Divorce is seldom an easy process, but difficulties are compounded when there is a business or a company involved. There is no standard formula for calculating an appropriate financial provision upon divorce and the Court’s approach is to calculate and then distribute the parties’ available resources between them to achieve a fair and equitable outcome.
The division of the ‘matrimonial pot’ has traditionally been the subject of a great deal of argument, and the Court has a duty to consider all of the circumstances of each case, including all of the income and capital available to the parties, and financial needs are taken into account including, but not limited to, the duration of the marriage, the ages of the parties, the standard of living during the course of the relationship, the needs of any children and any disabilities of either party or indeed, the children.
Businesses or companies are treated as a resource of the parties under section 25 of the Matrimonial Causes Act 1973 and including the value of such businesses in financial remedy proceedings is often an area of contention.
The Court must establish the value of each parties’ actual interest in a business, and then decide how that value should be reflected in the final financial distribution. The Court’s approach to achieving a fair financial outcome is by dividing assets ‘in specie’ to give parties a proportionate share of liquid and illiquid assets, and applying discounts to illiquid assets received by a party, and transferring shareholdings between parties.
Full and frank disclosure is always a necessity to assist in valuing all assets and resources between the parties and to quantify what is available for division and this includes valuing a business. Valuing a business is not always straightforward and it may be the case that an expert will need to be instructed to assist. Furthermore, the tax implications must be considered if extracting money from a business.
If a business valuation is calculated by reference to future income there is a risk of double counting if the payee is to receive a share of the business and also periodical payments from the income generated by that business.
Historic valuations may be a relevant consideration, particularly where there are arguments surrounding pre-matrimonial assets and post separation accrual. For example, a business may have been established before the marriage, inherited by a party or grow significantly post-separation because of one party’s efforts. This would therefore allow for a departure from the principle of equality when determining how the matrimonial assets are to be divided between the parties.
Unequal splits of joint business assets can be appropriate in some circumstances. For example, in the case of N -V- N (Financial Provision: Sale of Company) [2001]2FLR69, in which the husband’s business did not have sufficient liquidity (ability to generate cash) to finance an equal split, Mr Justice Coleridge awarded the wife a 39 per cent share of the total assets, which included the family home. Because of the financial circumstances of the business, the balance of her settlement was ordered to be paid over a period of years.
The judge commented that the “…those old taboos against selling the goose that lays the golden eggs have been largely laid to rest…but if it is necessary to sell her, it is essential that her egg-laying abilities are damaged as little as possible in the process.”
The valuation of a business will typically value its capital assets, so the value of everything owned by that business and its cash held, and its operational cash flow of that business.
Valuation of a business is quite often difficult and have been proved wrong. In the case of P -V- P (Financial Relief: Procedure) [2008] EWHC2953(Fam), a District Judge used a valuation of £730,000 for a shareholding in a business, but another shareholder offered to purchase the shares at £2.4 – 2.8 million. When considering the liquidity of a business, it is always of note that the value of a business is not the same as the value of cash.
In the case of S -V- S [2006] EWHC2339(Fam), a business was sold for £137million which was substantially outside the expert’s valuation of £4.5 – 20 million.
The Court generally does not have the power to order a transfer or sale of assets when they are owned by a limited company. The Supreme Court held that the doctrine of piercing the corporate veil exists only in a “small residual category of cases” and these principles of piercing the corporate veil came following the case of Prest -V- Petrodel Resources Ltd and Others [2013]UKSC34.
However, consideration should be given to the case of M -V- M and Others [2013] EWCH2534 where it was found that a husband had created a complex structure of off shore companies within which to hold family assets thus, these assets were deemed to be ‘under the control’ of the husband and held on a ‘resulting trust’, and thus available for division.
Ultimately, there is no set formula and each and every case will turn on its own facts. Consideration must always be given to the prescribed factors set out in section 25 of the Matrimonial Causes Act 1973. Most parties when divorcing will not want ongoing business ties and it is always imperative to seek the appropriate expert advice at an early stage.
This is not legal advice; it is intended to provide information of general interest about current legal issues.
