SHERIFFDOM OF SOUTH STRATHCLYDE DUMFRIES AND GALLOWAY

 

F99/04

	JUDGMENT OF SHERIFF PRINCIPAL B A LOCKHART
	in the cause
	ALISON HODGE
	Pursuer
	against
	ALISTAIR HODGE
	Defender

 

Act: D Cheyne, Advocate, instructed by HBM Sayers Giusti Martin

Alt: Mrs M Loudon, Advocate, instructed by Smail and Ewart

 

 

 

LANARK: 28 November 2006

 

The Sheriff Principal, having resumed consideration of the cause refuses the appeal at the instance of the pursuer and adheres to the Sheriff's interlocutor of 24 February 2006 complained of; refuses ground 1 of the cross-appeal at the instance of the defender and of consent upholds ground 2 of the cross-appeal and recalls the Sheriff's interlocutor of 24 February 2006 to the extent that the pursuer's fourth plea in law was sustained and decree was granted against the defender in terms of the pursuer's fifth crave for payment to the pursuer of a periodical allowance of £350 per month for a period of six months from the date of decree of divorce; of consent deletes finding in fact and law 4 and repels the pursuer's fourth plea in law; reserves all questions of expenses and appoints parties to be heard thereon in Lanark Sheriff Court on 17 January 2007 at 10.30 am.

 

NOTE:

 

Background to the appeal

 

1.             This is an appeal against the Sheriff's interlocutor of 24 February 2006. After hearing proof the Sheriff granted decree of divorce and held that the relevant date was 20 July 2002.

 

2.             The Sheriff found that as at the relevant date there was no matrimonial debt. The net value of the matrimonial property at the relevant date was £305,800. She found that the net value of the former matrimonial home, the defender's 25% shareholding in Hodge Plant Limited and the defender's director's loan was £252,432. She found that the source of the funds or assets used to acquire the former matrimonial home, the defender's 25% shareholding in Hodge Plant Limited and the defender's director's loan was derived from non matrimonial property, namely the family farming partnership of Messrs George Hodge Farms.

 

3.             During the marriage the defender was economically advantaged by the pursuer's non-financial contributions to the family partnership and to Hodge Plant Limited.

 

4.             During the marriage the pursuer was dependent to a substantial degree on the financial support of the defender. From the relevant date until December 2003 the defender alimented the pursuer at the rate of £500 per month, and thereafter by order of court from 15 October 2004 at the rate of £350 per month.

 

5.             The Sheriff found in fact and law that the net value of the matrimonial property should be shared fairly between the parties. A special circumstance existed justifying a sharing on a basis other than equality in respect of the net values of the former matrimonial home, the defender's 25% shareholding in Hodge Plant Limited and the defender's director's loan. Fair division of the net value of the remaining matrimonial property was an equal division. She found that to achieve a fair division of the net value of the former matrimonial home, the defender's 25% shareholding in Hodge Plant Limited and the defender's director's loan, a capital sum of £63,316 required to be paid by the defender to the pursuer. The net value of the remaining matrimonial property totalled £53,368 of which a one half share is £26,684. Accordingly total capital sum of £90,000 was to be paid by the defender to the pursuer. If the pursuer retained her own matrimonial property, valued in total at £20,549, the defender required to make an equalising payment of £69,451 to the pursuer.

 

6.             The pursuer had made a non-financial contribution to the family farming partnership and Hodge Plant Limited to the economic advantage of the defender, resulting in a financial imbalance in her favour. That imbalance was not fully corrected by the capital sum awarded. Accordingly the defender was found liable to pay to the pursuer an additional capital sum of £10,000.

 

7.             The pursuer required to adjust to the loss of financial support from the defender after divorce. The capital sum was insufficient to satisfy the requirements of section 8(2) of the Family Law (Scotland) Act 1985. To enable the pursuer to adjust to the loss of the defender's financial support the Sheriff held that the defender required to pay to the pursuer a periodical allowance of £350 per month for six months.

 

8.             The Sheriff made findings in fact and sustained pleas in law to achieve the settlement set out above. The net result was that, having found the net value of the matrimonial property at the relevant date to be £305,800, the Sheriff ordered that the defender should pay to the pursuer a capital sum of £79,451. The pursuer retained the items of matrimonial property in her name amounting to £20,549 and accordingly her share of the net value of the matrimonial property amounted to £100,000. The Sheriff heard the parties on a question of expenses and on 11 April 2006 the Sheriff awarded the expenses of the action to the defender.

 

9.             Against the interlocutors of 24 February 2006 both parties now appeal. Against the interlocutor of 11 April 2006 the pursuer appeals. To avoid any confusion, I shall refer to parties as "the pursuer" and "the defender" in this note. The pursuer appealed on the following grounds:

"1. The Sheriff erred in holding that there should be a 30% discount applied to the value of the defender's shareholding in Hodge Plant Limited on account of it being a minority shareholding. 2 The Sheriff erred in determining that the sum of £10,000 was sufficient to recognise the extent of the financial advantage conferred by the pursuer upon the defender during the course of the marriage. A sum of £20,000 should have been awarded. 3. The Sheriff erred in awarding the expenses of the proof against the pursuer. The action was not necessary."

 

10.         The defender appealed on the following grounds:

"1. The Sheriff erred in determining that the sum of £10,000 should be awarded to the pursuer for economic disadvantage suffered by her during the marriage. In particular she erred in considering that the sum awarded by way of capital sum under the provisions of section 9(1)(a) of the Family Law (Scotland) Act 1985 did not redress any economic imbalance and further in determining the issue with respect to the relative resources of the parties. 2. The period for which the periodical allowance should be payable should be less than six months."

 

11.         I deal with each ground of appeal in turn.

 

A. THE PURSUER'S APPEAL

 

1. The Sheriff erred in holding that there should be a 30% discount applied to the value of the defender's shareholding in Hodge Plant Limited on account of it being a minority shareholding which accorded no control over the company's shares to the defender

 

Submissions for the pursuer

 

12.         The Sheriff accepted, wrongly, in the submission of the pursuer, the evidence of the defender's expert valuer that should a discount be applied to the value of the defender's shareholding in Hodge Plant Limited, the appropriate discount was one of 30%. It was suggested that in coming to her determination, the Sheriff ignored the evidence of the defender, supported by that of his brother that the business of the company was pursued as a family business, where no decision was insisted upon without the agreement of all of the other family members who were shareholders. In effect, that evidence meant that the defender's shareholding, although a minority one, carried with it all the powers of a majority shareholding.

 

13.         One of the elements of the dispute was how best to value the 25% shareholding which the defender held in the limited company Hodge Plant Hire Limited at the relevant date. The background of the coming into being of the company was that it was the family who held the shareholding. Father, Mother and two brothers, one of which was the defender, each held 25% of the shares in the company. It had previously been carried on as a partnership. During the course of the marriage, for tax reasons, the plant hire part of the family business was incorporated into a limited company.

 

14.         It was important to note that this was a limited company and had formerly been a partnership. The implication was acknowledged by both sides that the limited liability company was conducted as a quasi partnership. This fact was conceded by both experts. The reason for the importance of this matter was that the Sheriff had chosen to rely on the expert evidence of the Chartered Accountant instructed on behalf of the defender who was versed in questions of share valuation. That expert took the view that the appropriate way in which the shareholding of 25% belonging to the defender ought to be valued at the relevant date was on the footing that a discount of the value of the shares ought to be applied to take into account that the shareholding represented a minority interest. The Sheriff set out her position on the evidence in paras 82 to 87 on pages 30 to 32. At para 87 the Sheriff opined:

"It was accepted that in reality the plant hire business was a quasi partnership despite the minority nature of the defender's shareholding. It was this factor that persuaded Mr Robb (the pursuer's expert) that a discount was inappropriate. However, here I accepted Miss Scott's (the defender's expert) reasoning. What was to be sold was a minority shareholding were the Articles of Association restricted the transfer ability of these shares and were silent as to the question of a discount. Miss Scott's evidence as I understood it was that in such a situation, including valuations for matrimonial provision on divorce, it was absolutely the convention to apply a discount. I was prepared to accept that evidence. It seemed to me that it would be contrary to commonsense to ignore the nature of the shareholding when arriving at a valuation for it."

