DISCLOSURE OF BUSINESS RECORDS – MUST THE WIZARD LET THE MORTALS SEE BEHIND THE CURTAIN?

While no two relationships have the same dynamic, for the business owners I represent, there is often a marked division of roles in their relationship.  That means that one spouse has often run the business which has seen financial goals kicked, and the other spouse has fulfilled a separate role, such as caring for children of the relationship and running the household of the parties’ shared life together, or even working in unrelated employment or running their own separate enterprise.

 

In reality, this means one thing – one spouse, the proprietor of the central business, has a wealth of information about that business coursing around inside their head, and control over all of the documents which underpin that information.  For businesses started and ‘grown’ during a long relationship, that can be a significant volume of data.

 

The other spouse is often possessed of some knowledge, but it is usually less detailed – arising from kitchen table discussions about ‘things at work’, bits and pieces of data overheard from telephone discussions and dinners with colleagues, and snippets of documents they have been asked to sign at meetings with commercial lawyers and accountants.  Overall, they are usually at a knowledge disadvantage in comparison to the proprietor spouse – they have a very broad understanding of the business and its operations, but the finer detail is a mystery.

 

It is perhaps unsurprising, then, that following relationship breakdown, the ‘uninformed’ spouse and/or their family lawyer will ask the ‘proprietor’ spouse to produce documents in relation to the business – balance sheets, profit and loss reports, asset registers, debtor and creditor lists, and bank statements.

 

A question regularly posed to family lawyers by the proprietor spouse is, ‘Do I need to provide this information’?

 

The sub-text of the question is usually that such records contain vital information, information which, if it became known to a third party, such as a competitor, a creditor, or a financier, could trigger some prejudice to the business, and which must therefore be guarded.

 

The Wizard of Oz does not wish the citizens of the Emerald City see behind the throne room curtain, for his mystique, and competitive edge, is then lost.

 

The proprietor spouse is therefore often disinclined to be transparent, preferring to ‘circle the wagons’, and keep their financial data as close to their chest as is possible.

 

The answer to the question often comes down to the following – to determine the case, what will the Judge need to know?  To do justice and equity between spouses, a Judge needs to know how items of property (such as an interest in a business) are held, and the value of those items of property.

 

Accordingly, the disclosure of financial information connected with a business is necessary to have its value assessed, and ultimately, the dispute determined.

 

While some former spouses are able to ‘agree’ on the value of a business, that is a task most commonly put to an expert – usually a forensic accountant – who will, based on his or her expert skills and experience, express an opinion as to value in the form of a written report.

 

Where it is practically impossible for an opinion to be expressed as to the value of a business without the financial records which demonstrate its financial position and trade history, it becomes a foregone conclusion that a Judge will order the production by the proprietor spouse of the documents disclosing this information about the business, because it is necessary for this information to be produced in order to resolve the dispute.

 

There is a further reason why this disclosure is required – statistically, only 4 out of every 100 matters which are commenced in Court will see the inside of a Courtroom for a final hearing.  The vast majority of cases will settle long before a Judge ever has to make a decision, an outcome which is reached by spouses coming to their ‘own deal’.  For those spouses to reach a position where they can seriously consider outcomes, they each need to be possessed of information, including information about the composition and value of the pool of property of their relationship.  Without each party being possessed of this information, important decisions cannot be made, and fairness cannot be done.

 

Accordingly, family law is an arena in which the Latin aphorism,  scientia potentia est, rings true – knowledge is power.  Separated spouses cannot make a settlement bargain if they do not know the facts, facts which include what items of property exist, and facts which can support opinions as to the value of those items of property.  Importantly, for those spouses who settle without having provided that information to the other, they risk having their agreed settlement set aside down the track (and the financial issues re-opened, possibly many years later).

 

For these reasons, an obligation on each spouse to provide full and frank disclosure of all relevant matters is embodied in the Court’s Rules, and our family law imposes potential penalties (including financial penalties) on those who fail to comply with this obligation.

 

Many exclaim that such an obligation is too great a burden for, and places an unbearable onus on, the proprietor spouse.  While that obligation is certainly greater, the proprietor spouse is often unable to resist it when it is cast in the following terms:  Would they permit themselves, in the commercial arena, to enter into a binding financial contract with a partner or supplier, if they were blind to the material facts associated with that contract?  The answer is self-evident.  Of course not.  Why then, would they expect their spouse to do exactly that – to enter into a binding financial settlement, without being possessed of key information?

 

In the end, a spouse will only be held to an agreement about financial matters if they entered into that agreement with the information necessary to make an informed decision about it – if they were deprived of that opportunity as a result of a failure to disclose, they have been potentially misled.  If the impact of that misdirection is material, the law may let them out of the resulting bargain (empowering them to seek a different or further outcome).  For many business spouses, who expect that their wealth will rebound with the passage of time, the very last thing they want is for their former spouse to be able to have a ‘second bite of the cherry’.  Another reason to have given complete and accurate disclosure.

 

As much as the proprietor spouse may feel aggrieved at having to meet this hurdle of full and frank disclosure, there are protections.  The uninformed spouse, in requesting and receiving those documents, is bound by an implicit undertaking, permitting them to use those documents for the purpose of the family law matter only.  They do not have a free rein to use those documents for any purpose beyond that.

 

And for those proprietor spouses who fear that their former spouse intends to wreak havoc by deliberately releasing confidential information to a party beyond the family law matter, in 9 cases out of 10, the request for the production of the documents is in fact driven by an entirely inverse motivation – to fix on a value of the business, so that a property settlement can be struck, rather than with any thought whatsoever of driving the value of that business down.  Despite what may be said in the heat of anger, it is not many spouses who will attempt to torpedo the value of a business, to their own detriment.

 

Accordingly, for sensitive information, the proprietor spouse should talk to their family lawyer, to ensure that the nature of the undertaking being given by the uninformed spouse is known to them (and the potential consequences of its breach are understood).
Of course, the obligation to disclose is not boundless.  The proprietor spouse receiving a request for production of business records should discuss them with their family lawyer, isolating those which are relevant, and any requests which should be resisted.

 

Ultimately, if we understand the reasons for things, we can often live with them.  The obligation of financial disclosure is one such thing – if understood from the perspective that the law requires full and frank disclosure because, without it, justice cannot be done, the task becomes more palatable.

 

Dan Bottrell

http://www.danbottrell.com

Facebook:  @DanBottrellLawyer

Instagram:  @bottrelldan

 

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