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This morning I noted that the media had picked back up the calls for divorce reform.

Influenced I am sure by the announcement yesterday that Chair Margaret Heathcote was to outline her concerns in a speech at Resolution’s annual conference in Manchester today.

One of Ms Heathcote’s main concerns is the danger that reform will fall by the wayside because MPs are tied-up with debating Brexit. And I for one, agree with her completely.

Now, we all have differing views about Brexit but one very real consequences of the endless wrangles at Westminster is that many other important issues are just forgotten altogether.

One of those is divorce reform.

Eventually, last September, the Government gave in to pressure from many quarters and committed to introducing ‘no-fault’ divorce.

Judges, barrister, solicitors and countless others had been campaigning for years to see the abolition of ‘blame’ at the very start of the divorce process. As things stand, the overwhelming number of divorces are based upon the behaviour or the adultery of the other person.

This leads to more unhappiness, misery and acrimony for couples who are already going through one of the most stressful periods in their lives. Inevitably, this affects any children involved.

Today in Manchester, the Chair of Resolution, the body which represents the majority of specialist family solicitors, Margaret Heathcote, urged the Government to fulfil its commitment.

She said,

“If you’re separating, and you’re faced with having to make unnecessary and unhelpful accusations against your ex on the divorce petition, there is nothing more important than this reform in the law.”

She went on to add that

“otherwise, every day that passes sees thousands of couples at risk of needless acrimony and denied the right to a kinder divorce process.”

The role of Government and the purpose of the law is to protect its citizens and make their lives easier where it is possible to do so and not to inflict unnecessary harm and damage children’s lives, possibly forever.

Stowe Family Law is the largest specialist family law firm in the country and we are part of the campaign to see divorce law changed and will continue to press for this much needed and long-delayed reform.

Graham Coy, London Chancery Lane 

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In a financial remedy claim following divorce the court can obviously only deal with property that belongs to one or both of the parties. Property that actually belongs to someone else is not part of the claim. As might be imagined, it is a common scenario that someone other than the husband and wife, often another family member, claims to own property that would otherwise be subject to the claim. In such a case, the court must decide as a preliminary issue who actually owns the property, before it decides the financial remedy claim itself.

That was the task facing Mr Justice Mostyn in the recent case Rothschild v Charmaine De Souza.

Now, before I describe the case I should explain that its facts are a little complex, as they often are when family businesses are involved. I will therefore be simplifying the facts of the case for the purpose of this post, to make it easier to follow. In particular, I will assume that there was only one business throughout the history of the case, whereas in reality there were several businesses.

The case revolved around who owned the family business. Was it owned by the husband and the wife equally, as the relevant paperwork suggested, or was it actually owned by the husband’s mother, as she claimed?

The business, a company, was incorporated in 1999. Its two issued one-penny shares were transferred from the formation agents to the husband and the wife. Thereafter all of the documentation relating to the company, including documentation signed by the husband, indicated that it was held 50:50 by the husband and the wife. Certainly, the husband did not, in any of that documentation, indicate that the true owner of the business was his mother.

The marriage broke down and the parties separated in September 2016. Divorce proceedings then ensued, along with financial remedy proceedings.

Within the financial remedy proceedings the husband was required to prepare a financial statement (‘Form E’), setting out details of his finances, including all of his assets. A draft of the Form E was delivered in April 2017, and this was the first time that the husband asserted that the business was owned by his mother. His mother was made a party to the proceedings and, as explained, the issue of the true ownership of the business fell to Mr Justice Mostyn to decide.

Perhaps the most interesting part of Mr Justice Mostyn’s judgment is the initial section (paragraphs 1 to 7), in which he explains his task, and how the court goes about deciding what he called (using a term that a lay person would understand) who ‘really owned’ the company. If you would like a plain-English introduction to what can be a horrendously complex area of law then I would recommend that you read those paragraphs. It all boils down to the difference between being a ‘formal owner’ (i.e. the owner according to the documentation, for example the deeds, in the case of land) and the real owner – it is quite often the case that, for various reasons, the two people are quite different.

In fact, Mr Justice Mostyn’s task in this case was not that difficult (or at least that’s how his judgment reads to someone who has never sat in judgment of anyone or anything!). The evidence clearly pointed to the business being owned equally by the husband and the wife. Mr Justice Mostyn listed examples of facts indicating that the business had been treated and represented as being in the ownership of the husband and wife (at paragraph 23 of his judgment). He called the list a ‘formidable catalogue’. In other words, they very strongly pointed in the direction of the business being owned by the husband and the wife.

Faced with this unpleasant truth, the husband’s mother turned against her son, alleging that he had ‘gone rogue’, by holding himself out as the owner of, and dealing with, her property, when he had no authority to do so. Mr Justice Mostyn was having none of it: the husband had not gone rogue, in asserting to the world, including to tax authorities, and moneylenders, that he was, with the wife, the real owner of the business – he was speaking the truth. In any event, if they did not have any interest in the business, why would the husband and the wife have devoted their working lives to it?

