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Cite as: [2002] ScotCS 273

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OUTER HOUSE, COURT OF SESSION

OPINION OF LORD KINGARTH

in the cause

S.D. or S

Pursuer;

against

P.C.S.

Defender:

________________

Pursuer: Cheyne, Digby Brown (for HBM Sayers, Glasgow)

Defender: McNair, Q.C.; Brodies, W.S.

15 October 2002

Introduction

The parties to this action of divorce were married in Scotland on 23 October 1981. There are three children of the marriage, two of whom remain under the age of sixteen years, namely R.L.S. born on 11 August 1987 and S.K.S. born on 21 August 1992. The parties ceased to cohabit on 20 December 1998.

The pursuer seeks decree of divorce on the ground that the marriage has broken down irretrievably by reason of the defender's behaviour. The defender does not seek to resist the granting of decree of divorce. Evidence in relation to this matter was given by the pursuer and her friend - both in affidavit form. I am satisfied by that evidence that the marriage has broken down irretrievably. I shall therefore grant decree of divorce.

On record the pursuer also seeks inter alia payment by the defender of a capital sum and of a periodical allowance. At the end of the proof the parties remained in dispute as to the amount which should be paid by the defender as capital sum and as to whether, and if so, in what sum any periodical allowance should be made payable. Although on record the defender has conclusions for the transfer of certain property to him, these conclusions were not insisted upon. The two younger children of the marriage have resided with the pursuer since the separation and there was no dispute but that they should continue to do so. At the end of the proof, however, the parties remained in dispute as to whether an order for contact in relation to the youngest child should be made in favour of the defender.

I propose to deal first with the pursuer's claim for a capital sum.

The net value of the matrimonial property

(a) Introduction

Any order which I make must, in terms of Section 8(2) of the Family Law (Scotland) Act 1985 ("the 1985 Act"), be (a) justified by the principles set out in Section 9, and (b) reasonable having regard to the resources of the parties. At the end of the proof both counsel were agreed, in the circumstances of this case, and on the evidence, that the only relevant principle which fell to be applied was that set out in Section 9(1)(a), namely that the net value of the matrimonial property should be shared fairly between the parties to the marriage. Counsel for the pursuer also sought to rely on the presumption, set out in Section 10(1), that fair sharing was equal sharing. Counsel for the defender on the other hand sought to argue that there were special circumstances which justified unequal sharing. The first task in these circumstances is to ascertain the net value of the matrimonial property at the relevant date - 20 December 1998.

At the outset it was made clear that the parties had been able to agree in relation to many elements of the matrimonial property at the relevant date, and at the close of the proof counsel for the pursuer produced a schedule which summarised, in table form, the matters upon which parties were - subject to one matter - agreed. The schedule, which disclosed the nature of certain matrimonial property, whether and if so, in what value it was held by either party at the relevant date, and its total value, is produced below as Schedule A.

SCHEDULE A

ASSET	DEFENDER	PURSUER
Heritable Property:- at Bothwell		£305,000.00
at Glasgow	£64,065.00
Contents	£5,100.00	£2,237.00
Company Pension Interest	£363.280.00	£383,688.00
Personal Pensions:- Scottish Widows £30,075.00
NPI(1) £26,548.00
NPI(2) £39,959.00
Norwich Union Plan £21,985.00
Equity & Law £19,094.00	£137,661.00
Scottish Widows £37,585.00
Norwich Union £21,941.00
AXA Equity & Law £19,163.00		£78,689.00
PEP's	£130,501.00	£102,206.00
Shares	£324,144.00	£85,347.00
Cars	£109,600.00	£60,000.00
Premium Bonds		£1,500.00
Bank Accounts:- Bank of Scotland Savings Account		£12,099.00
Bank of Scotland Savings Account		£36,750.00
Building Society Accounts	£382,307.00	£50,732.00
Fishing Rights	£32,300.00
AXA Policy	£105,718.00
TOTAL	£1,654,676.00	£1,118,248.00
GRAND TOTAL	£2,772,924.00

(b) The defender's shares - and the incidence of capital gains tax

The one matter listed in the schedule on which the parties remained at issue was whether the value of the defender's share portfolio should be assessed net of capital gains tax exigible on a realisation of those shares at the relevant date. For the avoidance of doubt, I record that counsel were agreed that this issue required to be resolved by the Court, notwithstanding the terms of apparent agreement as to the value of that share portfolio in joint minute No. 31 of process. There was, further, no evidence led, nor any argument addressed, in relation to potential capital gains tax on realisation of the pursuer's shares.

Section 10(2) of the 1985 Act provides that:

"The net value of the matrimonial property shall be the value of the property at the relevant date after deduction of any debts incurred by the parties or either of them - (a) before the marriage so far as they relate to the matrimonial property and (b) during the marriage, which are outstanding at that date".

The short but important question which requires to be resolved is whether the value of realisable property such as shares, (which, it was agreed, would fall to be valued on the basis of a notional sale at the relevant date,) should be taken to be the value after deduction of capital gains tax exigible on any such sale. Different views have been expressed on this matter in the Outer House and it has not - so I was informed - been the subject of decision in the Inner House. In Latter v Latter 1990 SLT 805, Lord Marnoch was concerned to assess the value of the defender's share-holding in a private family company. Although he assessed the value net of the costs of realisation, he declined to deduct capital gains tax. At page 809 he said:

"However in my opinion there is no reason why such a notional tax should be deducted. In this connection I do not doubt that the reference to 'net value' in the 1985 Act presupposes a hypothetical realisation of the parties' wealth but it is just that, namely a hypothetical realisation, and accordingly I cannot see why one should have regard to a notional tax liability which is without foundation in reality".

