How do the courts deal with someone unilaterally dissipating the matrimonial asset pool?

A recent decision1 in the Family Court addresses uncertainty with how the court deals with someone unilaterally dissipating the matrimonial asset pool.

It is not uncommon for one party in family court proceedings to allege that another person has disposed of or distributed assets, which would otherwise be included in the matrimonial asset pool available for distribution to both parties.

These situations can occur when one party unilaterally does any of the following:

  • withdraws funds from bank accounts, and spends them;
  • gives away assets to friends or family members;
  • gambles and loses funds; or
  • sells assets for well below cost price.

Traditional approach

So what has the Family Court done when faced with these situations?  In many cases the Family Court took the approach that if it was proved that the party had deliberately or recklessly embarked on a course of conduct designed to minimize the value of the asset pool then the amount dissipated or wasted could be included in the pool of assets on a notional basis.  Basically the person who dissipated the asset would simply be credited with the value of the asset as part of the final settlement, even though no such asset existed at the date of the final order.  The Court would refer to this as “add backs”, because they were effectively adding the non existent asset back into the asset pool.

In Omacini (2005) FLC 93-218 the Full Court classified three categories in which add backs may occur, namely:

  1. where parties have depleted funds to meet the cost of their own legal fees (this is contrary to the legislation which states parties need to meet their own legal costs);
  2. where there has been a premature distribution of assets; or
  3. where one party has been found to have “wasted” funds.

Uncertainty and confusion

This approach was generally followed as the unwritten rule until the case of Stanford [2012] HCA 52, which effectively created much doubt and uncertainty about whether add backs could be warranted. This evolved from Stanford’s finding that section 79 of the Family Law Act 1975 was concerned with the alteration of “the parties’ existing current legal and equitable interests in property”. The “existing” caused many of the profession to conclude that add backs should not form part of the asset pool because the parties no longer had an existing interest in that specific asset.

This was later confirmed in the case of Bevan v Bevan (2013) FLC 93-545 which stated at paragraph 79:

It appeared to most that the matter was settled and that no notional property would be included in the matrimonial asset pool.  Instead it would be dealt with as a relevant consideration when the Court decided what adjustment they would make in one party’s favour of the current net asset pool.

There were concerns that this new approach had diminished the Court’s power to hold the offending party properly accountable for the entire disposal.  The concern was there may not be an exact dollar for dollar replacement of the asset or funds and that the specific amount could be lost in the broad discretionary adjustment of all the assets.  It also raised questions in situations where the majority of the asset pool funds had been depleted and the current remaining assets could not be adjusted even in their entirety to achieve a just and equitable outcome for the innocent party.

Recent case confirms possible combined approach

Nevertheless the profession seemed to be coming to grips with this approach until the recent case of Vass & Vass [2015] FamCAFC 51 which addressed this issue from a new angle.

In this matter the husband appealed against the 65% to 35% adjustment of the matrimonial asset pool in the wife’s favour at first instance judgment.  Specifically one of his grounds of appeal was that the Trial Judge erred in notionally adding back $75,000 to the husband. $50,000 of the add back was monies the husband paid to his parents following separation, which he claimed was repayment of a loan he owed them.

The Full Court found the add back was warranted in this situation where the transfer of monies was not deemed to be a legitimate loan repayment but rather a dissipation of the current matrimonial assets.

Most noteworthy was the Full Court’s response at paragraph 138 and 139 of the judgment to the challenged add back:

There is no error committed per se in adjusting the parties’ actual property interests by a calculation involving notionally adding back into the pool sums which have been dissipated by the parties. We reject any suggestion that the decision of Bevan & Bevan (2013) FLC 93-545 – or, more particularly, the decision of the High Court in Stanford & Stanford (2012) 247 CLR 108 – is authority for any necessary contrary solution. Some statements made by the High Court may lead to the conclusion that references to “notional property” as have been referred to in decisions of this court and at first instance may need to be reconsidered.

The decisions referred to seek to remind the Court that, however the exercise of discretion might seek to deal with property that is said to be the subject of “add back”, proper consideration must be given to existing interests in property, and the question posed by s 79(2) as a separate inquiry from any adjustment to property interests by reference to s 79(4) if a consideration of s 79(2) reveals that it is just and equitable to alter existing interests in property.

It appears their Honours had cleverly combined the traditional and post Stanford approaches to achieve what they considered was the right outcome. It was effectively an adjustment by way of a notional add back.

Whether this judgment will provide more confusion or clarity remains to be seen.

Lavan Legal comment

Parties should always be aware that the court may hold them responsible for the unilateral dissipation of assets.

Given the current uncertain landscape of the law in this area, it is advisable that if there is a risk that a party will devalue the asset pool through a premature distribution or wastage, then it is strongly recommended that you seek legal advice promptly.

1 Vass & Vass [2015] FamCAFC 51