Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2013] CSOH NUMBER 136
F68/11	OPINION OF LORD TYRE in the cause SW, Pursuer; against TW, Defender: ________________

Pursuer: Speir, Macpherson; Sheehan Kelsey Oswald

Defender: J Scott QC, Innes; Balfour & Manson

8 July 2013

Introduction

[1] The parties to this action of divorce were married on 18 May 1996. They separated on 29 January 2010, which is the relevant date for the purposes of section 10(3) of the Family Law (Scotland) Act 1985 ("the 1985 Act"). There is no prospect of a reconciliation. There is one child of the marriage, E, who is over 16 years of age. The pursuer has a daughter, K, from a previous marriage who was adopted by the defender. K is also over 16 years of age. The contentious issue between the parties is financial provision. Between 12 March and 8 May 2013 I heard a proof which lasted for 10 days in total. Counsel for both parties provided me with detailed written submissions and calculations for which I am most grateful.

Decree of divorce

[2] The pursuer seeks decree of divorce on the ground that the marriage has broken down irretrievably as a consequence of the defender's behaviour. I am satisfied on the evidence that this ground has been established and I shall in due course grant decree of divorce.

Financial provision: orders sought by the parties

[3] At the close of the proof, counsel for the pursuer moved me to make the following orders:

(i) Transfer to the pursuer of the defender's one half pro indiviso share of the former matrimonial home at Mains of Shiels, Aberdeenshire;

(ii) Payment to the pursuer by the defender of a capital sum of £1,169,933 with interest at 8% on any deferred payment;

or, alternatively, for payment of a capital sum of £969,933 with interest as aforesaid and a pension share of £200,000;

(iii) Payment of a periodical allowance of £3,000 per month until payment of the full capital sum due;

(iv) Sale of the parties' yacht and equal division of the proceeds of sale;

(v) In the event of my ordering transfer by the pursuer to the defender of her shares in X Limited (see below), certain ancillary orders, discussed below.

[4] For her part, counsel for the defender moved me to make the following orders:

(i) Transfer to the pursuer of the defender's interest in Mains of Shiels (as above);

(ii) Transfer by the pursuer to the defender of some or all of her shares in X Limited;

(iii) Sale of the parties' yacht and division of the proceeds (as above);

(iv) A pension-sharing order in favour of the pursuer for up to £200,000;

(v) Payment by the defender to the pursuer of such capital sum as the court finds due, payable by instalments.

Matrimonial property at the relevant date

[5] By the time the action came to proof, the parties had reached agreement on the assets that comprised the matrimonial property at the relevant date and, so far as necessary to the calculation, the value of those assets at that date. They had also reached agreement on the identification and quantification of matrimonial debts at the relevant date. There remained, however, disagreement regarding the current value of certain assets, namely the matrimonial home and the pursuer's 24% shareholding in a company to which I shall refer as X Limited of which the defender is the managing director and owns a 26% shareholding. In addition, the practical arrangements for the sale of a yacht jointly owned by the parties were in dispute, although that dispute was largely resolved by an agreement reached by the parties shortly after the close of submissions.

[6] Because of the extent of agreement reached between the parties, it is unnecessary for me to set out here in detail the assets comprising the matrimonial property at the relevant date. It is sufficient to note that the parties calculated that the value of matrimonial property held in the name of the pursuer exceeded by £1,903,272 the value of matrimonial property held in the name of the defender, giving rise to a notional claim by the defender for a sum of £951,636 in order to achieve equal division. Neither party contended for this outcome. As will become apparent, the main reason for the existence of the foregoing excess is the fact that the pursuer's shares in X Limited constitute matrimonial property whereas the defender's shares do not. I find that the most convenient way to address the outstanding issues in the case is to deal firstly with valuation issues, asset by asset, and then to turn to the parties' arguments on the application of the principles and other provisions of the 1985 Act.

X Limited
Summary of company history

[7] X Limited was incorporated in 1988 and purchased off the shelf in 1989 by the defender and two other individuals, one of whom ceased to be involved within a few months. Thereafter X Limited was owned in equal 50% shares by the defender and his friend AB. At first the company carried on business producing CAD software for use within the oil industry. This met with limited success and for some time thereafter the company offered project management services. In about 1992, having realised that the Official Journal was a useful yet underused resource for identifying potential sources of work within the European Community, the directors of X Limited began to offer a service called TD. Subscribers to the service were sent details of invitations to tender which might be of interest to them and which they might not otherwise have discovered. The business started small and grew slowly as the number of subscribers increased. By the time of the parties' marriage in 1996, X Limited had several hundred subscribers. AB's brother RB had been recruited to assist with administrative duties. However, between about 1992 and 1995 the company was not making enough money to provide a living for its two directors and was at risk of losing its bank funding. Both the defender and AB sought and found other work. The defender carried out consultancy work in the Middle East and elsewhere which enabled the company to pay its bills. By the end of 1995 the business had been turned round and the company began to pay dividends funded by the TD business, although the defender and AB continued to work part-time in other employment until 1998.

[8] Since 1998, X Limited's business has continued to grow steadily. Its TD service now has over 4,000 subscribers. X Limited's customers have included national and devolved governments. The company also offers a related training and consultancy service. The defender is the managing director; AB is technical director and has been responsible inter alia for development of the business's software. For the year ended 30 June 2010, the company had a turnover of £3.3 million. For the year ended 30 June 2012 turnover was £4.3 million. In 2000, the defender and AB felt the need for an independent viewpoint on strategic issues within the Board of X Limited. MH, a chartered accountant, was appointed chairman and non-executive director and continues to hold those offices. He owns no shares in X Limited.

[9] In 1998 the issued share capital of X Limited consisted of 20,000 ordinary shares of which 10,000 were held by the defender and by AB respectively. On 16 June 1998 the defender transferred 4,800 shares (i.e. a 24% holding) to the pursuer. According to the defender's evidence, this transfer was made on accountancy advice for tax mitigation purposes. No further transfers of shares have since taken place. However, on 23 January 2003, the pursuer, the defender and AB entered into a cross-option agreement in terms of which the parties were granted options on the occurrence of the death of any of them. In essence, the defender and AB were given options to purchase the other's shares from his executors, and the executors were given cross-options to sell. AB would also have an option to purchase the pursuer's shares if the defender died survived by the pursuer. If the pursuer were to die survived by the defender, her shares would pass without consideration to him. In all cases, any shares transferred are to be valued as a pro rata proportion of the value of the entire issued share capital. It is a matter of agreement between the parties that one consequence of this is that in valuing the parties' shares in X Limited for any purposes connected with this action, no discount requires to be made in recognition of the fact that the parties have minority shareholdings.

[10] One of the contentious issues at the proof was the extent and value of the pursuer's contributions to the business of X Limited. It was not, however, in dispute that she had made various contributions over a period of years. At the time of the marriage the pursuer worked as a research pharmacologist in the School of Medicine at the University of Aberdeen, having obtained a PhD in pharmaco‑economics. She continued to work at the university until the end of 2000, as well as assuming the bulk of the household and child-caring duties within the family. Because she had acquired interviewing skills in the course of her previous pharmacy career, the pursuer became involved in the recruitment of staff for X Limited. She identified possible candidates, participated in interviews, made recommendations for appointment, and introduced a structured format for interviews. She was not remunerated for this work. In 2001 the pursuer organised a conference on public procurement at Heriot-Watt University with the purpose of raising X Limited's profile. This required a considerable amount of work and it was agreed by all concerned that the conference had been a success in that feedback was positive and the event itself made a profit. The pursuer received payment for this work. She was also involved in other aspects of X Limited's business. When the company moved out of its original "incubator unit" in a science and technology park to larger premises, she organised a promotional event. On one occasion she helped to put mailshots in envelopes. When in about 2008 the company was ready to move again, the pursuer participated in viewing premises and (although this was not accepted by the defender) claimed to have found the office premises to which the company moved and from which it continues to trade. She took decisions on interior decoration of the new premises.

