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
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.
Conclusion
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.