Lord Osborne agreed with that view in McConnell v McConnell 1997 Family Law Reports 97 at page 105. Counsel for the pursuer argued that I should follow the approach adopted in these two cases. By contrast, Lord Abernethy, in the unreported decision of Bolton v Bolton 17 February 1995, assessed the value of the defender's interest in two companies at the relevant date on the basis that both the costs of realisation and the incidence of capital gains tax required to be taken into account. Although counsel for the pursuer sought to persuade me that the case was special in that the defender's interest in the companies had in fact been realised some years after the relevant date, I was not persuaded by that submission. Further, it seems clear that Lord Sutherland in Savage v Savage 1997 Family Law Reports 132 accepted that the valuation of the pursuer's interest in his business at the relevant date fell to be made under deduction of any capital gains tax exigible on its realisation.

Although there may be arguments either way, I have come to the view that capital gains tax should be taken account of. It seems clear that the purpose of the 1985 Act is to secure a fair division of the wealth acquired in the course of a marriage as a result of the efforts of the parties during it. In assessing the value of matrimonial property at the relevant date for the purposes of such division, it seems reasonable to assess, so far as possible, the value to the parties, or either of them, of such property. In real terms, the value to any person of marketable assets such as a shares, is their value after deduction of capital gains tax, if any, exigible on realisation. I agree with Lord Sutherland in Savage v Savage when he said (at page 135) that: "In the context of endeavouring to value matrimonial property for the purpose of division some degree of realism must be allowed to play its part".

In these circumstances, unless the language of the 1985 Act clearly points in the opposite direction, I would be inclined to include the incidence of capital gains tax in the valuation of realisable assets such as shares. Considering the terms of the Act, there is nothing, in my view, which clearly points against that conclusion. Further, it is not too difficult to envisage circumstances in which injustice could be done if capital gains tax exigible at the relevant date was not taken into account. To take a simple example, if all of the matrimonial property at the relevant date consisted of shares owned by one of the parties to the marriage (that party being a higher rate tax payer), then, all things being equal, the Act could lead to a justifiable award of 50% of the shares' sale value, leaving the owner of the shares, after sale to meet the award and after deduction of capital gains tax, with only 10%. Although in making an order for capital payment, that order requires to be justified not only by the principles set out in Section 9 of the Act but also reasonable having regard to the resources of the parties (Section 8(2) of the 1985 Act), and although counsel for the pursuer accepted that the incidence of capital gains tax could properly be taken into account in assessing "the resources" of the parties, the likelihood is that that provision - as it has been interpreted - would not greatly assist the payer of the capital sum in the example given. In particular, even after capital gains tax, he would have resources available to meet the previously assessed fair share of the net value of the matrimonial property at the relevant date. As Lord Keith of Kinkell said in relation to a not dissimilar example in Wallis v Wallis 1993 HL 49 at page 55 C-D: "It does not appear that Section 8(2)(b) could be applied in such a way as to redress the balance in a situation of that kind". No doubt it is possible to envisage examples where capital gains tax exigible on a sale of property at the relevant date was no longer exigible to the same extent when the time came for a capital sum to be paid, in which case it might be said that the equities pointed in the opposite direction, (that is against having regard to capital gains tax at the relevant date). Such a case, however, would not be much different from any case in which matrimonial property increased in value, for whatever reason, after the relevant date, and, as was held in Wallis v Wallis, it is in general irrelevant to the assessment of a fair share of the value of matrimonial property that the value of that property or of any of the items comprised within it may have altered between the relevant date and the date of division. No doubt it could be argued that the proper place to take account of the incidence of capital gains tax at the relevant date would be as a potential "special circumstance" in accordance with Section 10(6)(d) or (e) of the 1985 Act. As to Section 10(6)(d), however, while no doubt the incidence of tax could be taken into account along with other factors if it was such as to make it unreasonable to expect part of the matrimonial property it to be realised at all (see for example the Lord Justice Clerk (Ross) in McConnell v McConnell (No.2) 1997 Family Law Reports 108 at page 112, para 20), that would be likely to have an impact, it seems, in relatively limited circumstances. Equally, Section 10(6)(e) appears to relate to expenses, etc. in connection with the divorce and, in any event, its language appears inapt to cover liability to tax.

I also agree with counsel for the defender that to take account of the incidence of capital gains tax on the notional realisation of property at the relevant date would not be very different from taking into account the penalties payable to a local authority on the notional sale of certain heritable property at the relevant date, as was done in Mackin v Mackin 1991 SLT Sh. Ct. 22 and Lawson v Lawson 1996 SLT Sh. Ct. 83. In addition, it seems to me to be difficult in principle to justify taking into account the expenses of any notional sale and not the incidence of capital gains tax. Finally, although the statutory provisions in England are different, I take some comfort from the fact that it appears to be the case that in assessing, under Section 25(2)(a) of the Matrimonial Causes Act 1973, "the ... property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future", it is, in general, the value of capital assets net of capital gains tax, and the expenses of sale, which is taken to be relevant (see e.g. Rayden and Jackson's Law and Practice of Divorce and Family Matters 17^th ed. at para. 21.35, O'Dv O'D 1976 Family Law Reports 83) - although there is, it seems, no hard and fast rule, (see White v White 2001 1 AC 596 at page 612).

As to the amount of capital gains tax exigible on a notional sale of the defender's portfolio at the relevant date, Mr Alan Barr, a partner in Brodies, W.S. specialising in tax law, gave unchallenged evidence that the taxable gain would be £184,650.00. Equally, there seemed little dispute but that, subject to any question of potential mitigation, the tax exigible on the defender, a higher rate tax payer, would have been £73,860. As to potential mitigation there was no convincing evidence (and Mr Barr did not accept) that any significant relief would be available. I therefore asses the relevant capital gains tax at £73,860.

