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IN
THE
HIGH COURT OF JUSTICE
FAMILY
DIVISION
|
|
Royal Courts of Justice Strand, London, WC2A 2LL |
|
|
02/04/ 2020 |
B e f o r e :
MR NICHOLAS CUSWORTH QC
(SITTING AS A DEPUTY HIGH COURT JUDGE)
____________________
Between:
|
G
|
Applicant
|
|
- and -
|
|
|
T
|
Respondent
|
____________________
SIMON WEBSTER QC and
THOMAS
HARVEY (instructed by Payne Hicks Beach) for
the
Applicant
ROBERT PEEL QC and LAURA HEATON (instructed by Farrer & Co) for
the
Respondent
Hearing dates: 23rd March – 2nd April
2020
____________________
HTML
VERSION
OF JUDGMENT
____________________
Crown Copyright ©
This
judgment was handed down in private on 2 April
2020.
It consists of 71 paragraphs and has been signed and dated by
the
judge.
The
judge hereby
gives
leave for
this
anonymised
version
of
the
judgment
to
be reported.
Mr CUSWORTH QC:
-
This
judgment concludes
the
final hearing of an application for financial remedies, following divorce proceedings.
The
first listed day of
the
hearing was Monday 23 March
2020,
which has meant
that
as a result of
the
Coronavirus pandemic, it has not been conducted in
the
Royal Courts of Justice, but rather by means of a
video-conferencing
facility,
through
which
the
parties and
the
court have all engaged entirely remotely, save for
the
wife's evidence which she
gave
whilst in
the
same room as her Counsel and instructing solicitor, albeit at an appropriate distance. In
this
way I have
taken
the
evidence of
the
parties, one witness who was overseas, and
the
Single Joint Expert, Ms Hall, as well as written and oral submissions from both leading counsel.
Background
-
The
husband is English, and
the
wife is South American by birth but is now a British citizen. Both are currently 45.
They
met in 1998 and married in September 2000.
The
parties have
two
daughters; aged 8 and 3.
The
children respectively attend a fee paying school and nursery in central London.
-
The
marriage came
to
an end in 2017.
The
parties separated in October/November 2017 and shortly afterwards
the
husband moved into rented accommodation; he now has a new partner with whom he has a young son, born in 2019.
The
wife continues
to
live in
the
former
family
home with
the
children of
the
marriage.
-
The
wife presented her divorce petition in February 2018. Decree Nisi was pronounced in July 2018, and it has not yet been made Absolute. Child arrangements have not proved
to
be easy, and will no doubt have proved costly for
the
parties.
That
unfortunate background makes
the
costs of
these
financial proceedings merely a part of what must add up
to
a daunting
total.
Those
financial costs for
the
husband stand at £697,903 and for
the
wife at £812,808.
This
is especially striking when one of
the
major issues between
the
parties beyond
the
value
of
their
assets has been
their
past and future liquidity.
- Shortly after
the
parties' marriage, in 2001,
the
parties moved
to
mainland Europe for
the
husband's work.
The
wife
too
worked in
the
financial sector whilst living
there
and continued
to
do so after
the
parties returned
to
England in 2004, until 2011. Following
the
birth of
their
first child, in 2012,
the
wife left formal employment and has not returned. In 2016,
the
parties moved with
their
elder daughter
to
live abroad where
the
husband's business was setting up a new office, and where
their
younger daughter was born.
The
family
returned
to
London in 2017.
- Not long after
their
return
the
marriage broke down.
Given
the
value
of
the
parties' assets, examined below, and
their
agreement
that
any award (within
the
spectrum of
those
contended for as fair for her under
the
sharing principle) will meet her needs appropriately without
the
need for her
to
consider a return
to
work if she does not wish
to,
her future earning capacity has not been a live issue between
them.
It should be said
that,
insofar as she may choose
to
return
to
work in
the
future,
there
has not been a suggestion
that
that
should happen within a
timescale
that
will affect her liquidity during
the
time
period which will be necessary
to
enable full implementation of
the
court's order.
-
The
family
home, Flat A, has
two
bedrooms, but in fact
the
parties own
three
separate flats in
the
same building: Flat C is rented out, whilst Flat B is occupied by
the
nanny. Plans
to
unite
the
properties have been put on hold. Flat A is
valued
at £4.4m, with a mortgage of £3.5m secured on it. Flat C is worth £1.7m against a mortgage of £1.1m, and Flat B is worth £515,000. Accordingly, whilst all
three
flats have a
gross
value
of £6.6m
they
only have equity of around £1.9m.
-
These
mortgages over
the
three
properties are inevitably expensive
to
maintain. In
the
period since separation
the
parties have used
the
liquidity available
to
them
to
meet
these
and other property payments.
This
has been because
the
husband's income has been significantly reduced from its previous levels and so has not been sufficient
to
service
the
family
outgoings.
Those
costs
together
with living and legal expenses have reduced
the
investment fund held at
the
time
of
the
parties' Forms E from around £4.2m
to
just under £1.5m now.
The
husband's business ("B Ltd")
-
The
company was originally incorporated in offshore in 2011, but subsequently shifted its centre
to
an alternative offshore jurisdiction. B Ltd sits at
the
top
of a corporate structure.
The
husband is one of
the
founder members of
the
business, as well as being its single largest shareholder.
The
business of B Ltd now
takes
two
forms: Proprietary
Trading,
where employees
trade
in
the
markets and make profits/losses from
those
trades,
and Market Making, where
the
business acts as a middle-man
to
facilitate
trades.
It deploys its own funds in
the
marketplace - it does not borrow money or use
third
parties' funds.
The
traders
use B Ltd's money, so
that
the
outcome of each
trade
directly impacts on
the
value
of
the
shareholder's funds in
the
company.
-
The
business started
trading
in late 2011.
The
husband and
two
other co-founders, Mr Y and Mr Z, are
the
directors of B Ltd: I heard evidence from Mr Y. Collectively,
these
three
own nearly
two
thirds
of
the
shares in
the
company.
The
husband holds about 1/3 of
the
total
shares.
The
remaining shares are divided between
the
further employees, or former employees, or on
their
behalf.
-
The
business now employs some 190 people, many more
than
the
amount at
the
point when
the
parties' marriage broke down. It briefly operated in 3 areas, adding asset management
to
its other 2 arms in 2016. However,
this
proved short lived. After
the
departure of
their
main
trader
Mr X in late 2018
to
set up a rival business,
the
asset management arm was closed down, and
the
business returned
to
its core activities - proprietary
trading
and market making.
-
The
husband relies upon
the
fact
that
B Ltd has no underlying regular income stream. It briefly received some management fee income, but
that
ended when
the
short-lived asset management arm shut down in 2018.
The
traders
therefore
need
to
make substantial profits,
to
cover
the
business' operating costs, and
to
pay
their
own significant bonuses, which keep
them
employed by B Ltd rather
than
moving
to
rival concerns, before
then
turning
a profit for
the
shareholders. However, historically
they
have done
that
very
effectively.
- In order
to
effect multiple
trades,
the
business uses a number of prime brokers.
The
prime broker will deploy its own capital
to
place
the
trade
and requires B Ltd
to
provide collateral against its own assets. It is
therefore
the
husband's case
that
the
value
of B Ltd can be set at
the
end of each day, in
that
it represents
the
sum of
the
accumulated profit held by
the
business. He points out
that
talented
staff are integral, and
that
selecting and retaining
traders
who will continually produce substantial profits for B Ltd is now a key skill of his. In particular he points
to
the
period after
the
departure of Mr X
towards
the
end of 2018, as a period when he had
to
work hard
to
maintain
team
morale and replace departing staff with others who would produce comparably
good
results
going
forward.
