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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Martin v Martin (Rev 1) [2018] EWCA Civ 2866 (21 December 2018) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2018/2866.html Cite as: [2018] EWCA Civ 2866, [2019] 2 FLR 291 |
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ON APPEAL FROM
Mr Justice Mostyn
High Court of Justice
Family Division
BV15D07863
Strand, London, WC2A 2LL |
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B e f o r e :
Lord Justice Moylan
and
Lord Justice Coulson
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Janie Claire Martin |
Appellant |
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- and - |
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Rupert Henry James Martin |
Respondent |
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Mr Lewis Marks Qc and Miss Katie Cowton (instructed by Radcliffes Le Brasseur) for the Respondent
Hearing dates: 4th and 5th July 2018
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Crown Copyright ©
Lord Justice Moylan:
Introduction
(a) that, when determining what part of the current value of the company was marital wealth, the judge wrongly applied a straight line apportionment from the date of its incorporation;
(b) that, in that exercise, the judge wrongly disregarded the fact that, when the parties started living together, the husband only owned half of the company; and
(c) that the judge was wrong not to provide a mechanism for the realisation of the shares in the company which formed part of the wife's award.
(a) that the judge wrongly treated the value he ascribed to the company as equivalent to cash and, as a result, awarded the wife an unfair proportion of the non-risk assets; and
(b) that the judge was wrong to order £20 million of the lump sum award to be paid to the wife within two years.
The husband, additionally, seeks to uphold some aspects of the judge's decision challenged by the wife on other grounds.
(a) What approach should the court take to the valuation of shares in a private company when determining how to divide the marital wealth; and
(b) What approach should the court take when determining what part of the parties' current wealth is properly to be defined as non-marital in circumstances where that wealth includes shares in a private company which was founded by a spouse prior to the date when the parties married or started living together.
I have defined the second issue quite narrowly because the decisions in this court of Hart v Hart [2018] Fam 93 and Versteegh v Versteegh [2018] EWCA Civ 1050 contain extensive consideration of the application of the sharing principle in the context of non-marital wealth.
Background
Expert Valuation Evidence
Hearing Below
The Judgment
"I am firmly of the view that the correct approach to give effect to the sharing principle is to try and calculate the scale of the matrimonial property and then normally to share that equally leaving the non-matrimonial property untouched."
"8. The single joint expert, Mr Simpson of Saffery Champness, has valued the business as lying between £185 million and £227.5 million, on the basis that the husband would participate in a reasonable period of hand-over to the purchaser (which the husband in oral evidence accepted he would do). Mr Simpson's methodology was not controversial. Unsurprisingly, Mr Pointer QC argues that the top figure should be taken while Mr Marks QC argues for the bottom figure. Mr Pointer QC made some good points in cross-examination, and in argument, as to why a figure, if not at the very top of the bracket, then certainly in its upper reaches, should be taken. Mr Simpson accepted that the price that would be paid by the notional or hypothetical purchaser would be in the "middle to upper end" of the bracket. Having considered the matter carefully, bearing in mind that a lot of value hangs on my decision, I have concluded that the price that would now be paid by the notional or hypothetical purchaser would be at the 85th centile of the bracket. I therefore conclude that the round figure to be taken for the present value of the company is £221 million (£221,125,000 to be numerically exact)."
"I am aware that in Chai v Peng & Ors Bodey J divided the "kitty" 60:40 in favour of the husband because the wife's award would be largely cash or easily realisable assets: see para 140. I do not adopt that approach. A valuation of an asset is the estimate of what it will sell for now. If it is perceived as being hard to realise then its value will be discounted to reflect that difficulty. It does seem to me to use discounted figures and then to move away from equality is to take into account realisation difficulties twice. Whatever the asset the only difference between it and its cash proceeds is, as Thorpe LJ once memorably said, the sound of the auctioneer's hammer."
Accordingly, the judge simply determined the share which the wife should receive by adding the values of all the assets, including the marital proportion of Dextra.
