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A recent Court of Appeal judgment has considered the tricky area of how business assets should be dealt with on divorce.

The case is Martin v Martin B6/2017/1509 and the leading judgment is given by Lord Justice Moylan which addressed both an appeal by the wife and cross-appeal by the husband. Essentially, the appeal boiled down to two questions:

  1. What proportion of a private company should be considered matrimonial when it was started by one party prior to the relationship; and
  2. What role should the risk associate with different asset have for the purposes of sharing the matrimonial wealth.

The first instance judgment, WM v HM [2017] EWFC 25, was made by Mister Justice Mostyn in May 2017. It related to a marriage that had lasted nearly 30 years where there were two children and both of whom were now adults. The assets were significant such that Mostyn J was satisfied that he only had to deal with sharing the matrimonial assets rather than assessing the parties’ needs.

The bulk of the available assets were shares in a private company. These were, at the time of the divorce, owned 100% by the husband.  The husband had started the company with a friend in 1978 when he had only had a 50% shareholding.  The relationship between the husband and wife started 8 years later in 1986.  Some of the current value of the company could therefore be attributed to the efforts made by the husband prior to the marriage and so should be considered non-matrimonial. This is despite the passage of nearly 30 years the marriage which often (but not always!) indicates that an asset has been incorporated into the marital pot.  This was not disputed by the wife although the method of calculating just how much of the business should be excluded from the matrimonial pot was an issue.  

Mostyn J determined that, for the purposes of his assessment, the business itself was worth £221m.  In determining what percentage of that value was matrimonial, he took what was referred to as a “straight line apportionment” approach. This meant that he divided the value of the company by the number of years that it had been in existence (approximately 39) and then multiplied that by the number of years that the relationship had endured (approximately 30).  Using this approach, he found that only about 80% of the company should be considered matrimonial.

On appeal, the wife argued that the method Mostyn J had used to calculate the 80% was flawed because it did not use the evidence presented to the Court by the single joint expert. Specifically, Mostyn J made no reference the value of the company at the start of the relationship or the fact that the husband’s interest at that time had only been 50%.  On her calculations the matrimonial value of the business would have been closer to 99%. This would have had the effect of increasing her overall award by approximately £17m.

On appeal, consideration was given to the different methods of apportioning matrimonial value to business assets and also to some of the inherent problems that such an exercise will always have to address.  The general conclusion is that the Court should not be bound by any one method and that the outcome of any calculation must be checked against a broad analysis of whether that outcome is fair taking into account the full circumstances of the case.  The same approach in one case might produce an unfair result in another; this will depend on the facts of each case.

The specific conclusion in this case was that Mostyn J had been entitled to use the straight-line approach and had given adequate consideration to whether he felt the outcome of that method to be broadly fair. The wife’s appeal therefore failed.

This may feel like a somewhat unscientific approach particularly when expert evidence was available and when the difference of a percentage or two could run to many millions of pounds.  The Court of Appeal reasoned that the alternative would be even more extensive analysis of business assets including historic analysis and that it would be impossible to eliminate the need for speculation and assumption completely. Such an alternative would be expensive, time consuming and contrary to overring objective in that it would prevent cases from being dealt with proportionately and expeditiously.

The wife did have some success at defending the husband’s cross appeal. Mostyn J’s division of assets saw the wife’s award predominantly comprised of a cash and the husband’s award predominantly comprised of company shares. In undertaking this division Mostyn J had made it clear that he had considered the two different assets to be like for like or pound for pound in value and that any assessment of risk had already been addressed in the values attributed to them. The husband argued that this approach was incorrect and unfair, as the shares carried greater risk whereas the cash assets where “copper bottomed” or lower risk.  He argued that the value of the business should be adjusted downwards to take this risk into account thus reducing the value of the wife’s award.

The Court of Appeal found that Mostyn J had been wrong to disregard the element of risk between the two assets. It referenced previous caselaw, including the case of Wells v Wells [2002] 2 FLR 97 at [24], which clearly supported the fact that risk was a relevant factor to be taken into account in the division of matrimonial assets.  The Court of Appeal, however, did not accept that the error should be corrected by adjusting the value of the business. The amount of the wife’s award therefore remained the same with the Court of Appeal instead restructure the payment of the wife’s cash lump sum to allow the company more time to realise the cash.

This case is a useful reminder of the difficulties that the Court can face when analysing matrimonial assets and business assets on divorce. It also highlights the uncertainty of taking matters to court and relying on a judge’s discretion to divide the matrimonial assets. Finally, it is worth considering the additional risks of appealing a first instance decision. Not only is it difficult to overturn the decision of a judge at first instance but there is a risk of a cost orders being made against the unsuccessful party (in this case the wife) and the total loss of anonymity for the parties at the appeal stage.

Emma Nash is a Partner at The International Family Law Group LLP. She provides clients with advice and support in relation to a comprehensive range of family law issues including child maintenance, financial provision on divorce, and financial claims by cohabiting couples.

 

Emma Nash

Emma.nash@iflg.uk.com

The International Family Law Group LLP

www.iflg.uk.com

© 08 Jan 2018