Business assets and divorce
Each case will be decided on its merits, however, the following sets out the general principals.
Business assets, whether in the form of shares in a limited company, interest in a partnership or LLP, or those of a sole trader, will be considered part of the relevant assets of the relationship alongside other property or investments. Unlike land/buildings, bank accounts and investments, an interest in a business can be difficult to value and is usually, by its very nature, illiquid.
Practitioners may fall into the trap of simply looking at an interest in a business as an asset that needs to be valued by an accountant. That asset is usually then added into the balance sheet along with the other assets owned by the parties. By contrast, it can be useful to look at a business asset as a resource: how much money can be drawn from that business to fund a financial settlement on divorce, and how much income could the business produce in the future? This latter issue often needs to be addressed when quantifying maintenance.
A further issue to consider is whether certain company assets may not be owned by a spouse, as described by Lord Sumption in Prest v Petrodel resources  UKSC 34,  All ER (D) 90 (Jun), ‘subject to limited exceptions…a company is a legal entity distinct from its shareholders’.
It is particularly important to acknowledge that the value of an interest in a business is inherently different to the value of a liquid asset. The courts have drawn a distinction between property or savings, which could be viewed as ‘copper-bottomed’ assets, and shares in a business, which are ‘risk-laden’ assets. In addition, the courts have shown an increasing reluctance to base an entire award upon an accountant’s valuation of a business interest and simply to apply the yardstick of equality.
Wells v Wells  All ER (D) 312 (Mar)
Robson v Robson  3 FCR 625
H v H  All ER (D) 415 (Apr)
Matrimonial/civil partnership and non-matrimonial/civil partnership assets
An argument may be made as to whether a business interest should be viewed as a matrimonial/civil partnership or non-matrimonial/civil partnership asset. In such circumstances, business assets generated solely by the efforts of one part (for example, where a business is inherited by a party, the existing value in the business at the time it was inherited, or the value that can be attributed specifically to the contribution of one party) may be classified as non-matrimonial/civil partnership assets. They will not be ring-fenced and excluded from consideration, but will be treated as the creator’s unmatched contribution so as to justify a departure from the application of the yardstick of equality.
Miller v Miller; McFarlane  UKHL 24,  2 FCR 213
Rossi v Rossi  EWHC 1482 (Fam),  3 FCR 213
In WF v HF the court considered that the significant pre-marital wealth of the husband could not be ignored. The company that the husband had set up prior to the marriage had been the ‘central plank of the family finances throughout the marriage’. The court held that the value of the company at the time of the marriage and the increase due to ‘passive growth’ indexation should be left out of the account in order to assess fairness of division.
WF v HF  All ER (D) 236 (May)
When representing a party owning an interest in a business, the point should be put on their behalf that adding the value of the business to the matrimonial balance sheet, in cases where the claimant may also be entitled to periodical payments funded by the profits of that business, risks giving the claimant a double benefit, since the capital value of the business often reflects future incomes by way of the ‘profit earning ratio’ basis of a business valuation.
V v V (financial relief)  2 FLR 697
Piercing the corporate evil
Historically the family courts have, in limited circumstances, considered a company to be the ‘alter ego’ of a party and have made orders (rarely) to pierce the corporate veil thereby treating corporate assets as matrimonial assets.