Accordingly Mr Justice Mostyn concluded as follows:

“My very clear and strong finding on the evidence is that, at least from the time of the creation of the [company], it was the common intention of [the husband] and [the wife] that the business … would be owned 50:50 by them. [The husband’s mother] knew of this and went along with it.”

He therefore made an order declaring that the business belonged to the husband and the wife in equal shares.

His full judgment can be read here.

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Divorce, whatever the circumstances, can be a tricky business but when a family or one of the partners runs their own business, things can be even more complicated.

One of the first stumbling blocks is working out an accurate valuation of the business. You cannot look at the division of a business without an understanding of its value.    

So, we asked Mark Heppinstall from the Stowe Family Law office in Ilkley, who is regularly instructed by business owners, or the spouses of business owners, to join us to explain the best way to get an accurate valuation.

“I am often asked by my clients whether there is a need to have any sole or shared business valued in the event of a divorce or separation.

To answer this, people need to understand that a business is something that can be considered by the Court as one of the financial resources that are available in a case, irrespective of whether the business is considered a matrimonial or non-matrimonial resource.

How to value a business

If a valuation is needed, in matrimonial cases it will usually be undertaken by a single joint expert acting on behalf of both parties. However, before instructing an expert, there are certain steps that should be taken first.

There should be consideration of full business accounts for the last two financial years, which applies to sole traders as much as it does to partnerships, LLP’s or shareholders in limited companies.

If a business is incorporated, abbreviated accounts can often be accessed online from Companies House. This contains easily accessible information that either party can review digitally at the touch of a button.

Whilst a useful overview, these are no replacement for full company accounts, which are usually much more informative and should include the full profit and loss account, balance sheet, detailed notes to the accounts and reports on behalf of the accountants and directors.

This information gives more context to the performance of a business than publicly accessible abbreviated accounts. Unsurprisingly, abbreviated accounts tend to be more concise and therefore might only tell part of the story.

A word of caution, it is worth bearing in mind that by the time business accounts or financial statements are available the data may be historic and could be out of date. Therefore, it is worth cross-checking this information against more current management accounts. This can help give both parties more confidence in a valuation and enable them to make more informed decisions without the need to instruct an expert.  

Additionally, if I am acting for a client who has an interest in a business, I often advise them to obtain a letter from their accountant to comment upon its value, which can assist in narrowing the issues in dispute. This can really help, although the flip side is that the spouse may be wary about relying on a company accountant’s valuation unless there is corroborating evidence from a single joint expert. Nevertheless it can help to explain how the valuation of the client’s interest in the business has been assessed.

I commonly see this if there is disagreement about how the business has been valued, or in cases where a spouse is less familiar with the business, which sometimes means they have less confidence in the accountant’s interpretation of its value.

If you cannot agree, how can the court help?

In most cases, after taking the above steps it is possible for an agreement on valuation to be reached. However, where this is not possible, the Court’s expectation is that expert evidence should be considered from a single joint expert instructed by both parties.

The question for the Court is whether it is necessary to instruct an expert.  If the Court is satisfied that an expert should be instructed, common practice is to instruct an independent accountant with no prior knowledge of the company in question. Although it would be expected that they should have sufficient knowledge of the market or sector in which the business operates.

Strictly speaking, there is no mandatory requirement for the Court’s permission to be obtained before an expert is instructed. However, permission is needed before expert evidence can be put before the Court.

If there is a dispute about whether to instruct an expert, this should be addressed at an early stage in a Court timetable and ideally no later than the first hearing. The Court will weigh up the cost and delay of instructing an expert against the potential value of a party’s interest in the business and the relevance of this in the context of the other matrimonial assets available.

The scope of an expert’s instruction should be carefully considered and could include the value of a spouse’s interest in a business, the extent to which this value is realisable (i.e. liquidity), the future maintainable income of the business and any tax consequences associated with a sale or disposition.

I often remind my client’s that the value of a business should be treated with caution and it is not realistic to compare a business valuation to property or other matrimonial assets.

Property is generally easier to value, easier to sell and convert to liquid capital and therefore more readily realisable. Business valuations are generally more uncertain, there is greater potential for change, they are typically regarded as more risk-laden and the sale of a business might affect a party’s earning capacity or future income; unlike the sale of a property.

The bigger financial picture

In view of this, clients should bear in mind that it can be misleading to treat a spouse’s interest in a business as a capital asset in isolation. Sometimes, it makes more sense to consider the income a spouse can draw from a business, which can be relevant when considering maintenance. Maintenance that could well be guillotined if a client was forced to sell their interest in a business to realise it’s capital value.

What is clear is that there is no one size fits all approach and each case will be based on its own facts. Sometimes a valuation from a single joint expert can really help, but all too often parties can jump to this starting point without first taking sensible and proportionate steps to consider whether this is necessary.”

Get in touch 

If you are separating from your partner and either you or your spouse hold an interest in a business, it is important to take early advice tailored to your specific circumstances.

At Stowe Family Law we work closely with our in-house forensic accountants to ensure that all bases are covered in this respect.

If you would like to get in touch with Mark you can email him at  Mark.Heppinstall@stowefamilylaw.co.uk or please do contact our Client Care Team at the details below.

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