[11] By 2000 the pursuer was finding it too difficult to carry on her employment and also look after the family, and so she gave up her job. Instead, she incorporated a company called TTAL of which she was sole director and shareholder. TTAL's objects were to provide training in the preparation of tender documents. The idea of a training service came from the defender who considered that it could be in X Limited's interests to recommend a training provider to potential subscribers to its services. Through TTAL, the pursuer ran courses which were advertised on X Limited's website. The defender provided technical content for TTAL's training materials and gave presentations at its courses. This caused some friction between the defender and AB because it took the defender away from his work for X Limited. The pursuer contributed non-technical content to the TTAL materials and organised the courses. TTAL traded profitably from 2001 until 2007; those profits were paid into the parties' joint account. By 2008, however, the pursuer was finding it unacceptably stressful and TTAL ceased to trade.

[12] In addition to all of the above, the pursuer maintained that throughout the period of the parties' cohabitation she contributed significantly to the management of X Limited. According to her evidence, discussions of company business between herself and the defender at home went well beyond the sort of conversations about work which might be expected to take place between spouses, to the extent that X Limited's business consumed their family life. She provided advice on matters such as management of employees and on how to deal with organisations in the public sector. The defender had found it difficult to discuss certain issues relating to X Limited with AB and sought advice from the pursuer instead. In 2006 and 2008 the defender was ill and required to take time off work. During those periods the pursuer operated as a conduit to ensure that the defender's control of the business was maintained while he was absent. The pursuer's account of her involvement in the business of X Limited was supported to some extent by evidence from two of her friends, Mrs Alexandra Fraser and Mrs Lesley Ann Fair, who both expressed the opinion that the pursuer's contribution went beyond ordinary intra-marriage discussions. The defender, however, saw the matter differently. He accepted that discussions of X Limited's business took place at home and that these discussions were beneficial to him and to the company. They did not, however, extend to discussion of strategic issues and did not go beyond what might be expected between husband and wife, especially as the pursuer owned almost one-quarter of the company's shares. The defender's position was supported by AB, who denied that the pursuer had any role in formulating strategy and could not remember any occasion upon which the defender referred to a proposal having been suggested by the pursuer. MH observed that it was difficult to know whether the pursuer was involved in the development of strategy but his impression at board meetings was that he was hearing only the defender's view.

[13] Looking to the future, the defender and AB have reached a stage in their careers where they would be interested in principle in selling the company if an acceptable offer were to be received. In 2008, they and their corporate advisers held discussions with a company which brings together potential suppliers and buyers. An offer of £10 million for the company was rejected by all three X Limited shareholders. There was some further discussion but matters did not progress. In early 2010, X Limited was approached by a venture capital company and discussions were initiated. X Limited supplied an Information Memorandum containing an overview of the company's activities and financial performance. The discussions continued into 2011 but in the end no offer was made. In 2011 X Limited was approached by a competitor expressing interest in buying its business; none of the X Limited shareholders welcomed this approach. Towards the end of 2012, the defender received a number of calls from venture capital companies expressing an interest in investing in X Limited. One of these approaches had progressed to the stage where an Information Memorandum was to be issued at about the time of the proof; no price had yet been discussed. The defender's hope was that the company might be sold within the next two years, but that was obviously dependent upon finding someone who was interested in buying.

Valuation issues regarding X Limited

[14] The parties are agreed that the value of X Limited at the relevant date was £9.5 million. I have already noted that it is also agreed, standing the terms of the Cross-Option Agreement, that shareholdings fall to be valued as a proportionate share of the value of the company. It follows that at the relevant date the pursuer's shares were worth £2,280,000. There is also substantial agreement on matters relevant to the current valuation of the company and, accordingly, of the pursuer's shares. Both parties instructed experts in share valuation who produced written reports and gave evidence at the proof. Mr Frank McMorrow, Chartered Accountant, was led as an expert witness by the pursuer and Mr Peter Graham, Chartered Accountant, by the defender. Mr McMorrow provided a report dated 13 July 2012 and a supplementary report dated 12 February 2013. Mr Graham provided reports dated 24 September 2012 and 5 March 2013 which were largely commentaries on Mr McMorrow's first report, indicating Mr Graham's points of agreement and of disagreement. Both experts were amply qualified to give opinion evidence on the matters which they were instructed to consider. Discussions between them produced agreement (in some respects in the form of compromise figures) in relation to all but four matters which must be resolved by the court. I address these in turn below, after mentioning one or two further matters in respect of which the parties are not in dispute.

[15] The expert witnesses agreed that an earnings-based approach was appropriate in valuing X Limited, and that assessment of the value of the company required an estimation of future maintainable earnings (FME) and the selection of a suitable multiplier to apply to FME. It was common ground that in calculating FME it was appropriate to use as a basis the company's operating profit, i.e. earnings before interest and tax (EBIT). The experts also agreed on:

·    a value to be attributed to a contract held by X Limited with a national government which, at the time of the proof, was subject to uncertainties which I need not detail here;

·    the net value of X Limited's offices in Aberdeen, and the contribution made by them to the overall value of X Limited; and

·    the amount held by the company by way of cash and loans to directors as at 12 March 2013.

This agreement was embodied in a joint minute which also recorded the experts' difference of opinion on three of the four matters in dispute. Mr McMorrow and Mr Graham were able to agree figures which I should use in the calculation of X Limited's value, depending upon whose opinion I preferred on each of the disputed matters. I have found the experts' co-operation in the identification of points of agreement and in the focusing and quantification of points of disagreement to be of considerable assistance in the production of this opinion.

Adjustment in respect of directors' remuneration
[16] It was common ground that in calculating FME, certain adjustments required to be made to the company's EBIT. The first of these concerned directors' remuneration to reflect the fact that, historically, the defender and AB had received salaries higher than the market rate for directors' salaries. The actual directors' salaries and associated costs therefore required to be added back to EBIT and a deduction made instead in respect of notional directors' salaries. In his first report Mr McMorrow used as the basis for his notional add-back a figure of £170,000 which had been used by X Limited in its discussions with the potential purchasers in 2008 and 2010, and which the defender had agreed was an appropriate figure to use in valuing the company at the relevant date. So far as current valuation was concerned, the defender had made representations to Mr McMorrow that the figure was too low to reflect market rates. Mr McMorrow accepted those representations and increased the notional add-back to £200,000 in his supplementary report. For his part, Mr Graham took into account that in 2010 X Limited had recruited a chief operating officer with a salary of around £105,000 plus other benefits. Mr Graham accepted the defender's view that a realistic figure for the basic salary plus pension of a director would be around £139,500, and accordingly proposed a notional add-back of about £279,000. The defender's figure, upon which Mr Graham's opinion was based, was supported at the proof by evidence, which I accept, from Mr Campbell Urquhart of the Urquhart Partnership, a recruitment and training consultancy, that to recruit a director with the capability to replace the defender or AB in X Limited, a salary package with a value around £145,000 to £150,000 would require to be offered. After discussion between Mr McMorrow and Mr Graham it was agreed that the arithmetic difference made to the calculation of the value of the company by this point of disagreement was £72,500.

[17] On this matter I prefer the approach of Mr Graham. In his submission, counsel for the pursuer criticised Mr Graham for having reached his view on inadequate information and having changed his mind as a result of persuasion by the defender and his advisers. It may be that at the time when he prepared his report Mr Graham was acting on somewhat second-hand information. It seems to me, however, that it is right to take account of up to date information regarding directors' salary package levels and that, having regard to Mr Urquhart's evidence, the information available to Mr Graham was reliable and fuller than that used by Mr McMorrow in his supplementary report. I shall not therefore include this £72,500 add-back in my own calculation.

