The unscrupulous spouse: freezing orders and s.37 of the Matrimonial Causes Act 1973

Spouses can stoop to devious methods to take advantage in divorce cases.  In many cases, action can be taken to ensure that the errant spouse does not profit from their wrongdoing.

The action to be taken will depend on various factors including the nature of the assets, the value of the assets and whether the disposal or intended disposal of the assets would hamper the other spouse’s financial claims in divorce. 

The steps outlined below are also applicable on judicial separation and civil partnership dissolution.

Immediate non-court actions

In some cases, protection can be obtained without going to court.  For instance a notice can be registered with the Land Registry against the family home.  A notice can be registered against other properties where there is a pending application in Court for a property adjustment order in divorce proceedings.  It may be possible to prevent further withdrawals from a joint account by contacting the bank.

However, there are many situations where further action is needed to prevent an injustice.

Overview of freezing injunctions and set-aside applications

S.37 of the Matrimonial Causes Act 1973 gives powers to the court to make freezing orders.  

Further the court can undo a wrong by ‘setting aside a transaction’, for example requiring the spouse’s friend in the above example to return the art collection to the ownership of the spouse.

The merits of making an application to the court is very fact specific.  There needs to be a pending application for financial relief which is broadly defined and covers applications for financial provision in divorce or civil partnership dissolution. 

If an urgent freezing order is needed, the financial provision claim needs to be issued or an undertaking given to the Court to issue the application as soon as possible. 

Criteria

The court would need to be satisfied that:

1. with the intention of defeating the other spouse’s claim, the spouse is about to make a disposition or to transfer out of the jurisdiction or otherwise deal with any property; or
2. the spouse having the above intention has made a ‘reviewable disposition’ and if the disposition were set aside, the court would make different provision for the other spouse; or
3. where the spouse has already obtained a financial order, the other has made a disposition or transfer with the intention of frustrating or impeding the order.

Guidance is provided in the leading case of Mostyn J in UL v BK (Freezing Orders: Safeguards: Standard Examples) [2013] EWHC 1735 (Fam) paragraph 51.  Process must be strictly followed.

Summary of the principles and safeguards

51.  The relevant principles and safeguards may be summarised as follows:

i) The court has a general power to preserve specific tangible assets in specie where they are the subject matter of the claim. Such an order does not necessarily require application of all the freezing order principles and safeguards, although it is open to the court to impose them.

ii) For a freezing order in a sum of money which is capable of embracing all of the respondent's assets up to the specified figure it is essential that all the principles and safeguards are scrupulously applied.

iii) Whether the application is made under the 1981 Act or the 1973 Act the applicant must show, by reference to clear evidence, an unjustified dealing with assets (which would include threats) by the respondent giving rise to the conclusion that there is a solid risk of dissipation of assets to the applicant's prejudice. Such an unjustified dealing will normally give rise to the inference that it is done with the intention to defeat the applicant's claim (and such an intention is presumed in the case of an application under the 1973 Act).

iv) The evidence in support of the application must depose to clear facts. The sources of information and belief must be clearly set out.

v) Where the application for a freezing order is made ex parte the applicant has to show that the matter is one of exceptional urgency. Short informal notice must be given to the respondent unless it is essential that he is not made aware of the application. No notice at all would only be justified where there is powerful evidence that the giving of any notice would likely lead the respondent to take steps to defeat the purpose of the injunction, or where there is literally no time to give any notice before the order is required to prevent the threatened wrongful act. Cases where no notice at all can be justified are very rare indeed. The order of the court should record on its face the reason why it was satisfied that no or short notice was given.

vi) Where no notice, or short informal notice, is given the applicant is fixed with a high duty of candour. Breach of that duty will likely lead to a discharge of the order. The applicable principles on the re-grant of the order after discharge are set out in Arena Corporation v Schroeder at para 213.

vii) Where no notice, or short informal notice, is given the safeguards assume critical importance. The safeguards are set out in the standard examples for freezing and search orders. If an applicant seeks to dis-apply any safeguard the court must be made unambiguously aware of this and the departure must be clearly justified. The giving of an undertaking in damages, whether to the respondent or to an affected third party, is an almost invariable requirement; release of this must be clearly justified.

Urgent, early, legal advice is critical. In the above example, it is important that the spouse obtains legal advice at the earliest opportunity. 

There needs to be an assessment as to whether the other spouse’s actions or proposed actions are likely to negatively impact on their settlement.

