Setting aside a transaction during financial proceedings

Insight

15.02.2024

Tensions often run high in financial remedy proceedings, and parties sometimes act improperly in an attempt to defeat their spouse's claims. The recent case of AP v BP and others [2023] EWFC 170, provides such an example, with the judge describing the case as one involving secret manoeuvres, manipulations and underhand dealings in a misguided attempt to gain financial advantage. In that case the wife had transferred shares to third parties during the course of the proceedings, which the husband successfully set aside pursuant to s 37(2)(b) of the Matrimonial Causes Act 1973 ('MCA 1973').

This column will consider the law and procedure to be followed when applying for such an order.

The purpose of s 37 is to give the court the power to prevent a party from taking action that will diminish the assets of the family which would otherwise be available for redistribution, or if that action has already been taken, to retrospectively set aside a transaction that has already taken place. Where a disposition has already been made, but the court has not yet determined the applicant's claim for financial relief, the relevant provision is s 37(2)(b).

It is important to note at the outset that the provisions of s 37 can only be used in matrimonial cases, and therefore cannot be used during applications for financial provision for children under Sch 1 to the Children Act 1989, or applications under s 14 of TOLATA 1996.

Even in circumstances where an injunction restraining a party from disposing of a particular asset (under the MCA 1973, s 37(2)(a)) has been discharged, if that asset is subsequently disposed of, an applicant can still apply under s 37(2)(b) for an order setting aside that subsequent disposition (Sherry v Sherry [1991] 1 FLR 307).

To fall within the provisions of s 37(2)(b), there must have been a “reviewable disposition” made by the 'other party' which, if set aside, would result in different financial relief being granted to the applicant. The requirement that the disposition be made by the “other party” means that the court could not set aside a disposition made, for example, by a trust.

The applicant has to prove, on the balance of probabilities, that the respondent made the disposition with the intention of defeating the applicant's claim for financial relief.

Proving intention can be notoriously difficult and is highly fact-specific. However, the applicant is assisted by the statutory presumption under s 37(5), MCA 1973. If the disposition had the effect of defeating the claim (to include preventing financial relief from being granted to that person, reducing the amount of financial relief which may be granted, or frustrating or impeding enforcement), and it was made within three years of the date of the application for financial relief, it is presumed that the disposition was made with the intention of defeating the applicant's claim. The burden then shifts to the respondent, who must prove that they made the disposition without the intention to defeat the applicant's claim. The third party's intentions are of no relevance at this stage of the exercise.

The intention to defeat the applicant's claim does not have to be the sole, or even the dominant intention, as long as it plays a substantial part in the intentions as a whole (Kemmis v Kemmis [1988] 2 FLR 223).

Section 37(4), MCA 1973 provides a potential defence to the third party who received the asset. To succeed, they must show that (i) there was valuable consideration (ii) they acted in good faith and (iii) they were without notice of the respondent's intention to defeat the applicant's claim.

There is no requirement that the consideration should be at market value; it must simply be “valuable”. However, selling at an under-value may demonstrate that the transaction was intended to defeat the applicant's claims, and may also go towards the third party's knowledge of the respondent's intention. Notice of the respondent's intention to defeat the applicant's claim extends to constructive knowledge. It will therefore include knowing something which ought to have caused him or her to ask further questions.

If the application is successful, the disposition will be set aside and the court will make consequential directions to restore the status quo prior to the disposition having taken effect, for example ordering a third-party recipient to sign a property transfer giving title back to the respondent. It is possible for a penal notice to be attached to any consequential order which gives effect to an avoidance of disposition order. If a third party who has received an asset refuses to transfer it back, the Family Court can sign the necessary documents instead (s 39, Senior Courts Act 1981).

Part 9 of the Family Procedure Rules 2010 applies, and therefore an applicant will need to file an application for the avoidance of disposition order and an application to join the third party, both in Form D11. The D11 should state (i) what order the applicant is seeking and (ii) why the applicant is seeking the order. A draft of the order sought must be attached to the application notice. The application notice must be signed with a statement of truth or may attach a witness statement from the applicant with a statement of truth. The application notice must be filed at least seven days before the court is to deal with the application. The application should be served on both the respondent and the third party who has received the property.

If disclosure has not yet taken place, the parties will provide disclosure in Form E. The applicant should include details of the property which has been dissipated and the person in whose favour the disposition is alleged to have been made at s 5.3 of the Form E. The court will then make directions for further evidence at the First Appointment and will also consider joinder of the third party.

If the application is made during proceedings and is not returnable at a hearing that has already been listed (such as the FDR or First Appointment), a directions hearing will be listed to consider the application for the s 37 order, the joinder application and the filing of further evidence.

Once the third party has been joined, it is then possible to seek disclosure orders against the third party.

Applying for a s 37 order is expensive, as it is likely to require the joinder of a third party and may have to be resolved as a preliminary issue at a separate hearing. If the parties hold sufficient other assets, it may be preferable to seek an add-back instead.