In conducting an analysis of a spouse’s income for support purposes involving a business, a chartered business valuator will typically request corporate financial statements, general ledgers and other financial documents (e.g., bank loan agreement, tax returns, invoices supporting expenses, etc.).
The valuator is interested in reviewing these documents for two main reasons. First, the documents will provide information to assess the compensation and personal benefits received by the spouse as well as persons or corporations with whom the spouse is related.
Second, the information will assist with the assessment of the level of pre-tax corporate income available for attribution to the spouse for support purposes under section 18 of the Federal Child Support Guidelines. For example, the bank loan agreement may have loan covenants designed to maintain adequate cash flow, minimum working capital and financial ratios.
An important issue affecting disclosure that often arises is the desire for confidentiality, which may lead the parties to seek a sealing order or enter into a confidentiality agreement. However, there are many potential difficulties with confidentiality agreements. Blaney v. Blaney, 2012 ONSC 1777 (Ont. S.C.J.) addresses the obligation to produce disclosure, as follows:
The obligation and onus to satisfy the court as to income and the value of assets and debts is on the person whose income or asset or debt is called into question. Here the respondent (husband) had that obligation. His obligation existed prior to any court orders, conferences or court attendances. [Emphasis added.]
The valuator may also request personal bank statements and credit card statements when there is a significant difference between a spouse’s reported income and the level of spending or lifestyle of the spouse. However, disclosure must be proportional to the issues involved (see Rule 1.04 (1.1) of the Family Law Rules).
What are the consequences of non-disclosure?
Consider the facts of the Ontario Court of Appeal case of Roberts v. Roberts, 2015 ONCA 450 (Ont. C.A.) where a husband continually did not comply with court disclosure orders. The wife requested disclosure from her husband by bringing a motion. The judge ordered the parties to exchange disclosure requests and respond in a defined period of time. Husband did not comply. Wife brought another motion, and on consent, the time line was amended. Husband did not comply. Wife brought a motion to strike the husband’s pleadings.
Instead of striking the husband’s pleadings, the judge provided the husband with a further extension, with condition that if he did not produce the required disclosure, the wife would be entitled to renew her motion to strike.
The husband did not answer all disclosure requests. Wife renewed her motion to strike the husband’s pleadings and the order was granted. The appeal court agreed with the trial judge, as follows:
The appellant’s conduct in ignoring court orders and failing to follow the basic principles of family law litigation put him in the exceptional category …where the judge’s discretion to strike his pleadings was reasonably exercised.
In the case of Laframboise v. Laframboise, 2015 ONSC 1752 (Ont. S. C. J.), the husband did not provide general ledgers from 2009 to 2012 to the wife’s ecpert, as he claimed they had been destroyed by a virus.
General ledgers were provided to the wife’s expert from 2005 to 2008. Based on the general ledgers provided prior to 2009, the expert estimated the level of personal expenses paid by the business from 2009 to 2012 based on patterns of personal spending recorded in the company in years prior to 2009.
On the other hand, the husband’s expert obtained the general ledgers for 2009, 2010 and 2012 from the husband’s accountant (the accountant advised that 2011 general ledger was not available due to an IT issue). The husband’s expert was also provided summaries of corporate credit card activities, not provided to the wife’s expert despite the requests to do so.
Based on the evidence, the court drew an inference that the husband’s income levels were closer to those determined by the wife’s expert (Mr. Pittman) than the husband’s expert (Mr. Savage):
Here, knowing the content of Mr. Pittman’s report, the applicant chose both to limit the scope of Mr. Savage’s work on his behalf, and not to provide the respondent with all of the documentation provided to Mr. Savage. These circumstances support an inference that the applicant’s incomes available for support purposes were closer to those determined by Mr. Pittman.
The failure to provide timely disclosure is often an impediment to a quick resolution of the financial issues of a divorce and can result in severe consequences such as a court’s power to strike a spouse’s pleadings, award costs against a party, draw adverse inferences, etc.
Roher, Bruce; The lawyers Weekly, February 19, 2016.