-
The
husband acknowledges
that
most
trading
firms have a relatively short life span because of
the
difficulty in continuing
to
make substantial profits over a lengthy period in a fiercely competitive market. Eventually, like some other such businesses, he suggests
that
B Ltd will be wound up. However, although most
trading
businesses do not last much more
than
about 10 years – and B Ltd is now in year 9 of its life cycle – he says
that
he and his partners have no immediate plans
to
liquidate
their
asset. His case is
that
the
very
significant recent increase in staff numbers presages a new attempt
to
grow
the
business and increase profitability for
the
existing shareholders, rather
than
as any form of preparation for a sale or other liquidation at any price
greater
than
the
net asset
value
of
the
company.
- During
the
brief
tenure
of
the
asset management arm of
the
business,
the
husband operated as a
trader
in asset management. He however stepped back from
that
section of
the
business even before its early closure. His performance is said
to
have suffered during
the
first 6 months of 2018, which his counsel Mr Peel QC describes as 'a
very
difficult
time
for (him) personally because of
the
divorce and children proceedings'. I have no doubt
that
that
was
the
case. He resigned from his asset management role in August 2018, just a few months before Mr X's departure and
the
closure of
that
element of
the
business. He continues
to
have oversight of
the
other
teams.
-
The
single most important dispute between
the
parties revolves around
the
value
to
be ascribed
to
the
husband's interest in B Ltd. It is essentially
the
reason why
the
case has not been resolved before
trial.
Resolving
that
issue has
generated
a
very
significant input not just from
the
SJE, Ms Faye Hall, who has reported, responded and updated regularly during
the
past 18 months. But also latterly from Mr Mark Bezant, who has been deployed for
the
wife as a shadow accountant
to
provide a critical evaluation of Ms Hall's methodology.
- Although a Daniels
v
Walker application was made on her behalf at
the
PTR in January
2020
for
the
court
to
receive full evidence from Mr Bezant, Holman J declined such an application as coming
too
late, but did allow
the
admission into evidence of a letter which Mr Bezant had written on 3 December 2019, setting out his concerns about
the
basis of
the
valuation
before
the
Court.
The
accountants subsequently met and have produced a statement identifying
the
areas on which
they
are agreed. Mr Peel QC for
the
husband had
the
opportunity
to
cross-examine Mr Bezant on
the
contents of his letter, but, on
the
basis
that
no positive case as
to
valuation
is
there
set out, he declined.
The
only expert
testimony
that
I
therefore
heard came from Ms Hall,
to
whom Mr Webster QC for
the
wife put
the
concerns which Mr Bezant had raised. I have carefully considered
the
content of
their
joint statement.
- Before assessing
that
valuation
evidence I will first set out
the
factual evidence which I have about
the
financial position of
the
company and its benefit
to
the
husband.
The
husband's income for
the
last 4
tax
years has been: April 2016 - £5,123,865
gross;
April 2017 - £2,086,503
gross;
April 2018 - £2,411,865
gross;
April 2019 - £411,072
gross;
April
2020
- a
gross
salary of £50,000pa, rising
to
£200,000 in December 2019, and a bonus of £959,564 relating
to
the
business' year
to
June 2019, paid in August 2019.
-
There
has been some contention about
the
level of
the
husband's pay since separation, and whether
there
has been any element of manipulation by him
to
reduce
the
amounts
that
have flowed
to
him.
This
has forced
the
parties, and in particular
the
wife,
to
use up much of
the
balance of
the
parties' liquid capital in meeting costs
that
would in previous years been
treated
as income expenditure. Previously,
the
husband has (up
to
2016) received substantial dividends from
the
company, as well as significant bonuses. For different reasons unconnected with
the
breakdown of
the
marriage, he says
that
these
are no longer available
to
him.
- Dividends.
The
last dividend received by
the
husband was paid in
the
tax
year
to
April 2016.
The
primary reason why
this
has been
the
case is said
to
be
the
change in
the
tax
regime after
that
date which rendered
the
payment of large dividends
to
shareholders in lieu of salary uneconomic. In addition
the
husband relies on
the
business' internal policy of seeking
to
maintain a balance 4
times
its annual running costs as a cash float within
the
company (which it is not currently doing
thanks
in significant part
to
its recent heavy recruitment of new staff);
the
demands of
the
Prime Brokers
that
all of
the
trades
placed by B Ltd are backed with cash collateral; and a concern
that
staff might mistake
the
payment of healthy bonuses as
the
prelude
to
exit preparations by
the
major shareholders, which in
turn
might
trigger
an exodus from
their
ranks.
- Bonuses. In his evidence
the
husband was at pains
to
explain
the
importance
to
the
business of continuing
to
incentivise
the
workforce,
to
avoid
their
departing
to
potentially
greener
pastures.
Thus,
he says, in a year where some make profits from
their
trades
but others losses, full bonuses
to
the
profit-makers will be paid, which may
therefore
be disproportionately large having regard
to
the
overall profitability of
the
company. Historically he has been both active and successful in his
trading,
which has led
to
his becoming entitled
to
substantial bonuses over
the
years. Now
that
he is not
trading
directly, he says
that
the
prospects for him
to
receive significant bonuses
going
forward is reduced. His benefit comes in
the
increase in
the
value
of his equity
through
the
successful
trading
of
those
that
he recruits.
-
There
is a slight anomaly in
the
bonus position: because
the
company year-end falls in June, with bonuses paid in August, accounts
to
April in any
given
year will show bonuses paid in
that
year which relate principally
to
the
previous year's
trading
results. In a normal year
this
would make little odds, but in a year when
the
company suffers a sharp drop in profitability, as it did in
the
year
to
30 June 2019, in
the
wake of
the
closure of
the
asset management arm,
the
reduction is magnified by being calculated against
the
backdrop of
the
bonuses paid in August 2018, on
the
back of
the
year
to
the
previous June when
the
business recorded a net profit of over £60m.
-
That
drop in B Ltd profitability in
the
year
to
2019 has been explained and is readily understandable. So
too
is
the
fact
that
the
husband's bonus paid in August 2019, of £942,000
gross,
was a lesser sum
than
that
paid
to
at least one of his fellow directors, on
the
basis
that
whilst he may have worked hard over
that
time
to
preserve
the
business, he did not create profit which is
the
major driver of remuneration. What on its face is more striking is
the
fact
that
this
year was not
the
nadir of
the
husband's earnings. It was rather in
the
previous year, when B Ltd itself was in
very
significant profit,
that
the
husband's performance – he says in large part due
to
the
strains of
the
breakdown of his marriage – was so poor
that
he received a bonus in August 2018 of only £308,958 for his efforts in
the
previous year. As I will discuss below,
that
is
to
be set against
the
fact
that
the
net asset
value
of his shareholding in
the
business in fact increased during
the
twelve
months
to
June 2018 by a
gross
figure of over £12.5m.
-
The
use of such a net asset
valuation
as
the
true
measure of
the
value
to
the
husband of his shares is controversial. Mr Bezant's letter expresses a number of concerns about Ms Hall adopting
that
method, under
two
general
headings. Collectively, he states:
a.
That
she has
valued
the
husband's shares at
their
pro rata interest in
the
net asset
value
("NAV") of B Ltd. However, he believes her
valuation
framework is internally inconsistent and places
too
much reliance on
the
prices observed in
the
internal share market for B Ltd's shares; and
b.
That
Ms Hall has
then
assessed
the
liquidity of
the
husband's shareholding. However, in so doing she has excluded what he considers
to
be
the
most realistic means by which he can extract
value
from his shares (dividends and bonuses). Instead, she has focused on what he considers
to
be
the
unrealistic assumption
that
the
husband either sells his shareholding
through
the
process set out in B Ltd's shareholders' agreement over a period approaching 20 years, or B Ltd is wound down.