"20. The linear approach is the evaluation which I make in this case. It resonates with fairness. It reflects my opinion of the true latency of the business at the time that the marital partnership was formed, and that, intrinsically, value is (at least) as much a function of time as it is of work or market forces. In argument, I asked "how could it be said that a day's work in 1980 in creating this company was less valuable than a day's work last week?" In my judgment, the answer is that it could not."
The result was that 20% of the current value of Dextra was non-marital and not to be shared. The judge also saw other advantages with this approach, namely that "it seems to me to provide a useful heuristic basis for analysing the issue, which if commonly adopted would have the beneficial side effect of eliminating arid, abstruse and expensive black-letter accountancy valuations of a company many years earlier at the start of the marriage" (paragraph 16).
"21 … That fact does not alter, in the slightest, my evaluative assessment of what element of the present value of the business should be treated as existing at the time the relationship started and which is therefore certainly to be characterised as non-matrimonial. The wife's arguments have made me ponder whether a further element, to reflect the co-ownership between April 1986 and April 1989, should also be designated as non-matrimonial property. The linear approach would suggest that the business was worth £61.5m in April 1989. So, it may be argued that £8.5m, being half of the difference between that figure and £44.5m, should also be treated as non-matrimonial. I do not take that step, but it does show that you should be careful what you wish for."
Submissions
Legal Framework: Discussion
(i) The Valuation Question
"The judge … had erred in awarding the wife the bulk of those assets which were readily saleable at stable prices, leaving the husband with all those assets which were substantially more illiquid and risk laden."
In the judgment of the court, given by Thorpe LJ, it was said at [24]:
"Having read the skeleton arguments and the judgment we were at once struck by the security of the result that the wife had achieved in contrast to the risks confronting the husband's economy".
Later in the same paragraph, Thorpe LJ referred to how sharing could be achieved in a clean break case:
"In that situation … sharing is achieved by a fair division of both the copper-bottomed assets and the illiquid and risk laden assets."
Later in the judgment the question was asked, at [26]: "is the judge's allocation of the risk-free realisable assets fair?". The answer was that it was not.
"… 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".
"As to the difference between the paper value of an interest in farmland and cash in hand (for which the judge cited P. v. P. (Financial Provision: Lump Sum) [1978] 1 W.L.R. 483 and Preston v. Preston [1982] Fam. 17) I would only say that the difference between a paper value of an interest in a farm partnership and cash in hand is dependent only upon the judgment of the valuer and future market fluctuations. Of course real value can only be established by signing a contract for the sale of the land and by the fall of hammer on the last lot of the farm sale. Of course there are substantial costs in turning farming assets into cash, although that factor was allowed for in the judge's calculations. But there are few assets more stable, more predictably realisable and more proof against inflation than prime agricultural land."
It can be seen that Thorpe LJ's focus was on, and only on, "prime agricultural land". He expressly identified why he considered that, whilst acknowledging that it depended on "the judgment of the valuer and future market fluctuations", the valuation of this type asset could be treated as being robust. As I have said, it was not a general observation about all assets and all valuations.
"[136] In H v H [ 2008] 2 FLR 2092 Moylan J highlighted the fact that the vulnerability of valuations had been specifically recognised by the House of Lords in Miller v Miller; McFarlane v McFarlane: [2006] UKHL 24, [2006] 1 FLR 1186. Moylan J said:
"[5] 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."
[137] Moylan J was referring to a business valuation, as was the Court of Appeal in Wells v Wells. Here the court is more specifically concerned with valuations relating to property developments. For the reasons given by Lewison LJ at [184] – [195], the same principle found in Miller and H v H applies as much to development land valuation as to conventional business valuations, perhaps even more so given the dramatic effect that even a small adjustment in a variable can make to a valuation and given the inherent unpredictability, described by Lewison LJ, in relation to property development projects."
Lewison LJ said:
"[185] 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)."