Adjustment in respect of non-recurring expenditure
[18] The second contentious issue also concerned possible add-backs in calculating future maintainable EBIT. When Mr McMorrow was preparing his supplementary report he noted that expenditure on two items, namely repairs and maintenance and IT support, appeared to be substantially higher in the year to 30 June 2012 than in previous years. He inquired of the defender whether the 2012 figures included elements of non-recurring expenditure. The defender provided a breakdown of recurring and one-off expenditure, noting in his covering email that some of the "one-off" expenditure might in fact recur in 2-3 years' time. The defender's breakdown categorised (subject to re-coding of one item) about £76,000 of IT support costs and about £129,000 of repairs and maintenance costs as one-off. Mr McMorrow accordingly added these figures back in calculating his adjusted EBIT. The defender's evidence to the court, which reflected previous discussions between himself and Mr Graham, was that although he accepted that there were non-recurring items in the 2012 accounts, no adjustment was needed because there would always be non-recurring items. IT costs in particular were continually escalating because the security requirements of the governments who were among X Limited's clients were becoming more stringent. The analysis which he had provided to Mr McMorrow was not entirely reliable as he had been preoccupied with other matters at the time when it was supplied. AB confirmed in his evidence to the court that IT costs were rising and emphasised that the company stood or fell by its IT infrastructure. On the basis of the further information from the defender, Mr Graham considered that it was not appropriate to add anything back in calculating the adjusted EBIT. After discussion between Mr McMorrow and Mr Graham it was agreed that the arithmetic difference made to the calculation of the value of the company by this point of disagreement was again £72,500. No evidential basis was provided to me for reaching different views in relation to repairs and maintenance and IT support respectively.

[19] On this matter I am satisfied that I should prefer the approach of Mr McMorrow. I accept the defender's evidence that X Limited will normally, or perhaps indeed always, incur items of non-recurrent expenditure, and I also accept that IT support costs are likely to increase over time. On the other hand the "peak" of higher cost in 2012 is very significant and is not repeated in the company's management accounts for the year to date to 31 December 2012. Even allowing for the possibility, mentioned by the defender, that IT costs may increase substantially before the June 2013 year end, I consider that an add-back of £72,500 covering both categories of non-recurrent expenditure is justified and I will include it in my calculation.

Selection of appropriate multiplier
[20] The next step in arriving at a valuation of the company was to calculate its enterprise value by applying an appropriate multiplier to the adjusted EBIT (the latter having been weighted to give greater weight to more recent years' figures). Mr McMorrow explained that he would begin by obtaining from published information the price/earnings ratios (P/E) of quoted companies carrying on business in the same sector as X Limited. He would then discount the average P/E of the quoted companies to reflect the smaller scale, associated risk, and non-marketability and non-transferability of a private company. For a valuation as at the relevant date, this gave a rounded P/E of 7.5. Using data from the Private Company Price Index (PCPI) as a cross-check produced a P/E of about 7.8. Mr McMorrow judged that 7.5 was an appropriate figure to use; this equated to an EBIT multiplier of around 4.72 and so in calculating a reasonable enterprise value of the company as at the relevant date Mr McMorrow used a multiplier of 4.75. Mr Graham agreed with McMorrow's approach and with his use of an EBIT multiplier of 4.75 at the relevant date.

[21] When Mr McMorrow carried out the same process to select an appropriate multiplier for calculation of the company's enterprise value as at July 2012, he noted that analysis of quoted P/E's in X Limited's sector would produce a discounted P/E of 6.6 for X Limited; data from the PCPI would produce a figure of 7.5. Mr McMorrow noted that there was uncertainty as to the future duration and profitability of a contract which X Limited held with a particular national government, and accordingly selected a lower EBIT multiplier of 4, equating to a P/E of about 6.8, in calculating the company's enterprise value in July 2012.

[22] In his second report, Mr Graham produced a current valuation of the company as at 11 February 2013. He agreed with Mr McMorrow's methodology and considered that an EBIT multiplier of 4 remained reasonable at that date. Published data showed a rise in quoted P/E's since July 2012. However, the experts were agreed that due to increasing uncertainty regarding future profit from the government contract to which I have referred, the value of this contract to X Limited should be stated as a lump sum and removed from the calculation of FME. This resulted in a reduced FME which indicated a bigger discount from a quoted P/E. For his part, Mr McMorrow considered that the stripping out of the government contract from FME removed a source of downward pressure. As at 12 February 2013 use of quoted P/E's produced a discounted P/E of 7.3 for X Limited; use of data from the PCPI gave a figure of 7.9. Without the risk associated with the government contract, Mr McMorrow considered that a figure in the middle of this range should be used, giving an EBIT multiplier of 4.25. In his evidence at the proof, Mr Graham maintained his view that it was appropriate to shave a little off the multiplier to reflect the significant reduction in the FME to which it was being applied.

[23] The selection of a reasonable EBIT multiplier is clearly a matter of professional judgment. This is not, as it seems to me, a situation in which one view is correct and therefore the other must be wrong. The gap between the two experts' selected multipliers is relatively small, albeit producing a significant difference in their respective valuations of the company. It appears to me that there is a good argument in favour of either figure and I am unable to identify any obvious flaw in either expert's approach which would lead me to prefer the other. That being so, I will split the difference in my calculation and use a multiplier of 4.125. I feel less embarrassed about doing this than I might otherwise have done, given that Mr McMorrow and Mr Graham have felt able to use compromise figures for so many other elements of the valuation calculation.

Deduction of imminent corporation tax payment
[24] The final matter upon which the experts were in disagreement concerned the fact that, as at March 2013, the company had a liability for corporation tax amounting to £327,000 which fell due for payment at the end of the month. Mr Graham's view was that a purchaser of the company at that time would be unwilling to pay a price for a company part of whose value was represented by surplus cash without seeking a discount to reflect the fact that some of that cash was about to disappear in payment of the tax bill. It was a "haggle point" which, in the real world, would be likely to be raised by the purchaser in negotiations, and would probably lead to the parties splitting the difference, resulting in a deduction of £163, 500 from the price paid. Mr McMorrow's opinion was that the tax liability was no different from any other creditor of the company who would in due course require to be paid. The fact that payment was imminent made no difference.

[25] On this issue I have little difficulty in preferring the view of Mr McMorrow. It seems to me that the exercise upon which both experts have embarked is a conventional one, using a well-recognised methodology but applying their judgment in relation to key figures (such as the multiplier just discussed) to be used in application of that methodology to the facts of the case. That methodology does not allow for haggle points. To introduce such a deduction into the calculation seems to me to introduce a subjective and unverifiable element into what is meant to be an objectively justifiable method of arriving at a value for the company. I do not regard it as a legitimate qualification of the figure produced by application of methodology endorsed by both experts, and I will not make such an adjustment in my own calculation.

Calculation of value of pursuer's shares
[26] The consequence of my decisions on the points of disagreement is that I find that the pursuer's shareholding in X Limited may be valued as follows, taking account of the various aspects of the valuation on which the experts were in agreement:

Enterprise Value of Company: £

FME per Mr McMorrow's calculation 1,040,000

Adjust for directors' remuneration add-back (72,500)

Adjusted FME 967,500

Multiplier 4.125

3,990,937

Add

Government contract continuation and hope value 804,000

Contribution of value of offices in Aberdeen 2,057,000

Cash and loans to directors 2,202,000

Current value of company 9,053,937

Current value of pursuer's shareholding (24%) 2,172,945

(or say) 2,172,950

The former matrimonial home

[27] Prior to separation, the parties lived together at Mains of Shiels, near Sauchen in Aberdeenshire. This is a detached Georgian mansion house built in 1742 with modern extensions. It has a floor area of about 394 m² and grounds extending to approximately 2.5 acres. It is situated in a secluded rural location approximately 20 miles from Aberdeen. The parties purchased the property in 2004 for £595,000. Since the relevant date the pursuer has continued to reside there. As the property is owned by the parties in equal pro indiviso shares there is no need to make any finding regarding its value at the relevant date. It is the common wish of the parties that the defender's share be transferred to the pursuer as a part of the court's order for financial provision, and it is accordingly necessary for me to make a finding as to its current value.

