For a number of years, it has been the practice of family lawyers to argue that monies spent by a party towards the end of a relationship or after separation, that have caused the asset pool to become arguably diminished, be "added back" to the asset pool. The affect of these ‘add backs’ were that the party that had the use of those funds would have them placed on their side of the ledger as if they still existed. The court was, in essence, treating those monies spent as a current asset. This approach is now changing.
People approaching separation, or shortly after a separation, can have many reasons for the use of marital funds. They may wish to reaccommodate themselves. They may waste the money through gambling or holidays. They can also take a more passive approach, by, for example, ceasing to meet liabilities, causing the asset pool to diminish. This has historically led to the court, as indicated above, treating those monies as if they still exist. This approach can cause hardship to both parties, particularly when having regard to the delays that occur in litigation, and the desire for people to get on with their lives whilst their family law matter is being determined.
A common sense approach was taken by Baker J in the matter of Kowaliw, where he said
“(a) Where one of the parties has embarked on a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets, or
(b) Where one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimised their value”.
This principle was interpreted by practitioners to ensure money wasted through gambling or a deliberate attempt to reduce the assets can be ‘added back’ in the interests of the other party.
However, our experience is that this is an area of law that has been, at best, misunderstood by some practitioners, and at worst, abused. A recent matter involved an asset pool with a conservative estimate in terms of the net assets of approximately $500,000. At various stages, the add backs that were sought totalled in excess of $2,000,000, with little prospect of success having regard to the changing state of the law.
However, since matters such as Stanford, and more recently Bevan, the court has started to take a refreshingly different approach to these types of argument, which has led, in our experience, to add backs finding less favour with the court.
So how is the law in relation to add backs being applied now?
The matter of Stanford sought to clarify the four step approach used in determining property matters under Section 79 of the Family Law Act. Following that decision, the Family Law Courts have been more cautious about notionally adding back property at the exact dollar figure but rather use their discretion to make an adjustment under Section 75(2)(0) of the Family Law Act. This provision allows the court to take into consideration any other matters that it considers relevant (generally of a financial nature) in determining any adjustments to the equal and equitable interests of the parties. This step comes after an assessment of the parties’ respective contributions and is contingent upon any adjustment being “just and equitable”.
In Bevan, the first judgment considering the decision in Stanford and made comment on the principle of add backs and consideration of the decision. The Full Court stated:
“We observed that “notional property”, which is sometimes “added back” to a list of assets to account for the unilateral disposal of assets, is unlikely to constitute “property of the parties to the marriage or either of them”, and thus is not amenable to alteration under Section 79. It is important to deal with such disposals carefully, recognising the assets no longer exist, but that the disposal of them forms part of the history of the marriage – and potentially an important part”.
What this essentially means is that the disposal of property, or a negative contribution made by one party which is not for the benefit of the marriage (i.e. expenditure on gambling, large withdrawals from bank accounts that go beyond reasonable living expenses etc) will not be added back at a dollar for dollar value but rather will be taken into consideration in determining whether there should be an adjustment in favour of the party who did not dispose of the assets. This approach has been followed in most, if not all, of the property cases heard in 2013.
For example, in Bangi & Belov of 2014, the loss of the Husband’s superannuation was sought to be added back to the pool of assets by the Wife. The Court stated ‘Given the warnings [in Bevan], I will deal with what happened to the husband’s superannuation when considering s 75(2) matters and not add the loss of superannuation back to the balance sheet’.
In the matter of Ledarn & Ledarn, 2013, the Court found that the wife had drawn more than her designated entitlement for lifestyle expenses and therefore could not “ignore the money that the wife took.” The court however made an adjustment under s75(2)(o) rather than adding the additional monies back into the asset pool.
In Peabody, the Court held that the funds withdrawn from the superannuation as well as legal fees paid by the Wife were not to be added back into the net assets but rather to take them into account when addressing the Wife’s post separation expenditure in the consideration of each party’s contributions. Therefore the notional property was not dealt with under s75(2)(o) but rather under s79(4) as post separation contributions.
In some cases though, the Court will add back the dollar for dollar value of property disposed of, should it see fit. In Wallace of 2013, there were several add backs sought including Interim Cost Orders and paid legal fees. At paragraph 22 the Court stated:
“In my view in light of Stanford & Stanford and Bevan & Bevan it is not appropriate to add back notional property which no longer exists. The proper course is to make an adjustment pursuant to s 75(2)(o). Having said this, I think paid legal fees are different. It is a matter of discretion of the trial judge. The source of funds to pay the legal fees is important. Where the legal fees were paid from joint fund it is appropriate to add those fees back.”
The Court found that in this instance legal fees were added back as well as the interim cost orders. The Court took other instances of the disposal of property into account under 75(2)(o).
It is therefore important that parties are able to quantify the value of property disposed of but for evidentiary purposes only as the court is more likely to use its discretion under 75(2)(o) and make an adjustment accordingly.
Dividing assets during a separation and divorce is highly complex. It is essential you seek advice from experienced family lawyers to assist you with these proceedings.