Credit crunch divorces

  • Author : Andrew Meehan
  • Date : May 2010
ABOUT THE AUTHOR: Andrew Meehan is a Senior Solicitor at Mills & Reeve LLP

A lthough recently released figures show that the UK economy has now emerged from recession, uncertainty remains about its ability to continue this recent growth. The downturn in the economy has caused many difficulties in divorce cases due to the consequent effect on parties’ assets, and this has raised a number of problems in valuation. This article will examine some of the problems encountered as a result.

Court’s duty

In every divorce case it is the court’s duty in deciding whether and, if so, in what manner, to exercise its powers under the guiding statute, the Matrimonial Causes Act 1973 (MCA), to have regard to all the circumstances of the case, the first consideration being given to the welfare of any child of the family under 18.

Section 25(2) of the MCA provides a checklist of factors to which the court shall pay particular attention. These include: the income, earning capacity, property and other financial resources of each of the parties. A snapshot of the values of the various assets involved in a divorce case must therefore be taken so that the court can quantify the asset base, the operative date for this being the date of trial.

The court has a vast discretion when it comes to determining a fair outcome. The MCA is now nearly 40 years old, and has been augmented by a significant amount of case law providing guidance as to the interpretation of the statute.

In these uncertain economic times, asset values are fluctuating significantly even over the course of proceedings

In these uncertain economic times, asset values are fluctuating significantly even over the course of proceedings, which might last for a couple of years or more between their commencement (when financial disclosure is provided) and a final hearing. Such turbulence makes obtaining an accurate snapshot extremely difficult. Different classes of asset, such as properties, investments, business assets and pensions, have all been affected in different ways, some more significantly than others. Proposals for settlement may have been put in reliance on the snapshot taken at an earlier stage in proceedings, which may become irrelevant in the event of a subsequent change in values.

Valuations may have to be updated before trial. Even when a settlement has been arrived at, a snapshot taken at the date of settlement can frequently produce unfair results for one of the parties if the value of the assets they are to retain falls shortly after the conclusion of proceedings, or there is a windfall if the market swings the other way.

Fall in value of business assets

Particular areas of difficulty are the extent to which a family business is a resource which can be drawn upon to fund a settlement on divorce and the valuation of that resource. Shares in a private limited company are risk-laden even in normal circumstances. However, there have been two recent cases, which have been subject to large amounts of publicity, which emphasise both the hazards created by the current economic climate, as well as the court’s unwillingness to unpick previously concluded orders. The most well-known of these cases is that of Myerson v Myerson [2009] EWCA Civ 282. The background is that Mr and Mrs Myerson negotiated a consent order when the assets were valued at c.GBP25 million, with Mr Myerson supposedly to retain 57 per cent of the assets, including the shareholding in a business, whilst his wife, who received cash and property, retained 43 per cent.

However, after the order was made, the value of Mr Myerson’s shares plummeted (from GBP2.99/share to GBP0.27.5 /share by the time of his appeal). He had already paid his wife the first instalment of her lump sum and owed more to be paid by further instalments over the following years (a lump sum payable by instalments being potentially variable in the future).

Mr Myerson argued on his appeal that the collapse in the value of his shares and the collapse of global credit markets undermined the fundamental basis upon which the original order was negotiated. He therefore said that these factors made it impossible for him to comply with the order and that it should be set aside.

However, his appeal was dismissed by the Court of Appeal, which said that the natural process of share price fluctuation, however dramatic, was insufficient to enable the court to interfere with its previous order.

There was a similar result in Horne v Horne [2009] EWCA Civ 487, in which the Court of Appeal held that both the dramatic fall in property prices and the failure of Mr Horne to improve the fortunes of his business were foreseeable at the time that the order was made and did not amount to an event enabling the court to interfere with the original order.

Problems with business valuation

Ordinarily a single joint expert is instructed to prepare a valuation of a business or shares in it, and will usually also address issues of liquidity and the possible extraction of money from the business to fund a divorce settlement. Tax issues will also be examined when money is being taken out of a business, as well as examination of the most tax-effective ways to raise capital, such as payment of dividends or bonuses, share buy-back or by borrowing.

The economic conditions have caused huge problems for the courts in attempting to value such businesses. Firstly, data as to appropriate comparables is very difficult to come by because of the lack of deal activity in the market. There is also a distinct lack of liquidity in many businesses in which sales have suffered, and the business’ remaining resources, built up in the good times, are instead having to be used to ensure their continuing survival, rather than being able to be used to fund divorce payouts. Often, a business simply cannot afford increased dividends or bonuses, or to fund the purchase of shares or borrow money from the bank.

These issues have meant that cases involving business assets are even trickier to resolve than under more benign economic conditions. Creative thinking and a degree of pragmatism have become the watchwords in these cases, even more than is usually the case.

Couples whose marriage would, in a better economic climate, be at an end, are instead left with no option but to remain living together until times improve
Fall in property prices

The recession has also affected the less well-off, for whom the matrimonial home is usually the main marital asset. Property values have fallen significantly since 2007. Different valuers can have different opinions as to the value of a property because the lack of demand and sales being completed makes valuation tricky. The usual order on a divorce is one for spouse to buy the other’s share in the property by way of remortgage. However, the tightening of the lending criteria has made cheap borrowing so much harder to obtain, meaning that couples whose marriage would, in a better economic climate, be at an end, are instead left with no option but to remain living together until times improve.

A number of parties who have previously negotiated a settlement a year or more ago predicated on the basis of a sale of a property, working on the property’s value at that time, have received a shock when the property has eventually sold and they have received far less than they expected or, in some cases, nothing at all because the other spouse was to receive a minimum figure from the sale proceeds, leaving nothing for that party.

Negative equity has also reared its head. This again has lead to couples deciding to continue living together and also arguments as to who should retain the debt rather than the assets. A recent example of the problems caused by negative equity is the recent Court of Appeal case of Marano v Marano [2010] EWCA Civ 119. Mrs Marano was from an exceptionally wealthy family who had set up many trusts and investment vehicles for her and her children. Mr Marano was in business as a property developer, which had a positive value at the time of his financial disclosure in 2007, but had lost value as a result of the property crash and, by the time of the appeal, was substantially in negative equity. In order to divide the assets equally, the judge ordered Mrs Marano to pay her husband a lump sum. Mrs Marano appealed the order on the basis that the judge had been wrong to use a valuation of the property company at the date of trial, which was only a snapshot and also on the basis that liquidation was not a foreseeable eventuality as Mr Marano had committed to trading himself out of the market downturn. However, the Court of Appeal in this case disagreed and rejected Mrs Marano’s appeal.


Pensions have always been a complex area. A key issue now is that the value used for the purposes of divorce proceedings, the Cash Equivalent (CE), may not necessarily provide an adequate indication of value. This can be of particular importance in the cases of Small Self-Administered Schemes (SSASs) or Self Invested Personal Pensions (SIPPs), where the underlying asset base may be volatile and may frequently contain property or investments.

‘Moving target syndrome’ poses a problem. Without descending into the technical reasons why, there can be a delay of several months, or even longer, between the date the CE is provided as part of the process of financial disclosure and the date the pension sharing order is finally implemented. This can cause huge disadvantage where the pension value has changed significantly in the interim, or where the pensioner has several pension arrangements so that comparative valuation issues arise.


This brief article highlights just some of the issues, particularly valuation issues, which have been magnified by the prevailing economic conditions. The continuation of these problems will depend on whether the recent ‘green shoots’ of recovery continue, or whether there is a double-dip.


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