"[151] I fully accept that the making of a Wells order is something that should be approached with caution by the court and against the backdrop of a full consideration by the court of its duty to consider whether it would be appropriate (per s25A MCA 1973 ), to make an order which would achieve a clean break between the parties. I do not accept however that Wells was a wholly singular case and should be regarded as such by the courts."
(ii) The Marital Property Question
"[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. Fairness has a broad horizon. Sometimes, in the case of a business, it can be artificial to attempt to draw a sharp dividing line as at the parties' wedding day. Similarly the 'equal sharing' principle might suggest that each of the party's assets should be separately and exactly valued. But 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. The costs involved can quickly become disproportionate. The case of Mr and Mrs Miller illustrates this only too well.
[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."
"[28] While the analytical distinction is clear, it may be far from easy to decide whether an asset should properly be characterised as matrimonial or non-matrimonial, or indeed as somewhat hybrid; and, in truth, it is around that difficulty that a lot of the argument in this case has really centred."
"[34] It needs to be stressed, however, that the methodology is a tool and not a rule. The overarching duty upon the court is to exercise its statutory duty under s 25 of the Matrimonial Causes Act 1973 (as amended) (the MCA 1973) and to exercise the wide discretionary powers conferred upon, and entrusted to, it by Parliament in a way which is principled and above all fair to both parties on the facts and in the circumstances of the particular case."
"[59] As well as having particular regard to the matters listed in s 25(2), the court is required by s 25(1) of the MCA 1973 to have regard to all the circumstances of the case. In my view, it is one of the circumstances of this case that the husband already owned the ASOS shares before the cohabitation and marriage; that they already had value then; but that they greatly increased in value during the period of the cohabitation and marriage. The question for the discretion of the court is: how fairly to reflect those considerations in making its overall exercise of discretion?"
After referring to features of the business' development, Holman J continued:
"[61] In my view, it does not fairly reflect these considerations to carve out from the current value of the shares a mere £4.8m, as Mr Bishop and Mr Bradley, basing themselves on Mr Lane's report, contend. Much greater allowance must, in fairness to the husband, be made for the history in order, to borrow words from Lord Nicholls in Miller quoted in para [38] above, to 'reflect the amount of work done by the husband on this business project before the marriage'."
"[63] In my view, not as an accountancy exercise, but in the exercise of broad judicial discretion, the only fair way to treat the remaining pre-existing shares (and the three Wimbledon investment properties) is to treat them as to half as the personal non-matrimonial property of the husband, and as to half as the matrimonial property of the parties to be evenly shared."
"[96] Mr Bishop rightly does not seek to say that the judge was wrong to adopt the impressionistic/discretionary approach, rather his complaint is that the judge failed properly to exercise his discretion in this respect and should have adopted the division proposed by him on behalf of the wife in relation to the totality of the assets. Such a division should, he submitted, have been calculated by reference to a computation of all the assets to include a conservative figure in relation to valuation of the development land.
She went on to observe that, in that case, "the judge was entitled, and really had no option, but to give weight to the non-matrimonial assets in a more general way as part of the totality of his discretionary exercise", at [101].
"[99] In the majority of cases, the court will be able to value the assets, both matrimonial and non-matrimonial, and therefore, if appropriate, make orders by reference to a percentage of the total assets. That is not going to be the case in those less common cases such as the present one, where the court has been unable to place a value on certain of the assets."
I agree, and this includes being able to ascribe a value to a private company, in the manner referred to above, for the purposes of the determining what part is marital and what part not.
Determination
(b) The Marital Property Question
"the court will undertake a broad evidential assessment and leave the specific determination of how the parties' wealth should be divided to the next stage."
"… my evaluative assessment of what element of the present value of the business should be treated as existing at the time the relationship started and which is therefore certainly to be characterised as non-matrimonial."
This approach seems to me to be entirely consistent with the principles I have referred to above.
(a) The Valuation Question
LORD JUSTICE COULSON:
LORD JUSTICE SIMON: