Category: Family Law

In a financial remedy claim following divorce the court can obviously only deal with property that belongs to one or both of the parties. Property that actually belongs to someone else is not part of the claim. As might be imagined, it is a common scenario that someone other than the husband and wife, often another family member, claims to own property that would otherwise be subject to the claim. In such a case, the court must decide as a preliminary issue who actually owns the property, before it decides the financial remedy claim itself.

That was the task facing Mr Justice Mostyn in the recent case Rothschild v Charmaine De Souza.

Now, before I describe the case I should explain that its facts are a little complex, as they often are when family businesses are involved. I will therefore be simplifying the facts of the case for the purpose of this post, to make it easier to follow. In particular, I will assume that there was only one business throughout the history of the case, whereas in reality there were several businesses.

The case revolved around who owned the family business. Was it owned by the husband and the wife equally, as the relevant paperwork suggested, or was it actually owned by the husband’s mother, as she claimed?

The business, a company, was incorporated in 1999. Its two issued one-penny shares were transferred from the formation agents to the husband and the wife. Thereafter all of the documentation relating to the company, including documentation signed by the husband, indicated that it was held 50:50 by the husband and the wife. Certainly, the husband did not, in any of that documentation, indicate that the true owner of the business was his mother.

The marriage broke down and the parties separated in September 2016. Divorce proceedings then ensued, along with financial remedy proceedings.

Within the financial remedy proceedings the husband was required to prepare a financial statement (‘Form E’), setting out details of his finances, including all of his assets. A draft of the Form E was delivered in April 2017, and this was the first time that the husband asserted that the business was owned by his mother. His mother was made a party to the proceedings and, as explained, the issue of the true ownership of the business fell to Mr Justice Mostyn to decide.

Perhaps the most interesting part of Mr Justice Mostyn’s judgment is the initial section (paragraphs 1 to 7), in which he explains his task, and how the court goes about deciding what he called (using a term that a lay person would understand) who ‘really owned’ the company. If you would like a plain-English introduction to what can be a horrendously complex area of law then I would recommend that you read those paragraphs. It all boils down to the difference between being a ‘formal owner’ (i.e. the owner according to the documentation, for example the deeds, in the case of land) and the real owner – it is quite often the case that, for various reasons, the two people are quite different.

In fact, Mr Justice Mostyn’s task in this case was not that difficult (or at least that’s how his judgment reads to someone who has never sat in judgment of anyone or anything!). The evidence clearly pointed to the business being owned equally by the husband and the wife. Mr Justice Mostyn listed examples of facts indicating that the business had been treated and represented as being in the ownership of the husband and wife (at paragraph 23 of his judgment). He called the list a ‘formidable catalogue’. In other words, they very strongly pointed in the direction of the business being owned by the husband and the wife.

Faced with this unpleasant truth, the husband’s mother turned against her son, alleging that he had ‘gone rogue’, by holding himself out as the owner of, and dealing with, her property, when he had no authority to do so. Mr Justice Mostyn was having none of it: the husband had not gone rogue, in asserting to the world, including to tax authorities, and moneylenders, that he was, with the wife, the real owner of the business – he was speaking the truth. In any event, if they did not have any interest in the business, why would the husband and the wife have devoted their working lives to it?

Accordingly Mr Justice Mostyn concluded as follows:

“My very clear and strong finding on the evidence is that, at least from the time of the creation of the [company], it was the common intention of [the husband] and [the wife] that the business … would be owned 50:50 by them. [The husband’s mother] knew of this and went along with it.”

He therefore made an order declaring that the business belonged to the husband and the wife in equal shares.

His full judgment can be read here.

The post Husband’s mother fails in claim that she was the real owner of the business appeared first on Stowe Family Law.

Divorce, whatever the circumstances, can be a tricky business but when a family or one of the partners runs their own business, things can be even more complicated.

One of the first stumbling blocks is working out an accurate valuation of the business. You cannot look at the division of a business without an understanding of its value.    

So, we asked Mark Heppinstall from the Stowe Family Law office in Ilkley, who is regularly instructed by business owners, or the spouses of business owners, to join us to explain the best way to get an accurate valuation.

“I am often asked by my clients whether there is a need to have any sole or shared business valued in the event of a divorce or separation.

To answer this, people need to understand that a business is something that can be considered by the Court as one of the financial resources that are available in a case, irrespective of whether the business is considered a matrimonial or non-matrimonial resource.

How to value a business

If a valuation is needed, in matrimonial cases it will usually be undertaken by a single joint expert acting on behalf of both parties. However, before instructing an expert, there are certain steps that should be taken first.

There should be consideration of full business accounts for the last two financial years, which applies to sole traders as much as it does to partnerships, LLP’s or shareholders in limited companies.

If a business is incorporated, abbreviated accounts can often be accessed online from Companies House. This contains easily accessible information that either party can review digitally at the touch of a button.

Whilst a useful overview, these are no replacement for full company accounts, which are usually much more informative and should include the full profit and loss account, balance sheet, detailed notes to the accounts and reports on behalf of the accountants and directors.

