Looking at the ownership of a business in divorce proceedings and how that should be taken into account is quite different from dealing with other assets.

The business very often has other interested parties. It brings with it an income and Directors are also required to act in the company’s best interests. The issues that need to be covered to deal with its ownership correctly can often ‘straddle’ both the areas of family and corporate law. Expertise and advise in both areas can often be necessary to ensure every angle is covered and that avoidable tax consequences of other expenses do not arise.

Consideration needs to be given to how best to extract funds or, if that is even going to be possible (or necessary) at all. There needs to be a balancing of the risk of company assets with that of the non-company assets. Sometimes the business needs to be valued and thought needs to be given as to how best to balance that valuation with that of, for example, a property or cash in the bank.

The leading authority on this crucial question of ‘balancing’ risk-laden and non-risky assets is the case of Wells [2002] EWCA Civ 476. The interpretation of the thinking in that case generally follows this sequence:

  1. There should be a division of the ‘copper bottomed’ assets and the risk-laden, illiquid assets.
  2. It can be a bad idea and create tax complications for a couple to both remain shareholders.
  3. It is more desirable for one of the parties – still usually the husband – to retain the company but to recognise his taking the riskier asset he should receive more than 50% of the total assets.

A recent Court of Appeal case has thrown this into question.

The case of Martin [2018] EWCA 2866 saw the judge divide the global asset pool equally, even though a large proportion of the husband’s share was made up of shares in a private company. The reasoning was based on the fact that the valuation took into account the difficulty inherent in achieving a sale. Mostyn J, deciding that case, took the view that to discount a valuation that already arrives at discounted figure is to take account of the difficulties twice over.

The Court of Appeal did not agree with Mostyn’s J’s interpretation. Notwithstanding the valuation factors and the comparative thinking used to arrive at a valuation of property vs a valuation of a business, the Court of Appeal was steadfast in its view that there does need to be a more general recognition by the Court of the comparative risks of business vs non-business assets.

For the time being at least, the approach in Wells remains good law.

Andrew Barton of Stephens Scown explains, “In practice, those representing clients in business cases need to give careful thought to the terms of the business valuation. We are sometimes involved in cases where little regard has been had for the Wells point at that time, and our client is effectively left with an open goal – be they seeking to retain the business or arguing that the risk associated with the business should only be modestly recognised”.

Andrew is a partner in the family team at Stephens Scown LLP. The team has top ranking in both Legal 500 and Chambers UK. Andy specialises in the financial aspects of relationship breakdown, particularly high value and complex financial work. He is recognised as a leader in his field by Chambers UK and is recommended in Legal 500. He is also included in the CityWealth Leaders List, an international guide to private wealth management for ultra high net worth clients. To contact Andy, please call 01392 210700 or email solicitors@stephens-scown.co.uk.