(c) Income tax paid on income arising prior to the relevant date

At the end of the proof counsel were, as I understood it, agreed that tax payable on income arising prior to the relevant date would properly be regarded as an "outstanding" debt at the relevant date in terms of Section 10(2) of the 1985 Act though payable later (in accordance with the approach adopted in McCormick v McCormick 1995 SCLR 958, McConnell v McConnell and Jackson v Jackson 2000 SCLR 81, although not Latter v Latter). It was agreed that income arising from the parties' partnership (as to which see later) would have been taxed in the following tax year, whereas income arising from shares, etc. would have been taxed in the year it arose. It was also, as I understood it, undisputed that the defender had in 1999 made payments in respect of income arising prior to the relevant date, and taxable in the tax year of 1997 - 1998, in the sum of £22,352.47 (£6,584.26 being referable to tax assessed on the pursuer and £15,768.21 referable to tax assessed on the defender). Equally, it appeared to be accepted that after the relevant date the pursuer paid tax of £2,556.73 in respect of income arising prior to the relevant date. There was however a dispute as to the extent to which payments apparently made by the defender in the course of 1999 and in January 2000, in respect of assessments made on the pursuer and on himself for years 1998-1999 and 1999-2000, (all as shown in statements of account forming No. 7/68 of process), could properly be said to relate to income arising prior to the relevant date. At the end of the proof, counsel for the defender submitted a schedule which indicated (and this was not, it seemed, disputed by counsel for the pursuer), that payments had been made in respect of tax assessed on the pursuer for the tax year 1998-1999 in sums of £7,378.61 and £7,378.62, and in respect of the tax year 1999- 2000 in sums (reduced by counsel by one quarter in a broad attempt to exclude partnership income which could not have arisen before the relevant date) of £4,919.07 and £4,919.07. It was accepted that the statements of account showed substantially higher figures having been paid by the defender in respect of assessments made on him for these years, and that the difference could readily be accounted for in large measure by the fact that the defender, a higher rate tax payer, was subject to tax in respect of income on his shares arising after the relevant date.

In these circumstances, counsel submitted that it would be reasonable to take into account all of the payments made by him in respect of tax liabilities assessed on the pursuer in the relevant years and payments of an equivalent value made by him in respect of assessments made on himself. Counsel for the pursuer, however, argued that there was no clear evidence as to the sources of the income on which tax was then paid. I have considerable sympathy for that submission. The problem is that even the case of the pursuer, income arising from sources other than the partnership after December 1998 would have been taxed in tax years 1998-1999 and 1999-2000. While the evidence suggested that a substantial part of her assessed income would have been from the partnership, I do not consider that it would be safe to take any more than 50% of the tax paid in respect of the assessments made on her as referable to income arising prior to the relevant date. This would produce a figure in respect of assessments made on her of £12,297.68. Adding, in accordance with counsel for the defender's broad approach, a similar figure in respect of tax paid on the assessments made on him, produces a total of £24,595.37. Overall, therefore, there falls to be deducted from the defender's share of the matrimonial property at the relevant date £46,947.84, and £2,556.73 from the pursuer's share. For the avoidance of doubt, I should indicate that I accept the evidence given by the defender himself that the relevant payments were indeed made by him, evidence which was not, I think, challenged in cross-examination. I say this because at one point in his submissions, counsel for the pursuer stressed that it had not been proved that the payments were made by the defender himself, as opposed to having been made by the partnership or company (as to which see below), although at the end of the day I did not understand him to insist, in the circumstances of this case, that this would have made any difference.

(d), Bothwell

At the end of the proof, a dispute remained as to whether certain heritable property at Bothwell, should be included as matrimonial property in the ownership of the defender at the relevant date.

The only evidence given in relation to the property was by the defender himself. His evidence, as I understood it, was that in 1991, following the sale of property at Chapelhall which had been in his name since before the marriage, he bought certain other property with the proceeds, in which thereafter he allowed his sister to live and which, nominally at least, was in her name. When that was sold, in 1994 or 1995, Bothwell was bought with the proceeds, in which again he allowed his sister to live and which, again nominally, was in her name. At the relevant date it would have been worth, he thought, about £150,000. Although the registered proprietor in the land register was his sister, the defender maintained (and apparently maintains in an action in Hamilton Sheriff Court), that she only holds the property, which is truly his, on his behalf. This was in accordance, he maintained, with an agreement made with his sister. No writing, however, was produced to confirm that agreement.

On the basis of this evidence, I am not satisfied that the property can be regarded as belonging to the defender or that it should be included as matrimonial property at the relevant date. Counsel for the pursuer, although not conceding the point, did not argue strongly to the contrary. I would, in any event, have been inclined to disregard it for the purposes of any sharing on the basis that the funds used to acquire it, were not, it seems, derived from the income or efforts of the parties during the marriage (Section 10(6)(b) of the 1985 Act).

(e) The S businesses

A major area of dispute between the parties related to the proper valuation of the defender's interest in what was referred to as the "S Businesses". At the relevant date this comprised a group of four different entities. The main business activity was the hire (to the construction industry and local authorities) of plant and equipment and vehicles, with or without drivers or operators. A subsidiary activity was vehicle body building and repairs. The entities were, variously, a partnership, known as S.P., and three companies - S.D.L., E.M.B. Ltd (a subsidiary company wholly owned by S.D.L.), and B (S) Ltd (a subsidiary company owned 80% by S.D.L. and 20% by S.P.).

