Asset-stripping and what it means for divorcing couples
Here at Hylton Potts, we deal with a dozen different divorce cases every day. No matter who’s to blame or how the divorce came about though, it’s always the financial concern that seems to take the top priority with most couples. Of course, our clients are always deeply emotionally distressed too, but as the legalities around divorce can seem so complex, we often find that ensuring they’re treated fairly becomes the most important aspect of the divorce.
Occasionally, we do unfortunately come across clients whose spouse is attempting to pull the wool over the eyes of the court to prevent their wealth being reduced significantly by proceedings. This occurs when one party attempts to mask how much their assets are truly worth, or attempts to rid themselves of certain assets prior to divorce proceedings, so that they can simply take them back at a later date.
This process of asset stripping is a technique also used by companies for a variety of circumstances, and interestingly, we’ve come across a recent ruling that could have an impact both on the way solicitors advise their clients, and on the consequences for such behaviour. In today’s article, we’ll give you a brief rundown of the case, the key takeaways from it, and describe some of the ways your spouse could attempt to do something similar.
The Case of Marex Financial Limited v Carlos Sevilleja Garcia 
On the 25th April this year, Mr Justice Knowles dismissed a case which challenged the Court’s jurisdiction on a matter which has been in and out of courtrooms since 2013. Put simply, the Claimant in question made claims against two companies, Creative Finance Limited and Cosmorex Limited, for sums due while he had acted as their foreign exchange trading broker.
The judge proceeded to release a draft of his judgement, stating that the Claimant had been successful with his claim and would be awarded sums of more than US$5 million. However, things stared to go awry when the Claimant alleged that the Defendant proceeded to asset-strip the two companies after the draft judgement was released. This meant they would be unable to pay the debt, and the Claimant would be substantially financially impacted.
Since then, a freezing injunction was obtained on 14th August 2013, while the two companies went into liquidation in December 2013. Regardless, the Claimant claimed damages against the Defendant for:
- Inducing/procuring the violation of the Claimant’s rights under the judgement dated 26 July 2013, and…
- Intentionally causing loss to the Claimant by unlawful means, (i.e. by dissipating the assets of the two companies)
This was challenged by the Defendant, as he stated the Claimant could not show to the required standard that such claims fell within what is referred to as “the tort jurisdictional gateway” for three reasons:
- The alleged tort of inducing a breach of the Claimant’s rights does not exist
- The Claimant had not relied on any qualifying unlawful means for the purposes of the tort of causing loss by unlawful means
- The Claimants claims were barred by the rule against reflective loss.
What happened next?
As we know from the above, the counter argument was dismissed by the judge who ruled that the Claimant had a better argument than the Defendant on a number of grounds, with the two most noteworthy areas being:
- The cause of action which is commonly referred to as the “tort of procuring or inducing a breach of contract” extends to the violation of rights under a judgement – this is a significant ruling as it suggests a new breed of tort which is more wide-reaching and inclusive
- The Defendant suggested that the breach of judiciary duty owed to a company, (in this case, alleged asset-stripping) doesn’t interfere with the freedom of the company to deal with the Claimant, so it’s irrelevant. However, Judge Knowles rejected this, as the very point of the asset-stripping in this context was to take away the freedom to meets the companies’ obligation to the Claimant.
We know that the terminology of these cases can get a little gruelling, and these rulings have various legal implications across the board, but what about when we look specifically at divorce law? One area which is the most important for us to consider is around freezing injunctions.
This is exactly as it sounds – in this case, a court order to freeze the assets as they stand. By presenting a counter argument to the proposed “tort of accessory liability” regarding the judgment debt the companies now couldn’t pay, this decision could have a knock-on effect for other kinds of freezing orders.
For example, if asset-stripping were to occur between two spouses, there is now a legal precedent for what happens prior to freezing injunctions. Solicitors may need to advise their clients differently on what they can and cannot do with their assets prior to these being granted, as well as the inclusion of activities with any third parties.
What could my spouse do?
At Hylton Potts, it’s our job to advise you on the best course of action when it comes to divorce proceedings. We always want to ensure you get the fairest deal possible, so it’s important that we understand these legal developments in the context of what your spouse could do to protect their assets and their own individual wealth.
Some of these actions include:
- Using retirement plans, life insurance policies and so on, to shield assets
- Decreasing business profitability
- Selling assets for undervalued amounts to suppress the value of your estate, and similarly, intentionally underestimating the value of purchases such as antiques and artwork
- Overpaying tax which can be claimed back
- Giving monetary gifts to friends, relatives and so on, to be given back to your partner after proceedings have concluded
If you’ve just started divorce proceedings and you’re concerned about your financial position, or if you think your spouse could be hiding certain assets from the court, we are here to help. Our dedicated team is always on hand to give you advice, and you can call us on 020 7381 8111, or email us at email@example.com.
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