 

15.         Counsel indicted that the issue of whether the 30% discount ought to be applied to the defender's 25% minority shareholding was one of great importance. The pursuer's expert's evidence was that no discount ought to have been applied to the valuation of the defender's shares. I was referred to the Family Law (Scotland) Act 1985 section 9(1) which sets out the principles which the court shall apply in deciding what order for financial provision, if any, to make. I was also referred to the Family Law (Scotland) Act 1985 section 10(1) which provides that the net value of the matrimonial property shall be taken to be shared fairly between the parties to the marriage when it is shared equally or in such other proportions as are justified by special circumstances, and to section 10(2) which provides that the net value of the matrimonial property shall be the value of the property at the relevant date. It was submitted that the court was required to consider what was meant by "value" in terms of section 10(2).

 

16.         I was referred to the case of Latter v Latter 1990 SLT which held that the appropriate way of deciding value is on the basis of a hypothetical sale of the assets involved at the relevant date between a willing buyer and a willing seller. Counsel for the pursuer referred me to the Sheriff's judgment as follows:

"18. In valuing the defender's 25% interest, Mr Robb proceeded on the hypothesis that the whole plant hire business was to be sold at the relevant date, by a willing seller to a willing buyer, because for a private company that is normally what would happen. In reality there was no market for small shareholdings in private companies. A prospective buyer of an unquoted company would want control of the whole company. In this case the memorandum and articles of association for the business were standard, and included the standard condition prohibiting a shareholder from selling his shares without the consent of the other shareholders/directors. If the defender's 25% share was to be sold in isolation, the consent of his brother and parents would be required. There would be no market for his share without that consent. Further, the defender's 25% share was not protected by any clauses in the memorandum and articles of association. There would be no market for a 25% shareholding unless the minority shareholder had rights protecting his position. If the whole business was to be sold, any restrictive provisions on the sale of a minority shareholder would not enter the calculation. Each shareholder would receive the same price per share on the sale. Thus having obtained a value for the whole Plant Hire business, Mr Robb then proceeded to quarter the value to arrive at a value of a 25% shareholder." 19. Although the defender's share was a minority shareholding, Mr Robb did not consider it appropriate to apply a further discount to reflect this. He conceded that it is often appropriate to apply a discount to represent the fact that a minority interest shareholding is being valued. A discount would be appropriate for a 25% shareholder who has invested in a company, but has no control over it. Such a shareholder could be forced out. However, the plant hire business, although a limited company at the relevant date, was really a quasi partnership between family members. It was a family business and he could assume there was consensus as to what was to happen in that business. In that situation a further discount to reflect the value of a minority shareholder was not usually appropriate. Although this approach did not take into account the possibility of a family fallout, Mr Robb was of the view that he had to assume a sale of the whole business to value the company at all. 20. The defender led as a professional witness Miss Judith Scott, CA, currently Director of Forensic Accounting with P B Stoy Hayward. She had specialised in forensic accounting for 12 years. Miss Scott's wide experience includes share valuation disputes and she has previously given evidence in the Court of Session and the Sheriff Court. Like Mr Robb, Miss Scott's remit was to provide a valuation of the defender's 25% interest in the plant hire business. She had access to various sources of information, as set out in her report, including meeting with the defender and Mr Stewart, the family accountant. 21. Miss Scott stressed that in any share valuation the objective was to value what a willing seller could sell his particular shareholding at, to a willing buyer. It was a hypothetical exercise, made more difficult in the case of an unquoted company, as here. She noted that although the plant hire business has a number of large customers, it has no written contracts and all work is secured on the basis of the business reputation and the defender's contacts. In addition, when the trade and assets were transferred from Messrs George Hodge Farms to the limited company on 31 January 2001 no value was attributed to goodwill, on the assessment by the family accountant that any goodwill was personal to the partners. 22. In valuing the defender's 25% shareholding in the plant hire business, Miss Scott began by consideration of all the valuation methods. She then considered the actual minority shareholding of 25% interest. She looked at the memorandum and articles of association and noted that the defender is restricted in his ability to sell his shareholding and in reality could only do so with the agreement of the other shareholders/directors. She then considered the value of that shareholding with reference to both the earnings valuation method and the net assets methods, before deciding that the net assets methods was the most appropriate."

 

17.         The Sheriff preferred the earnings valuation method (which was the pursuer's position) and not the net assets methods (which was the defender's position). However although the Sheriff accepted the pursuer's evidence regarding the method of valuation of the shares, she preferred the defender's expert on the question of a discount.

 

18.         As far as the question of the discount was concerned at para 30 the Sheriff stated:

"Miss Scott then considered whether any discount should be applied to the sum of £63,250. She stressed that the purpose of the valuation exercise was to arrive at the value that might arise on the hypothetical sale of the defender's shareholding, taking account of the rights attaching to it, by a willing seller to a willing buyer. The value of his shares, as opposed to the value of all the shares in the business, is what was relevant to matrimonial property. It could not be assumed that all the shares were to be sold. She had not previously come across Mr Robb's approach to valuation, where the hypothesis was that the whole company was to be sold, a value found therefore and the result quartered to arrive at a value of a 25% shareholder. The value of the whole business could only be in starting point in assessing the value of the minority shareholding. That was because the matrimonial asset was the 25% shareholding, not the whole business quartered. It was necessary to look at the rights attaching to the shareholding, as generally set out in the articles of association of any company. The question of quasi partnership also fell to be considered. A minority shareholding, unprotected by any provision in the memorandum or articles of association, was less attractive to a prospective buyer than a majority shareholder in the same business. In this case, there was no provision in the articles providing that a discount should not be applied. In the absence of such a provision Miss Scott presumed a discount should be applied in view of the minority nature of the shareholding and having regard to the case law. Like Mr Robb, Miss Scott was of the view that the plant hire business was a quasi partnership. However, in this case, based on her experience and a consideration of case law, she concluded that she should not take into account the quasi partnership nature of the plant hire business. In her view that was not relevant to a matrimonial valuation. What was relevant was the way in which one could conventionally value a minority shareholder where there were restrictions in the articles of association on the transferability of those shares. The articles did not say that the company was to be treated as a quasi partnership and were silent on the question of discount, Miss Scott's view was absolutely the convention to apply a discount to a minority shareholding."

 

19.         It was submitted on behalf of the pursuer that if the defender's expert had properly taken into account the principle she had just enunciated that the hypothetical sale was supposed to be on the footing that all the rights attached to the shares were to be sold with the shares, she would have come to the view that one of the rights that attached to these shares on the basis of the unchallenged evidence of the defender was that no decision on this company were ever taken without the agreement of all the shareholders. That was the position that was also spoken to by the defender's brother who also agreed the business was a family business and decisions were always taken unanimously or not taken at all.

 

20.         It was submitted that that evidence was fully consistent with the agreed position of the parties that the business operated as a quasi partnership. On the basis of the evidence, it operated on the basis of a partnership that had determined that all the partners had to be agreeable to any particular policy decision before that policy could be implemented by the company.

 

21.         It was submitted that that meant that on sale by a willing seller, a willing buyer would be purchasing his shares on the basis that they carried with them full rights of management control and thus the discount applied by the defender's expert should not be taken into account. Miss Scott had approached the valuation on the footing that, because the shareholding was a minority interest, without special protection in terms of the memorandum and articles of the company, then it carried with it no rights over the conduct of the company other than those which a shareholder may have in his capacity as a director.

 

22.         Considering the question of a hypothetical sale as proposed in Latter v Latter supra the question posed was why there should be considered to be removed from what was being sold some of the rights that the shares had in the hands of the defender. Why should it be that a purchaser intending to buy the shares should find them less valuable than they were in the hands of the defender.

 

23.         It was submitted that this was an unquoted company. The standard form of memorandum and articles entitled the directors of a company to veto the transfer of shares if they did not approve of the sale. This was what the experts meant when they made reference to the lack of value (or lack of market) of a shareholding in an unquoted company. On the face of it, such a prohibition, which occurred in the great bulk of unquoted companies in the memorandum and articles of association, would present an insuperable difficulty in coming to a valuation of any such shares as it could almost be said the none of the directors of a private limited company would sanction the sale of shares to someone outwith their family or to someone of whom they disapproved. It was suggested that this problem not only affected a minority shareholding, but also majority shareholdings.

