Setting aside consent order due to non-disclosure11.07.17
Matrimonial Finance and Financial Remedy expert Mark Gore considers the recent case of AB v CD (2016) EWHC 10, also (2016) WLR (D) 106, decision 11th January 2016 by Roberts J, which reviews the law and its application.
This case is an important and useful recent illustration of the Court’s willingness to set aside a Consent Order made at the FDA due to material non-disclosure.
Matrimonial Finance and Financial Remedy – The Law
Other grounds might include fraud, misrepresentation, mistake, lack of consent or new events (as in Bader v Bader). The present case concerns non-disclosure.
There is a helpful summary at para 149 onwards. See Livesey v Jenkins  AC424, generally:-
An application to overturn a Consent Order for non-disclosure will not succeed if that disclosure would not have made any substantial difference to the Order the Court would have made. The Applicant must act promptly once non-disclosure has been discovered. Ongoing negotiations between parties does not absolve either from the duty of ongoing disclosure.
For example Sharland v Sharland  UKSC60 (non-disclosure of facts which would affect value of shares). The duty of full and frank disclosure continued even after parties had reached agreement because the Court still had to exercise its discretion under Section 25.
Also Gohil v Gohil  UKSC61 where W’s suspicions of non-disclosure were actually recorded on the face of the Order (!) and 3 years later W applied to set the Order aside, H having been sent to prison meantime for serious money laundering. The Order was set aside, the result would have undoubtedly been different had the Court been in possession of the full facts.
Crucially, the Court emphasised a remark by Thorp LJ in Bokor-Ingram v Bokor-Ingram  EWCA Civ 412 that the duty of disclosure “extends beyond what is certain on the date that the Order is made, to any fact relevant to the Court’s review of the foreseeable future”.
This is surely a wide test indeed.
This is all quite different from Bader grounds which relate to new, supervening events; self-evidently, non-disclosure relates to facts known to one of the parties already.
The Issues in this Case
- Both parties were wealthy and both held shares in a company, and central to the deal was that H transferred his shares in it to W. His complaint was that afterwards, he learned that an “investment” in excess of £3,000,000 was going to be made, or had been made, to that company which would result in the shares dramatically increasing in value. He asserted he would never have agreed to the order if he had known this.
- W asserted that she had complied with her duties to the Court, and to H, because of restrictions imposed by confidentiality to third parties, and commercial sensitivity. The Judge concluded that W had not deliberately deceived the Court, but the effect was to deprive it, and H, of the full picture. In short, the Asset Schedule at the time would have significantly undervalued the shares, and by implication, H would have demanded answers to his Questionnaire. The order was set aside.
The Basic Facts
- On the Forms E, the assets had amounted to about £6,000,000.
- The company in question had been started by W (according to her before she met H), and later, H and others invested in it.
- On commencement of divorce litigation, the firm was making a loss. However it had substantial cash reserves of over £1,500,000. In his Form E, H valued his own shares on the basis of what appeared to be the going value at the time.
- Crucially H served a Questionnaire dealing with the company, obviously designed to establish the present and likely future value of it (para 22 judgment).The parties attended the FDA in February 2012, with Leading Counsel, the parties pursued a negotiation. W was very keen to obtain a clean break as to their respective business interests and was apparently prepared to give up valuable claims in relation to other things. A detailed order was agreed and approved by the Court (para 31).
- W asserted that H, in common with other shareholders, had seen not only regular management accounts but also documents referring to a possible opportunity for a contract with the Ministry of Justice. H denied this, the Court found that W was right, but that H had no wider knowledge of the company’s affairs and the Court accepted that at that time he reasonably assumed that his shares had little or no value over and above that attributed to them in his Form E.
- There was an important clause in this, an “anti-embarrassment clause”. Here however, and critical to the outcome of this case, W contended that the purpose of this clause was to provide for what would happen in the event of a sale of W’s shares in the company before the end of 2013, at a higher price. H would be compensated. She was saying that there was no non-disclosure, but even if there was and even if it was material, the whole point of this clause was to redress any financial imbalance because it provided H with the ability to increase his share of the assets if W were to sell the company before the end of 2013 (paras 32 and 33).
- This is, surely, a very interesting argument. In effect W was saying that the mechanism provided protection for H against a possible disadvantage about which he was unawares, so there was no prejudice to him.
- H accepted that this clause provided him with an opportunity to share in any future increase in value but denied that this was the specific reason for the existence of the clause, and that it was never intended to provide W with “a shield” against allegations of non-disclosure (para 35).
- Six weeks later, it became public knowledge that a hedge fund had allegedly bought a multimillion pound stake in the company which was in the last four for a hugely valuable Ministry of Justice contract, to tag offenders. H wrote to W demanding an explanation (para 40).
- W denied that the hedge fund had made an “investment” in the company as such, but she had certainly been looking for potential investors. H issued a further detailed Questionnaire relating to these allegations.