S.P. started in about 1973 with the defender as a sole trader operating as a contractor, carrying out street works mainly for BT, and mostly involving hand-digging. The first item of plant, a second-hand JCB, was acquired in 1975 and used mainly in relation to the contracting work, although occasionally hired out. After the business expanded, involving both contracting works and hire of plant, by 1980 most of the profits according to the defender still came from contracting work. There were however twelve items of plant capable of being hired. By the date of the marriage there were fifteen such items. Contracting and plant hire each contributed to about 50% of the turnover. Thereafter, the business continued the expand, with the hire business expanding into the hire of self-drive commercial vehicles in about 1983, and the contracting side gradually diminishing until it ceased in about 1990. The business expanded to such an extent that by 1984 it was thought appropriate to form a limited company - namely S.D.L. S.P. became a partnership between the pursuer and defender in February 1987. The partnership agreement stated that the initial capital belonged to the defender but provided inter alia that the pursuer and defender would share profits equally after any salary taken by the defender. By joint minute, however, the parties agreed that notwithstanding the terms of the partnership agreement, S.P. was to be taken at the relevant date as the sole property of the defender. Although S.P. traded in parallel with S.D.L. for a period from around 1986 until 1991, since 1991 S.P. did not trade with customers but was simply maintained as a vehicle for the remuneration of the pursuer and defender from trading profits generated by S.D.L.; that is it raised charges to S.D.L., met certain expenses and any profit was shared equally between the partners. It seems the partnership ceased to trade in April 2001.

From 1991 onwards, S.D.L. was, and remained at the relevant date, the real trading entity in the S Businesses. It was profitable. It appeared that the transition and ultimate transfer of the mainstream plant and vehicle hire business from S.P. to S.D.L. was not in any sense a "sale and purchase" transaction. No assets or liabilities were formally transferred. No consideration was paid by S.D.L. to take on the Sweeney mantle and continue the trade previously carried on by the partnership. It was simply the case that the company (at that time wholly owned by the defender) continued a trade which had previously been carried out by the partnership. Although at the relevant date the defender owned 99,000 of the issued shares (99%) and the pursuer 1,000 (1%), counsel were agreed that the whole value of the company's business could reasonably be taken as the value of the defender's shareholding.

E.M.B. Ltd, based in a separate location in Airdrie, was bought by S.D.L. in 1994 and at the relevant date traded (and continues now to trade) in the building and repair of vehicle bodies. B (S) Ltd carried on a similar business, but ceased operations in 1997. It was loss making at about the relevant date. It was effectively agreed, by counsel, in submissions at the end of the proof, that the value of these two businesses at the relevant date should also be ascribed entirely to the defender, in particular adding further value to his share-holding in the parent company S.D.L.

In the course of the proof the main detailed evidence on the valuation of the S businesses was given by Mr Frank McMorrow, C.A., a partner in a Company and an expert in the valuation of businesses and unquoted company share valuations. He was instructed on behalf of the defender. It was his evidence that S.P. and S.D.L. should be viewed as a combined entity for the purposes of valuation, as S.D.L. simply fed an element of its trading profits into S.P. to cover certain costs and leave a residual profit for the partners. It was his clear view that an earnings based valuation of S.D.L. was appropriate as a profitable going concern, and that S.P. should be valued also on an earnings basis. Consistent with his initial detailed report (which formed No.7/1 of process) he explained how he assessed a future maintainable profit of £256,000 per annum and, applying a P/E of 5, valued S.D.L. and S.P. at the relevant date at £1,655,000. In terms of the parties' agreement this would represent the value of a sale of the defender's interest in the combined entities at the relevant date. In September 2001, about a year after his first report, he produced certain revised figures in a further report to which he spoke - No. 7/41 of process. That further information was made available by or on behalf of the defender and had caused him to make certain revisals. The new information consisted of some new expert valuations of property, but more significantly also of some information provided by the defender and his accountant which suggested that figures in the company accounts for turnover in 1997, and to a lesser degree in 1998, were exceptionally high as a result of what was said to be the exceptional sale of plant in those years. It was his evidence in respect of the latter that a prudent purchaser would make a suitable downward adjustment in assessing future maintainable earnings. In the result he assessed the value of S.D.L. and S.P. at the relevant date at £1,217,000. It was his evidence that an asset based valuation was appropriate in relation to both E.M.B. Ltd and B (S) Ltd. In his opinion the appropriate valuations of these business - after revisals following receipt of formal property valuation opinions - was £288,000 and £189,000 respectively. His final opinion, therefore, was that the overall valuation of the S businesses (and, in terms of the parties' agreement, of the defender's interest in them) at the relevant date was £1,694,000. This figure took no account of the potential impact of capital gains tax on the defender if his interest in the businesses was sold at that date. As to that Mr McMorrow claimed no expertise.

The valuation expert instructed on behalf of the pursuer, Mr Alan Robb, C.A., a partner in Robertson Craig & Company, agreed in general terms with the approach that Mr McMorrow had adopted to the valuation of the S businesses. He questioned however the downward adjustment of future maintainable profit which had been made in Mr McMorrow's second report.

At the end of the proof counsel for the defender submitted in the first place that the court should proceed on the basis of a net asset valuation for S.D.L. (together with S.P.) - a valuation which would, in accordance with Mr McMorrow's figures, have produced instead an overall valuation for the S businesses of about £1.5 million. It was his submission that on the evidence both Mr McMorrow and Mr Robb had underestimated the significance to the future profitability of the company of the defender's own personal input. He submitted further that the evidence suggested that the figures produced by the valuation of S.D.L. (and the partnership) on an earnings basis were unlikely to have been achieved without a purchaser tying in the defender, either by a service contract or by a suitable restrictive covenant, and that it would be wrong in principle to assess any part of the matrimonial property at the relevant date as including anything in the nature of future contributions by the defender. Reference in that regard was made to the Opinion of Lord Osborne in McConnell v McConnell, in particular at para. 19-49, when his Lordship, declining to value certain shares on an assumption that the defender would remain available, for a significant period of time, to the purchaser, said:

"However, it is equally clear to me that the terms and policy of the Act of 1985 in relation to orders for financial provision on divorce are such that, in relation to a capital sum, a claimant has no right to participate in property generated by the efforts of the other party following upon the relevant date. I consider that the assumption made by Mr Hamilton, to which I have referred, would necessarily have the effect of enabling the pursuer in reality and substance to such property."