[28] Evidence on behalf of the pursuer was given by Mr Colin Hepburn, a chartered surveyor who has been a partner in DM Hall since 1985 and whose professional career has been spent wholly in the north-east of Scotland. He is responsible for managing DM Hall's Inverurie office and his work consists mainly of providing valuations of residential properties for potential lenders and, more recently, home owners' reports. He receives his instructions from individual clients and estate agents. He sees around five or six properties each year of a size and character similar to Mains of Shiels. Mr Hepburn carried out inspections of the property in July 2011, September 2012 and January 2013 and on each occasion produced a valuation report. The first of these had been on joint instruction. In the course of his September 2012 visit, Mr Hepburn took photographs showing a number of aspects of the property which required remedial work. Mr Hepburn described the Aberdeenshire property market as "linear", with prices reducing as one travelled further from Aberdeen along the various major roads radiating from the city centre. Deeside was recognised as a "purple patch" where property values were at a premium. Mains of Shiels was in Donside and not located in the purple patch. Mr Hepburn produced a list of comparators, the most useful of which he considered to be a property called Auchnagathle, near Alford, for which he had prepared a home report on behalf of the sellers. This house was further from Aberdeen and had a smaller floor area than Mains of Shiels but had a more convenient layout and a larger area of land including a steading building. It had sold in May 2010 for £927,000. Most of Mr Hepburn's other comparators remained unsold, but he nevertheless regarded them as useful because the "offers over" price of an unsold property could be regarded as a backstop. Having regard to his comparators, and after deducting the sum of £50,000 as an estimate of the cost of necessary remedial works, Mr Hepburn valued Mains of Shiels at £975,000 in its present condition.

[29] Evidence on behalf of the defender was given by Mr Ralph Peters, a chartered surveyor with ten years' qualified experience who had been employed by Strutt & Parker in their Banchory office for four years. His principal area of expertise was estate management. He carried out approximately three or four valuations of rural property each year, mostly for bank security purposes. Mr Peters carried out an inspection of Mains of Shiels on 4 August 2012 and produced a valuation report which was countersigned by Mr Robin Maitland, the senior partner of Strutt & Parker in Scotland. He visited the property again during the proof. Mr Peters described a "golden circle" with a radius of about 20-25 miles around Aberdeen city centre, within which property prices were higher than those outside. Mains of Shiels was located within the golden circle. He considered that the Deeside purple patch extended into Donside. Mr Peters produced his own list of comparable properties consisting mainly of properties sold by Strutt & Parker. These included Auchnagathle, which Mr Peters also regarded as the best comparator for Mains of Shiels. In his view it would have sold for over £1 million if it had been located within the golden circle. He queried the appropriateness of using unsold properties as comparators: it could be that there were underlying reasons why each had not sold. In the course of his most recent visit to Mains of Shiels, Mr Peters had noticed some deterioration in its condition and had his attention drawn to some groundwater flooding. He was prepared to deduct around £20,000 to £30,000 from the value of the property to take account of the need for remedial works. Subject to that reduction, he valued Mains of Shiels at £1,100,000.

[30] Having given careful consideration to the evidence of both surveyors, I have concluded that I should prefer the evidence of Mr Hepburn. He has spent almost 30 years valuing rural properties in the area in which Mains of Shiels is situated. He had personal acquaintance with many of the properties used as comparators, including in particular Auchnagathle. He impressed me as a witness who had adopted a balanced view and was not attempting to find reasons to justify a lower valuation. His explanation for refusing to attribute a value in excess of £1 million to the property was cogent, relating mainly to the comparable properties which could not achieve that price. He observed that a selling price of £1.1 million would indicate a 90% increase in value since the property was purchased in 2004, which did not accord with statistical data from Aberdeen Solicitors' Property Centre. Mr Peters had significantly less experience of the Aberdeenshire market. His principal area of expertise is estate management and not valuation. I regarded his golden circle analysis, implying a sharp drop in prices at a particular distance from the city centre, as less probable than Mr Hepburn's linear analysis implying a steady reduction in value as one progresses along each radial road. My impression was that much of Mr Peters' evidence, especially in relation to comparable properties, was second hand; in particular, he had never visited Auchnagathle. I do not accept that the property defects which persuaded him to allow a reduction from his valuation were not present when he carried out his inspection in August 2012. His estimate of the sum to be allowed for remedial work did not appear to have any sound foundation. For these reasons I do not feel able to place the same confidence in his opinion as I do in that of Mr Hepburn. I accordingly find that the value of Mains of Shiels in its present condition may fairly be stated to be £975,000.

[31] It was agreed by joint minute that as at 13 February 2013, the balance of the mortgage loan secured on Mains of Shiels was £132,765. The net value of the property for the purposes of the following financial provision calculation is accordingly £842,235, whereof each party's half share amounts to £421,118.

Yacht

[32] The parties are joint owners of a yacht which was purchased at about the time of separation. As it is in co-ownership it did not require to be valued at the relevant date. In March 2012 it was valued at about £270,000. Both parties sought an order for its sale, but the practical details of the marketing were a matter of dispute. By the close of the proof, however, the parties had reached agreement on most matters concerning its sale. In my assessment of the parties' respective resources (below) I proceed on the basis that that agreement will be adhered to. It is, of course, uncertain when and at what price a sale will be achieved.

Relevant statutory principles

[33] In terms of section 8(2) of the Family Law (Scotland) Act 1985, the court is required to make such order, if any, as is

(a) justified by the principles set out in section 9; and

(b) reasonable having regard to the resources of the parties.

The principles which are of relevance to the circumstances of the present case are those in section 9(1)(a) and (b), i.e.

(a)  the net value of the matrimonial property should be shared fairly between the parties to the marriage; and

(b)  fair account should be taken of any economic advantage derived by either spouse from contributions by the other, and of any economic disadvantage suffered by either spouse in the interests of the other spouse or of the family.

Section 10(1) provides that the net value of matrimonial property shall be taken to be shared fairly when it is shared equally or in such other proportions as are justified by special circumstances. Section 11(2) provides that for the purposes of section 9(1)(b), the court must have regard to the extent to which (a) the economic advantages or disadvantages sustained by one spouse have been balanced by economic advantages or disadvantages sustained by the other, and (b) any imbalance has been or will be corrected by a sharing of the value of the matrimonial property or otherwise.

Arguments for the parties
Argument for the pursuer

[34] Counsel for the pursuer submitted that, in addition to what the pursuer was due in respect of equal sharing of the matrimonial property, she should receive a capital sum to reflect economic advantages sustained by the defender and economic disadvantages sustained by the pursuer. Those advantages and disadvantages arose in two respects. Firstly, there was the pursuer's contribution to the value of the defender's shares in X Limited which, as I have already noted, are not matrimonial property. This advantage to the defender, it was argued, would not be balanced by an equal division of matrimonial property. In contrast to Coyle v Coyle 2004 Fam LR 2, the pursuer in the present case could identify specific financial and non-financial contributions made by her to the wealth created during the marriage through X Limited's business. Reference was also made to Wilson v Wilson 1999 SLT 249, where a wife whose contribution consisted of looking after the home and the children was awarded a capital sum in respect of advantage to the husband from business profits not applied to improve the parties' lifestyle while they were married. In the present case, Mr McMorrow gave evidence which was not seriously challenged that at the date of the marriage the company was worth £40,000, giving the defender's one half share a value of £20,000 in 1996, equating, according to the pursuer's calculation, to a present day value of £31,800. The pursuer was involved at a crucial stage of the company's development and made significant contributions to its success, including recruitment of key staff, provision of consultative support to the defender, acquisition and development of new business premises (on two occasions), marketing work including the 2001 conference, operating TTAL which was of indirect benefit to X Limited, and assistance in management when the defender was absent due to illness. There was an associated case of economic disadvantage to the pursuer in that when she was bearing primary responsibility for housekeeping and child rearing, as well as running TTAL, she was unable to advance a career of her own. To recognise this advantage and disadvantage, counsel submitted that I should add to the pursuer's share of the matrimonial property a sum equivalent to 10% of the increase in value of the defender's shares in X Limited between the date of the marriage and the relevant date.

[35] The second respect in which it was submitted that the pursuer had sustained a disadvantage concerned mortgage payments since the relevant date. From June 2010 until the proof, the defender paid a sum by way of aliment to the pursuer amounting to one third of his net salary. Out of these payments and her other income and capital resources, the pursuer made repayments in respect of the secured loan on Mains of Shiels. However, the mortgage was an offset mortgage, and between June 2010 and September 2011 the defender had sums deposited with the lender which substantially reduced the interest payable on the mortgage loan. Counsel for the pursuer submitted that she had sustained a disadvantage, and the defender an advantage, with regard to half of the difference between the mortgage reduction due to payments made by the pursuer since June 2010 (£52,865) and the interest saving achieved at the expense of the defender. Using the defender's best guess that the interest rate would have been 5% (amounting to £6,971 over the period), counsel submitted that half of the difference, i.e. £22,947, should be added to the pursuer's share of the matrimonial property.