 

24.         The hypothesis which the defender's expert was offering was that, without any special protection contained in the memorandum and articles, the minority shareholder was stuck with that situation. Both experts had attempted to arrive at a practical solution. I have already recorded the position of Mr Robb for the pursuer in para 7 of this note. He proceeded on the basis of the whole of the plant hire business being sold. It was submitted that it was important to appreciate what Mr Robb was trying to do with the otherwise insuperable problem that, without agreement of the other shareholders, no shareholding could be sold. His solution was to envisage the sale of the whole company by all the shareholders. That was why he concluded that, having obtained a value for the whole Plant Hire business, he merely proceeded to quarter that value to arrive at the value of a 25% shareholding. At para 19, which I have already set out in full, the Sheriff recorded why Mr Robb did not consider a discount was appropriate.

 

25.         It was submitted on behalf of the pursuer that to value the shares at all, the valuation required to be on the footing that none of the shareholders were going to object to the sale. The only question which arose in coming to a valuation of a minority shareholding was whether or not a discount required to be applied because the shareholding carried no control. It was submitted that what parties did know was that a shareholding did carry control because, from the evidence, it was clear that not only did each 25% shareholder carry weight with the other shareholders, but each shareholder in fact could exercise a de facto right of veto. The evidence was that no decision was made without the agreement of all four family members and shareholders.

 

26.         It was submitted that the defender's expert Miss Scott essentially agreed that this was a quasi partnership. She concluded that were the articles did not say that the company was to be treated as a quasi partnership and was silent on the question of discount. In the circumstances, in her view, it was absolutely the convention to apply a discount for a minority shareholding. With that conclusion the Sheriff agreed (para 87 page 32).

 

27.         It was further submitted that the Sheriff was in error in agreeing to the proposition that a discount should be applied to this minority shareholding because of the provisions of section 459 of the Companies Act 1985. Section 459(1) provides:

"A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act of omission on its behalf) is or would be so prejudicial."

 

28.         One of the powers which the court had been given was to order that a minority shareholding should be purchased by a majority shareholder on a pro rata basis. It was submitted there may be a situation where, by order of the court, shares could be sold, not only to a willing third party, but to the company itself or to the remaining shareholders. To achieve this, where the memorandum and articles did not facilitate such a transfer, the court could make such an alteration to the memorandum and articles of association and make such an order.

 

29.         It was submitted on behalf of the pursuer that the memorandum and articles of association of a company rarely disclose that a company is a quasi partnership and in circumstances where it is appropriate, the court has a wide ranging power to order the sale of shares to a variety of parties. While it was accepted that there was a convention that a discount should be applied in ordinary circumstances to minority shareholdings, that convention flew off in circumstances where the court was dealing with the valuation of what was essentially a quasi partnership. I was referred to the case of Re Elgindata Limited 1991 BCLC 959. In that case it was alleged that P had conducted the affairs of Elgindata in a way that was unfairly prejudicial to his and his wife's interests. It was held

"(1) R had a legitimate expectation that he would be consulted on policy matters relating to the company's affairs ... (2) in an appropriate case, it was open to the court to find that serious mismanagement could constitute unfairly prejudicial conduct"

 

30.         It was submitted that in a quasi partnership, if one of the shareholders wanted to sell, he was entitled to do so. If unfair prejudice was established thereafter, the purchaser would be able to apply to the court for any of the remedies set out in section 459 of the Companies Act 1985. The impression had been given to the Sheriff by Miss Scott on behalf of the defender that, as no protection was offered to the shareholder in the memorandum and articles of association of the company, the shares could only be sold at a discount and with approval of the other directors. It was submitted that applying the "hypothetical sale" test of Latter v Latter, one was entitled to take into account (a) no director would object and (b) the shares would carry all the benefits that they had in the hands of the defender.

 

31.         It was submitted that the basis on which the defender's expert had proceeded was that the minority shareholder had no protection. That was not correct. The court could intervene in appropriate circumstances. I was referred to Ebrahimi v Westbourne Galleries Ltd 1942 2 AER 492 at 500 where Lord Wilberforce said:

"It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights or to exercise them in a particular way." I was also referred to Saul D Harrison & Sons plc 1995 BCLC14 at 19 where Lord Hoffman said: "Thus the personal relationship between a shareholder and those who control a company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or company in general meeting ... It often arises out of a fundamental understanding between the shareholders which form the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company ..."

 

32.         It was submitted that the Sheriff had misdirected herself because Miss Scott's evidence was incomplete in its analysis of the appropriate treatment of discount. It was suggested that when the Sheriff referred to a restriction on the transfer of shares, either the restriction was taken into account or it was not. If it was taken into account, there would be no sale and no value as Mr Robb had said in evidence. If the restriction was not taken into account, then the shares could be sold to anybody. That was what Mr Robb was trying to say when he said that his approach was on the basis of the whole company being sold. That was a practical solution to the problem. Sheriff had said there should be a discount because the memorandum and articles where silent on the matter. It was suggested that this conclusion misunderstood why a discount should be applied at all and that the facts of this case militated against the operation of a discount. The memorandum and articles of association were silent on discount and silent on the question of control. Nevertheless, there was a remedy which could be available to the purchaser from the defender if he thought that, despite the minority nature of his shareholding, his control of the company was slipping away because he had been treated in an unfairly prejudicial manner. That remedy lay in terms of section 459 of the Companies Act 1985.

 

33.         It was further submitted the Sheriff had misunderstood the question of control when she said at para 87 at page 32:

"It seems to me that it would be contrary to common sense to ignore the nature of the shareholding when arriving at a valuation for it". It was suggested the Sheriff had ignored one important aspect of this minority shareholding which carried with it all the elements of control. This minority shareholding carried with it all the elements of control that one possibly could because the evidence indicated that no decision would be taken without the consent of all the shareholders.

 

34.         It was submitted that not only did the Sheriff err in making a discount, she further erred in applying the size of discount which she did. At page 33 para 88 she said:

"The amount of discount then had to be decided upon. As her starting point in assessing the appropriate level of discount, Miss Scott looked at the range of discounts from 50% upwards which the Inland Revenue commonly negotiate in the valuation of private company shares. I did not understand her to thereby attempt to assimilate this case with non-matrimonial share valuations. In this difficult area, the Inland Revenue information on discounts levels was the only information available and one had to start somewhere. Having considered the range, Miss Scott then took into account the circumstances of the plant hire business and the shareholding to be valued and arrived at a lower discount of 30%. I was prepared to accept that figure. I felt it was significant that Mr Robb's view was that if a discount was to be applied 20-25% was not unreasonable."

 

35.         It appeared that Miss Scott had used the evidence of Mr Robb as a stepping stone to reach her conclusion of 30%. However it was suggested there was no explanation as to why she chose a discount of 30%. It was submitted that Miss Scott did not appropriately explain how she went from 50% to 30%, which was the figure the Sheriff accepted. The Sheriff stated that she thought it significant that Mr Robb thought 20-25% was not unreasonable.

 

36.         I was invited, in light of the submissions which had been made, to hold that a discount was inapplicable. If I accepted that position, finding in fact 4(ii) should be altered to read:

"4. At the relevant date the matrimonial property comprised ... (ii) the defender's 25% shareholding in Hodge Plant Limited with a value of £67,500."

 

Submissions for defender

 

37.         The pursuer's accountant was of the opinion that the valuation of the defender's 25% shareholding should be valued at 25% of the valuation of the whole company. The defender's accountant was of opinion that a discount should be applied to the defender's 25% minority shareholding (para 30) and that the appropriate discount was 30% (para 31). It was submitted that in para 30 the Sheriff was talking about a convention in relation to the valuation of minority shareholdings for matrimonial purposes. The Sheriff was not saying that she had been told that there was an absolute convention as to how minority shareholdings are valued and that she was applying a discount. The Sheriff was dealing with the question of a quasi partnership and how to reach a valuation for matrimonial purposes. While the defender's accountant suggested an appropriate discount was 30%, the pursuer's accountant conceded, that if any discount was to apply, a discount of 20-25% for a 25% minority shareholding was not unreasonable (para 19 and 31).

 

38.         In considering whether or not any discount should be applied the Sheriff correctly determined that in valuing this item of matrimonial property, one is valuing the defender's shareholding on the hypothetical basis that the defender's 25% shareholding in Hodge Plant Limited was an item of matrimonial property which was being sold to a willing buyer. This hypothetical sale did not involve a proposed sale of the whole company. The Sheriff took into account the defender's evidence that the business was a family business, run on the basis of unanimity of decision and was in reality a quasi partnership (para 87). The Sheriff took into account the memorandum and articles of association. The Sheriff took into account that in all her experience in determining valuations for divorce purposes the defender's accountant had never come across the approach to discounts put forward by the pursuer's accountant, namely that the whole company was to be sold (paras 30 and 87). In determining that a discount should be applied, the Sheriff neither erred in law, nor did she take into account any irrelevant issues or fail to take into account any relevant issues. Counsel for the defender had referred to the remedies available for minority shareholders under section 459 of the Companies Act 1985. It was submitted that cases involving unfairly prejudicial conduct to minority shareholders were not relevant to the question of valuing a minority shareholding for the purposes of Family Law (Scotland) Act 1985. These cases dealt with company law. In essence particular remedies were available to ensure that a shareholding was sold on a pro rata basis where it had been established that there has been unfair prejudice suffered by a minority shareholder. It was submitted that this whole section of law did not apply until there had been unfairly prejudicial conduct. One could appreciate why such powers were given to the court if a minority shareholder wished to realise a reasonable value for his shareholding in the event of the minority shareholder having suffered unfairly prejudicial conduct.

 

39.         It was submitted that what the pursuer was seeking to do in this case was to have a value of a shareholding in a company made disregarding the articles of association. I was referred to Miss Scott's evidence at page 131/15 to 21:

"In a matrimonial case, it is my understanding that one looks at the shareholding to be valued and the rights attacking to it as set out in the articles of association. In this case those articles restrict the transferability of Mr Hodge's share ..."

 

40.         As far as the amount of the discount was concerned, I was referred to Miss Scott's evidence at page 105/14 of the notes of evidence:

"Q. In paragraph 7.4 you deal with the question of a discount of 30% ...? - A. Yes. Q. You mention a discount of 30%, did you give consideration to any other percentage discount in this case? - A. Yes. In share valuations undertaken for tax purposes and in situations where there are no considerations of quasi partnership, one would generally apply a much higher discount than 30% to a 25% interest ... So, depending on the circumstances of the case one could negotiate a discount of between 50 and 90% with the Inland Revenue in typical minority valuations. I have used the lower figure to take account of Mr Hodge's role in the business and his relationship with the other shareholders. So I have made some allowance for that factor."

 

41.         The Sheriff, in coming to the view that she considered a 30% discount appropriate, was accepting the evidence from an expert based on her experience of valuations. The Sheriff pointed out that she had taken some comfort, in assessing that figure on the fact that Mr Robb, the pursuer's expert, while he did not accept that there should be a discount, concluded that, if there was to be a discount, it should be of the order of 20-25%. It was submitted that the Sheriff's decision on the amount of the discount is based on the evidence of the defender's expert, Miss Scott and could not be said to be wrong.

 

42.         It was submitted, that the Sheriff, in coming to her decision on the value to be attributed to the defender's shareholding did so in a measured manner and was guided by both experts. Counsel pointed out that she had been unable to find any reported cases where minority shareholdings had been considered in matrimonial disputes. Counsel for the defender did not refer me to any such cases. It was submitted the Sheriff was entitled to rely on the expert evidence which she had received.

 

Decision

 

43.         Essentially there are three points which require determination by me in respect of the appeal against the Sheriff's holding that there should be a 30% discount applied to the value of the defender's shareholding in Hodge Plant Limited on account of it being a minority shareholding which accorded no control over the company to the defender. These are:

a. Does the fact that there was evidence that the defender had de facto control of the company because it was a quasi partnership and no decision was made without the agreement of all four family members affect the issue? b. Do the rights conferred on minority shareholders by section 459 of the Companies Act 1985 affect the issue? c. Was the Sheriff entitled to assess the discount at 30% and did she give appropriate reasons for that decision? I deal with these issues in turn.

a. Did the fact that there was evidence that the defender had de facto control of the company because it was a quasi partnership and no decision was made without the agreement of all four family members affect the issue?

 

44.         The shares in Hodge Plant Hire were held in equal proportions by the defender, his brother, his father and his mother. There was evidence that the business was run as a quasi partnership and no decision was made without the agreement of all four family members. It was suggested on behalf of the defender that, although the defender's shareholding was a minority one, it carried with it all the powers of a majority shareholding because nothing would be done by the family without the defender's agreement.

 

45.         The memorandum and articles of association of the company were silent on the question of voting rights, and from that it was to be assumed that voting would be in proportion to the shareholding. As I understand the argument for the pursuer this was irrelevant because in practice nothing was done unless the defender agreed. For this reason it was said that a willing buyer purchasing the defender's shares would purchase them on the basis that they carried with them full rights and management control and that the purchaser would be in the same position as the defender had been. It was suggested, as I understand it, that because the directors of the company were entitled to veto the transfer of shares, if they agreed to the transfer of shares, the purchaser would be in the same position as the defender had been.

 

46.         I do not accept that argument. The defender is a minority shareholder in Hodge Plant Hire Limited. He owes 25% of the shareholding. The memorandum and articles of association of the company do not give him any preferential position regarding control of the company or in the decision making of the company. The case of Latter v Latter supra makes it clear that the value of the shareholding should be on the basis of the hypothetical sale of the assets involved at the relevant date. I take the view that the assets involved in this case are clearly the 25% shareholding owed by the defender. I see no justification for the proposition put forward by the accountant for the pursuer that the valuation should be conducted on the basis of a hypothetical sale of the whole company. I agree with the Sheriff when she states at para 87 of page 32:

"It seems to me that it would be contrary to commonsense to ignore the nature of the shareholding when arriving at a valuation for it." In my opinion the Sheriff was entitled to accept the expert opinion of Miss Scott that the hypothetical sale envisaged in Latter v Latter supra involved the sale only of the defender's 25% shareholding and not the sale of the whole company.

 

47.         The value of the defender's 25% shareholding has to be determined in light of the nature of the shareholding. It is a minority shareholding. The defender has 25% of the voting rights in the company. When his shareholding is sold, albeit with the consent of the other shareholders, the purchaser will have the same voting rights as he has. Although the company is currently conducted on the basis of a quasi partnership and no decision is taken without the full agreement of all four family members, there is no legal requirement for that situation to continue on sale. I do not accept the position put forward by counsel for the pursuer that the position of the purchaser would be exactly the same as that of the defender in respect that no decision would be made without his consent. A purchaser would be a minority shareholder with a 25% voting right in the affairs of the company. I consider that the Sheriff was correct to take the view that a discount required to be considered in view of the minority nature of the defender's shareholding.

 

b. Do the rights conferred on minority shareholders by section 459 of the Companies Act 1985 affect the issue?

 

48.         It is perfectly true to say that a minority shareholder who has suffered from unfairly prejudicial conduct as the hands of the other members of the company can avail himself of the provisions of section 459 of the Companies Act 1985 and that, inter alia, the court could order a sale of a minority shareholding on a pro rata basis. However, such a remedy presupposes unfairly prejudicial conduct. That is a situation far removed from the making of ordinary decisions in the course of a company's affairs. In a business situation one could envisage many issues in which the view of the majority would prevail without a minority shareholder suffering unfair prejudice. I accept the submission made by counsel for the defender that cases involving unfairly prejudicial conduct to minority shareholders were not relevant to the question of valuing a minority shareholding for the purposes of the Family Law (Scotland) Act 1985. These remedies did not apply until there had been unfairly prejudicial conduct. I take the view that, in considering a valuation of the defender's 25% shareholding in Hodge Plant Hire Limited, it has to be recognised that the shareholding is a minority shareholding. While it is correct to say that if that minority shareholder suffers unfair prejudice in due course certain remedies are available to him in court, that is an entirely different matter from a recognition that in any issue which requires to be voted upon in regards to the affairs of the company, the minority shareholder would not have a controlling voice. I do not accept that the submissions by counsel for the pursuer under this head are relevant to the question of whether a discount should be applied to the value of the defender's 25% shareholding.

 

c. Was the Sheriff entitled to assess the discount at 30% and did she give appropriate reasons for that decision?

 

49.         When shares in a private limited company fall to be valued on the basis of a hypothetical sale between a willing buyer and a willing seller, the fact that the shareholding is a minority shareholding in my opinion must necessary result in a discount in the value of that shareholding. In this case the purchasers of the defender's 25% shareholding would have no control in decisions taken which affected the business of the company. In my opinion it is clear that that issue must be recognised by the value of the shares being discounted. It was said that the Sheriff erred in making a discount of 30%. It was said that the Sheriff had given no explanation as to why she chose a discount of 30%. It was further submitted that Miss Scott had not appropriately explained how she went from a discount of some 50% and upwards which was a discount applied by the Inland Revenue in valuation of private company shares to one of 30% in this case.

 

50.         In selecting a figure of 30%, the Sheriff accepted the expert evidence of Miss Scott on the matter. I have already quoted in para 34 of this note what the Sheriff said on the subject, but in essence Miss Scott's evidence was that she looked at the range of discounts from 50% upwards which the Inland Revenue commonly negotiate in the valuation of private company shares. Having considered that range, Miss Scott took into account the circumstances of the plant hire business and the shareholding to be valued and arrived at a lower discount of 30%. The Sheriff accepted that figure and considered it significant that Mr Robb's view was that if a discount was to be applied 20 to 25% was not unreasonable.

 

51.         This is a matter for the Sheriff's discretion. In my opinion it could not be said on the basis of Miss Scott's evidence that the Sheriff was wrong to select a discount of 30%. Indeed it would have been open to her on the evidence to select a higher discount. Regard required to be had to the fact that a third party buying into a family business and faced with three other directors who were all members of the family would, in all probability, find it very difficult to have his or her voice heard in any issue when it came to a vote by shareholders.

 

52.         I take the view that in the whole circumstances the Sheriff was entitled to reach the conclusion which she did on this subject. The exercise of her discretion in selecting a figure of 30% for the discount was, on the evidence neither wholly wrong, unwarranted, or unreasonable.

 

53.         For the reasons which I have set out, I reject the pursuer's first ground of appeal.

 

2. The Sheriff erred in determining that the sum of £10,000 was sufficient to recognise the extent of the financial advantage conferred by the pursuer upon the defender during the course of the marriage.

 

Submissions for pursuer

 

54.         I was referred to various sections of the Sheriff's note as follows:

"100. In short, the pursuer did make a non-financial contribution to the work of the farm and plant hire business, for which she was not paid. I accept that the defender was economically advantaged by this contribution. Had the pursuer not done this work it would fall to others to do in terms of time, effort and cost. In submissions the pursuer sought £20,000 for the economic advantage she had conferred on the defender by her unpaid efforts in the farm, farm business, and plant hire business. It was said she worked a good number of years one morning per week. If she had been paid £5,000 over four years she would have earned £20,000" "101. In relation to the dispute as to whether the pursuer suffered an economic disadvantage in relation to the interests of the defender, I note that although she described giving up her career when she married, she continued to compete in chosen events, train horses and teach privately throughout her marriage. ... In my view, none of that suggested that she was tied to the farm, or that her marriage stopped her progressing in her career because of her devotion to her husband and the family business." "109. Section 11(2) of the 1985 Act requires me to consider the extent to which the economic advantages or disadvantages sustained by either spouse have been balanced by the economic advantages or disadvantages sustained by the other. It is only where there is an economic imbalance in the applicants favour that an award can be made. The onus rests on the applicant to show such an imbalance. "110. I have to take into consideration the evidence that the pursuer's income from her jobs throughout her marriage was spent for the most part on her equestrian interests, although she bought the odd household item. The pursuer accepted that she would not be able to live the way she did, and maintain her two horses, without her husband's income. However, it was not suggested that the pursuer enjoyed a luxurious lifestyle. Moreover, I accept that keeping two horses played a large part in the pursuer's lifestyle and the daily expense thereof was in a large part met by her. "111. Taking all the circumstances into account I consider that there is an economic imbalance in the pursuer's favour in respect of the unpaid work she did for the farm and plant hire business, although not to the extent sought by her. I have to consider whether any economic imbalance is corrected by her share of the matrimonial property. Although the capital sum to be awarded is not in any sense insubstantial, in my view given the relative resources of the parties it is just that the pursuer be awarded an additional sum to redress the economic imbalance. I assess that additional sum at £10,000." "112. In my opinion, on the evidence the pursuer has failed to show an economic imbalance in her favour in respect of the economic disadvantage suffered by her in relation to her equestrian career, and I accordingly make no reward in this respect."

 

55.         It was submitted on behalf of the pursuer that the Sheriff had, in applying the correct test under section 11(2) failed to take into account and give any reason for rejecting the submissions made on behalf of the pursuer that, at the very least, £20,000 would represent an appropriate award for the economic advantage conferred on the defender by her working in connection with the defender's business.

 

56.         It was submitted that there were two concepts involved. (1) the value of the advantage conferred on the defender by the pursuer working for him on the farm and in connection with Hodge Plant Hire Limited and (2) the value of the disadvantage suffered by the pursuer in relation to her equestrian career. The Sheriff held that there had been no direct disadvantage to the pursuer.

 

57.         It was submitted there had been no explanation by the Sheriff for her arriving at the figure of £10,000. She did not set out how she had reached this conclusion. It was submitted that even conceding the "broad brush approach", she had done so after rejecting the pursuer's claim of disadvantage. It was submitted there required to be an explanation as to why the figure of £10,000 had been chosen. It was submitted the Sheriff had failed adequately to demonstrate that she had balanced the competing considerations of economic advantage sustained by the defender and the economic disadvantage suffered by the pursuer. What the Sheriff had done was that she had looked simply at the advantage of the unpaid work undertaken for the defender had produced to him, and dismissed the proposition that the pursuer may have suffered disadvantage in the pursuit of her equestrian career. The Sheriff had not, in any clear way, turned her mind to the balancing exercise that she required to carry out. It was suggested that the sum of £10,000 should be deleted and the sum of £20,000 inserted in respect of the economic advantage which the pursuer had conferred on the defender during the course of the marriage.

 

Submissions for defender

 

58.         The Sheriff had been criticised for not giving her reasons for awarding the pursuer £10,000 and not "at least £20,000" as submitted by the pursuer under this head of claim.

 

59.         It was submitted that there were two aspects of this claim, first the economic advantage sustained by the defender by the pursuer's work in the business during marriage and secondly economic disadvantage suffered by the pursuer by her alleged inability to progress, or hindrance at progressing, her equestrian pursuits during the marriage and after. The Sheriff did not accept that the pursuer had suffered any economic disadvantage as regards her lack of progress in the equestrian world or otherwise as far as her future career was concerned (para 101-108). The Sheriff did however find that the defender had been economically advantaged by the pursuer's contributions to the business (para 99-100). A sum of £20,000 was claimed for these contributions.

 

60.         It was submitted the Sheriff justified an award of £10,000 by "taking all the circumstances into account" and considering that there was an economic imbalance in favour of the pursuer "but not to the extent sought by her". There was no evidence presented of what would have been the cost incurred by the defender if he had had to employ someone to do the work done by the pursuer. The pursuer herself conceded that a "broad brush" approach was appropriate in dealing with claim under this head (para 107). In the circumstances the Sheriff decided that some award should be made in which she quantified the award under this head.

 

61.         She gave careful consideration at paras 99 and 100 to the factors which she required to take into account:

"99. in relation to the plant hire business, I accepted that from about mid 1999 until May 2002 the pursuer helped calculate the wages. I accepted Mrs Hodge's evidence that prior to April 2000, when the paperwork for the plant hire business was transferred from the farm house to a portacabin Mrs Hodge did the bulk of the books, including the invoicing, and the defender had very little involvement. From about April 2000 until the relevant date I accepted the evidence that the pursuer spent every Wednesday morning at the portacabin on the work of the plant hire business, giving up a morning's paid employment with Mrs Duncan to do so. I also accepted the additional time was spent by the pursuer in the course of week on the office work of the plant hire business although not to the extent contended by her. 100. The pursuer did make a non-financial contribution to the work of the farm and the plant hire business, for which she was not paid. I accept that the defender was economically advantaged by this contribution; had the pursuer not done this work it would fall to others to do in terms of time, effort and cost. ... If she had been paid £5,000 over four years she would have earned £20,000." She concluded: "111. Taking all the circumstances into account I consider that there is an economic imbalance in the pursuer's favour in respect of the unpaid work she did for the farm and plant hire business, although not to the extent sought by her. I have to consider whether any economic imbalance is corrected by her share of the matrimonial property. Although the capital sum to be awarded is not in any sense insubstantial, in my view given the relative resources of the parties it is just that the pursuer be awarded an additional sum to redress the economic imbalance. I assess that additional sum at £10,000." It was submitted that this was a reasoned decision and I was asked to uphold it.

 

Decision

 

62.         In connection with this ground of appeal I am satisfied that the Sheriff is entitled to take a broad approach to the issue. The Sheriff set out in paras 99 and 100 the circumstances in which the defender was economically advantaged by the pursuer working for him. The pursuer claimed one morning a week over four years would have earned her £20,000. The Sheriff held that from about mid 1999 until May 2002 the pursuer helped calculate the wages and that from April 2000 until the relevant date, 20 July 2002 the pursuer had spent every Wednesday morning on the work of the plant hire business and that she did spend some additional time in the course of each week in the office, although not to the extent contended by her. She held, on the evidence, that the pursuer had suffered no economic disadvantage in connection with her equestrian career. There was accordingly an economic imbalance.

 

63.         As the Sheriff correctly pointed, she had to consider whether that economic imbalance was corrected by the pursuer's share in the matrimonial property. The Sheriff concluded:

"Although the capital sum to be awarded is not in any sense insubstantial, in my view given the relative resources of the parties it is just that the pursuer be awarded an additional sum to redress the economic imbalance. I assess that additional sum at £10,000."

 

64.         In my opinion the Sheriff was entitled to take that broad view. No exact figures were available to allow her to calculate what sums the pursuer might have been paid by the defender. Four years at £5,000 per annum was merely the submission made on behalf of the pursuer. It was not supported by evidence and was not accepted by the Sheriff. The Sheriff took into account the capital sum awarded. She was perfectly entitled to take a broad brush approach on the basis of the evidence available to her and award an additional sum of £10,000 to redress the economic imbalance. In my opinion there is no merit in this ground of appeal.

 

3. The Sheriff erred in awarding the expenses of the proof against the pursuer

 

Submissions for pursuer

 

65.         It was suggested that, as far as the award related to the expenses of the proof was concerned, the award failed adequately to reflect the conduct of the parties. It was submitted that the expenses of the proof unfairly penalised the pursuer. The Sheriff said in her note:

"15. What is clear is that the defender made three attempts to settle this case and avoid a proof. The offers made, whether formal or informal could not be said to be unreasonable. The first of these attempts was an offer to settle at about £95,000. That offer was made an early as August 2003. When the pursuer's own items of matrimonial property amounting to some £20,000 are taken into account, that offer to settle would have seen the pursuer's share of the net matrimonial property at about £115,000. After proof, the pursuer's share of the net value of the matrimonial property was £100,000. Even on the basis of the first offer to settle, it could not be said that the pursuer "beat the tender" nor that she had enjoyed substantial success in the action, even on a broad brush approach. 16. So the defender made three attempts to settle this action an avoid a proof, and in the event, after proof, the pursuer was unsuccessful in financial terms. The pursuer had sought £26,000 for her claim for economic advantage/disadvantage in addition to half the net value of the matrimonial property. After a proof she was awarded about one third of the matrimonial property. Of course, it does not automatically follow that in a consistorial action expenses follow success. However, in deciding the question of expenses, these three attempts to settle, and the final outcome and in my view are very significant factors. 17. In addition I was satisfied that the defender had cooperated fully in meeting all requests for financial information made on behalf of the pursuer. I had to take into account the offers made by the defender to have the parties respective accountants negotiate on the question of business interests. On a reading of the letter of 8 February 2005 the first such offer must have been made before that date. By the date that the pursuer did not take up that offer, it seemed to me that at the very least an opportunity had been lost to foreshorten the evidence of the expert accountants. There were areas, for example, in relation to the figures for rent and directors remuneration where a compromise figure might have been reached. At the very most, an opportunity had been lost to avoid the evidence of the expert accountants altogether. 18. From memory the evidence of expert accountants took up the best part of a day's evidence 19. When I took all these matters into consideration it seemed to me fair and reasonable that the expenses of the proof should be awarded against the pursuer. Otherwise I found no expenses due to or by either party."

 

66.         It was first said that the Sheriff was incorrect to say that there was an opportunity to avoid the evidence of the experts. Their evidence took time and dealt with the issues of the method of calculation of the valuation of the minority shareholding and the question of a discount. It was submitted the Sheriff had gone too far when she stated that the expert testimony might have been avoided.

 

67.         As far as the offer of £95,368 made in the letter of 11 August 2003 was concerned, that was on the basis that the pursuer retained her own items of matrimonial property subsequently valued at £20,549 and each party bore their own expenses. The second offer of £105,000 made in a letter of 8 February 2005, after the action had been raised on the basis of the pursuer retaining £20,549 of her own items of matrimonial property and both parties paying their own expenses. There was a difference of view between counsel about whether any offer was made on the morning of the proof. I decline to get involved in that dispute. A third offer does not affect the Sheriff's reasoning. The sum awarded was substantially less than those offered on 11 August 2003 and 8 February 2005.

 

68.         It was said that the Sheriff had relied on the question of "beating the tender". It was submitted the emphasis in consistorial actions should be on the conduct of the parties. I was referred to the case of Adams v Adams 1997 SLT 150 where it was held that the decisive question was why the parties had to go to proof at all, and not the impact of an adverse award of expenses on the wife. I was referred to Lord Gill (as he then was) at page 151C-E:

"Section 22 of the Family Law (Scotland) Act 1995 abolished the rule that a husband was liable for his wife's expenses in a consistorial action. It does not follow that in such an action expenses must now follow success. The provisions of the 1995 Act are complex ... In applying these provisions the court has a wide discretion ... The court's approach to expenses must be more flexible that it would be in a simple petitory action ... In exercising its discretion as to expenses the court may take into account such matters as the reasonableness of the parties claims, the extent to which they have cooperated in disclosing, and agreeing of the value, their respective assets, and offers they have made to settle, the extent to which the proof could have been avoided and, of course, the final outcome." And at 151H "In my view, the decisive question is why the parties had to go to proof at all"

 

69.         It was submitted that the pursuer's claim was not so unreasonable as to be ill founded. The sums in respect of economic advantage and disadvantage were moderately stated and the Sheriff went some way to meet them. Parties had cooperated in lodging a joint minute. The real issue was the proper valuation of the minority shareholding. There had been offers to settle. The judgment involved materially a question of an appropriate interpretation of two experts views. The pursuer had been guided by her expert in going to proof. As far as the conduct of the parties was concerned, it was submitted that the pursuer's conduct was not so extraordinary or, on the advice of her advisers, so misplaced as to visit her with the expenses of the proof which had lasted for six days and was a very considerable financial penalty to the pursuer.

 

70.         As far as the extent to which the proof might be avoided, it was submitted that the proof required to proceed because the experts had to give evidence about their differing approaches. There was a technical issue at the heart of the proof, that of valuation of the shares and the question of the discount. The pursuer was partially successful as the Sheriff had accepted the pursuers calculation of the valuation of the shares.

 

71.         The decisive question was to why the parties had to go to proof. As far as the pursuer was concerned, she was guided by her expert. He stood by his views and, if accepted, they would allow an award higher than the highest offer made by the defender. There was £20,000 difference between the share valuations. They were finely balanced judgments involved in which the defender had to seek advice. It was suggested that in these circumstances it would have been appropriate for no expenses due to or by either party to have been awarded in respect of the proof. The pursuer was entitled to go to proof. With Adams the question was whether the proof required to take place. It was suggested this proof required to take place because of the experts' evidence.

 

72.         It was submitted that the Sheriff had failed to take into account the reasonableness of the pursuer's claim and failed to appreciate that the value of the assets was a matter for professional interpretation. It was submitted the Sheriff had paid too much attention to the offers to settle. It was submitted that in the whole circumstances the proof could not have been avoided. It was submitted that there had been a wrong exercise of discretion by the Sheriff as far as this decision was concerned.

 

Submissions for the defender

 

73.         Counsel for the defender emphasised that any award of expenses was a matter for judicial discretion. I was referred to the judgment of Lord Ordinary (Lord Gill) in the case of Adams v Adams (No 2) 1997 SLT 150. Therein the Lord Ordinary pointed out that in a consistorial action it does not follow that expenses must follow success. At page 151E the Lord Ordinary stated:

"In exercising its discretion as to expenses the court may take into account such matters as the reasonableness of the parties' claims, the extent to which they have cooperated in disclosing and agreeing on the value of their respective assets, the offers they have made to settle, the extent to which proof could have been avoided, and, of course, the final outcome." In the case of Adams the decisive question was found to be why the parties had to go to proof at all.

 

74.         It was submitted that it was of significance that in a letter dated 11 August 2003 a capital sum of £95,368.07 was offered. This offer was on the basis that the pursuer retained her own items of matrimonial property, amounting to some £20,549 and that she discharge any claim for periodical allowance.

 

75.         The divorce action was raised in September 2004 and by letter dated 8 February 2005 a capital sum of £105,000 was offered, again on the basis that the pursuer retain her own matrimonial property and that she discharge any claim for periodical allowance.

 

76.         The pursuer was awarded £79,451 on the basis that she retained her own items of matrimonial property of £20,549.

 

77.         It was submitted by counsel for the defender that the pursuer had been awarded far less than she was offered some three years previously.

 

78.         In addition counsel for the defender emphasised that the conduct of the defender throughout had been proper. There had always been a full and frank discussion about the extent and nature of matrimonial property. In a letter of 8 February 2005 the defender offered a joint meeting between the parties' solicitors and accountants to discuss the business interests. The offer to have both accountants meet was repeated in a letter of 8 June 2005. In October 2005 there was a joint meeting between the instructing solicitors. It was envisaged that the meeting would also be attended by both parties' accountants. The defender's accountant attended, but the pursuer's accountant did not. The submission on behalf of the defender was that only the expenses of the proof should be awarded to the defender. It was submitted that the Sheriff had exercised her discretion in an appropriate manner and in particular she had regard to all the relevant issues as discussed in the case of Adams v Adams (No 2) supra. It had been said on behalf of the pursuer that the Sheriff had failed to exercise her discretion in two ways namely (a) the award failed to reflect the parties' conduct adequately and (b) the award of expenses at the proof unfairly penalised the pursuer.

 

79.         As far as (a) the conduct of parties was concerned, it had been submitted for the pursuer that the pursuer's conduct was not so extraordinary for her to bear the consequences of the proof. It was submitted that the main issue regarding expenses was why the parties had to go to proof at all and not whether or not the pursuer could be criticised on how the litigation was conducted. The defender sought the expenses of the proof not on the basis that the litigation had not been conducted expeditiously on behalf of the pursuer. In the submission on behalf of the defender the issue of the pursuer's conduct was not relevant. The defender's position was that the pursuer was adopting an unreasonable position because she refused at least two offers to settle the action. The question of the pursuer's conduct was addressed to the Sheriff and she considered the matter. As far as (b) was concerned, the question of the award of expenses unfairly penalising the pursuer I was referred to the case of Adams supra. In that case it had been submitted that an adverse award of expenses could seriously deplete the capital sum awarded to the pursuer and would cause her financial stress in respect of paying school fees. The Lord Ordinary concluded at page 151F:

"I do not regard the impact upon the pursuer of an adverse award of expenses as a decisive consideration in this case. In my view, the decisive question is why the parties had to go to proof at all."

 

80.         While counsel for the defender did not go so far as to say that the question of penalising the pursuer was irrelevant, it was nevertheless not one of the most important considerations a judge should consider when considering all the issues relevant to the question of expenses. In reality the pursuer in this case had been awarded a capital sum of £80,000 which was ready to be paid over in cash so she would have more than sufficient capital to meet any award of expenses.

 

81.         The Sheriff had regarded three matters of importance: (1) The fact that the defender made three offers to settle, the first by letter dated 11 August 2003 in which he offered to pay a capital sum of £95,368, the second by letter dated 8 February 2005 by which he made an increased offer of a capital sum of £105,000 and the third on the morning of the proof. As I have said, there was a difference of opinion between counsel as to whether a third offer was made on the morning of the proof. I take the view that the Sheriff reasoning applied equally to the other two offers. The Sheriff awarded a capital sum of £79,451 and a periodical allowance of £350 per month for a period of six months (amounting to £2,100). Accordingly the defender had offered to pay the pursuer substantially more than she was actually awarded some three years before the proof. (2) The fact that the defender cooperated fully in disclosing his assets. (3) The fact that the defender sought to narrow down the issues in dispute, by suggesting that the two accountants instructed by the parties should meet, an offer which was not taken up by the pursuer's agents.

 

82.         It was further submitted by counsel for the defender that the main issue in dispute was the source of funds argument. There was a presumption that net matrimonial property should be shared equally. The defender argued in this case that certain items of matrimonial property derived from non-matrimonial property and accordingly there were special circumstances whereby, in this case a fair division of matrimonial property was not on an equal basis. The Sheriff held that the total matrimonial property was £305,000 and that special circumstances applied to £252.432 of it. These related to the net value of the former matrimonial home, the defender's 25% shareholding in Hodge Plant Limited and the defender's director's loan. In that regard the defender had been totally successful in his argument. The two written offers took into account the source of funds argument.

 

83.         Further there was a dispute about the extent of the matrimonial property. The pursuer had claimed that the defender had taken money out of the plant hire business to the farm business despite her objections. She said that there was a £100,000 payment on one occasion and a further payment of £157,000. The pursuer had also raised issues about how the defender financed his motorbike hobby. Despite all these matters, the Sheriff accepted the evidence that the defender had met all requests for financial information made on behalf of the pursuer and that the defender's motorbike hobby was operated with funds which passed through the parties' joint account. The defender had been successful in this aspect of the case.

 

84.         This was a discretionary decision and it could not be said that the Sheriff was unreasonable or plainly wrong.

 

Decision

 

85.         In my opinion the Sheriff has approached the question of expenses in a perfectly appropriate way. The award relates only to the expenses of the proof. Each party is required to bear their own expenses prior to the proof. She has had regard to the case of Adams v Adams (No 2) supra and considered all the relevant issues discussed in that case. The Sheriff has set out her reasoning very clearly in her note. She has noted in particularly the issues set out in Adams of the reasonableness of the parties' claims, the extent to which they had cooperated in disclosing and agreeing on the value of the respective assets, the offers they had made to settle, the extent to which proof could have been avoided and the final outcome. In particular she addressed the important question set out in Adams of why the parties had to go to proof at all. It is clear that the defender made an offer to settle by letter dated 11 August 2003 by payment of a capital sum of £95,368. This was to be on the basis that the pursuer would retain the items of matrimonial property in her name, subsequently valued by the Sheriff at £20,549, and that each party would bear their own expenses. Secondly an offer was made by letter dated 8 February 2005 of £105,000 on the same basis after the action had been raised. In fact the Sheriff awarded a capital sum of £79,451 with a periodical allowance of £350 per month for a period of six months, amounting to an additional £2,100 again on the basis that the pursuer would retain the items of matrimonial property in her name of £20,549. As the Sheriff put it, even on the basis of the first offer to settle, it could not be said that the pursuer "beat the tender" nor that she had enjoyed substantial success in the action, even on a broad brush approach. The Sheriff, as she was entitled to do, clearly attached great significance to the attempts made by the defender to settle the case.

 

86.         The Sheriff also was satisfied that the defender had cooperated fully in meeting requests for financial information made on behalf of the pursuer and making offers to have the parties' respective accountants negotiate on the question of business interests. These offers were not taken up.

 

87.         There were also the factors raised before me by counsel for the defender, namely that one of the main issues at the proof was the source of funds argument which resulted in the Sheriff finding that special circumstances applied to the value of the matrimonial home, the defender's 25% shareholding in Hodge Plant Limited, and the defender's director's loan amounting to £252,432.

 

88.         On the question of whether it was necessary to go to proof at all, in my opinion the Sheriff was entitled to take the view she did. She was further entitled to proceed on the basis that the defender achieved substantial success in the action. As far as the submission that the award of expenses unfairly penalised the pursuer is concerned, the fact of the matter is that the pursuer would be paid about £80,000. There is no question of the pursuer being unable to meet the expenses. Lord Gill stated in the case of Adams v Adams (No 2) supra at F:

"I do not regard the impact upon the pursuer of an adverse award of expenses as a decisive consideration in this case."

 

89.         In the whole circumstances, I take the view that the decision which the Sheriff reached was one which she was well entitled to take. In my view it could not be said that she had exercised her discretion wrongly, nor that her decision was wholly unwarranted, manifestly inequitable, or unreasonable. It was a reasoned decision taken on the basis of the information available to her and in conformity with the law as set out in the case of Adams v Adams (No 2) supra.

 

B. CROSS APPEAL ON BEHALF OF THE DEFENDER

 

1. The Sheriff erred in determining that the sum of £10,000 should be awarded to the pursuer for economic disadvantage suffered by her during the marriage. In particular she erred in considering that the sum awarded by way of capital sum under the provisions of section 9(1)(b) of the Family Law (Scotland) Act 1985 did not address any economic imbalance and further in determining the issue with respect to the relative resources of the parties

 

90.         The Sheriff dealt with the award of £10,000 to the pursuer under this head in para 111 where she noted:

"Although the capital sum to be awarded (to the pursuer) is not in any sense insubstantial, in my view given the relative resources of the parties it is just that the pursuer be awarded an additional sum to redress the economic imbalance."

 

91.         It was submitted, that in terms of section 8(2) of the Family Law (Scotland) Act 1985 an award for financial provision must first, be justified by one of the principles in section 9 of the Act, and secondly be reasonable having regard to the resources of the parties. It was suggested this involved a two stage test. In considering the parties relative resources in arriving at an award of £10,000 the Sheriff erred in law. The parties resources were only relevant to the second stage of the test. They were irrelevant in relation to the issue of justifying an order sought under section 9(1)(b) of the Act. It was submitted that the form of the Sheriff's judgment suggested that she took into account the relative resources of the parties in deciding to make an award of £10,000. She ought to have made an award on the basis of the principle set out in section 9(1)(b) of the Act, and thereafter determined whether it was reasonable having regard to the resources of the Parties.

 

92.         It was suggested that the court could not make any greater award than would be justified by the principles in section 9 of the Act, although it could make a lesser award if only a lesser award would be reasonable having regard to the parties' resources. I was referred to the case of Latter v Latter supra where Lord Marnoch said at 807F:

"The first of these was that under section 8(2)(b) of the Act I could increase any capital sum beyond what I considered justified by the principles set out in section 9 of the Act. In my view this proposition derives from the word "and" and its plain conjunctive meaning, a construction of which, at least initially, counsel for the pursuer expressly disavowed. In the event, I am clear, that I can do no such thing and that section 8(2)(b) can only operate to cut down any sum, otherwise justified, having regard to the current resources of the parties."

 

93.         I was asked to amend finding in fact in law 4 on page 4 of the Sheriff judgment to read:

"The pursuer made a non-financial contribution to the family farming partnership and Hodge Plant Limited to the economic advantage of the defender, resulting in a financial imbalance in her favour. That imbalance is fully corrected by the capital sum awarded above." This would mean that the pursuer would not receive the additional capital sum of £10,000.

 

Submissions for the pursuer

 

94.         Counsel for the pursuer submitted that a narrow construction had been applied to the language which the Sheriff had used. It was suggested that when one read para 111 in its totality one could reasonably say that the Sheriff was taking all the circumstances into account. I was also asked to look at para 122:

"As I understood the submissions for the defender, there was no issues as to the adequacy of the defender's resources to meet the capital sum and periodical allowance." It was clear that the Sheriff was saying that there was no issue regarding the adequacy of the defender's resources to meet any award so she left that out of account. However, mindful of the obligation not to make an award which is not justified in terms of the principles set out in section 9(1) of the Act and not capped by any argument on resources, she decided to make an award of £10,000.

 

95.         Counsel for the pursuer submitted that the Sheriff had applied her mind to the double test of (a) was the payment justified by the principle set out in section 9(1)(b) of the Act and (b) was it reasonable having regard to the resources of the parties. Only if both tests were met could she make award. It was submitted the Sheriff had not misdirected herself. A proper construction of her reasoning and use of language in para 111, when read with para 122, was that she came to the view that there was an economic imbalance in the pursuer's favour. She considered that economic imbalance was not corrected by the pursuer's share of the matrimonial property. She noted that although the capital sum to be awarded was not any sense insubstantial, it was just that the pursuer would be awarded an additional sum of £10,000 to redress the economic imbalance. It was clear from para 122 that there was no issue as to the adequacy of the defender's resources and she accordingly decided to make the award. It was suggested that the Sheriff was correct in this approach.

 

Decision

 

96.         I am prepared to give effect to the interpretation of the Sheriff's words in para 111 urged upon me by counsel for the pursuer. The words should not be taken in isolation. I have regard to the Sheriff's statement at para 122 that there were no issues as to the adequacy of the defender's resources to meet the capital sum and periodic allowance.

 

97.         The Sheriff held that there was an economic imbalance. She then had regard to the capital sum which she had awarded which she noted was not insubstantial. I consider that in all the circumstances she was entitled to take the view that the imbalance would be corrected by a further payment of £10,000 to the pursuer. She found that the defender had the resources to make such a payment. I accept the Sheriff's reasoning as set out in her note as to how she arrived at the figure of £10,000. In my view she approached the question of financial provision as she was required to do in terms of section 8(2) of the Family Law (Scotland) Act 1985. She exercised her discretion by deciding that, having regard to the capital sum awarded and the nature of the economic imbalance between the parties, the economic imbalance would be corrected by a payment of £10,000. That was a figure which the defender was able to afford. In my opinion that was an approach that the Sheriff was entitled to take. I reject this ground of appeal.

 

2. In light of the pursuer's appeal against the Sheriff's decision and the defender's continuing payment of interim aliment, the period for which a periodical allowance should be payable should be less than six months

 

98.         The defender has been paying interim aliment of £350 per month since the Sheriff's interlocutor on 24 February 2006. In fact since the proof the defender has paid a total of £3,850, whereas in terms of the Sheriff's interlocutor he was only obliged to pay six months at £350. It was suggested that finding in fact and law 5 should be deleted and that the pursuer's fourth plea in law should be repelled. This was conceded by counsel for the pursuer.

 

Conclusion

 

99.         In the event I have refused the three separate grounds of appeal on behalf of the pursuer. I have refused the first ground of appeal in respect of the cross-appeal for the defender. The second ground of appeal is allowed of consent.

 

100.     I have, as requested, reserved the question of the expenses of the appeal and I have fixed a hearing. It is perhaps appropriate to record that this appeal lasted over two days for a total sitting time of 71/2 hours. Three quarters of an hour of that time were taken up with the consideration of the cross-appeal. I would say at this stage that I am prepared to certify the cause as suitable for the employment of counsel. Parties stated that they would endeavour to agree expenses when the result of the appeal was known. If this did not prove possible and the hearing required to proceed, it was agreed that parties' solicitors would appear.