England and Wales High Court (Family Division) Decisions

In October 2017 the wife issued her Form A and divorce petition.  The proceedings have followed a relatively conventional course, save in one respect, and there is no need for me to set out its history.  The one aspect which does need attention is the instruction of expert accountants to value R Ltd and its associated companies.  By agreement, Grant Thornton (GT) were instructed to produce a valuation which came in in October 2018.  Both sides were dissatisfied with the conclusion and each applied successfully for permission to instruct their own valuer.  W has accordingly instructed Jon Dodge of Walton Dodge and H instructed Faye Hall of Smith and Williamson.  It is fair to say that the report of Mrs Hall is considerably closer in methodology and outcome to that of GT than is the report of Mr Dodge. 

i)                    Whether or not the parties owe £352,000 to W’s father.  I have already expressed my conclusion on that issue;

ii)                  The value of H’s business assets.  On this the parties are some £9.5M apart, the single biggest component of the dispute being as to whether or not a terminal value attaches to R Ltd;

iii)                Whether or not a value is to be attributed to W’s shareholding in various entities set up by her father and which in 2015 she transferred to the children of the family;

iv)                Whether or not a value should be attributed to her interest in various trusts established by her family.

So far as the issues of her business assets and interests in trusts are concerned, it is said on behalf of the husband that although it is conceded that these are in all respects non-matrimonial assets they are nevertheless resources that are available to the wife either in terms of capital or in terms of income production.

H remains living in CP which has an agreed value of £1.25M and is subject to a mortgage of £553,000.  Putting to one side the question of whether any funds will be due to W’s father, there is an agreed equity of just under £660,000.  H says it is a perfectly adequate home for himself, his partner and their child and for the two children of the family when they visit.  He thus goes on to say that W’s reasonable housing needs do not exceed £1.3M.  They are no greater than his own.

Since the age of 18 the wife has been the recipient of various shareholdings in companies operated by her father.  Her two siblings have benefited likewise.  These gifts started in 2001 when she was aged 18.  It is not challenged that notwithstanding these gifts, W’s father has remained in total control of the operation of the various companies and save as is set out later in this judgment, W has received no benefit.

W receives a monthly payment of £1,000 which has been paid to her for very many years.  She says that is the totality of her receipts from the entities which her father has created.  In addition, the sum of £8424 p.a. is paid by M Ltd into her DLA to fund a minimal contribution to national insurance and preserve or enhance her position in respect of the state pension.  She does not see that money or the £3,000 p.a. nominally paid to her by one of the family trusts.  The only other payment that she can recall receiving was the one-off sum of £20,000 paid into an ISA. 

In the course of her evidence W made it clear that she did not anticipate seeking employment.  She has not worked since the marriage and she expects to continue to look after the children and the home with the assistance of her housekeeper.  That said, she has a good degree from a prestigious university and notwithstanding her relatively modest employment history as an assistant merchandiser with a department store chain I have no doubt that she could earn a modest income if so minded.  It is relevant that it was not the anticipation of the parties that she would work but it is an option that is open to her when the younger child is a little older.

H receives a salary from R Ltd of £250,000 pa [£143,000 net].  He is also entitled to preferential dividends in the sums of £500,000 and £267,000 p.a. gross, £310,000 and £166,000 net.  This gives a total annual income of £1.017M gross, £619,000 net of tax.

It is unnecessary for me to go further back into its history than 2017 when on 1 ^st January 2017 Mr S joined R Ltd as a full-time consultant, having embarked upon a detailed strategic review of the business.  Mr S has a background in private equity and is a long-term friend of Mr E, the co-founder with H of R Ltd in its current form and to a lesser extent of H.  At that time H and Mr E each held 50% of R Ltd.

i)                    PG:  The wife proposes that the property be transferred to her and that she should take over all the expenditure upon it, the husband seeks its sale;

ii)                  CP:  It is agreed that this property should be transferred to the husband and that he should meet the expenses on it;

iii)                Debts to W’s father:  W proposes that she should take over sole responsibility for the PG borrowing and says that she will also repay the £827,000 borrowed by her primarily for legal expenses.  H asserts that this latter debt should in the first instance be paid from her non-matrimonial DLA but accepts that in the long run should be in effect shared equally between the H and W as he has paid his own costs in a broadly similar sum from matrimonial assets.

iv)                Lump sum:  W seeks a balancing lump sum of £706,000, increased in closing to £903,154, which she claims equalises the non-business assets, while H offers £100,000.

v)                  H’s business interests:  W seeks that his interest in R Ltd should be sold forthwith (i.e. within 12 months) and the proceeds divided 50/50.  As a fall back but very much second choice she seeks a lump sum of approximately £12.1M payable in equal tranches in 2021 and 2023, saying that this reflects one half of the value of his interest in R Ltd less a 5% discount to reflect the fact that she is receiving cash.  H’s proposal is that W should receive a sum equal to 50% of what he receives for his interest in the company up to a cap of £8.65M, reflecting what he says is one half of the value of the business.  This will be payable in 5 years time or at such later time as a liquidity event takes place.

vi)                Spousal payments:  W seeks 50% of the expected net preference dividends until receipt of her share of the proceeds of sale, which she calculates as £238,000 p.a. H offers £40,000 p.a. plus 25% of the net preference dividends.

vii)              Child periodical payments:  W seeks £20,000 p.a. per child plus school fees.  H offers £10,000 p.a. per child plus school fees.  

By far the biggest difference between them relates to whether or not a terminal value should be added, put by Mr Dodge at £18.8M and at zero by Mrs Hall (and also by GT).  Mr Dodge argues as follows:  the company will continue after the five year period at the end of which it will be sold or floated.  It will not be wound up.  Taking a terminal value allows one to build in the value of the likely future cashflow after 2023, as when the company is sold it will have an infrastructure in place and projects in progress that will not yet have flowed into the profit stream but nevertheless will be of significant value to the purchaser. 

