Although the wife succeeded, it remains the case that, as Carr LJ stated in her supporting judgment, whilst there are judicial statements at the highest level to the effect that fraud unravels all (see, e.g. ‘A judgment that is tainted and affected by fraudulent conduct is tainted throughout …’ per Lord Brunswick in Hip Foong Hong v H Neroira & Co [1918] AC 888 at 894, cited with approval recently by Lord Kerr in Takhar v Gracefield Developments Ltd & Ors [2019] UKSC 13 at [45]) this ‘broad mantra’ needs to be treated with caution given that, as the judgments in Kingdon and Sharland themselves demonstrate, fraud does not necessarily unravel all. Although it is imperative that a fraudster must not be able to retain an advantage derived from their fraud, and the courts must be astute in ensuring so, its mere presence does not always unravel all. It cannot do so. There are also statutory exceptions (see Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 710) and circumstances where fraudulent non-disclosure is proved but remains insufficiently material to justify setting aside the order.

Goddard-Watts was a case which, on its facts, demanded the unravelment of all because the extent, materiality and repetition of the non-disclosure was so great that anything else would have failed to do justice. So, the degree of turpitude (see Williams v Lindley [2005] EWCA Civ 103), although not expressly referenced, remains a factor of paramount importance when assessing whether the fraud is capable of isolation and remedy.

Proportionality is essential (or at least should be) to almost all decisions family lawyers have to make, and applications to set aside financial orders are no different: it is the thread which runs through Kingdon and has been endorsed by courts of the highest level. Once the fraud has been proved it is to be judged against the nature, extent and pervasiveness of the fraud and the appropriate and proportionate next steps determined thereafter.

So, the principle is not absolute. But its strength has not been diluted, just clarified. In fact, this case demonstrates just how powerfully the principle is enforced: that 13 years, three final orders, two appeals and (on our count) no fewer than five reported judgments later, justice requires the matter start afresh. Once fully digested, it becomes clear that the judgment in Goddard-Watts goes some way to settle the tension that can exist between finality and fairness, and reaffirms that fraudsters can expect short shrift from judges in England and Wales.

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