Argument for the defender

[36] Counsel for the defender submitted that it would be appropriate to order an unequal sharing of matrimonial property in the defender's favour to recognise the fact that the defender's business, including the TD service which has since proved so successful, had been established before the marriage and that the pursuer's shares had been transferred to her as a gift by the defender. Reference was made, by way of comparison, to Watt v Watt 2009 Fam LR 62 (para 125) and Sweeney v Sweeney (No 2) 2006 SC 82 (paras 8 and 9).

[37] It was argued that there was no foundation for the pursuer's section 9(1)(b) claim based on economic advantage to the defender. The pursuer had not made a material contribution to the value of X Limited. Its success depended upon AB's IT skills and the defender's expertise and experience in relation to public procurement, and not on any skills of the pursuer. It was accepted that she had assisted the business with regard to organising the 2001 conference, developing interview procedures and participating in the recruitment process, filling envelopes on one occasion and talking to the defender about the business. It was not accepted that she had a strategic role in offering business advice to X Limited. TTAL had a community of interests with X Limited and it was arguable that the economic benefit flowed to the former from the latter. She was not instrumental in the acquisition of the company's current offices. She did not participate in the management of X Limited during the periods of the defender's illness. Any contribution made by the pursuer was not proportionate to those of the defender and AB. Any net economic advantage from her contribution was reflected in the value of her shares. She had in any event gained an economic advantage by being given the shares in the first place, not by way of reward for her contribution but as an arrangement to maximise family income during the marriage.

[38] Nor had the pursuer demonstrated an economic disadvantage to herself. In the course of the marriage she had operated TTAL; she had then (as narrated below) obtained a law degree and was engaged in obtaining a professional legal qualification at the time of separation. She had domestic assistance from a cleaner, and the defender assisted with child care. It was further submitted (i) that the pursuer had derived an economic advantage in the form of the defender's contributions to TTAL and his financial support during her period of study for her law degree and Diploma in Legal Practice, and (ii) that the defender had suffered an economic disadvantage by adopting the pursuer's daughter and assuming financial responsibility for her. There was no imbalance which required to be corrected by financial provision additional to the pursuer's entitlement after application of section 9(1)(a) and section 8(2)(b).

[39] Counsel for the defender made submissions in relation to the parties' resources to which I return below. It should be noted at this stage, however, that it was submitted that if I were to make an order for transfer of the pursuer's shares to the defender and for payment of a capital sum by the defender to the pursuer, I should make a deduction from that sum of, say, 20% of the value of the pursuer's X Limited shares. This could be seen as an issue concerning resources or, alternatively, as based on special circumstances justifying a departure from equal sharing. The transfer of shares by the pursuer to the defender would attract capital gains tax holdover relief. However, if as expected the defender sells all his shares in X Limited, including those transferred to him by the pursuer, he will incur a liability to capital gains tax, probably at an effective rate of 10% after entrepreneur's relief. Moreover, any capital payment - or payments - which he is required to make to the pursuer will be paid out of dividends on which income tax at 30.55% has been paid. In all the circumstances a deduction of 20% of the value of the shares was reasonable.

[40] As regards payments since the relevant date to reduce the debt secured on Mains of Shiels, counsel submitted that the defender should be credited with all or part of the reduction in liability of the pursuer, amounting to half of the total reduction by £70,949, i.e. £35,475. The defender retained funds in an account to offset interest; he made loan repayments via the joint account until June 2010 and thereafter remitted part of his salary to the account from which loan repayments were made. He did so while servicing the mortgage which he obtained for the purchase of the property where he now resides.

[41] Applying the figures which I have held to represent the appropriate current values of Mains of Shiels and of the pursuer's shareholding in X Limited, the differences between the parties' positions after proof are therefore as set out in the following calculation:

Defender's figure Pursuer's figure

£ £

Notional sum due by pursuer to defender (951,636) (951,636)

Transfer of defender's share of Mains of Shiels (421,118) (421,118)

Transfer of pursuer's X Limited shares 2,172,950 2,172,950

Adjustment for economic advantage (X Limited) 232,224

Adjustment for special circumstances (X Limited) (434,590)

Adjustment for mortgage reduction 22,947 (35,475)

Capital sum due by defender to pursuer 1,055,367 330,131

Discussion - fair sharing and economic advantage/disadvantage: X Limited

[42] I address firstly the pursuer's claim under section 9(1)(b) in relation to the value of X Limited. My impression was that the extent of her involvement in the company's business, especially in the early days of the marriage, was greater than the defender and AB were willing to concede. AB in particular appeared reluctant to accept that the pursuer contributed anything of value to the business at all, and I formed the clear view that the evidence of both the defender and AB was coloured by antipathy towards the pursuer as a consequence of the breakdown of the parties' relationship in recent years. I am satisfied that in relation to matters such as interviewing potential employees and organising the 2001 conference, the pursuer had useful skills to offer which brought benefit to the company at no or minimal cost. I am also satisfied that there was a great deal of discussion of the business of X Limited between the defender and the pursuer, and that the extent of that discussion, at least in the proportion of time at home taken up with it, was greater than the amount of time which one might expect, on average, to be spent by spouses discussing a business carried on by one or other of them. I am sure that the willingness of the pursuer to discuss the practicalities of X Limited's business with the defender was of significant benefit to him. On the other hand, I am equally sure that the pursuer overstated the importance of her input to the development of X Limited. I accept the evidence of the defender and AB, as well as that of MH, that strategic issues were discussed and decided at board meetings, as one might expect, and that if the pursuer had had any influence on the defender's thinking, this was not explicitly acknowledged by him. I find it more difficult to accept the pursuer's evidence that, although the defender refused to listen to her opinion and insisted on getting his own way on all domestic matters, he nevertheless sought her advice and opinion on the strategic development of the company of which he was managing director. In cross-examination the pursuer stated that she looked on herself as a shadow director; in my judgment this would not be an appropriate description of the level of her involvement.

[43] In the light of these findings, I am satisfied that the defender as a shareholder in X Limited derived economic advantage from the participation of the pursuer in certain aspects of the company's business and from the parties' discussions of that business at home. However, I conclude that the pursuer's participation has made a relatively minor contribution to the financial success of the company, whose highly profitable history to date seems to me to derive from the directors' skill in identifying a potentially lucrative market and having the IT and other expertise to exploit that market to great effect. The pursuer as a 24% shareholder in X Limited has participated financially in that success, which is largely attributable to the respective business skills of the defender and AB and does not to any material degree derive from her own activities. In my judgment any economic advantage to the defender from the pursuer's involvement in X Limited which is reflected in the value of his shares is at the very least balanced by the economic advantage to the pursuer from her own share ownership. The present case may be contrasted, for example, with De Winton v De Winton 1998 Fam LR 110, in which the wife/pursuer invested capital in her husband's business (which was not matrimonial property) and used her income to provide the family with a standard of living that they would not otherwise have enjoyed. There was an economic disadvantage to the pursuer which corresponded to an economic advantage to the defender, and an award of a compensatory capital payment under section 9(1)(b) was held to be appropriate. In the present case I do not consider that there is any economic advantage to the defender, or economic disadvantage to the pursuer, arising from her contribution to the company's business that requires the making of a compensatory capital payment. I regard the present case as distinguishable from Wilson v Wilson (above) because in the present case, in contrast to Wilson, the profits of X Limited were applied, during the marriage, to enhance the parties' lifestyle and not retained outside the matrimonial commonwealth.

[44] I turn next to the defender's argument that I should order an unequal sharing of the matrimonial property to acknowledge that X Limited was trading before the date of the marriage and that the defender made a gift of the pursuer's 24% shareholding to her. In the circumstances of the present case, I do not accept this argument. In contrast, perhaps, to some of the reported cases, the value of X Limited at the date of the marriage was minimal in comparison to its value at the relevant date and now. On any view, as counsel for the pursuer submitted, it would be appropriate only to take into account the value of the shares at the time when the gift was made and not their current value. I do not regard even this as appropriate. According to the defender, the transfer was made with the purpose of benefiting the family finances as a whole and was not intended as an act of benevolence to the pursuer at the expense of the defender. It seems likely that the family finances have indeed obtained tax benefits during the period of the marriage from the fact that income has been received by the pursuer rather than the defender. I do not consider that this argument provides a justification for departing from equal sharing.