In March 2018 R Ltd produced not only their BAU forecast but also a Best Case (BC) forecast.  Both valuers had regard to the BC scenario and did the same discounted cashflow calculations to that forecast as they had done to the BAU forecast.  This produced substantially higher figures (Mr Dodge’s £36.4M increased to £49.1M and Mrs Hall’s £37.0M increased to £52.6M), the difference being the use by them of different valuation dates.  Each then applied a weighting to the BE which in Mr Dodge’s case was 50% reducing his forecast down to £42.8M and in Mrs Hall’s case 10% reducing her figure down to 38.6M.  The figures are set out in more detail at page D522. 

The valuers agreed between them that if H is to realise his business interest at the time of the liquidity event there should be no discount applied.  However, the wife asks that I should order a sale of H’s business interests at a significantly earlier time.  Both accountants agree that in those circumstances there would need to be a discount applied.  Mr Dodge says that if the husband was to sell his 40% interest the discount would be 20-25% whilst if he were ordered to sell only half his shares the discount would be correspondingly higher in the 25-35% bracket.  Mrs Hall says a 30% discount for a sale of 40% of the shareholding and “north of 50%” for a sale of half his holding.

W’s primary case is that I should order a sale now.  I have reached the clear conclusion that I should not do so.

                                          i.             This is not a propitious time to sell.  The company has just recorded its two worst years.

ii.       The discount which H would have to bear on the value of his shares is substantial.  I recognise W’s desire to obtain her independence and certainty and for the early imposition of a clean break but it would be at the cost of significant financial loss to each party.

iii.     She proposes that if H has not sold them within 12 months a receiver should be appointed.  I understand the logic of this suggestion but it is hardly likely to bolster the price achieved or enhance the management of the business in the intervening period.

iv.     The relatively limited and anecdotal history of court ordered sales does not give one confidence of a successful outcome.

v.      For all these reasons it seems to me, in circumstances where in my judgement W is not in immediate need of funds, it would be in the interests of both parties for the sale to be deferred.

W’s fallback position is that I should order the payment of the sum that she is to receive in two equal tranches, the latter being upon the occurrence of the liquidity event.  I have considerable sympathy with this argument and I agree with W that I should reject H’s proposal that W should simply receive 50% of whatever he ends up with whenever the liquidity event takes place, with a maximum cap being set at half its current value.  The effect of the proposal would be that W shares equally in any downside but does not share in any upside; nor would she have any fixed date by which she would receive her share.  It is inherently unfair to her.  True it is, as the husband points out that he has no certainty either, but he remains engaged in a business which he wishes to retain and which has the prospect of bringing him significant reward.  In my judgement it is more helpful for the parties to know exactly what it is that H should be paying W and when it is due.

 “Short of selling his shareholding I cannot see any logical basis upon which I can find that liquidity will or can be made available to H before the liquidity event save in the payment of the very substantial dividends to which he is entitled.  It is entirely proper that W should feed into these dividends and into H’s salary to a far greater extent than he proposes but beyond that she will have to wait for the receipt of her funds until such time as H’s interest is realised”.

The parties’ positions are slightly contrary in this respect.  H says that no discount should be applied but that is against the background of his contention that W’s award should be capped by reference to current value and that she should not feed further into what he might achieve.  W says that there should be a discount but limited to 5%.  I bear in mind particularly that this is a business which it is expected to be sold and that it is at H’s instance that the delay is occurring and I shall not therefore allow a discount.

This has not formed a significant focus of this case.  Both parties have inevitably haemorrhaged capital in the build up to these proceedings.  H has in effect paid all his costs of £880,000 from his accrued capital whilst W’s remain outstanding.  Henceforth H will be able to apply his income to the support of the family.  Both parties have put forward budgets in the usual way H puts his budget at £177,000 exclusive of sums that he pays towards W’s household but inclusive of £19,800 by way of school fees and extra tuition for the children to which he agrees to go on paying.

1.       Business assets: H shall pay W a lump sum of £8,948,930 being one half of the value of the net business assets on a 40% shareholding.  In the event that his shareholding is diminished by a share grant to employees by no later than 30 April 2023 to a minimum figure of 38%, the lump sum shall be reduced pro rata.  This will be payable by 1 August 2023, namely 4 months after the year end.  Upon payment in full there will be a clean break.

The sum will become interest bearing from the date it is payable. I do not make interest payable before then because W will be feeding in to any success of the company through the level of dividend payment that she will receive. 

2.       The personal assets shall be equalised by a payment on account of £300,000 by 1 October 2019.  I envisage that this will be likely to come by way of a remortgage of CP.  This extra borrowing will still leave headroom of a little over 30% of value.  The balance of £250,000 will bear interest from 1 October 2019 and shall be paid by 1 January 2021, probably out of dividend income.

3.       PG shall be transferred to the wife and CP to the husband with each indemnifying the other and seeking release from current liabilities.

4.       H shall pay W periodical payments until payment of the lump sums due (a) from 1 August 2019 in the sum £50,000 pa, which represents about 35% of his salary, plus (b) from the date hereof 35% of his net bonus/dividend receipts.

5.       H shall pay child maintenance at the rate of £15,000 pa per child and school fees and existing tuition costs.

The effect of these income awards is that in a year with two preferential dividend payments, as anticipated, W will receive £166,600 plus £50,000 plus her income of £12,000 plus child maintenance of £30,000 = £258,000 and H will be left with the balance of his salary and dividends = £373,000 less school fees of ca £20,000.