On the evidence it was submitted that I should take the view that without some future involvement of the defender there was essentially no goodwill in the business, which therefore should be valued on a net asset basis.

On this matter I reject the defender's submission. Neither of the valuation experts supported a net asset basis for the valuation of S.D.L. (and the partnership). In particular I found the evidence of Mr McMorrow in general to be extremely impressive. He was measured, fair and careful. I saw no reason to take the view that he - instructed on behalf of the defender and provided with information by or on behalf of the defender - had not had proper regard to the part played by the defender himself in the business. It was his view that while it was likely that a purchaser would seek to tie in the defender, a failure to do so would not diminish the value assessed to any material extent. He took account in particular of the fact that although for a not insubstantial period prior to the relevant date the defender took, at the very least, a back seat (as he himself put it in evidence - indeed Mr Halliday, his accountant, described him as having been "absent"), nevertheless the business had continued to operate at a profit, albeit apparently to a degree less well. His valuation further assumed the replacement of Mr S by a managing director. I had the distinct impression by contrast that Mr Halliday when he gave evidence, tended, when pressed at any rate, to overestimate the personal importance of the defender. It is true that Mr Robb was inclined to think that, perhaps, less would be paid by a purchaser if the defender was not in some way tied in, but he was not certain as to the extent to which this would be significant.

A dispute remained however as to whether Mr McMorrow had properly made adjustments to future maintainable profits on the basis of the information provided to him which suggested the extraordinary nature of part of the turnover in the financial year 1997, and to a lesser degree in 1998. By way of background there was little dispute but that at the relevant time the company's plant was held on leases in terms of which the company paid a market rent for the first three years (the primary period) and thereafter paid little or no rent but was entitled to virtually the whole proceeds of any sale. It was also not in dispute that for some years up to the relevant date sums realised on sale of plant were included in the total turnover figures in the company's accounts. Equally, the cost of leasing the plant and machinery in any year was included as a cost to be deducted, along with other costs, from the turnover, in the assessment of gross profit. Prior to his second report Mr McMorrow was made aware by Mr Halliday that included in the total turnover figures in the accounts for the years to April 1997, 1998 and 1999 were £563,000, £138,000 and £50,000 respectively in respect of the sale of leased plant. No figures were available for 1996. He was informed by Mr Halliday and the defender that the figures in the year to 1997, in particular, were the result of sales of plant at an exceptional level; sales deliberately made to improve what would otherwise have been a much reduced turnover in that year. This evidence, in the event, was not seriously challenged. As a matter of valuation judgement Mr McMorrow assessed that a prudent purchaser would have adjusted out, in considering turnover figures for 1997, 1998 and 1999, proceeds from the sale of plant in excess of the lowest annual figure provided to him (i.e. proceeds above £50,000 per annum).

Counsel for the pursuer sought to persuade me that this was unjustified. Subject to one matter, I am unable to accept that submission. It is true that Mr Robb's final position was that he would have needed more information, particularly in relation to rental charges in previous years, especially 1996, before he could agree to Mr McMorrow's adjustment, at least as to its extent. The difficulty he had was, it seemed, twofold. In the first place he only had the bare figures and not the underlying information or assurances from the defender or his accountant and, secondly, and perhaps more significantly, he considered that it would have been necessary to seek to ascertain whether perhaps any exceptional sale figures in the year 1997 might not have been mirrored by exceptional rental costs relative to the same equipment in earlier years, particularly in 1996, which would, putting it broadly, have tended to balance things out. He appeared, however, to accept in cross-examination that he would have found it difficult to dispute information coming from management, based on figures on which certain audit checks had been carried out, that 1997 was indeed an exceptional year for sales of plant. This, in effect, was the tenor of the evidence of Mr Halliday and the defender. Moreover, the weight of the evidence appeared to me to suggest that primary rental payments in respect of equipment sold of in 1997 would for the most part have been incurred in years prior to 1996; years which, on the evidence, would not have been of great interest to a potential purchaser in assessing future maintainable profits. On the other hand, however, the evidence given suggested that 1997 was perhaps the only exceptional year. If that is right it is, I think, difficult to justify Mr McMorrow's selection of the £50,000 figure for 1999 as a base. If instead the average of the sales figures for 1998 and 1999 was taken as the base figure (i.e. £94,000, which incidentally corresponded to the defender's recollection of sales of plant in 1996 too), parties were agreed that the overall valuation of the S businesses, using Mr McMorrow's approach otherwise, would be £1,709,000.

The question remains whether capital gains tax payable by the defender on a sale, at the relevant date, of his interest in the S businesses would fall to be deducted and, if so, what the figure for such tax should be. For the reasons already given I have come to the view that there should properly be a deduction in respect of such tax. As to the amount there was no dispute, as I understood it, but that if the defender's interest in the businesses, having a value at the relevant date of £1,709,000, was sold for cash at that date the capital gain tax payable by him (at 40% of the taxable gain, assessed after taper relief) would have amounted to £592,968. In particular, from the sale price it was agreed there would fall to be deducted a base cost in respect of certain heritable property owned by S.P. of £115,000 (which, it was agreed, Mr McMorrow had wrongly assumed was part of the company's assets) producing a total gain of £1,594,000 which, with taper relief at 7%, would have produced a taxable gain of £1,482,420. Counsel for the pursuer, however, argued that this was the maximum payment which would have been paid and that there was no evidence which would enable the court to assess what the figure would have been if certain potential tax minimisation steps had been taken. In particular, he commended the evidence of Mr Robb that it might have been open so to structure the sale that an element was paid for residual goodwill in the partnership, the base cost of which, together with indexation, could have been set against the overall gain. Alternatively, the purchase could have been arranged in part for cash and in part for loan notes, which latter would have postponed, in part, the payment of capital gains tax with, in the event, potential for increased taper relief by reason of changes in the law. Further, roll-over relief (similarly postponing capital gains tax liability) could have been available if the proceeds of sale of the defender's shares in S.D.L. or of his interest in the partnership were reinvested by him in other trading companies or a new business.