- Importantly, late in 2012 one of the company’s other directors wrote to W reminding her that her employment contract prohibited her from releasing confidential company information and that H could not be relied upon to respect confidentiality. There had already been a complaint that H had gone to the press about some aspects of the case.
- At this point the Court embarked on a detailed and complex analysis of W’s legal duties; she was in effect wearing two hats; one as the Respondent to this application, and the other as a director and shareholder of a company. The information sought was commercially sensitive in the extreme. The Board of Directors of the company would not permit her to respond to her request to be allowed to disclose what was sought by H (see para 62).
- There was ongoing national press speculation about the hedge fund’s “investment” and in May 2013 H issued yet a further application seeking disclosure from the company itself. The company’s response was that this was a fishing expedition designed to cause commercial trouble for the company.
- At a directions hearing in May 2013 W’s Counsel confirmed, for the first time, that the hedge fund was an “investor” in the company. That was many months after H issued his set aside application. It also appeared that £3.4million had been paid on an assumption that shares would be allotted in the company prior to W’s Form E and was not disclosed. Critically, in Replies to Questions ordered by the Court W confirmed that the hedge fund had made available £3.5million to the company in October 2011 (well before the Consent Order).W also confirmed a substantial loan to the company in 2010, repayable within 12 months, but W’s case was that H knew this, being included in shareholder updates.
- Without getting the Ministry of Justice contract, W contended the company would not be able to repay a £2,000,000 loan. The lender did not want to convert the loan into equity. The hedge fund’s subsequent “investment” was used to repay that £2,000,000 loan.
- There is a detailed explanation (para 79) but in short the hedge fund’s money could be treated by the company either as a loan (but which would have made the company seem insolvent) or as paid up but unissued share capital, hence W said she was justified in not disclosing that information either at the time of the Consent Order or in the intervening months afterwards. W said that the injection of cash by the hedge fund made no material difference to the share price – hence no material difference to the value of the shares. The hedge fund was but one possible investor and there was no reason (said W) to disclose that aspect of the company’s affairs in these proceedings. The hedge fund ultimately agreed to convert the loan to shares, but that was much later on.
- So much for W’s explanation. H however contended that the hedge fund’s investment, which became shares, at a much higher price per share, effectively undervalued both his and W’s shareholding for the purpose of these proceedings. Further had he known that this hedge fund was prepared to back the company he would not have agreed to transfer his shares to W on the terms that he did – it has to be remembered that H was a very experienced and successful venture capitalist (para 81).
- The chairman of the hedge fund gave evidence and significantly (para 132) confirmed that the hedge fund’s payment of £3.5million in October 2011 was seen by him as an equity investment, not a loan. They received a share certificate and it was recorded as such in the hedge fund’s own accounts. He did however agree that neither W nor the company may have known that the hedge fund had so recorded it.
The Court’s Conclusions
The hedge fund’s recent investment/injection of cash into the company would have been a potentially material factor in any exercise in valuing the shares. H was in ignorance of it.
The shares in the company continued to rise in value during the litigation, but that was not a reason for setting aside the Consent Order as such.
Although W was entitled to rely on her expectation at the FDA that questions going to valuation of shares would be the subject of further directions, critically, her duty in relation to disclosure continued as that day progressed in negotiations – it would have become clear that the Court was not going to be asked to make further directions by virtue of the agreement, so the burden was on W to disclose. It was W’s knowledge of the facts which gave rise to her obligation to disclose information about the hedge fund. It was not for H to “work it out for himself”.
The information provided by W was not full and frank. She was not guilty of deliberate fraud or deception. She honestly believed at the time she had properly complied with her duties of disclosure. There was no deliberate attempt to mislead H or the Court.
However, her response to enquiries afterwards was not proper. For example her solicitor’s assertion afterwards, in relation to the hedge fund, that “there has been no injection of cash” was thoroughly misleading.
The non-disclosure was material. H was deprived of the opportunity of deciding whether or not to agree to the terms proposed on the basis of a fully informed decision. Hence he cannot have given his full consent. He would never have agreed the terms had he realised the potential value of the shares. The anti-embarrassment clause was not a defence to the failure to disclose. It provided only some time limited protection for H.
Because W’s failure to disclose was neither deliberate nor with intention to mislead, the burden was on H to satisfy the Court now that the effect of non-disclosure was such that the terms of the order were substantially different from the order which would have been made or agreed had disclosure been made. That burden was easily discharged.
The potential undervalue of both parties’ shares in the company was “a fundamental obstacle to the integrity of the 2012 Consent Order”.
Although not setting out any new principle of law, this case emphasises the ongoing duty of disclosure about sensitive commercial transactions including developments which may increase the value of assets (but which have not already done so).
It also reminds us that shaking hands on a deal at Court does not absolve a party from providing relevant disclosure (and in this present case in relation to Questions which had already been asked).