-
The
detail of
these
points, which I shall not set out in full but which I have carefully considered, was put robustly
to
Ms Hall by Mr Webster for
the
wife, but she remained firmly in her reported position. On both points, she had responded by letter on 3 March
2020
to
the
criticisms made as follows:
a. She did not agree
that
she had placed
too
much reliance on
the
prices observed in
the
internal share market in
valuing
B Ltd's shares, and
that
to
value
B Ltd by reference
to
any earnings methodology would be highly subjective in
terms
of both B Ltd's maintainable earnings and an applicable multiple
thus
providing an unreliable result; and
that
in not distributing
the
profits earned in recent years and utilising
them
within
the
business
to
generate
further returns,
the
NAV at any
given
date provides a reliable estimate of
the
value
of
the
business at
that
date, as it captures
trading
gains
or losses as
they
happen, with any future returns being inherently uncertain; and
b. In
view
of a dividend stream realisable from
the
company,
the
husband is unable
to
solely influence any decision
to
make such a distribution and as such she could not see
that
a reliable income stream in
the
form of an annual dividend is currently easily discernible.
The
payment of any dividend would impact on
the
remaining NAV of
the
company at
that
point in
time
which would reduce in an amount equal
to
the
dividend paid; in
view
of
the
husband's reduced
trading
activity, she could not see
that
a reliable income stream in
the
form of an annual bonus from B Ltd was currently easily discernible. She also appreciated
that
this
situation may change, and
the
husband may again receive a higher
trading
bonus.
- I am keenly aware
that
I have heard evidence only from Ms Hall, from whom I have also received a full report and a series of further calculations and responses. From Mr Bezant I have only his single letter, which questions Ms Hall's assumptions but for entirely understandable reasons is not able
to
offer a positive alternative case, for which reason he was not invited by Mr Peel
to
give
oral evidence. I have read and considered
the
comparable but different business
transactions
considered but rejected as direct comparators by Ms Hall, re-raised by Mr Bezant and
then
again distinguished by Ms Hall. In
the
absence of a balanced case on each side, it is not straightforward
to
form a
view
about which I can be sure
that
I would be satisfied in any circumstances.
- However,
the
alternative
valuation
posited by Mr Webster – one
taking
a price
to
book calculation after significant discounting, is one rejected by Ms Hall in her initial report and not positively championed by Mr Bezant. Ms Hall, in December 2018, had
taken
2 public companies operating within
the
same industry as B Ltd, but for reasons she had explained both under markedly different models from B Ltd. She also pointed out
that
the
accounting policies of
the
companies could be
very
different. She
then
took
the
average ratios for
those
companies' market share price over
their
respective book
values,
noting
that
industry ratios
tend
to
reflect market expectations of future
growth
in
the
industry. She also considered price
to
earnings ratios, but as
this
approach is
vulnerable
to
the
wildly divergent earnings in B Ltd, it is not pursued by Mr Webster.
- Ms Hall in her rejected calculation applied discounts on account of
the
lack of marketability,
given
B Ltd's status as a private company, and a further restricted stock discount on account of
the
specific characteristics of a shareholding in B Ltd.
These
considerations included
the
fact
that
no formal or informal offers had ever been made in respect of
the
business, and
that
a sale of
the
husband's equity was restricted by
the
Shareholders' Agreement
to
sales on an internal market, which I will consider in more detail below.
Taking
the
figures as at October 2018, she arrived at an applicable ratio (rounded) of 1.4, which ratio Mr Webster 'with some reservation' invites me
to
apply
to
the
October 2019 NAV of
the
husband's shareholding in B Ltd in calculating
the
quantum of
the
wife's award.
-
The
restrictions in
the
shareholders' agreement are important, not just in considering
the
only historical basis upon which B Ltd shares have
traded,
but also when considering liquidity issues in relation
to
realisation and implementation.
The
underlying aim of
the
policy as described by
the
husband is
that
all shares are held by employees so
that
they
have "skin in
the
game"
and B Ltd
vetoes
any attempt
to
sell shares externally.
This
is evidently not a completely accurate description, as some former employees,
given
their
high churn rate, retain
their
shares for some years after departure, and will not normally be required
to
sell immediately. Equally, some employees do choose for
tax
reason
to
have
their
shares held by
family
members, or other
vehicles.
- However,
this
I accept does not detract from
the
overall purpose lying behind so much of
the
company's operation, which is
to
ensure
that
the
best staff can be retained and recruited.
This
is because, I am satisfied,
the
directors see
that
as being
the
surest way
to
ensure
that
the
significant profit levels of past years are maintained – for
the
ultimate benefit of
their
equity interests.
- Mr Peel has made criticisms of
the
wife, for seeking at an earlier stage in
the
proceedings an order for
the
transfer
of some of
the
husband's shareholding
to
the
wife, in part satisfaction of her claim. Such criticism is misplaced. Particularly at a
time
of extreme economic
turbulence,
whether for
the
company, as in
the
latter half of 2018, or for
the
global
economy as of now, an outcome in a case such as
this
where
there
are fundamental issues about
the
true
value
of a private company, its liquidity and
the
paying party's available exit strategy may in not a few cases be met with an acceptable solution of
the
sort discussed in Wells
v
Wells [2002] EWCA Civ 476, and ultimately cautiously approved by
the
court appeal in
Versteegh
v
Versteegh
[2018] EWCA Civ 1050.
That
they
did not
through
Mr Webster pursue
that
outcome as
their
primary position before
this
court I
take
to
be a pragmatic recognition by
the
wife's advisors of
the
difficulties
that
they
would encounter,
given
the
stringent restrictions on share sales and
the
evident hostility of
the
directors – foremost amongst whom of course is
the
husband.
-
Those
restrictions include a narrow annual sale window in what is an internal market for share sales and purchases between employees.
This
means
that
there
is a practical limit
to
the
number of shares which can be sold; which is determined annually by whether
there
are sufficient purchasers
to
buy
the
shares. In
the
past 2 years, not all of
the
shares which have been offered for sale have in fact been
taken
up.
The
value
of each share is set by
the
NAV referable
to
the
June year-end accounts just past, and calculated by
the
auditors. Sales
to
third
parties are only allowed in
very
exceptional situations, and have never in practice occurred. Borrowing against shares is barred without consent, and whilst as indicated it is possible for employees
to
transfer
shares
to
trusts
or
family
members with permission of
the
directors,
the
directors are able
to
refuse a request
to
transfer
shares in
this
way, and are able
to
refuse
to
register any such
transfer.
Whilst
the
husband's own expressed reluctance would ordinarily create little
traction,
the
rarity of
this
having
taken
place historically is relevant. In any event,
the
wife's primary case is for a clean break in a fixed sum paid over a period of years, a similar scheme
to
the
husband's, albeit in significantly
greater
amounts.
- Let me say at once
that
I understand
the
reservations expressed by Mr Bezant and Mr Webster about
the
basis of Ms Hall's
valuation,
limited as it is
to
the
NAV of
the
husband's shares. Whilst such
value
will, as she comments, capture all of
the
historic profitability in
the
company (and
this
is especially so in absence of any dividends in
the
past 3 years), it doesn'
t
appear on its face
to
capture
the
fully rounded
value
to
the
shareholders of an edifice which has been remarkably successful at
generating
profits over
the
9 years of its existence
to
date.
That
concern is only compounded by
the
husband's frank evidence
that
he would not want
to
sell his shares now, at NAV, because of course
they
are worth more
to
him
than
that,
in
that
he anticipates continuing
to
operate B Ltd into
the
future, and
to
continue
to
recruit staff
to
its banner whose efforts will only swell
the
value
of
the
equity in
the
company.
-
The
problem for
the
court is
to
determine from
the
limited evidence before it whether
that
obviously enhanced
value
to
the
directors actually has a corresponding
value
in
the
marketplace. In other words, whether any
third
party would see
value
in acquiring B Ltd as a
going
concern, at a premium based upon its past
trading
record. It is striking
that
no example has been citied
to
me of any similar entity having been acquired in such a way.
The
husband's case is
that,
if he were
to
depart,
the
collection of employed
traders
which he has assembled would soon dissipate, and with
them,
their
individual ability
to
generate
profits for
the
shareholders. His case is put upon
the
basis
that
the
equity in B Ltd is no more
than
a pile of cash,
the
accumulated profits of past
trades,
and essentially
that
no-one is
going
to
pay more for a pile of cash
than
its simple
value.
