The resolution of finances upon a Divorce is often complex due to the differing variables and circumstances at play when considering a couple’s marital finances.
Where one or both parties’ hold business assets, the complexities are enhanced and careful consideration is required to ensure the assets are valued appropriately taking into account the specific business structure involved.
It is essential that couples in this situation seek professional advice from legal and financial experts familiar with family law, business legalities, taxation and accounting principles. Robust advice at an early point can help couples in their efforts to achieve a fair settlement that protects their interests, provides for both parties and their dependents, and preserves the business.
General Principle: A Fair and Reasonable Settlement
The general principle for any divorce or dissolution is that both parties are entitled to a fair and reasonable financial settlement. Parties attempting to negotiate a settlement should have regard to this. If a settlement cannot be agreed and it falls to the Court to determine the appropriate outcome, the Court will have regard to the following ‘checklist’ of factors set out in section 25 Matrimonial Causes Act 1925:-
(a) the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future, including in the case of earning capacity any increase in that capacity which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire;
(b) the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
(c) the standard of living enjoyed by the family before the breakdown of the marriage;
(d) the age of each party to the marriage and the duration of the marriage;
(e) any physical or mental disability of either of the parties to the marriage;
(f) the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family;
(g) the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it (in limited circumstances);
(h) in the case of proceedings for divorce or nullity of marriage, the value to each of the parties to the marriage of any benefit . . . which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring.
The first consideration from the Court would always be the welfare of any child or children under the age of 18. Thereafter, the Court will consider what is a fair outcome in all of the circumstances, with particular emphasis upon the following:-
i) An assessment of the reasonable housing needs of both parties and any children
- What provision is needed to re-house the parties and any children?
- To what extent can the parties fund their housing needs themselves from their own resources and personal borrowing capacity?;
ii) An assessment as to the assets available for division
- The Court will consider whether all available assets were generated by the couple during their relationship. Any assets not so generated could be classed as ‘non-matrimonial’. This is usually assets acquired before the relationship , or gifted to/ inherited by one party.
- There may be an assessment whether those assets were “mingled” or “matrimonialised” during the relationship.
- Where the assets include a business, the Court will need to consider various factors such as when the business was established, how it was funded at the outset and over the years, whether marital funds were invested and whether it funded family life during the marriage.
- Valuing business interests can be challenging and the Court will need to carefully assess if/ how the business contributed to the value of the matrimonial pot in order to consider whether it is right and appropriate for the total value in the business to be included in the total asset value calculations for the purposes of a division.
- The Court may be asked to consider whether the value in any non-matrimonial assets should be ringfenced and not divided alongside the matrimonial assets, or whether the value in those assets is required to meet needs to the extent the matrimonial assets are of insufficient value. Non-matrimonial assets will only be included in the pot to be divided if they are required to meet needs.
- Assets or value amassed post-separation can also be treated in a similar way.
- See below for further detail regarding the valuation of assets.
iii) Consideration of the family income
- This will involve an assessment of the total income of both parties in contrast to their outgoings (their ‘income needs’). Child maintenance is generally calculated by the Child Maintenance Service outside of the Court process. However, Child Maintenance entitlement/ liability will be factored into the calculations in the Court process and any shortfall that one party has in meeting their income needs may highlight the need for additional provision (spousal maintenance).
Assessment of the assets available and their value
The process under point (ii) above is more challenging where it involved complex asset portfolios, particularly where the valuation and division of business assets proves necessary as a result of the divorce.
If the nature and value cannot be easily determined and agreed in a reliable manner, expert help may be required. Both parties and their representatives need to understand the structure and extent of an asset, the current and potential value in the future, and whether there is scope for it to be divided as part of the Divorce or Dissolution. This is often the case with pension funds, investment portfolios, overseas assets and business interests. It can also be the case with certain liabilities i.e. tax liabilities linked to a family business.
During a Divorce or Dissolution the structure of the business will impact upon the way the situation is assessed and the application of the relevant factors noted above.
- Sole traders operate as individuals. It is often difficult to distinguish business and personal assets (for example where the family home doubles up as their business premises). The value in the business may be intrinsically linked to an individual; their personal skills/ qualifications; and any goodwill they have generated.
- Partnerships involve two or more individuals sharing ownership and liability for the business. Each Partnership will have a different structure, with the Partners potentially having differing entitlements to share in the profits and proportionate responsibility for any liabilities.
- Limited companies. The valuation of a party’s interest in a Limited company is dependant upon the extent of their interest. One or both spouses may be shareholders, which can pose a real challenge in terms of valuation, management and asset division. The value of a shareholding may be affected by, for example, the economy and market conditions, company performance, and future earning potential. The parties may be in dispute regarding the running of the business post-separation and this too can impact on the valuation from a reputational perspective. Discounts may apply e.g. to reflect the reduced value of shares held by a minority shareholder.
Accordingly, these different business characteristics create a unique set of circumstances for the purposes of valuation and division. It is therefore crucial that the valuation is conducted the right way with these characteristics in mind.
- Where parties are involved in a contested Court process, they will appoint a Single Joint Expert (SJE) who will usually be a forensic accountant jointly appointed jointly by the parties to value assets in an appropriate way.
- An SJE appointed to value business interests will use a variety of methods, including an assessment of what a hypothetical buyer might pay for the business by reference to comparables; the costs of setting up an equivalent business from scratch; the value of the business compared to sales of comparable entities; or a valuation of an individual’s interest in a business based on the dividends that an investor would receive.
- The mode of valuation will depend on a number of factors, i.e. the size and structure of the business interests. The parties will need to agree the most appropriate method. Inevitably, there will be situations where one party will have conflicting views about the most appropriate method and specialist advice or guidance from the Court may be required.
Other considerations and complications for the Court to assess:-
- An increase or decrease in asset value post-separation. An expert may be required to value the asset as at the date of separation and again at the date of final hearing so that a comparison can be drawn.
- Third party interests and/ or liabilities to third parties? Do they need to intervene in the process?
- Business disputes – it may be unrealistic for the parties to continue in business together. There may be a third-party business owner to consider.
- Are there barriers to an asset being sold transferred? For example, restrictions or Charges registered. In Farming businesses, land may not be directly linked to the business. It may be held on trust and earmarked for future generations. The same may apply to other inherited assets.
- Overseas assets – do the parties require international legal advice?
- Questions about asset liquidity – adjustments and alternative solutions may need to be considered to ensure a fair division of the assets whilst preserving the functionality of the business
- Are there any ancillary legal and regulatory requirements associated with a proposed transfer of interests? E.g. upon the transfer of shares in a Limited Company, including the terms of shareholder agreements and the Company’s articles of association.
- Liabilities arising out of the division of assets – in particular, tax including Corporation Tax, Capital Gains Tax, and Stamp Duty. Parties should obtain specialist tax advice before committing to any settlement which might give rise to a tax liability, and also to ensure that they benefit from any available reliefs.
It is clear therefore that both parties involved in a financial negotiation as part of their Divorce or Dissolution, will need specialist advice from a legal and accountancy perspective based upon their personal circumstances.
Our specialists at DTM Legal LLP are poised to guide clients through the process from a legal perspective and signpost them to other professionals for supplemental advice linked to the above considerations. For further advice and assistance regarding business, finances and divorce please contact our Family Department.
Colette Blackburn: 0151 304 7145 / colette.blackburn@dtmlegal.com
Helen Davies: 01244 568 635 / helen.davies@dtmlegal.com
