What happens if your ex-partner has unilaterally sold a matrimonial asset or spent large sums of money following a separation? Are these disposals accounted for in a property settlement?

Following a line of recent court judgments the answer to these questions is not so clear.

Generally when a Court determines a property settlement it follows a 4-step process:

Step 1: Identify and value the assets, liabilities and financial resources of the parties.

Step 2: Identify and assess the financial, non-financial and welfare contributions of the parties.

Step 3: Assess the future needs of the parties, including the disparity of income and future earning capacity.

Step 4: Consider whether the orders that may flow from these findings are just and equitable. If not, make adjustments to the property interests of the parties to ensure a just and equitable outcome.

In Family Law the dispute commonly arises in relation to Steps 2 and 3, where the parties argue about how they contributed to the matrimonial assets or the weight that should be placed on their future needs.

You would assume Step 1 would be straightforward identification, however the situation often arises whereby one party has unilaterally expended or disposed of a matrimonial asset after separation and before settlement. Examples of this include large withdrawals from bank accounts that go beyond reasonable living expenses, expenditure on gambling, expenditure on legal fees from joint funds or where a party has embarked on a course of conduct that has negligently or recklessly diminished or wasted matrimonial assets.

So what does the Court do in this situation? Is it fair to allow one party to receive an early benefit from the matrimonial pool and the other miss out? Should this property be accounted for and added back to your pool of assets?

For decades the Courts have recognised the injustice of ignoring such dissipation of matrimonial assets. Therefore, when the situation has presented itself, the Court has applied a well-accepted principle of notionally “adding back” the value of the asset to the pool and regarding it as an asset that the party receiving the benefit had already received. The Court makes a determination as to whether the disposal or expenditure was reasonable and whether it would be just and equitable to recognise the add back.

Recently however, the Courts have thrown this long-standing approach into doubt.

In Stanford & Stanford the High Court held that it is necessary to identify the existing legal and equitable interests of the parties when considering whether it is just and equitable to make a property settlement order. In accordance with this decision, an add back does not constitute a legal or equitable interest or right under common law or pursuant to equitable principles and, therefore, cannot form part of the property of the parties. This focus on identification of the parties existing property stands contrary to the principle of notionally adding back property that has been disposed of by one party.

This decision was considered by the Full Family Court in Bevan & Bevan in relation to add backs and notional property. The Court raised doubts on the appropriateness of adding back property to an asset pool which is no longer in existence, observing that notional property is unlikely to be “property”. The facts of the case did not require a conclusive determination on the issue, however the Court made some interesting observations regarding add backs. The Court said that it is important to carefully deal with unilateral disposals by recognising they are no longer in existence, but that the disposal forms an important part of the history of the marriage. The Court indicated that the legislation provided ample scope to consider the unilateral disposals when it is exercising its discretion to alter the property interests of the parties in order to achieve a just and equitable outcome.

So what does this mean for the future of add backs?

Well the Courts have not completely rejected the practice of adding back dissipated assets and regarding them as notional property, however there are early signs of a changing approach. The Court may no longer regard the dissipated assets as notional property at Step 1 of the process but may consider the disposal as a negative contribution at Step 2 or when it is of the opinion that the justice of the case requires the disposal to be taken into account and will make adjustments accordingly. Certainly this approach changes the way cases ought to be presented to the Court in the future.

Watch this space…