Mubarak v Mubarak  1 FCR 193
The leading case on piercing the corporate veil is currently Prest v Petrodel Resources  UKSC 34,  All ER (D) 90 (Jun). At first instance Moylan J had found that the husband was the ‘effective owner’ of the Petrodel Group. The Court of Appeal allowed the companies’ appeal on the basis the court did not have jurisdiction under section 24(1)(a) of the Matrimonial Causes Act 1973 (MCA 1973) to make such an order against the husband because although he controlled the companies, it was they, and not the husband, that owned the properties. On appeal to the Supreme Court the wife argued that:
- the husband was ‘entitled’ to the properties
- the ‘alter ego’ line of authorities entitled the court to pierce the corporate veil
- the companies were nuptial settlements capable of variation, and
- the husband was the true beneficial owner of the properties in any event
The Supreme Court allowed the wife’s appeal on the fourth ground, ie that the husband was the true beneficial owner of the properties in any event, and concluded that the companies held the properties on trust for the husband ‘by virtue of the particular circumstances in which the properties came to be vested’ in them. Lord Sumption, giving the leading judgment, made it clear that it is a fundamental principle that a company is a legal entity in its own right and that to justify an order to transfer company assets to a spouse it has to be shown that the other spouse is entitled to those assets even though they are held in the name of the company. He concluded that:
- the phrase ‘entitled either in possession or reversion’ was to be interpreted as a legal or equitable proprietary right and no broader meaning could be allowed in a family law context than in any other court
- piercing the corporate veil is permissible ‘in a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company’, ie Salomon v A Salomon & Co [1895-99] All ER Rep 33,  AC 22, and the ‘alter ego’ approach was wrong
The wife was refused permission to appeal on the nuptial settlement issue, which did not appear to be ‘seriously arguable’.
The court was critical of the lack of disclosure provided by the husband and the companies. It concluded that the husband had provided the funds to purchase the properties held by the companies and that, on the basis, the companies held the assets on trust for the husband. Therefore, the properties constituted property to which the husband was ‘entitled, wither in possession or reversion’. On the issue of disclosure and adverse inferences, Lord Sumption said:
The concept of the burden of proof, which has always been one of the main factors inhibiting the drawing of adverse inferences from the absence of evidence or disclosure, cannot be applied in the same way to proceedings of this kind as it is in ordinary civil litigation. These considerations are not a licence to engage in pure speculation. But judges exercising family jurisdiction are entitled to draw on their experience and to take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing.
The approach is Prest was followed in the similar case of M v M  EWHC 2534 (Fam),  All ER (D) 133 (Aug).
Sale of the business
While courts will try to avoid selling a business, they will require a sale if there is no other way to achieve a fair outcome. It is, however, exceedingly rare that the court would ever order the sale of a business. Even where a court does require a sale, it will usually try to give the party who owns the business interest the maximum opportunity to buy out the other party’s interest by staging payments over a period of time and requiring payment to the other party of periodical payments for maintenance in the meantime. A court will also be concerned to give the party with the business interest time to sell the business so as to avoid a fire sale where the full value of the business may not be realised and the basis of an order therefore undermined.
N v N (financial provision: sale of company)  2 FLR 69
Smith v Smith  3 FCR 552,  All ER (D) 223 (May)
In the vast majority of cases evidence will be required from an accountant in respect of the business interests. Usually one accountant will be instructed by both parties as a single joint expert. It is only in limited cases where it may be appropriate for each party to instruct their own expert to provide evidence in respect of the business. Such circumstances may include the situation where one party is deliberately seeking to conceal assets within the business or has attempted to dissipate business assets. The issue of expert evidence will be considered by the court at the first appointment in accordance with the FPR 2010. The permission of the court is required to adduce expert evidence.
In some circumstances the report from an expert accountant may only need to be limited; for example, after a short marriage or where the business is a modest enterprise, the court may direct that an accountant provide a simple ‘desktop’ valuation of the business interests. The court may also seek to cap the accountant’s fees to be incurred.
Where a single joint expert is instructed, they will usually be specifically asked to advise on liquidity (or lack of it), the possibilities available to extract money from the business and the tax consequences of the same. If a significant proportion of the value of all the parties’ assets is represented by an interest in a business, illiquidity may mean that it is not possible to achieve a financial settlement that also facilitates a clean break. In such circumstances an alternative to requiring a sale of the business might be to transfer all non-business assets to the other party or to transfer to them some of the shares owned by the party with the business interest. The voting rights connected with such shares are usually retained by the business-owning party and consideration would need to be given to protecting the income flow from shares transferred by a shareholders’ agreement being put in place. An order for the transfer of shares is usually a last resort.
D v D and another  1 FCR 603,  All ER (D) 37 (Mar)
F v F  EWHC 438 (Fam),  All ER (D) 236 (May)
AC v DC (No 2)  EWHC 2420 (Fam),  All ER (D) 11 (Apr)
These notes are for guidance only and do not constitute advice. Anyone reading the above should discuss matters with an advocate.