[45] The next matter is the defender's claim for an adjustment in the sharing of capital to take account of his future liabilities in respect of (i) capital gains tax on sale of any shares transferred to him by the pursuer and (ii) income tax on dividends which he may require to use to make a capital payment to the pursuer. The first question is whether it is correct in principle to have any regard to such potential liabilities. In my opinion I am not precluded by authority from doing so. In Sweeney v Sweeney (above), the court resolved a controversy by holding that when ascertaining the value of matrimonial property at the relevant date it was not necessary to make a deduction for any capital gains tax hypothetically due if the asset had been disposed of on that date. I note, however, that the court pointed out (para 15) that

"...there are other stages at which the actual or foreseeable incidence of tax and other liabilities or costs upon any realisation or disposal can be brought into account."

So, for example, in Coyle v Coyle (above), one of the decisions approved by the court in Sweeney v Sweeney, Lady Smith considered that a prospective liability for capital gains tax could be taken into account in assessing a spouse's resources when determining, in accordance with section 8(2)(b), whether a particular order was reasonable. In Sweeney itself, the court appears (para 16) also to envisage the possibility of prospective tax liabilities constituting "special circumstances" justifying a departure from equal sharing of matrimonial property, although no view was expressed at that stage as to what effect the "tempering requirements" of sections 8(2) and 10(1) might have in the circumstances of that case. In the present case counsel for the defender hedged her bets by describing the proposed adjustment in respect of prospective tax liabilities as being for "special circumstances/resources". Having regard to the observations in Sweeney, I am satisfied that I would be acting within the duties imposed upon me by the 1985 Act were I to decide, having regard to all of the circumstances, to take tax liabilities into account either as special circumstances for the purposes of section 10(1) or as a factor relevant to reasonableness under section 8(2).

[46] That being so, I now proceed to consider whether either of the prospective tax liabilities founded upon constitutes special circumstances justifying a departure from equal sharing. In my opinion it is appropriate to make an adjustment in respect of the defender's prospective liability to capital gains tax on disposal of shares which are transferred to him by the pursuer in accordance with an order of this court. I reach this view for the following reasons. To begin with, I am satisfied that a sale of those shares is by no means hypothetical. It is, as I have already narrated, the wish of both the defender and AB to sell the company whenever an acceptable price is offered for it. There are obviously uncertainties as to timing but I consider that I am entitled to proceed on the assumption that a sale will take place, and that it will probably take place sooner rather than later. That being so, it seems to me to be appropriate to regard the current value of the pursuer's shares as including an element of locked-in tax liability whose burden she will not bear if her shares are transferred to the defender with the benefit of hold-over relief. Different considerations appear to me to apply to the defender's liability to pay income tax on dividends which he may, as a matter of fact, require to use in order to satisfy an order which I may make to pay a capital sum to the pursuer. The defender's obligation to pay tax on his own income is not, in my opinion, relevant in this case to the question whether special circumstances justify departure from equal sharing: it may fairly be described, so far as the pursuer is concerned, as res inter alios. It may still, however, be relevant to my duty under section 8(2) to make an order that is reasonable having regard to the parties' resources, and so I do not disregard it: rather I put it to one side for the time being. At this stage of the calculation, I am persuaded that special circumstances justify making a 10% deduction from the value of shares which I order to be transferred by the pursuer to the defender.

[47] My opinion thus far has proceeded upon an implicit assumption that one of the orders that I will make will be for transfer of the whole of the pursuer's shareholding in X Limited to the defender. It was a matter of agreement between the parties that the clean break that this would facilitate would be a most desirable outcome. The practical difficulty, of course, is whether, having regard to the value of those shares, the defender has the resources to fund the capital payment to which the pursuer would be entitled in order to achieve fair sharing of the matrimonial property. One option which was explored in the pleadings and in the evidence before me was an order for transfer of part only of the pursuer's shareholding, leaving her with the remainder until such time as the company is sold. It is convenient to deal with that matter now. A number of drawbacks to this option were identified. The pursuer's principal concern was that as a minority shareholder she would have no say in the company's dividend policy. It would be possible for the directors of X Limited to choose to reward themselves wholly or mainly in the form of salary rather than dividends, thereby minimising the amount which would have to be paid to the pursuer during the period prior to such sale. In order to obviate this risk, the pursuer proposed, if I were minded to order the transfer of less than the whole of her shareholding, the putting in place of minority shareholder protection similar to that which would be insisted upon by a venture capital company investing in a business by purchasing a minority equity share. Evidence was given at the proof by Mr Sandy Finlayson, a solicitor whose specialisation includes venture capital transactions, as to the conditions typically demanded in a Shareholders' Agreement by such an investor in order to afford it sufficient control over the governance of the company to safeguard its investment. I do not require to deal with these conditions in detail. It is sufficient to note that in the present case any such minority shareholder protection would require the agreement not only of the defender but also of AB as the other director and the holder of the remaining 50% shareholding in X Limited. AB made it clear that he was not willing to enter into an agreement which would confer information, pre-emption, dividend, anti-dilution and other rights on the pursuer and which would inter alia require re-negotiation of the Cross-Option Agreement. That is sufficient to render this proposal impracticable, although I would add my own opinion that, given the animosity evident in the course of the proof between the pursuer on the one hand and the defender and AB on the other, it would have been a wholly inappropriate solution for the circumstances of this case. I consider in any event that the pursuer's fears for her future treatment as a minority shareholder are exaggerated. The directors of X Limited are unlikely to act against their own interest by attempting to reduce the company's profits in order to produce a lesser amount distributable by way of dividends. There are good reasons why a company might wish to remunerate its directors by way of dividends rather than salary and, of course, the directors of X Limited have in the past chosen to use a mix of dividends and salary. Whatever may be the attitude of the defender, I see no reason to anticipate that AB would act against his own interest in agreeing to a reduction in the proportion paid by way of dividend purely as a means of minimising the amount paid to the pursuer. I also accept the evidence of MH that he would be vigilant for, and would do what he could to protect the pursuer from, any unfair treatment of her as a minority shareholder.

[48] Having said all that, there is clearly much to be said for effecting as clean a break as possible between the pursuer on the one hand and the defender and X Limited on the other, not least because it would remove one potential complication from future negotiations for the sale of the company. My provisional aim, therefore, is to devise a scheme of financial provision which, while compliant with the requirements of section 8 of the 1985 Act, provides for transfer of the whole of the pursuer's shareholding in X Limited to the defender.

Discussion - fair sharing and economic advantage/disadvantage: mortgage reduction since June 2010

[49] I have already set out the parties' contentions regarding departure from equal sharing to take account of payments made to reduce the loan secured on Mains of Shiels since June 2010. I consider that the argument for the pursuer is to be preferred. I reject the defender's contention that the alimentary payments which he has made to the pursuer since June 2010 should be characterised as loan repayments. I accept, on the other hand, the analysis on behalf of the pursuer that the loan repayments that she has been making out of funds provided to her by the defender by way of aliment have reduced a liability of both parties. The pursuer has been credited in the calculation of the net current value of Mains of Shiels with a sum which takes into account that reduction of liability; it seems to me to be fair to make a deduction to recognise the economic advantage to the defender in having his half share of the liability reduced. It is also reasonable, as counsel for the pursuer recognised, to make allowance for the interest foregone by the defender on the sum deposited in connection with the offset arrangement. I see no reason to interfere with counsel's calculation of the value of the economic advantage to the defender and will make an adjustment, in the pursuer's favour, of £22,947.

