Divorce, hidden assets and suspected fraud – what can you do?
June 19, 2008 128 comments
The examination of a solicitor’s file may be required if a fraud has come to light.
When financial cases are bitterly contested, there can be allegations of non disclosure and even fraud against spouses who disclose incomes and assets that are less than expected.
If the husband has supervised the family finances, his wife may know little about the couple’s overall financial standing. So if he is creative and anticipates a divorce, he may try and divest himself of assets in order to produce a relatively modest balance sheet. In such a situation, what can a wife do?
Sometimes the wife’s expectations are unrealistic. She can’t accept what is there in black and white, because her emotions have clouded her judgment. More often than not her suspicions are well-placed, but proving them is another matter. What if the evidence rests in another solicitor’s drawer? Is it possible to obtain the crucial file?
Take the following as an example; in my experience, this isn’t an uncommon scenario. A husband wishes to increase an asset portfolio which, on divorce, will be split. He doesn’t want to pass up a terrific deal; equally, he is determined that his soon-to-be-ex-wife should not benefit. He decides to have a nominee acquire the asset for him. This nominated representative may be a relative, a company or even an offshore trust. He gives explicit instructions to his commercial solicitors as to how the transaction is to proceed, revealing that he is ultimately set to benefit. The nominee also instructs solicitors, and the asset is duly acquired. In such a case, all parties concerned are fully aware that the husband is the overall beneficiary. However, his actions will minimise his wife’s claims against him.
This is fraud. If it ever came to light, the couple’s marital settlement could be set aside and the husband could be prosecuted for perjury. There is an ongoing duty of full and frank disclosure in financial cases in family law until a court order is made. Such a transaction must therefore be disclosed, with the court and the man’s wife made aware of the position. In our hypothetical case, it isn’t, the wife guesses what is going on but she can’t be sure. She tells her solicitors that her husband’s commercial solicitors are Firm X, and that the third party is the best friend of her husband, and his solicitors are Firm Y.
Can the court order disclosure of the relevant files held by Firms X and Y on behalf of the husband and his best friend? The answer is that on the wife’s application, the court can “join” third parties such as the best friend, into the proceedings but this is very risky as nothing may come of it and she may end up paying his legal bill. The court having joined the best friend may also order disclosure of parts – but not all – of the relevant files of Firm X and Firm Y.
The problem faced by the suspicious wife is the rule of legal professional privilege which is regarded as sacrosanct. One form of this rule, known as legal advice privilege, applies to all communications between client and solicitor for the purposes of obtaining or giving legal advice. It exists for the client’s benefit. The courts preserve the right of a client to take legal advice free from outside scrutiny. Because of this, all instructions and advice remain strictly confidential.
In a leading family law case, heard in 2006, C v C (2008) 1FLR 115, Mr. Justice Munby stated that “privilege is in principle, absolute” It is founded upon “vitally important public policy”. This means that someone giving instructions to a solicitor and taking advice can be assured that a confidence will remain a closely guarded secret. This is as it should be: we solicitors are guardians of many secrets.
There is one exception when privilege does not apply: in a case of fraud such as the example I have outlined above. In that example, the examination of a solicitor’s file would be ordered if the fraud had come to light. According to Mr. Justice Munby, who re-states century-old law, such an examination should be exercised “very sparingly”.
In the case of C v C, the wife’s suspicions were strongly aroused but not proved. She believed that a Liechtenstein trust, of a type known as an Anstalt, was selling a property behind her back. She also believed that the Anstalt was in effect, her husband. She asked the court to order an inspection of the Anstalt’s solicitor’s conveyancing file. The solicitors concerned refused, claiming that legal advice privilege applied.
The court held that the wife’s case, which was founded upon her suspicions and lacked solid grounds, was not strong enough to merit the waiving of privilege. She remained unable to access the parts of the file that were covered by legal advice privilege.
This may seem unfair and circuitous. How could the wife prove a fraud without access to the file? But…how could she gain access to the file without first proving a fraud?
Making an allegation of fraud is a serious matter; an incorrect accusation could have meant that the wife would have had to pay all the legal costs involved, as well as damages for any losses suffered. On balance, the Judge decided the argument in favour of legal advice privilege was too strong. The wife lost her application.
But do bear in mind that solicitors are Officers of the Court, and they cannot mislead the court and present a financial picture of a client, that they know to be false. If the client tries to pull a fraudulent stunt through the commercial department of his family law solicitors, their professional obligations to the court would prevent this happening and they could not continue to act in the family law proceedings if their client refused to tell the truth.
Sometimes lawyers fail to realize that privilege applies to some of the documents in a file. This sounds scarcely credible, but it happens. Sometimes they fail to read the entire file they agree to hand over or are ordered by the Court to be produced. Ignorance can lead to disaster, if solicitors blithely disclose prejudicial file notes – which are covered by legal advice privilege – to the other side. Some Solicitors may think that discovering a wrongdoing on a file which has to be disclosed by court order, means the attendance notes and solicitor/client correspondence must be disclosed in their entirety and waive privilege without the client’s consent. That is not the case. It is always for the client to waive privilege. However, if the damage has been done what then? Where documents are disclosed by mistake, the court may order their return to the client but in the case of a demonstrable fraud, I think it is too late! The client’s only remedy having been badly compromised, may be to sue the ignorant solicitor for whatever losses can be legitimately claimed.
For the client and lawyer on the other side, such a blunder can be a godsend if fraud is suspected. The lawyer has no duty of care to his or her client’s spouse, and is entitled to assume that where compromising documents are produced in the normal way, legal advice privilege has been waived.
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June 19, 2008
Categories: Finances and Divorce