At the end of the day I am not persuaded that it would be right to reduce the figure for capital gains tax previously assessed. In the first place Mr Robb was unable to say clearly - other than to say that in broad terms the tax burden could potentially have been lessened - what the effect would have been. Further, I prefer the evidence of Mr Barr to the effect that the Inland Revenue would most likely have regarded goodwill in the partnership as having been transferred by a form of osmosis to S.D.L., leaving little or no residual goodwill in the partnership itself. Further, as to the notion of payment in part by loan notes, it seems to me that the 1985 Act presupposes a realisation in return for cash as the relevant date of the parties' realisable assets. In any event this, together with reinvestment to obtain rollover relief, would only postpone the incidence of tax and changes in the law after the relevant date should, I consider, be ignored. As to reinvestment to obtain roll-over relief, (and also perhaps in relation to any assumed foregoing of cash in favour of loan notes) it would, it seems to me, be wrong - for reasons similar to those expressed by Lord Osborne in McConnell v McConnell above - to allow the pursuer to benefit from a valuation of assets dependent upon the economic activities of the defender after the relevant date. For completeness, I would only add that although a suggestion was made to Mr Barr that the taxable gain on sale of the defender's shares in the company could have been reduced by an award of dividend prior to the sale, it was his view that this would have made a minimal difference.

Sharing of the net value of the matrimonial property

As already indicated, at the end of the proof both counsel were agreed that the principle which relevantly fell to be applied in the circumstances of this case, in the assessment of the capital sum, was that - in accordance with Section 9(1)(a) of the 1985 Act - the net value of the matrimonial property should be shared fairly between the parties to the marriage. They were also agreed that in the circumstances of this case, none of the other principles referred to in Section 9(1) had any relevance, at least directly. Counsel for the pursuer, for his part, sought to rely on the presumption set out in Section 10(1) of the 1985 Act that fair sharing is equal sharing. For his part, counsel for the defender sought to argue that there were a number of special circumstances justifying an unequal sharing, i.e. one which provided the pursuer with less than one-half of the net value at the relevant date.

In the first place counsel founded on the development of the S business by the defender operating as a sole trader between January 1973 and October 1981, the date of the marriage. Although, as I understood it, he accepted that the expansion of that business thereafter, and indeed the partnership and the three companies, fell properly to be regarded as matrimonial property, he submitted that there should be proper recognition of the special circumstance that by the date of the marriage, largely due to the efforts of the defender himself, the business was to a very large degree "up and running", and that the subsequent successful expansion of that business could be regarded as significantly founded upon that base. I was invited, in particular, to have regard to Section 10(6)(b) of the 1985 Act which provides that special circumstances .... may include .... "the source of the funds or assets used to acquire any of the matrimonial property where those funds or assets were not derived from the income or efforts of the parties during the marriage". He accepted that it was not easy to fit his argument precisely to those words but the Act merely provided examples of special circumstances, and the argument, he submitted, was plainly based on similar principles. Counsel accepted that, on the evidence, some assistance had been given to the defender prior to the marriage by the pursuer from about 1977 and, in particular, from 1980 when she had moved to live with the defender, but her input had to be regarded as modest. In all the circumstances, it would be fair that, so far as the value of the S businesses was concerned, the pursuer should be found entitled only to 40% of that.

Counsel for the pursuer for his part did not, it seemed to me, dispute that in principle the Court could have regard to the development of the S businesses by the defender prior to the marriage. He argued, however, that it would be inappropriate to make any allowance in the absence of any evidence as to the value of the business at or about the time of the marriage. Considerable time had, in any event, passed since then during which, on the evidence, the pursuer herself had assisted in the build-up of the business up to at least the birth of the parties' first child in 1982. Thereafter the pursuer had looked after the family home, enabling the defender, along with others, to build-up the business - all of which pointed to an equal sharing as being fair. In any event, the defender had underestimated the extent to which, on the evidence, it was shown that the pursuer had assisted in the build-up of the business prior to the marriage.

I have come to the view that while it would be right to recognise the efforts of the defender in building-up the business over a period of some years prior to the marriage, it would be wrong to do so to the extent suggested. On the one hand, I accept the evidence from the defender that from very humble beginnings in 1973, when he had no equipment whatsoever, he was able to develop the business thereafter to such an extent that by 1981 it operated, both in contracting and in plant hiring, with fifteen machines, ten operators and twenty labourers, and a turnover of about £350,000 per annum. On the other hand, there is no doubt that the business expanded materially thereafter to the extent that in the year to April 1998, the turnover of the major entity, S.D.L., was of the order of £2,000,000. By then the original contracting work played no part. There was, further, no evidence as to the value of the business at the date of the marriage, which was over seventeen years before the parties' separation. Moreover, on the evidence, it seemed that the pursuer, while working herself in Dundee, regularly gave the defender help at least as a typist from relatively early on in the parties' relationship, which started in about 1975, and thereafter, more importantly, about a year and a half before the parties were married, moved to Chapelhall to live with him and then (and thereafter until at least the parties' first child was born in 1982 and probably for a period beyond that), gave secretarial assistance in respect of wages, typing, telephones and the writing of VAT receipts. She had given up her secretarial job in a University Department to do that. The pursuer herself in evidence did not seek to exaggerate the amount of the assistance she gave, but equally it seemed to me that the defender did tend to underplay it. Thereafter she looked after the family home and the children, enabling the defender, along with others, to build up the businesses. In all the circumstances I consider that an equitable recognition of the factor founded on by the defender would result in a fair share, for the pursuer, of the value of the defender's interest in the S businesses at the relevant date being 48% thereof.