-
The
question is whether
the
B Ltd name,
the
IT systems, which
the
husband says are unique
to
each
trader
and would become obsolete upon
their
departure, and
the
current accumulation of
traders
all in
the
same place would be of sufficient additional
value
that
an offer for a significantly
greater
sum
than
the
simple
value
of
the
cash pile can be predicted, with sufficient certainty
that
an award can be made in
the
wife's favour
valuing
the
husband's interest in
the
business at a specifically
greater
amount
than
his current interest in
the
equity, as adjusted by Ms Hall.
- I must also remember
that
it is clearly
the
case
that,
since
the
parties' separation,
the
business has undergone a significant degree of surgery, beginning with
the
husband's own resignation from
the
asset management department in
the
summer of 2018,
the
departure of Mr X and
the
closure of
that
department,
the
loss of a
very
large number of
the
traders
then
employed and
the
recruitment of
very
many more, such
that
the
personnel now
trying
to
generate
the
profits for
the
shareholders of B Ltd will be almost completely different from
those
who were
there
in 2017/8, and are
there
now in much
greater
numbers. What
this
means in practise on analysis is
that
even if such an offer were made now,
the
traders
whose skill was being purchased by
the
prospective buyer would be substantially different from
those
who were in place when
the
parties separated. So, any Price/book calculation would have
to
be applied
to
the
NAV at
the
appropriate
time
– which
time
I will discuss below.
- However, notwithstanding any issue of
timing,
I am not persuaded, on
the
evidence before me,
that
a proposed entrant or current participant into
the
market who had a fund in excess of say £200m with which
to
start
to
trade
would pay a premium
to
the
directors of an established
trading
house
to
buy an operation such as
this,
absent
the
acquisition of secured or at least likely prospective financial benefit from so doing. If
the
personnel stay, as I accept
that
they
do, because of
the
current directors' enlightened bonus policy, it is foreseeable
that
the
departure of
the
directors would soon precipitate
the
departure of many of
their
traders.
That
is not
to
say
that
such an acquisition is impossible, simply
that
it is not sufficiently likely, especially in
the
absence of any obvious precedents,
to
render it fair
to
the
husband
to
make an award
to
the
wife on
the
assumption
that
it is more likely
to
happen
than
not.
- Whilst I am far from being sure
that
when
the
husband does realise his residual interest in B Ltd he will only be able
to
do so for its NAV, on
the
balance of probabilities, for all of
the
reasons which I have expressed above,
that
is
the
most likely scenario on
the
evidence before me. I accept
the
husband's evidence
that
proprietary funds of
this
size do not regularly
get
sold. I have considered
that
the
fact
that
the
usual lifespan of such a concern is not much more
than
10 years would suggest
that
an exit for
the
directors will come sooner rather
than
later. But equally,
the
fact
that
the
current rapid expansion does not suggest
that
this
is a business on
the
verge
of wind-down by its directors.
There
is no evidence before me of any impending sale, and
the
evidence of both
the
husband and Mr Y
very
clearly is
that
none such is in prospect – nor any other exit. I remind myself
that
the
asset management arm of
the
business was wound up in 2018 rather
than
sold.
-
The
Authorities. I have also carefully considered
the
several recent authorities about
the
approach
to
be
taken
when attempting
to
place a
value
upon a private company for
the
purposes of a financial remedies application, when
there
is no evidence
that
the
company is in
the
throes
of sale.
Those
authorities now firmly
take
their
cue from
the
decision of Moylan J (as he
then
was) in H
v
H [ 2008] 2 FLR 2092 where he pointed
to
the
fact
that
the
fact
that
the
vulnerability
of such
valuations
had been specifically recognised by
the
House of Lords in Miller
v
Miller; McFarlane
v
McFarlane: [2006] UKHL 24, [2006] 1 FLR 1186. He said:
-
The
experts agree
that
the
exercise
they
are engaged in is an art and not a science. As Lord Nicholls said in Miller
v
Miller ; McFarlane
v
McFarlane [2006] 2 AC 618 [26]: "
valuations
are often a matter of opinion on which experts differ. A
thorough
investigation into
these
differences can be extremely expensive and of doubtful utility". I understand, of course,
that
the
application of
the
sharing principle can be said
to
raise powerful forces in support of detailed accounting. Why, a party might ask, should my "share" be fixed by reference other
than
to
the
real
values
of
the
assets? However,
this
is
to
misinterpret
the
exercise in which
the
court is engaged.
The
court is engaged in a broad analysis in
the
application of its jurisdiction under
the
Matrimonial Causes Act, not a detailed accounting exercise. As Lord Nicholls said, detailed accounting is expensive, often of doubtful utility and, certainly in respect of business
valuations,
will often result in divergent opinions each of which may be based on sound reasoning.
The
purpose of
valuations,
when required, is
to
assist
the
court in
testing
the
fairness of
the
proposed outcome. It is not
to
ensure mathematical/accounting accuracy, which is invariably no more
than
a chimera. Further,
to
seek
to
construct
the
whole edifice of an award on a business
valuation
which is no more
than
a broad, or even
very
broad,
guide
is
to
risk creating an edifice which is unsound and hence likely
to
be unfair. In my experience,
valuations
of shares in private companies are among
the
most fragile
valuations
which can be obtained."
- More recently in
Versteegh
v
Versteegh
[2018] EWCA Civ 1050, Lewison LJ explained in a little more detail
the
reasons why Moylan J's rationale in
the
former case was a sound one. He said:
-
The
valuation
of private companies is a matter of no little difficulty. In H
v
H [2008]
EWHC
935 (
Fam),
[2008] 2 FLR 2092 Moylan J said at [5]
that
"
valuations
of shares in private companies are among
the
most fragile
valuations
which can be obtained."
The
reasons for
this
are many. In
the
first place
there
is likely
to
be no obvious market for a private company. Second, even where
valuers
use
the
same method of
valuation
they
are likely
to
produce widely differing results.
Third,
the
profitability of private companies may be
volatile,
such
that
a snap shot
valuation
at a particular date may
give
an unfair picture. Fourth,
the
difference in quality between a
value
attributed
to
a private company on
the
basis of opinion evidence and a sum in hard cash is obvious. Fifth,
the
acid
test
of any
valuation
is exposure
to
the
real market, which is simply not possible in
the
case of a private company where no one suggests
that
it should be sold. Moylan J is not a lone
voice
in
this
respect: see A
v
A [2004]
EWHC
2818 (
Fam),
[2006] 2 FLR 115 at [61] – [62]; D
v
D [2007]
EWHC
278 (
Fam)
(both decisions of Charles J)."
- Subsequently, in Martin
v
Martin [2018] EWCA Civ 2866, Moylan LJ, as he now his, returned
to
the
theme
and analysed how
the
court should look
to
utilise
these
valuations
once
they
have been received and determined. He said:
93. How is
this
to
be applied in practice? As referred
to
by both King LJ and Lewison LJ [in
Versteegh],
the
broad choices are (i) "fix" a
value;
(ii) order
the
asset
to
be sold; and (iii) divide
the
asset in specie:…
The
court has
to
assess
the
weight which can be placed on
the
value
even when using a fixed
value
for
the
purposes of determining what award
to
make.
This
applies both
to
the
amount and
to
the
structure of
the
award, issues which are interconnected, so
that
the
overall allocation of
the
parties' assets by application of
the
sharing principle also effects a fair balance of risk and illiquidity between
the
parties. Again, I emphasise,
this
is not
to
mandate a particular structure but
to
draw attention
to
the
need
to
address
this
issue when
the
court is deciding how
to
exercise its discretionary powers so as
to
achieve an outcome
that
is fair
to
both parties. I would also add
that
the
assessment of
the
weight which can be placed on a
valuation
is not a mathematical exercise but a broad evaluative exercise
to
be undertaken by
the
judge.