[50] The effect of my decisions regarding adjustments based upon either special circumstances justifying departure from equal sharing or taking account of economic advantage or disadvantage on the calculation of the sum due by the defender to the pursuer is as follows:

£

Notional sum due by pursuer to defender	(951,636)
Transfer of defender's share of Mains of Shiels	(421,118)
Transfer of pursuer's X Limited shares	2,172,950
Adjustment for special circumstances (X Limited)	(217,295)
Adjustment for mortgage reduction	22,947
Capital sum due by defender to pursuer	605,848
(or say)	606,000

Resources

[51] I address now the requirement of section 8(2) of the 1985 Act to make an order for financial provision that is reasonable having regard to the resources of the parties. The pursuer's situation may be summarised as follows. In 2007, after she had ceased to operate TTAL, the pursuer studied for and obtained a two-year law degree at the University of Aberdeen. In 2010 she obtained a Diploma in Legal Practice and in 2012 she completed her traineeship with a firm of solicitors in Aberdeen. The pursuer had a previous connection with an individual who is now managing director of a company called Verdex Limited which manufactures a range of varnishing products. The pursuer's legal qualification and her background in chemistry were of interest to the company, and in 2012 the pursuer was employed by the solicitors' firm with which she had trained on the understanding that she would mainly carry out work instructed by Verdex, who would fund her salary. At the time of the proof, however, as a result of changes within the solicitors' firm, the pursuer was moving to become an in-house solicitor employed directly by Verdex. Her current salary was £25,000 per annum. The stability of her employment was dependent upon Verdex's continuing business success. As matters stood she did not anticipate any significant increase in her salary. If her employment by Verdex were to be terminated she would consider undertaking a pupillage with a view to practising as an advocate in Scotland. She could not return to work as a pharmacist without retraining, and prospects of obtaining employment thereafter would be uncertain. She wished to continue to reside at Mains of Shiels; however, her current salary was not sufficient to service the whole of the loan secured over it and she would wish to repay it in full out of any capital sum ordered to be paid in these proceedings. She intended to use the remainder of such capital sum to supplement her income in future. She expressed a strong preference for an order for payment of a capital sum rather than an alternative solution such as retention of shares in X Limited or a pension-sharing order.

[52] The defender's future income, at least in the short term, will mainly comprise remuneration and dividends from X Limited. In most years since 2009, X Limited has made a profit after tax (and after deduction of directors' salaries) in excess of £1 million. The total sums extracted from the company by way of directors' salaries and dividends have usually, in the years since 2007, exceeded £1 million, sometimes significantly so. Management accounts for the period to 28 February 2013 indicated that the company was enjoying another profitable year. As noted earlier, the company had at the time of assessment of its current value for the purposes of the proof cash and loan repayments due by directors amounting to £2,202,000. No dividend for the year ending 30 June 2013 had been declared and I have been informed that none will be declared until after my opinion has been issued and any transfer of shares that I may order has been effected. The defender's outgoings include mortgage payments on his house, payments of child support for E, and financial support provided to K.

[53] The defender's capital wealth, including non-matrimonial property such as his X Limited shareholding and the house which he has purchased (subject to a mortgage) since the parties' separation, is substantial. There is, however, little that is readily realisable. The parties will at some time, currently uncertain, each receive a one-half share of the proceeds of sale of the yacht. The defender has a self-invested personal pension whose assets include cash amounting, as at February 2013, to just under £300,000. This total includes two sums of £100,000 funded from X Limited and paid into the fund by the defender on 28 March 2012 and 3 December 2012 respectively. Equivalent pension-funding payments were made by the company at the same times for the benefit of AB. I noted earlier that the pursuer concluded, as an alternative to part of her claim for a capital payment, for a pension sharing order under sections 8(1)(baa) and 8A of the 1985 Act in the sum of £200,000. The pension scheme administrators confirmed by letter that the fund's liquidity would permit such an order to be made. Leaving aside for the moment the option of making such an order, the potential sources of funds for payment of a capital sum by the defender to the pursuer would appear to be his share of the proceeds of sale of the yacht; future profits extracted from X Limited by way of salary or dividend; proceeds of a sale of X Limited; or funds borrowed by the defender on security of the value of his defender's shares in X Limited. The last of these possibilities was not explored in evidence. Under reference to Watt v Watt 2009 SLT 931 at para 138, counsel for the pursuer submitted that it was for a party who seeks to limit what might otherwise by payable according to the principles in section 9 on the ground of inadequacy of resources to prove that such limitation should be made. In the absence of evidence to the contrary, the court should presume that bank borrowing against the security of the shares would be available. Whilst accepting that the onus in relation to inadequacy of resources rests upon the defender, I consider that the possibility of personal borrowing against the security of his shares ought to have been put to the defender for comment. In the absence of this, I do not consider that I should proceed upon an assumption that such a course of action would be practicable, although I do not discount it altogether. I conclude that if a capital sum is to be paid to the pursuer prior to a sale of X Limited by the defender and AB, it will probably require to be funded largely by profits extracted from X Limited.

[54] At first sight, X Limited has over £2 million in cash available for distribution to its shareholders. It was, however, submitted on behalf of the defender that the amount actually available is much lower. The defender stated in his evidence that the current policy of the company was to maintain a working capital requirement of around £700,000. A policy to this effect had not previously been considered necessary but the directors' attention had been focused upon it by the defender's attempts to work out how much he could afford to pay to the pursuer by way of a capital sum. Accordingly, of the £2 million, £700, 000 required to be set aside for working capital. £327,000 had been paid in corporation tax, a further £100,000 required to be set aside for proposed IT expenditure, and a further £100,000 as a provision for expenses of an ongoing litigation. That left around £775,000 available to pay a dividend. Tax at an effective rate of 30.55% would be payable on the defender's one half share of that sum, leaving a net sum of £269,000. From that sum the defender would require to repay his outstanding loan of £100,000 to X Limited. Some of the balance of £169,000 could be used to make payment of a capital sum to the pursuer, although the defender also required to provide for the legal expenses of this action.

[55] I accept that it would not be reasonable, having regard to the defender's resources, to make an order for immediate payment of a capital sum in excess of £600,000. However, in my opinion the foregoing calculation significantly understates the defender's ability to make a capital payment at this time. I note that the reserves of X Limited have been built up significantly in recent years. I recognise, of course, that the company's dividend policy will be directed by AB as much as by the defender and that it would be unreasonable for me to make an order that could not in practical terms be implemented without prejudice to the interests of AB. I do not, however, accept that the company's ability to pay a dividend is as restricted as counsel for the defender submitted. In the first place, I do not attach a great deal of weight to the figure of £700,000 in the company's recently-formulated working capital policy. The defender fairly accepted in his evidence that this had been a rough and ready calculation and that £600,000 or £800,000 could have been chosen. He also confirmed that the company's income stream is constant throughout the year. Nor do I consider that it is appropriate to deduct the £327,000 corporation tax liability simply because it happened to be due imminently at the time of the proof. Other months will have other liabilities which will similarly be met from the income stream. Assessing the matter as best I can, having regard to the company's past dividend policy and its current cash balances, I am satisfied that the company is presently capable of funding a dividend of at least £1 million without detriment to the interests of either the defender or AB. It follows that I am not satisfied that in assessing what is reasonable with regard to the defenders' resources, I require to make a deduction from the capital sum due by him because he will be chargeable to income tax on dividends paid to him. Finally I do not accept that it is appropriate to make allowance for the £100,000 due by the defender to the company because, as counsel for the defender acknowledged in her submission, repayment by the defender has the effect of making that further sum available to the company for distribution.

[56] I see no reason to conclude, on balance of probabilities, that X Limited's profits are likely to reduce significantly in the near future. I accept the defender's evidence that there is a question mark over the extent of the future profitability of the government contract to which reference has been made, although it should be recalled that with that question mark in view Mr McMorrow and Mr Graham nevertheless agreed that its contribution to the overall value of X Limited could be stated at £804,000. There was no evidence of any concern regarding the future profitability of the TD service which contributes around two-thirds of the company's turnover, and both Mr McMorrow and Mr Graham produced figures for future maintainable earnings indicating that the company is in a good state of health. It is likely, therefore, in my opinion, that the ability of the company to pay substantial salaries and dividends to its directors and shareholders, will be maintained in the short term, i.e. during the next two years at least.