I was not, however, persuaded by any of the other arguments advanced by the defender for an unequal sharing.

In the first place, counsel referred to Section 10(6)(d) ("the nature of the matrimonial property, the use made of it (including use for business purposes or as a matrimonial home) and the extent to which it is reasonable to expect it to be realised or divided or used as security"), and argued that it was not reasonable to expect the defender to have realised his interest in the S businesses which was the source of his livelihood and of support for his children. He accepted, however, that he could only make something of this - given the apparent value of the defender's other realisable assets at the relevant date - if the Court was persuaded to value his share holding and his interest in the S businesses without regard to the incidence of capital gains tax. In the circumstances I need say no more. I add only that if I had valued the defender's shares and interest in the S businesses without regard to capital gains tax, Section 10(6)(d) could have had significance depending upon the degree to which the defender's other assets - in particular his pension interests - could reasonably be regarded as realisable. I record only that in the course of submission it was agreed that the date which matters for Section 10(b)(d) is the relevant date and reference was made, as to the approach to be adopted, to McConnell v McConnell (No.2) 1997 Family Law Reports 108.

Counsel also referred to Section 10(6)(e) ("the actual or prospective liability for any expenses of valuation or transfer of property in connection with the divorce"). In the first place, he submitted that if capital tax gains tax fell to be disregarded in assessing the net value of matrimonial property, then its incidence could properly be taken account of as a special circumstance. It would be like an expense of the transfer of property. Again, in light of the decision I have made in respect of capital gains tax, the matter does not arise, but in any event I regard this argument as ill founded having regard to the language of Section 10(6)(e), not least having regard to the period of time to which it appears to relate. Secondly, counsel submitted that regard should be had, in this context, to evidence relating to apparent expenses incurred by the defender in respect of the valuation of the S businesses. It was submitted that I should find that Mr McMorrow charged fees of £12,000 for his work, that Mr Halliday's time and fees in respect of additional work on the valuation reports prepared by McMorrow amounted to £8,225 (being £7,000 plus VAT in accordance with No. 7 - 72 of process) and that the work of Mr William Murdoch and Mr J C Todd, company employees, in compiling lists of assets could properly be valued at £42,062.51 - all as per No. 7/70 of process to which the defender spoke. It was submitted that the appropriate way to recognise these expenses would be to deduct them from the valuation of the Sweeney businesses.

I found the evidence relating to these expenses unpersuasive. No statement of account was spoken to by Mr McMorrow, although he did give evidence of charging between £10,000 and £12,000. Equally, no direct evidence was given by Mr Halliday in relation to this matter. Although no doubt some work was done by company employees, it is not obvious, in light of Mr McMorrow's evidence - which was largely based on published accounts - that it would have needed to be extensive and I am unable to rely, in the absence of documentary support or any evidence from Mr Halliday, on the defender's somewhat vague assessment of the extent of this, as detailed in his letter No. 7/70 of process. In any event, I see no reason to make any allowance under Section 10(6)(e) in respect of these expenses. Apart from anything else, I consider that the expenses of the engagement of Mr McMorrow and Mr Halliday could properly be considered as part of the ordinary expenses in connection with the divorce action.

Account, it was said - I think under reference to Section 10(6)(c), - should also be taken of the fact that the defender, or his businesses, had met certain sums expended by the pursuer, by use of an MBNA credit card, on goods and services between December 1998 and April 1999. The total of the sums expended, in accordance with a schedule produced in No. 7/48 of process, was said to be £11,646.03. While during the same period the pursuer had used the same credit card to obtain cash, to the value of £7,500, this, it was accepted, had already been deducted from the director's fees said to have been due to her, all as described in a letter dated 2 February 2000, again forming part of 7/48 of process. The pursuer for her part gave evidence that she had always, during the marriage, been in the habit of using the credit card for goods and services, and that during the relevant period she had needed to use the card to meet her daily living expenses. Indeed, after the separation, but before the defender agreed, apparently in late 1999, to pay £3,250 to her per month, backdated to the date of separation, she had, she said, required to spend most of the funds in her building society account to meet her living expenses. I saw no reason to dispute her evidence that these expenses were reasonably incurred, and no adequate explanation was offered in evidence as to why it was thought appropriate to deduct them now, but not apparently in February 2000. In the event, this was not a matter strongly pursued by counsel for the defender.

The order for a capital sum

For the above reasons I have reached the view that an order for payment of a capital sum of £744,783.80 would be justified by the principles set out in Section 9 of the 1985 Act - all as set out in Schedule B below.

SCHEDULE B

	Defender	Pursuer
Matrimonial property per Schedule A	£1,654,676.00	£1,118,248.00
Less
Tax Outstanding	-£46,947.84	-£2,556.73
CGT on Share Portfolio	-£73,860.00
Total	£1,533,868.16	£1,115,691.27
Grand Total	£2,649,559.43
One half thereof	£1,324,779.71
Less pursuer's share	-£1,115,691.27
Total due to pursuer re above assets	£209,088.44
The defender's interest in the S businesses	£1,709,000.00
Deduct
CGT on realisation	-£592,968.00
Net value	£1,116,032.00
48% to pursuer	£535,695.36
Add total due re other assets	£209,088.44
Total due to pursuer	£744,783.80

In terms of Section 8(2)(b), the Court could not pronounce an order for that sum unless it was reasonable having regard to the resources of the parties. In the event, counsel for the defender sought only to argue that it had not been shown that any award above £750,000 could be regarded as reasonable, having regard to the evidence, or lack of it, - as to the current or prospective value of the defender's resources. This matter again, therefore, does not give rise to the need for any detailed assessment. There was, however, it seemed to me, some force in the defender's submission, given that the only real evidence in respect of his current and prospective resources came from the defender himself. The effect of that evidence, without going into detail, was that much of his property at the relevant date had been realised and the proceeds lent to S.D.L. which was undergoing a substantial restructuring. There was no clear evidence as to the current value of the businesses, which had had a difficult period since the relevant date, and no independent evidence to dispute the defender's contention that there could be difficulty in replacing his loans in the company accounts with bank lending. Evidence in relation to future prospects was unclear, although the defender was at least reasonably hopeful. In the event, however, it was not disputed that an award of a capital sum of the order of £750,000 could be said to be reasonable having regard to the resources of the defender, nor was it disputed it, as I understood it, that a reasonably substantial portion of any such award could be paid immediately. In these circumstances, I shall make an order for payment of a capital sum (rounded up) of £744,784.00, of which £350,000 is for immediate payment. As to how and when the balance should be paid, the matter will be put out By Order.

