Divorce Proceedings and Your Business Part 218Jul2023
In our previous article, we explored the confidential nature of divorce proceedings; the legal framework of protection of confidentiality over documents and information disclosed in divorce proceedings; and remedies available from the Court if you discovered that your spouse has obtained your confidential information without your consent.
In this article, we shall continue to explore the financial disclosure mechanism in divorce proceedings, the extent of financial disclosure you will be required to make regarding your business; and concluding with a few past examples of parties attempting to limit the information available on the disclosed documents.
Questionnaires and Answers
The Court has general oversight of the extent of discovery to guard against using discovery applications to fish for information. Requests for disclosure of documents must be relevant to the issue in dispute and must not be oppressive and/or disproportionate. Questionnaires that do not comply with these requirements will not be allowed. On the other hand, the Court has the power to compel a party to give disclosure.
However, this does not mean that a unified standard of disclosure is applied throughout the entire proceeding to ensure proportionality. Where only general disclosures are expected prior to the FDR hearing, more detailed disclosure maybe allowed if no settlement is reached and the matter proceeds to trial.
How then do you deal with requests to disclose your company’s corporate documents?
Obligations of a shareholder
Legal practitioners under the Common Law will be familiar with Salomon v Salomon & Co. Ltd.  AC 22, which firmly establishes that a company is a legal person of its own right, having a separate and distinct identity from its shareholders. Although a shareholder has a right to share in the profits of the company, he / she has no right in the assets in the company’s name, which belong to the company. This principle applies regardless of whether the company is owned by a sole shareholder or a number of shareholders.
In this context, a shareholder has to disclose in divorce proceedings what is provided by the company in its capacity as a shareholder. This may assist in an expert’s valuation of the shares.
The above does not apply where a company is wholly controlled by you. In that case, you may be required to disclose all relevant documents in the company’s possession. (B v B (divorce proceedings: discovery)  1 ALL ER 801)
Where there are financial dealings between you and a private company that you are interested in (most typically loans made between yourself and the company), you may also be required to explain and provide evidence of such dealings.
Obligations of a director
The Form E itself only requires you to disclose the directorships that you have held in the last 24 months. Given that directors have no entitlement over the company’s assets, your disclosure may be limited to information and documents relating to director’s remuneration. Where there are financial dealings between you and the company (such as a director’s loan), you may be required to explain and provide evidence of such dealings.
Obligations of a director who is also a shareholder
A director will usually have access to corporate financial documents which are not available to shareholders, such as profit and loss statements, balance sheets, cash flow statements, corporate bank statements or even invoices and receipts. These documents maybe highly relevant in litigation as to the valuation of the company, and thus the value of your shareholding in the company.
Although these documents belong to the company, the general rule ‘is that a party to a suit must disclose all the documents in his possession, custody or power which are relevant to the matters in issue. The Court has a discretion whether or not to order him to make such disclosure, and also has a discretion whether or not to order him to produce the documents for inspection by the other party or the Court’ [emphasis added]. (B v B, above) These documents can be categorised into those that are: (i) in actual possession / custody of the party who is a director of the company; and (ii) within the director’s power to obtain from the company.
Documents in Actual Possession / Custody of a Director – If there are relevant documents of the company that are within your physical possession, you must disclose them upon request by the other party, even though you may be holding them as a servant, agent, or officer of the company.
Documents in the Power of a Director to obtain from the company – Whether these documents are in the power of a director will depend on the facts of each case. In his context, ‘power’ means ‘the enforceable right to inspect or obtain possession or control of the documents’. (B v B, above)
The Judicial Discretion
Having said the above, it does not mean that the Court will always order disclosure of documents in the custody, possession and power of the director beyond what is required in the Form E. Ordering disclosure is within the discretion of the Court. In exercising its discretion, the Court will have to regard to all the circumstances of the case. ‘The court will balance the relevance and importance of the documents and the hardship likely to be caused to the [applicant] by non-production against any prejudice to the [respondent] and third parties likely to be caused by production’. (B v B, above)
Generally speaking, the Court is unlikely to order disclosure beyond financial statements unless 1) further documents or information are necessary for valuation, or 2) there is evidence indicating that the financial statements are unreliable (such as evidence of accounting irregularities or unusual fluctuation in figures).
More importantly, the Court will not order parties to do which they have no power to do, nor make an order for production unless it is satisfied that production is necessary either for disposing fairly of the issues between the parties or for saving costs. In a corporate setting, the board of directors may have legitimate reasons for opposing production of sensitive corporate documents. If this is the case, provided that the Court is satisfied that the objection is not contrived for the purpose of frustrating the powers of the Court, the Court will not compel the director to disclose the documents sought.
I am Obliged to Disclose, What’s Next?
Even when a party is under an obligation to disclose, that party may still seek to limit the scope of disclosure, the form of disclosure, or the persons having access to the documents. In the past, where information involved requires to be kept in utmost confidence (e.g. trade secrets), parties have successfully sought to limit disclosure to the parties’ representatives and accountants (as opposed to the party seeking the disclosure) and on a need-to-know basis. In those circumstances, the Court will be the final decision-maker as to ‘who gets to see what’ to strike a balance between maintaining confidentiality and avoiding prejudice to the other party’s ability to advance his case.
In other circumstances where document sought might be voluminous (in one case, requesting a few years of the company’s trade records), parties may wish to consider inspecting the documents prior to requesting production of copies.
A party’s obligation to give full and frank financial disclosure is first and paramount in any divorce proceedings. Failure to comply could potentially attract serious legal consequences.
Even when a party is able to disclose information or documents, the Court may still refuse to exercise its discretion to order disclosure, if such disclosure is unnecessary, disproportionate or may cause undue hardship to the disclosing party. Even if a disclosure order is made, the disclosing party may still invite the Court to impose conditions of disclosure.
Needless to say, each case will turn on its own facts and each concern will require its own tailor-made solution.
Adrian Au and Sam Ng (Gilt Chambers)
For specific advice on your situation, please contact:
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.