[57] Finally in relation to resources, I should record that counsel for the pursuer submitted, under reference to a calculation contained in his written submission and put to the defender in cross-examination, that the defender had failed to disclose all of his assets, having regard to sums that he had received since the date of separation. Reference was made to the fact that details of a bank account not previously mentioned had been provided in response to a specification of documents. I do not find it necessary to deal with this matter in detail. I am not satisfied that counsel's calculation is sufficiently reliable and complete to demonstrate that the defender not only has an undisclosed fund of at least £130,000 but also was untruthful when giving his evidence to the court. The amounts of some elements of the defender's expenditure since the date of separation, including the cost of furnishing the house where he now resides and the legal expenses of these proceedings, are not clearly established by the evidence. I find that the omission of previous reference to a particular bank account was an oversight of minor significance. I accept the defender's evidence on this matter as credible and I also accept it as largely reliable, bearing in mind that he himself accepted that some of the figures he provided were estimates.

Decision

[58] In the light of these findings I consider that it is possible to make an order which complies with the requirements of section 8(2) of the Act without the need for a pension sharing order, and without leaving any X Limited shares in the ownership of the pursuer. In terms of section 12(3), the court has power to order that a capital sum shall be payable by instalments. I propose to make an order for payment by the defender to the pursuer of the sum of £606,000 in three instalments. The first instalment will be in the sum of £206,000. I will hear submissions on the timing of payment of this instalment which will require to be co-ordinated with the transfer of the whole of the pursuer's shareholding in X Limited to the defender, which I shall also order. The second instalment, in the sum of £200,000, will be payable on or before 30 June 2014 and the third instalment, also in the sum of £200,000 will be payable on or before 30 June 2015. In the event that the defender sells his shares in X Limited prior to 30 June 2015, any or all outstanding instalments will be payable within 14 days after receipt by the defender of his share of the purchase price, if that occurs before the date when the instalment in question would otherwise have fallen due. For all of the reasons given above, I regard such an order as reasonable having regard to the resources of both parties. So far as the pursuer is concerned, receipt of the first instalment plus, it is to be hoped, her share of the proceeds of sale of the yacht will enable her to repay the outstanding loan secured over Mains of Shiels.

Interest

[59] Section 14(2)(j) of the 1985 Act empowers the court to make an incidental order specifying the date from which any interest on any amount awarded shall run. Guidance regarding the exercise of the discretion conferred by section 14(2)(j) was provided by the court in Geddes v Geddes 1993 SLT 494, concerning in particular the circumstances in which the court might award interest for a period prior to the date of decree. Lord President Hope observed (page 500-1) that a claim for financial provision is unlike other categories of claim which attract interest from a date earlier than the date of decree because no part of any amount awarded under section 8(2) can be said to have been wrongfully withheld before decree has been pronounced. Instead, Lord President Hope proposed that guidance could be obtained from the rule that where possession of land is taken but the price not paid, interest is due on the price until it is paid. His Lordship observed:

"There may be circumstances where a party who has had the sole use or possession of an asset since the relevant date, the whole or part of the value of which is to be shared with the other party on divorce, should be required to pay interest as consideration for the use or possession which he has had between the relevant date and the date of decree. An order for interest may, for example, be appropriate where the use or possession has resulted in a benefit which has not been taken into account in some other way in making the order for financial provision. It may also be appropriate where, as in [Gulline v Gulline 1992 SLT (Sh Ct) 71], the amount of the principal sum is fixed by the decree but payment of it, in whole or in part, is postponed to a later date. Whether interest should be awarded on this basis, and if so on what part of the award, from what date and what the rate of interest should be is in the discretion of the court, bearing in mind that an incidental order for interest under s 14(2)(j) is an integral part of the order for financial provision under s 8(2) of the Act."

[60] Counsel for the pursuer submitted that if I were minded to allow payment of a capital sum by instalments, interest should be awarded on those instalments at the judicial rate, and not at any lower commercial rate, because the pursuer would be deprived of her entitlement to dividends yet unable to invest the sum found due to her. Counsel for the defender submitted that there was no basis for an award of interest from any date earlier than the date of decree: the pursuer had been in receipt of aliment and dividends. Nor should interest be awarded on instalments which are likely to be paid out of dividends from company profits that have not yet been generated. If interest were awarded it should not exceed 4%. Reference was made to Farstad Supply AS v Enviroco Ltd 2013 SLT 421 and to McHugh v McHugh 2001 Fam LR 30.

[61] I consider that in the circumstances of the present case it is appropriate to make an order for payment of interest. Receipt by the pursuer of the capital sum to which I have found her entitled on application of the section 9 principles will be delayed not because the defender is without resources but because these resources are not readily realisable. Transfer of the pursuer's shares to the defender will enhance his return from the company, not all of which is required in order to meet the pursuer's capital entitlement. The pursuer, in the meantime, does not have the whole of her capital sum to invest. In past years the pursuer received her dividend (if declared) on or before the company's year-end. In these circumstances I consider it appropriate to order payment of interest on the first instalment of capital at the judicial rate from 1 July 2013 until payment. As regards the second and third instalments, I shall order payment of interest on each instalment at the rate of 4% per annum from the date of decree until the due date for payment (above), and at the judicial rate from the due date until payment. Interest will similarly run at the judicial rate from 14 days after receipt by the defender of his share of the purchase price of X Limited, if that occurs before the date when any instalment is still due, until payment.

Ancillary orders in connection with the transfer of the pursuer's shares

[62] Counsel for the pursuer sought two ancillary orders under section 14 if I were minded to order the transfer of the pursuer's shares to the defender:

• an order that the defender execute an irrevocable election for holdover relief in respect of the shares; and
• an order that the defender deliver a pledge over any shares for which an order for transfer is made to subsist until payment in full of the capital sum (including any interest) is made.

The need for the first of these ancillary orders was said to arise out of concern that if the defender refused or failed to join in a holdover election, the pursuer would be chargeable to capital gains tax on the disposal of her shares to the defender. It will be apparent that my decision proceeds upon an assumption that such an election will be made by both parties. I did not understand there to be any indication by the defender that he would not join in an election, and it seems to me that the best way to deal with this matter would be for an undertaking to that effect to be provided by the defender to the pursuer, via agents, prior to the date when I pronounce my interlocutor. As regards a pledge, counsel for the defender complained that fair notice had not been given of any intention to seek such an order. Be that as it may, I see no need for such a pledge. The pursuer will have a court order for payment of instalments of capital in her favour and it is, in the first instance, a matter for the defender to decide how to implement that order. Accordingly, as presently advised, I do not propose to make either of the ancillary orders sought.

Periodical allowance

[63] The pursuer sought an order for payment of a periodical allowance of £3,000 per month until the full capital sum due had been received. Counsel for the pursuer confirmed that this order was sought under section 9(1)(d) of the 1985 Act, i.e. for a period of not more than three years to enable the pursuer to adjust to the loss of the defender's financial support upon which she had been dependent to a substantial degree, and in particular to compensate for the loss of dividend payments at a time when she had not received the whole of any capital sum awarded. Counsel for the defender submitted that no order should be made for payment of a periodical allowance. In terms of section 13(2), the court may not make such an order unless it is satisfied that an order for payment of a capital sum would be inappropriate or insufficient to satisfy the requirements of section 8(2). A pursuer in receipt of a substantial capital sum is expected to utilise it to adjust to loss of support: see McConnell v McConnell (No 2) 1997 Fam LR 108, Lord Justice-Clerk Ross at para 20-36. In any event the defender's resources did not permit payment of both a capital sum and a periodical allowance.

[64] I accept the submission on behalf of the defender. In my opinion the pursuer can be expected to utilise the three instalments of capital to adjust to the loss of the defender's financial support, and I do not consider that a case has been made for award of a periodical allowance in addition.

Postscript: By Order hearing

[65] Parties were agreed that before pronouncing decree, I should put the case out By Order to be addressed on a number of practical issues arising from my decision, which I did. These issues included:

• the timing of the transfer of title to Mains of Shiels by the defender to the pursuer;
• the transfer of the pursuer's shares in X Limited to the defender;
• the date for payment of the first instalment of capital, plus interest;
• the execution of a holdover election for capital gains tax purposes;
• submissions on expenses.

My interlocutor granting decree of divorce and making the necessary orders concerning financial provision was pronounced on 25 July 2013 following the By Order hearing. I also heard parties' proposals regarding the features of my opinion which required to be anonymised prior to publication. This version of my opinion gives effect to those proposals.