Periodical allowance

The evidence disclosed that the pursuer, although having a secretarial background, had not worked independently since shortly after the birth of the parties' first child. She was, at all times thereafter, and remains, wholly dependent upon the defender. In or about late 1999, the defender agreed to pay her £3,250 per month backdating that to the date of separation. Since December 2000, the defender has paid, under Court order, the sum of £4,000 per month. On the evidence, I find that that sum has at least been adequate to meet the pursuer's needs - although she herself gave evidence, under reference to certain outgoings, that more could reasonably be justified. She accepted that on divorce she intended to try to retrain but, while she would like to do office work again, she thought it might be hard for her to get a job given the length of time she had last worked, and her age. I see no reason to disagree.

In these circumstances, counsel for the pursuer sought a periodical allowance of £4,000 per month payable for one year to enable the pursuer to adjust to the loss of support on divorce - all under the principle described in Section 9(1)(d) of the 1995 Act. At the very least, she should be awarded, it was said, a periodical allowance until she received payment of the capital sum. Counsel did not seek to suggest under reference to Section 13(2)(b) of the 1985 Act that it would appropriate to make an order for an additional capital sum to meet her income needs. Although formally questioning the figure of £4,000 a month, counsel for the defender's main position was that, since the pursuer would be able to meet her income needs out of income produced by the capital sum awarded, (he suggested that a minimum sum of £200,000 should be made payable immediately), the Court could not be satisfied, under reference to Section 13(2)(6), that an order for periodical allowance was justified.

Having regard to all of the factors to which I must have regard in terms of Section 11(4) of the Act, I have come to the view that it would be in accordance with the principle described in Section 9(1)(d) to make an order for periodical allowance at the present rate of £4,000 per month for one year following upon decree of divorce (and in terms of Section 13(2)(b) that the proposed order for capital sum would, of itself, be insufficient and that no further order of capital sum would be appropriate). It seems plain on the evidence that the pursuer will need time to adjust, and that she has been for a very substantial time dependent upon defender. Although, as is agreed on both sides, she will in due course able to have the benefit of income produced by any capital paid, it will, on the face of it, take some time for her to obtain the full benefit of that, and I see no reason why she should be expected to use part of the capital to meet her income needs (nor was this argued).

Contact with S.K.S.

At the end of the proof, the defender sought an order for contact between him and S.K.S. the youngest child of the marriage, at least initially every second Sunday from 2 pm until 6 pm.

On the undisputed evidence, it appeared that there was contact between the defender and his two younger children after the separation but that this arrangement came to an end some time in 2001 because, it seemed, the defender repeatedly let the children down by failing to appear. It is the pursuer's belief that S.K.S. would like contact to resume, although he would be reluctant to go on his own. There was some hearsay report that R.L.S. was willing to accompany S.K.S. provided he himself was not compelled to go. She thought that contact should resume, and gave evidence that once the divorce was finalised, she would seek to persuade S.K.S. to go, (if necessary with his older brother R.L.S.). The parties' oldest son B, who has fallen out with the defender, thought that S.K.S. would only go if R.L.S. was prepared to go too. I saw S.K.S. on his own. He was composed, articulate and with apparently clear views. He felt he had been let down when his father had not turned up. He was, however, happy for contact to resume - particularly if his father sought to do activities with him, such as go-carting or fishing - provided R.L.S. was there too. He said he would not go otherwise, even if the pursuer thought it a good idea. The defender for his part accepted that he had been unreliable in the past at a time when he was unwell - indeed it seemed he had had a drink and drugs problem. He was now better and was back in full-time employment. He accepted that it appeared R.L.S. did not want to see him.

I have little difficulty on the evidence in finding that it would be in the interests of S.K.S. to restart contact with his father. The pursuer herself thought so. S.K.S., in general, seemed to be in favour of a resumption of contact and the defender was obviously keen and apparently determined to try to do better than he had before. The question is whether it would be better to leave this to be achieved, if possible, by agreement between the parties rather than by making an order of the Court. In that regard I bear in mind, of course, the provisions of Section 11(7)(a) of the Children (Scotland) Act 1995. The pursuer's evidence was that she would seek to persuade S.K.S. to go and all the indications are that R.L.S. would be prepared to go with him, so long as he himself was not under any compulsitor. I have come to the view that it would be better to make an order rather than not. There is plainly a degree of animosity between the parties and they were, despite some pressure from the Court, unable to agree even on this matter. In these circumstances I think there is more chance of avoiding disputes if an order is made, and further that it would perhaps help the pursuer to persuade S.K.S. to go, so far as that is necessary at all. The pursuer was apparently concerned that if an order was made it might suggest that she was being penalised. That manifestly is not the case. All the evidence suggested, and the defender accepts, that the failure of the contact arrangement before was entirely his fault, and it is up to him to make sure that it works if he wishes it to continue. Whether the contact should be increased will depend upon how it works for a reasonably extended period, and I think it wrong to build in any specific phased increases into the order I make now. I would hope, however, that the parties will be flexible when necessary about timings - in particular if it might help S.K.S. to be involved in enjoyable activities with the defender.