How to Deal with Business Structures in Divorce Cases
When a couple divorce, assets are split, but might happen to the business they both share?
Below Julie-Ann Harris, Partner & Head of Family, and Resolution Accredited Specialist at Coffin Mew, discusses the current UK law regarding business structures in divorce cases, taking point from case law and offering some insight into the options available.
It is now commonplace that a corporate or business structure will fall to be dealt with by the divorce courts in financial remedy matters as a resource of one or both of the parties under section 25(2)(a) Matrimonial Causes Act 1973 (MCA 1973). When considering a fair outcome, the court must first establish the value of the business interest before it is able to decide how the asset is treated in the eventual settlement.
In certain cases, professional valuations are essential but following Moylan, J in H-v-H  EWCA Civ 1306 where he likened them to no more than a chimera where they should be used as guidance rather than rule, their usefulness to the court is limited to help the court test the fairness of the proposed outcome. Fairly sweeping when we consider the costs of a valuation which can run into tens of thousands.
This principle by definition extends to when is it sensible to value and when is it not? A rule of thumb is that sole traders, cash businesses, minority shareholdings in quoted companies and businesses that generally yield income only may not benefit from a valuation. If in doubt, a forensic accountant will help in the decision-making process.
Experts have many valuation methods including discounted cash flow (where there is minority shareholdings), assets (such as property investment/management companies) or earnings (where the company is trading it is necessary to establish future maintainable earnings and assess how much a prospective purchaser might pay).
Many valuations include calculations using all three methods to work out the best one to fit the corporate model. Once a value is attributable the expert will consider if any discounts apply to take into account issues such as illiquidity, minority shareholdings and whether the company is attractive to the open market for sale. Tax implications will be high on any expert’s agenda when looking at the options to extract cash from the business.
Practitioners should be alive to the issue of double counting that may arise if a capital value is attributable to a company and included in full on one side of a schedule of assets where ongoing spousal maintenance is a possibility. This was illustrated in the Court of Appeal case of Smith v Smith  EWCA Civ 454, where the district judge’s order was appealed after he fell into error and divided the parties’ assets equally, attributed 100% of the business to the husband but then ordered the husband to pay spousal maintenance equal to half his earnings from the business.
Where valuation is difficult or liquidity is an issue the courts may adopt the approach in Wells-v-Wells  EWCA Civ 476, which was most recently revisited in Versteegh v Versteegh  EWCA Civ 1050. In this case the wife received a share in her husband’s business as part of the overall settlement. This option is most often deployed when other assets are insufficient to produce the sums necessary to secure a settlement and whilst it files in the face of the courts duty to consider a clean break, the protection for the parties may outweigh this consideration.
Other options available to the court for settlement purposes include one party retaining the business or shareholding and pay either a lump sum or spousal maintenance, or sometimes it is appropriate to do both. Either way the court will often depart from strict equality of 50% to reflect one party retaining the more risk laden assets whilst the other receives the benefit of liquid cash or the “copper bottomed assets.”
Other options available to the court for settlement purposes include one party retaining the business or shareholding and pay either a lump sum or spousal maintenance, or sometimes it is appropriate to do both.
Sale of a company which produces income to support the parties is rare and this potentially catastrophic option is deployed only as a last resort. A deferred lump sum to be paid upon realisation of a shareholding is sometimes favourable as shares remain with the owning party rather than subject to a transfer. Security for the recipient spouse is however essential.
It is essential to remember that a limited company is a separate legal entity and unless the court can pierce the corporate veil there is no power under section 24 MCA 1973 to transfer corporate assets to either party other than shares which are classed as property in accordance with section 24(1)(a) MCA 1973. In complex corporate structures the court may look for more creative options as it did in Prest v Petrodel Resources  UKSC 34, where it was satisfied that the companies were simply the husband’s nominee.
The chimeric nature of corporate structures in context of the divorce should make the most seasoned practitioner reach for their circle of trusted advisers and this is perhaps the one element of family work where engagement with other professionals should be seen as the rule rather than the exception.