94. …
The
need for
this
approach derives from
the
fact
that,
as said by Lewison LJ,
there
is a "difference in quality" between a
value
attributed
to
a private company and other assets.
This
is a relevant factor when
the
court is determining how
to
distribute
the
assets between
the
parties
to
achieve a fair outcome.
95. It might be said…
that
it would be unfair
to
award one party all
the
"upside" in
the
event
that
the
valuation
proves
to
have been an under-estimate.
That,
however, is intrinsic in an asset being
volatile.
There
is potential for
the
value
to
increase as well as decrease. If one party is not participating in
that
risk and is obtaining what
Thorpe
LJ referred
to
in Wells
v
Wells as a secure result, one aspect of achieving
that
result is
that,
because
they
don'
t
have
the
burden of
the
risk of a decrease in
value,
they
also don'
t
have
the
benefit of an increase in
value
…
96. …it is all about weight and balance. Not placing undue weight on a
valuation
and seeking
to
achieve a fair balance of risk between
the
parties in
the
allocation of
the
assets.
- So
too
in
this
case, I remind myself
that
there
is no certainty at present what
the
economic future of
the
planet will hold, in
the
short or medium
term.
The
husband's evidence has been
that,
since
the
last company figures were received in October 2019,
the
asset
value
of
the
company had first risen sharply,
to
the
tune
of more
than
£50m, but
then
fallen back
to
a figure now which is probably less if anything
than
it was in June 2019.
That
he had not disclosed
the
fact of
the
original rise may fairly be
the
subject of criticism, regardless of
the
precise wording of
the
PTR order of Holman J, but of more import is
the
fact
that,
by fixing a price for
the
assumed
value,
there
is no likelihood
that
that
creates prejudice for either party in particular.
- It is also right
that,
given
that
the
value
put forward by Ms Hall is one based on
the
NAV of
the
company,
the
court can be certain
that
is accurate as at
the
date
that
it is
taken.
The
only question is as
to
alternative methodology, and
that
renders
this
valuation
perhaps more robust
than
those
based on uncertain forecasts predicated upon past performance.
- I would also stress
that
in
this
case, I am not faced with a 'bracket' for
valuations
provided by
the
experts. Ms Hall's is
the
only expert
valuation
before me. Mr Webster's brave attempt
to
apply her rejected methodology
to
more recent figures is worthy of consideration, but must inevitably come with considerably less weight. In
this
regard, Moylan LJ continued in Martin as follows:
97. I have not yet addressed one key aspect of Mr Marks' submissions, namely
that
a judge should adopt a conservative figure when fixing
the
value
of shares in a private company. I am acutely aware of
the
importance of reducing scope for argument and "
the
need for clear
guidance",
as I mentioned in Hart
v
Hart, at [97]. However, as Lord Nicholls said in White
v
White, at p. 612
G,
as "with so much else in
this
field,
there
can be no hard and fast rule". I do not consider it appropriate
to
seek
to
limit or direct where in a bracket a judge should alight…As I have already said, it is
the
use which is made of such
valuations
which is of critical importance.
- It follows from
the
above
that
I accept in
the
circumstances Ms Hall's methodology and
valuations
at
various
points in
time
as being
the
safest and most reliable available
to
me, and
that
the
husband's shares in B Ltd will
therefore
be considered at
their
NAV for
the
purposes of determining
the
outcome of
this
case, rather
than
as calculated by any other method. However,
the
issue of determining a fair
value
does not end
there,
as
there
remains another matter of key importance, which is
the
date at which
the
value
of
the
husband's shareholding should be calculated.
- In Hart
v
Hart [2017] EWCA Civ 1306, Moylan LJ dealt with
the
approach which
the
court should
take
in determining what property should and should not be included as property which is subject
to
the
sharing principle. He said:
67.
The
exercise on which
the
court is engaged, when applying
the
sharing principle… is …
to
determine whether
the
current assets owned by
the
parties …comprise
the
product of marital endeavour.
The
court must
then
decide how
that
determination should impact on
the
court's award…
…
84. In my
view,
the
court is not required
to
adopt a formulaic approach either when determining whether
the
parties' wealth comprises both matrimonial and non-matrimonial property or when
the
court is deciding what award
to
make.
This
is not necessary in order
to
achieve "an acceptable degree of consistency", Lord Nicholls in Miller (paragraph 6), or
to
achieve a fair outcome…
85. It is, perhaps, worth reflecting
that
the
concept of property being either matrimonial or non-matrimonial property is a legal construct. Moreover, it is a construct which is not always capable of clear identification. …When property is a combination, it can be artificial even
to
seek
to
identify a sharp division because
the
weight
to
be
given
to
each
type
of contribution will not be susceptible of clear reflection in
the
asset's
value.
The
exercise is more of an art
than
a science.
86. In my
view,
the
guidance
given
by Lord Nicholls in Miller remains
valid
today
and, indeed, bears increased weight in
the
light of
the
courts' experience since
that
case was decided. It can, as he said, be artificial
to
attempt
to
draw a "sharp dividing line".
Valuations
are a matter of opinion on which experts can differ significantly. Investigation can be "extremely expensive and of doubtful utility".
The
costs involved can quickly become disproportionate. Proportionality is critical both because it underpins
the
overriding objective and because,
to
quote Lord Nicholls again: "Fairness has a broad horizon"…
-
This
was later
taken
up by King LJ in
Versteegh,
when she said:
90. Wilson LJ (as he
then
was) in
giving
judgment in Jones was by no means blind
to
the
limitations inherent in his choice of
the
arithmetical route saying:
"[35]…Criticism can easily be levelled at both approaches. In different ways
they
are both highly arbitrary. Application of
the
sharing principle is inherently arbitrary; such is, I suggest, a fact which we should accept and by which we should cease
to
be disconcerted. "
…
93. In
Goddard-Watts
v
Goddard-Watts
[2016]
EWHC
3000 (
Fam)
Moylan J
took
issue with
the
use of
the
word 'arbitrary' in relation
to
the
judicial decision making process saying:
"…. Wilson LJ said in Jones…. "Application of
the
sharing principle is inherently arbitrary". Whilst I am not entirely happy with
the
concept
that
that
sum I award
to
reflect
these
factors is arbitrary, I
take
it
that
Wilson LJ meant discretionary rather
than
susceptible
to
the
application of a precise formula."
94. In my judgment it is however
the
observation of Lord Nicholls in Miller and McFarlane [2006] UKHL 24;[2006] 1FLR 1186 which continues
to
carry
the
day:
"[26]
This
difference in
treatment
of matrimonial property and non-matrimonial property might suggest
that
in every case a clear and precise boundary should be drawn between
these
two
categories of property.
This
is not so.
[27] Accordingly, where it becomes necessary
to
distinguish matrimonial property from non-matrimonial property
the
court may do so with
the
degree of particularity or
generality
appropriate in
the
case.
The
judge will
then
give
to
the
contribution made by one party's non-matrimonial property
the
weight he considers just. He will do so with such
generality
or particularity as he considers appropriate in
the
circumstances of
the
case.
- Further, in
the
case of Martin, Moylan LJ also said
this:
113. In conclusion, a judge has an obligation
to
ensure
that
the
method he or she selects
to
determine
this
issue leads
to
an award which,
to
quote Lord Nicholls in Miller; McFarlane, at [27],
the
judge considers
gives
"
to
the
contribution made by one party's non-matrimonial property
the
weight he considers just … with such
generality
or particularity as he considers appropriate in
the
circumstances of
the
case".
This
provides
the
same perspective as Wilson LJ's observation in Jones
v
Jones about "fair overall allowance", at [34].
This
was why Holman J was entitled in Robertson
v
Robertson
to
reject
the
"accountancy" approach, not only because it seemed unfair
to
the
husband, but because he did not consider
that
this
fairly reflected
the
relevant considerations in
the
"overall exercise of (his) discretion", at [59]. Both of
the
latter cases concerned
the
development of
trading
companies and, in my
view,
these
observations apply with particular force in such circumstances.
…
115. Finally, on
this
question, I mention briefly
that
the
manner in which
the
court determines whether property is or is not matrimonial can probably be described as partly evaluative and partly discretionary. …
the
exercise is clearly at least in part evaluative because it is based on
the
court's assessment of
the
evidence as
to
whether
the
relevant asset is from a source external
to
the
marriage or
the
product in part or in whole of marital endeavour. But I also consider
that
it can be partly discretionary for
the
reasons set out in paragraph 113 above.
-
The
time
for
valuation.
In
this
case,
the
determination for
the
court is
the
assessment of
the
date at which it should determine
the
value
of
the
husband's shareholding is fixed, for
the
purpose of placing a
value
on
the
wife's sharing claim. For
the
husband, Mr Peel argues
that
this
should be, because it can be
very
nearly determined,
the
date or at least
the
month of
the
parties' actual separation, he says in October 2017.
There
is no dispute
that
the
shares in B Ltd were completely matrimonial up
to
that
point, and
the
husband has,
throughout
the
relevant period, held 2,547,813 of
them.
Mr Peel argues his position
thus:
a.
There
has been no 'passive
growth'
in
the
value
of
the
shares, which simply reacts
to
the
rise and fall in NAV, dependent upon
the
success or otherwise of
the
daily
trades;
b.
There
is no underlying income stream: profit is only
generated
by successful
trading;
and
c.
The
so called 'Cowan principle' of one party
trading
with
the
other party's undivided share of
the
assets has not survived Miller.
-
Taking
the
first 2 of
these
3 arguments
together,
there
is of course a superficial attraction
to
fixing on
value
as at
the
date of separation if
the
court can, because it is a fixed point when something significant in
the
marital relationship changed.
The
share price at
that
point, relied on by Mr Peel, was 12.03. However, notwithstanding
the
daily nature of
the
trading
business, a closer analysis of business' history, and of its figures, makes it clear in my
view
that
such a determination would produce an unfair outcome for
the
wife.
a. As at year end June 2017,
the
share price for B Ltd was 12.52. 1 year later, as at June 2018,
that
price had risen
to
17.058.
The
price as at October 2017 was clearly not reflective of
the
overall
trend
at
that
time.
b. Later in 2018
the
husband was
to
resign from
the
asset management arm of B Ltd on account of his poor performance, and receive a bonus which, by
the
standards of every bonus earned by him prior
to
that
date can fairly be described as negligible.
c. His own case is
that
in
the
first 6 months of 2018,
the
period immediately following separation, he was affected by
the
difficult children proceedings and
generally
the
breakdown of his marriage, and so was not able
to
give
his best
to
the
company.
d. It was only some months after
this
resignation by
the
husband
that
Mr X resigned, and necessitated
the
husband springing into
the
action by which he says
that
he saved
the
company by closing down asset management, and by reorganising and upscaling
the
balance of its other operations.
e.
There
is
thus
no evidence before
the
end of
the
year
to
June 2018 of
the
husband
taking
extraordinary post-separation steps
to
preserve
the
value
and integrity of
the
business. Indeed,
the
evidence from his bonus share in
that
year suggests
that
his contribution was much less
than
in
the
years which both preceded and followed it.
f. Notwithstanding
the
husband's comparative lack of contribution,
the
period between October 2017 and June 2018 was a
very
profitable one for
the
company, with
the
share price rising by nearly 5 full points from 12.063
to
17.058.
This
added £12.7m
to
the
gross
value
of
the
husband's shares, £10.2m
to
their
net
value.
g.
Given
the
company's restrictive share sale policy,
the
first opportunity for
the
husband
to
sell any of his shares had he wanted
to
do so
to
provide for
the
wife's entitlement was after June 2018, at which point
the
referenced share price rise had
taken
place.
- As
to
Mr Peel's
third
point, I acknowledge Mr Webster's submission
that
that
the
'Cowan principle' is now in practice considered under
the
general
heading of 'Continuum
versus
new
ventures',
a phrase coined by Roberts J in Cooper-Hohn
v
Hohn [2014]
EWHC
4122 (
Fam),
and subsequently
taken
up by Mostyn J in JL
v
SL (No.2) [2015]
EWHC
360 (
Fam).
In
that
case
the
judge discussed his own summary analysis of
the
principles relating
to
post-separation accrual in Rossi
v
Rossi [2006]
EWHC
1482 (
Fam),
and stated:
34. '…
the
Court of Final Appeal of Hong Kong in its recent decision of Kan
v
Poon FACV20/2013, (2014) 17 HKCFAR 414 approved my summary. Ribeiro PJ stated at para 133:
""
The
summary of
the
principles provided in Rossi
v
Rossi is broader
than
Thorpe
LJ''s stricter approach [in Cowan] and is, in my
view,
preferable. It points
to
various
factors relevant
to
deciding whether a post-separation accrual justifies departure from equality, including
the
length of
the
marriage and separation,
the
nature of
the
property accruing and
the
means or efforts by which it was acquired, and so forth.""
35. In
that
case
the
attempt by
the
husband
to
exclude
the
post-separation accrual from
the
marital pool failed. Ribeiro PJ stated at para 134:
""In my
view,
the
increased Analogue
Group
profits do not provide a
ground
for departure from
the
equal sharing principle in
the
present case.
The
parties married in January 1968 and separated in mid-2008, over 40 years later.
The
period of separation prior
to
the
hearing date was relatively insignificant.
The
profits accruing
to
the
Analogue
Group
during
the
post-separation period arose out of
the
business which had been built up in
the
course of
the
marriage, in respect of which W can legitimately assert an unascertained share on
the
principles accepted in LKW
v
DD.""
- Mostyn J
then
considered whether Roberts J's decision in Cooper-Hohn may have been an example of a sharing award made against non-matrimonial assets. He said:
40. …I
think
the
proper analysis is
that
Roberts J was saying
that
the
fund retained its matrimonial character but
the
wife would share unequally in
the
increase in
the
value
achieved by
the
husband alone in
the
period of separation.
41.
This
approach is
to
my mind undoubtedly correct for
those
assets which were in place at
the
point of separation.
They
remain matrimonial property but
the
increase in
value
achieved in
the
period of separation may be unequally divided. I emphasise may. Obviously passive
growth
will not be shared other
than
equally, and
there
will be cases where on
the
facts even active
growth
will be equally shared, as happened in Kan
v
Poon.
42. On
the
other hand
there
will be cases where
the
post-separation accrual relates
to
a
truly
new
venture
which has no connection
to
the
marital partnership or
to
the
assets of
the
partnership. In such a case
the
post-separation accrual should be designated as non-matrimonial property and save in a
very
rare case should not be shared.
43. In SK
v
WL [2010]
EWHC
3768 (
Fam)
there
had been a substantial increase in
the
value
of
the
matrimonial assets during
the
six years which had elapsed between separation in 2004 and
trial
in 2010. A business which had been incorporated in 2001 was built up by
the
husband substantially after separation and sold for a large sum in 2008. Moylan J declined
to
calculate
the
assets at
the
point of separation (which were conceded should be divided equally) and
to
determine what share (if any)
the
wife should be awarded of
the
post-separation
growth.
Rather, he awarded
the
wife 40% of all
the
assets,
the
departure form equality reflecting his intuitive
view
of how
the
growth
should fairly be reflected.
44. It would appear
that
Roberts J in
the
end adopted
the
same approach in Cooper-Hohn
v
Hohn.
- In
this
case,
the
husband has not shown
that
the
post-separation accrual relates
to
a '
truly
new
venture'
in
the
period up
to
June 2018, nor
that
that
venture
has no connection
to
the
assets of
the
partnership. Whilst
the
profits may have depended upon new
trades,
the
traders
were no doubt for
the
most part
those
selected and put in place by
the
husband and his partners during
the
marriage;
these
were not new profitable
trades
or endeavours by
the
husband himself. On
the
facts of
this
case, for all of
the
above stated reasons, I find
that
the
balance of fairness would not lead
to
a date for fixing
the
value
of
the
wife's equal interest in
the
husband's shareholding earlier
than
June 2018.
- Mr Webster however would
go
further, and his calculation, although based on Ms Hall's multiple computed by reference
to
the
June 2019 figures, would
take
the
share price uplifted
to
October 2019, when
the
share price stood at 20.651. For
the
reasons which I have already in part articulated, I reject
this
date as one on which
to
quantify equal sharing as being
too
far from
the
ending of
the
marital partnership
to
be a fair one for
the
husband.
The
evidence which I accept is
that,
although not perhaps in a
trading
role, he did make significant interventions
to
protect and preserve
the
value
of
the
company from
the
autumn of 2018 onwards, as corroborated by
the
evidence of his co-director Mr Y. It is also of relevance
that
there
has been a large
turn-over
of
trading
personnel since
that
time,
and a significant increase in
the
number of employees.
The
business has far less of a feel of continuum
to
it
than
it did in
the
summer of 2018.
- I have
given
careful
thought
to
whether some lesser share in
the
growth
of or decline in
the
B Ltd NAV would be fair for
the
wife in
the
period after 2018, up
to
the
date when
the
court's order is fully implemented and all of her share has been paid
to
her. Until
that
day, in a
very
real sense
the
husband is 'continuing
to
trade
with her share', and it was plain from his answers
to
me
that
his hope, certainly on
the
basis of his proposal for resolution, was
to
be able
to
realise enough
to
meet his obligation largely from future remuneration, rather
than
by
the
sale of shares if he could avoid it. It is clear
that,
regardless of
the
current world
turmoil,
this
husband still expects
to
grow
the
value
of B Ltd as and when
trading
conditions allow him
to
–
that
is one of
the
advantages of
the
'zero-sum
game'
that
the
business engages in;
there
are profits
to
be made in bad
times
as well as
good.
- On balance I have decided
that
overall fairness would not be met by
this
outcome; any notional uplift
to
the
value
of
the
shares as at June 2018 would be so artificial as
to
be meaningless, and falling on
the
wrong side of
the
line
that
must, in my
view,
be drawn between
the
discretionary and arbitrary, where such a line can be drawn with confidence. As it is,
the
June 2018 price is likely
to
be well within 2 points of
the
current
value,
which has recently fallen back by more
than
£50m on
the
basis of
the
husband's evidence
to
me. I consider
that
it is fair
to
both parties
to
determine
that
the
recovery from 2018,
the
roller-coaster
that
has been
the
last 9 months, and any progress or otherwise from
this
point are properly beyond what might be classed as marital endeavour.
- However, I consider
that
in
the
exercise of my discretion, it would equally be fair in
these
circumstances
to
ensure
that
the
period for which
the
wife is kept waiting for
the
full implementation of her award fixed at
that
date is as limited as possible within
the
constraints of
the
available liquidity.
- I will
therefore
take
the
value
of
the
husband's B Ltd shares for
the
purpose of
the
wife's award as being 17.058,
giving
a
gross
value
of £43.4m and a net
value
of £35.3m, assuming a realisation at CGT rates.
Given
that
the
value
of
the
wife's share will be paid over
time,
as envisaged in both parties' final proposals,
this
is fair.
- I should add
that
whilst I have had regard
to
the
wife's challenged evidence
that
the
husband once
told
her
that
he
thought
the
business may be worth more
than
£200m, it can carry little weight in any circumstances, and does not affect my acceptance of
the
SJE's conclusions.
Other Assets
- Before I
turn
to
questions of liquidity and
timing,
I will deal with
the
remaining more minor issues about
the
valuation
of
the
balance of
the
parties' assets.
The
non-business assets stand at just under £4.3m million net.
There
are a number of properties, many of which are subject
to
mortgages.
The
combined net equity of
these
properties is about £3.1m net. In addition
there
are
various
bank accounts, investments and pensions, which have been depleted by
the
need
to
service
the
parties' living costs in
the
absence of sufficient income, and
the
very
significant expenditure on legal fees referable both
to
the
children proceedings and
these
financial proceedings.
-
The
issues between
the
parties which I will determine are as follow:
a.
The
Gym.
Soon after separation
the
husband unilaterally invested £300,000 into a
gym.
His case is
that
is now worthless, having been devalued before
the
coronavirus epidemic, but now killed off by it.
The
wife wants
the
whole of
this
investment added back at cost
to
the
schedule on his side. Whilst making
this
investment might have been insensitive on
the
husband's part, it was carried out before
the
collapse in his income
the
following year, and (contrary
to
his case
that
the
wife's interest in B Ltd should actually be fixed before
this
date) as I have
taken
the
view
that
the
gain
in
the
value
of his shares in
the
period when
the
investment was made should accrue
to
her benefit, it would be inappropriate
to
add
this
asset
to
the
schedule. In
the
event
that
the
husband does in fact recover anything,
then
he should share it equally with
the
wife.
b.
The
wife further seeks
to
include in
the
asset schedule about £400,000 paid by husband
to
or for
the
benefit of his
family
over a number of years as follows:
(i) £169,000 was
given
to
his mother
to
refurbish
the
property which was bought in
the
parties' joint names soon after separation but in which
the
husband's mother now lives with his sister. Although I do not accept
the
husband's case
that
this
work on
the
property was 'pre-agreed', it is
the
case
that
the
property is on
the
asset schedule and has been
valued
in its current condition post-refurbishment. It would
therefore
be inappropriate
to
add back any of
this
sum.
(ii) £50,000
given
by
the
husband
to
help his sister with a deposit
to
buy a property in 2004;
this
payment is far
too
long ago
to
merit reattribution now and should not have been claimed, notwithstanding any purported agreement between
the
parties.
(iii) £30,000 which was invested by
the
wife into
the
husband's brother-in-law's business.
This
item was not referred
to
in
the
closing submissions for
the
wife, and should in any event not be included in all
the
circumstances
(iv) £150,000 was
given
to
the
husband's sister
to
pay for school fees for her children. In his oral evidence
the
husband said
that
he was quite prepared, appropriately, for
this
gift
to
be
taken
onto his side of
the
asset schedule, and
given
its nature
there
is no obvious reason why
the
wife should contribute
to
the
payment of
those
fees, so
that
should be included.
c. Chattels and artwork.
The
husband wishes
to
include
the
contents of Flat A on
the
schedule at £75,000, and accepts
that
artwork acquired and held by him should also be included at £45,000.
The
wife's position is
that
neither item should be included and
that
in
the
event of any issue an in specie division can be discussed and arranged. As with
the
above issues,
this
is really de minimis in
the
context of
the
principal area of dispute between
the
parties. I consider
that
it is inappropriate
to
include
the
chattels for division in
this
way, but in
those
circumstances will also exclude
the
artwork, and leave
the
parties
to
make
their
own, hopefully consensual, arrangements.
d.
The
European property.
The
wife wishes for
this
property
to
be sold and its proceeds divided, as she is unsure about its current
valuation.
The
husband's case is
that
the
property should be attributed
to
her in
the
division of assets. In circumstances where neither party wants
to
retain
the
property, it should be sold and
the
proceeds divided. I will leave it
to
the
parties
to
agree who should have conduct of sale, and how its eventual sale price will impact upon
the
schedule of payments which I will direct below in relation
to
the
balance of
the
wife's entitlement.
- Finally, I have not excluded
the
balance of
the
husband's net 2019 bonus from
the
asset schedule,
given
how much joint capital has been spent in meeting income obligations since separation, and I have allowed as appropriate
the
deduction of
the
March mortgage figures from
the
wife's bank balances.
Structure and Implementation
-
Turning
now
to
the
structure of
the
order, and
to
how
the
wife's entitled share will be provided for her,
the
parties' respective open offers both provide for
the
wife's share
to
be paid out
to
her over a period of over 5 years. However,
the
payments
to
be made on
the
wife's proposal are exponentially bigger
than
those
offered by
the
husband.
They
also fall in June rather
than
in September. Whereas, in addition
to
the
transfers
of heavily mortgaged properties,
the
husband only suggests
the
payment of just over £1m (payable in September
2020)
before September 2021,
the
wife seeks £6m in June
2020,
and a further like sum in June 2021. Overall, her calculations would leave
the
husband
to
find a series of lump sums
totalling
£30m, whereas
the
husband offers only £11m, and so staged
that
in all probability he is hoping
to
pay
these
sums from his remuneration, however received, as opposed
to
by
the
sale of shares. Neither proposal is reasonable, quite apart from
the
respective eventual quantum.
-
Taking
the
figure for B Ltd calculated as set out in
this
judgement, and making
the
adjustments
to
the
other disputed figures as indicated, leaves
the
total
matrimonial asset base for division between
the
parties of £39.662m, which should be divided equally, pursuant
to
the
sharing principle.
The
wife's small non-matrimonial properties are excluded.
This
leaves
the
wife's share at £19.831m, of which £16,787,595 will be comprised in
the
lump sums
to
be paid
to
her over
time
by
the
husband. I am satisfied
that
this
is a fair sum overall, having
taken
into account all of
the
factors in s.25 of
the
Matrimonial Causes Act 1973, and
the
guidance
contained in
the
Court of Appeal authorities referred
to
above.
The
award represents just over 45% of
the
total
asset base if
the
NAV for B Ltd as at June 2019 is
taken,
which is
the
latest reliable figure, which fairly represents a departure as
the
result of
the
husband's efforts since June 2018.
- In
terms
of an appropriate payment schedule, I do
take
into account
that
in
the
financial year
to
2019, over £11.6m of shares in B Ltd were offered for sale and £8.36m of shares were
taken
up, or
the
value
of around 20% of
the
husband's current shareholding. Whilst it clear
that
there
is an active internal market for
these
shares, it is equally clear
that
there
are usually more on offer
than
can be purchased, so
there
will be a limit on
the
amount
that
the
husband can fairly raise annually. However,
given
the
value
of
the
equity attributable
to
his holding, and
given
his immediate obligation
to
the
wife,
the
husband will have
to
begin
taking
far more active steps
than
he has
to
date
to
begin
to
realise some of his interest, or
to
extract funds by means of bonuses or dividends (if agreed) if
the
shares cannot be sold in sufficient quantity, or if he wishes
to
retain
them.
Providing fairly for
the
wife will require
the
husband
to
work hard
to
raise
the
amount required. I do accept Mr Webster's submission
that
B Ltd's current restrictions on liquidity are a function of
the
company's desire
to
continue
to
trade
at ever increasing levels, and he should
therefore
have some scope for flexibility.
- In relation
to
the
date for first payment, I accept Mr Peel's argument
that
a payment plan including payments annually in September is fair,
given
that
it will allow
the
husband
to
sell shares in
the
internal market, and/or process his bonus at
the
year end. I also acknowledge
that
the
current year is an extraordinary one for everybody. However,
there
is also force in Mr Webster's criticism of
the
husband
that
he should have made some effort during
the
currency of
these
long drawn out proceedings
to
attempt
to
sell some of his shares, so
that
at
the
least he could have enabled
the
wife
to
discharge in short order
the
substantial mortgages which she will inherit.
- I find
that
a fair spread of
the
husband's liability will be
that
he should pay £2,787,595 by 1st September
2020,
£5m by 1st September 2021, a further £5m by 1st September 2022, and
then
a final payment of £4m by 1st September 2023. I consider
that
he will be able
to
withdraw
those
sums from his interest in B Ltd with no more
than
proportionate disruption
to
the
overall business of
the
company, when balanced against
the
desirability of providing
the
wife's award
to
her and achieving a clean break as soon as practicable. I am satisfied from his evidence
to
me
that
this
will be practical for him, and whether it be by dividend, bonus or share sale, or a combination of
the
3, is a matter for him.
- In
the
meantime,
there
has been a dispute between
the
parties about
the
applicable rate of interest in relation
to
the
outstanding payments, absent default, with
the
husband contending for 1.75% or 1.5% and
the
wife seeking
the
current judgment rate of 8%.
Given
the
length of
time
over which
the
payments are being made,
the
rate proposed by
the
husband is
too
low. However,
the
judgment rate should only be applicable in
the
event of default.
The
appropriate rate will be
the
current Duxbury rate of 3.75%
to
run from 1st May
2020.
- As
to
the
other
terms
of
the
order, I consider
that
a fair balance would be achieved by
the
following:
a.
Given
that
I have shortened
the
anticipated
time
for payment, an acceleration clause in not appropriate.
b. Similarly, having determined
that
the
fair
value
of
the
business is all
the
circumstances in
that
of
the
NAV as at June 2018,
there
should be no 'ratchet' provision in
the
order.
c. In relation
to
security,
the
husband is prohibited by
the
corporate documents from creating any charge over
the
shares unless
the
company so permits. Unsurprisingly, B Ltd has confirmed
that
it would not permit such borrowing.
That
leaves 3 possible ways by which
the
husband can extract funds
to
meet
the
wife's award: share sales, bonuses and dividends. It is fair for
the
wife
to
have reasonable notice until such
time
as
the
order has been implemented in full, of
the
husband's anticipated receipt from each source on every occasion of receipt, sufficient
to
enable an application
to
be made if appropriate either
to
delay extraction for further consideration or, more likely, freeze some appropriate part of
that
receipt.
This
would clearly also apply in
the
event
that
there
was in fact a sale in whole or in part of
the
business. But in any of
those
events
the
court will have in mind in dealing with such application:
i.
The
imperative
to
achieve a clean break as soon as practicable;
ii.
The
evidence
that
the
husband has
given
about his inability
to
create liquidity which has led
to
the
wife's award being paid over 3 ½ years rather
than
immediately; but also
iii.
The
fact
that
the
husband himself will be entitled
to
a reasonable measure of liquidity
going
forward in circumstances where he is meeting
the
payments due
to
the
wife under
the
court's order
timeously.
d.
Given
what I said at (c) above, any issue about permitted extraction should be dealt with by application in
the
circumstances which have arisen – but both parties should be cautious about referring
the
matter back
to
court if a proportionate and sensible way forward can be arrived at.
e. I will leave counsel
to
agree
the
detail of
these
and
the
other provisions in
the
order.
- As
to
the
level of child maintenance, I have fully in mind
the
views
of Mostyn J as recently expressed in CB
v
KB [2019] EWFC 78. I also bear in mind
the
fact
that
under my order
the
significant majority of
the
husband's receipt from all sources over
the
next 3 ½ years will be employed in meeting
the
wife's capital entitlement. However, it also seems appropriate
to
add
to
what would otherwise be
the
appropriate level of child maintenance an additional element for extra-curricular expenses,
to
avoid future dissention between
the
parties. Payment should be at
the
rate of £35,000pa per child, and of conventional duration.
Conclusion
- Finally, I would like
to
express my
gratitude
to
all of
the
lawyers concerned for
the
sensible and pro-active way in which
they
have dealt with
the
novel logistical issues in
this
case. By meeting on screen 30 minutes before
the
start of each day we have ensured
that
no
time
has been lost during
the
hearing, and a conclusion for
the
parties
through
this
judgment will have been received by
them
at
the
time
originally mandated by
the
court at
the
PTR hearing in January
2020.
Whilst I of course express
the
hope
that
the
current
government
restrictions will not require
to
be in place for a
very
prolonged period, I equally
trust
that
the
experience of
this
hearing at least will have demonstrated
that
the
court system is able
to function remotely as needed, at least where financial remedies cases are concerned and insofar as available resources allow.
BAILII:
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URL: http://www.bailii.org/ew/cases/EWHC/Fam/2020/1613.html