If an application is being considered, the applicant needs to be aware that if their application causes loss, particularly to any third party, then they may be liable for that loss. Undertakings to provide for damages to third parties are usually required prior to an application being brought.

Is Add Back an alternative solution?

There needs to be consideration of whether to argue ‘add back’ instead of seeking an injunction.  Add back arises where one spouse has disposed of assets but there are sufficient assets remaining to enable the court to give the other their full settlement without recourse to the asset which has been transferred.  The court can consider the asset disposed of by the spouse when calculating the other spouse’s entitlement.  

This early assessment may be possible. However, it depends on knowledge of the overall assets.  If it is unclear as to whether add back can adequately compensate the spouse, a freezing application may be justified and the position reviewed when there has been financial disclosure of the assets.

Intention

It must be evidenced that there is an intention to defeat the spouse’s claims for financial provision.  

A spouse is assisted because it is presumed, unless the contrary is shown, that dispositions that defeat or would defeat their claims are done with that intention (s37 (5) MCA 1973).  The onus is on the spouse transferring or disposing of the asset to show he had no such intention which may be difficult in the context of a pending or imminent divorce.

If the disposition has already happened, again the onus is on the spouse to show that he had no intention to defeat the other’s claims if the disposition took place less than three years before the other spouse applies to the court.

Therefore, the onus is generally very much on the disposing party to show that they were acting in good faith and had no intention to defeat the other’s claims.

Court Powers

The court’s powers are very wide.  It can prevent possible future dispositions and can make such orders as it thinks fit to restrain one party to protect the other’s claim.  Further the court can give consequential directions to give the effect to the order.

By way of example, freezing orders can prohibit one spouse from drawing on bank or building society accounts (perhaps save for their normal living expenses which can be limited to a certain figure).  Other assets such as shares, land and property, chattels (this includes personal possessions such as cars, art collections, jewellery etc) can be frozen.

The court has a discretionary power to make freezing orders.  In some cases, the non-disposing spouse should seek an undertaking or assurance from the other that they will not dispose of specified assets rather than make a premature application. This is not appropriate in all cases where to forewarn the spouse could lead to problems and an application for a freezing order can be made without the other party’s knowledge.  The first they would know, assuming the other spouse has successfully obtained the order, would be when they are served with a temporary freezing order and notice of a court date when the position will be reviewed.  Not all cases warrant obtaining a freezing order without notice and legal advice should be taken.

Please note that the court can make these orders not only in divorce proceedings but also judicial separation and dissolution of civil partnership proceedings.

Worldwide Assets

For an order to include assets located outside of the jurisdiction of England and Wales, it is crucial to establish whether the order will be recognised and enforceable in the foreign jurisdiction. If it is not, urgent advice will also be required in that other jurisdiction.

Costs Orders

The court can order the losing party to pay the other’s costs, and that includes when an application is brought that is ill-founded. It is important that the spouse alerted to the risk of disposal obtains proper advice on the merits of their application and for that matter the other party similarly obtains advice on opposing the application.

A freezing order would commonly last until there is a financial settlement so that the asset is preserved.

Setting aside a disposition

This is more complicated because it involves a third party and in the above example the friend who has purchased the art collection for next to nothing.

Both the transferring spouse and their friend would need to be given notice of the application.  The spouse cannot obtain an order without notice, ie without their knowledge.

In the above example the transfer of the art collection is a reviewable disposition capable of being set aside by the court unless the transfer was made for valuable consideration to the friend who, at the time of the disposition, acted in relation to it in good faith and without notice of any intention on the part of the spouse to defeat the other spouse’s claim. 

As mentioned, the merits of these cases are very fact specific.  Would the friend be aware of a pending divorce? Was the art collection sold for so little that it was bound to raise suspicion on the friend’s part? The court can infer intention from the circumstances of the case.

The third party would be joined into the proceedings as they may wish to make representations to the court. The costs are likely to increase as a result.

What happens if the friend transfers the art collection to someone else?  There is some comment in case law (Ansari v Ansari  [2008] EWCA Civ 1456) which suggests the court’s powers could extend to subsequent dispositions although it is an arguable point.

Summary

S.37 is an essential tool to help a spouse achieve a fair and reasonable settlement where the other party has other ideas.  S.37 is commonly used at an early stage to preserve or retain assets pending a final settlement.  It can be used after there is a final settlement if one party tries to frustrate or impede the settlement.

Urgent action is often required.  The court will want to know when the risk of disposal came to the attention of the person making the application to the court. Any delay in raising their case is likely to harm it/jeopardise the outcome.