This information gives more context to the performance of a business than publicly accessible abbreviated accounts. Unsurprisingly, abbreviated accounts tend to be more concise and therefore might only tell part of the story.

A word of caution, it is worth bearing in mind that by the time business accounts or financial statements are available the data may be historic and could be out of date. Therefore, it is worth cross-checking this information against more current management accounts. This can help give both parties more confidence in a valuation and enable them to make more informed decisions without the need to instruct an expert.  

Additionally, if I am acting for a client who has an interest in a business, I often advise them to obtain a letter from their accountant to comment upon its value, which can assist in narrowing the issues in dispute. This can really help, although the flip side is that the spouse may be wary about relying on a company accountant’s valuation unless there is corroborating evidence from a single joint expert. Nevertheless it can help to explain how the valuation of the client’s interest in the business has been assessed.

I commonly see this if there is disagreement about how the business has been valued, or in cases where a spouse is less familiar with the business, which sometimes means they have less confidence in the accountant’s interpretation of its value.

If you cannot agree, how can the court help?

In most cases, after taking the above steps it is possible for an agreement on valuation to be reached. However, where this is not possible, the Court’s expectation is that expert evidence should be considered from a single joint expert instructed by both parties.

The question for the Court is whether it is necessary to instruct an expert.  If the Court is satisfied that an expert should be instructed, common practice is to instruct an independent accountant with no prior knowledge of the company in question. Although it would be expected that they should have sufficient knowledge of the market or sector in which the business operates.

Strictly speaking, there is no mandatory requirement for the Court’s permission to be obtained before an expert is instructed. However, permission is needed before expert evidence can be put before the Court.

If there is a dispute about whether to instruct an expert, this should be addressed at an early stage in a Court timetable and ideally no later than the first hearing. The Court will weigh up the cost and delay of instructing an expert against the potential value of a party’s interest in the business and the relevance of this in the context of the other matrimonial assets available.

The scope of an expert’s instruction should be carefully considered and could include the value of a spouse’s interest in a business, the extent to which this value is realisable (i.e. liquidity), the future maintainable income of the business and any tax consequences associated with a sale or disposition.

I often remind my client’s that the value of a business should be treated with caution and it is not realistic to compare a business valuation to property or other matrimonial assets.

Property is generally easier to value, easier to sell and convert to liquid capital and therefore more readily realisable. Business valuations are generally more uncertain, there is greater potential for change, they are typically regarded as more risk-laden and the sale of a business might affect a party’s earning capacity or future income; unlike the sale of a property.

The bigger financial picture

In view of this, clients should bear in mind that it can be misleading to treat a spouse’s interest in a business as a capital asset in isolation. Sometimes, it makes more sense to consider the income a spouse can draw from a business, which can be relevant when considering maintenance. Maintenance that could well be guillotined if a client was forced to sell their interest in a business to realise it’s capital value.

What is clear is that there is no one size fits all approach and each case will be based on its own facts. Sometimes a valuation from a single joint expert can really help, but all too often parties can jump to this starting point without first taking sensible and proportionate steps to consider whether this is necessary.”

Get in touch 

If you are separating from your partner and either you or your spouse hold an interest in a business, it is important to take early advice tailored to your specific circumstances.

At Stowe Family Law we work closely with our in-house forensic accountants to ensure that all bases are covered in this respect.

If you would like to get in touch with Mark you can email him at  [email protected] or please do contact our Client Care Team at the details below.

The post Tricky business: How do you work out what the family business is worth? appeared first on Stowe Family Law.

In any type of litigation the parties may obviously be aggrieved by a decision of the court that goes against them. However, in family litigation the sense of injustice can go much deeper, especially where children are involved. It can reach such a point that the aggrieved party may seek redress outside of the court, which they see as biased against them.

This is nothing new. Aggrieved litigants have always gone to the media to try to gain support for their case. However, more often than not of course the media are not interested, or not prepared to get involved. What has changed in recent times is that other avenues of redress have opened up for the aggrieved litigant.

I am talking, of course, about social media, whether Twitter, Facebook, blogging, YouTube or some other form. Social media has given the aggrieved litigant a potential audience beyond anything that could previously have been imagined. And there are few limitations upon what can be said on social media. Better still, you can reach that audience with great ease, by writing a few words, or by just posting a video, all from the comfort of your own home. But that ease of use can be a problem: without the ‘filter’ of having to go to the media, litigants can often get themselves into trouble before they have had a chance to consider the implications.

Obviously, the actual audience may often initially be quite small, limited to those friends and family who follow your social media account. But it doesn’t take much knowledge to widen the audience significantly, by reaching out to others with a similar grievance. And then those others only need to click a button to spread the word to their own followers. Soon your story might be known by thousands of like-minded people.

It all seems such a wonderful idea. With a few words and a few clicks of a mouse you can gather an army of supporters, ready to tackle the injustices of the biased family courts.

But this road is fraught with dangers, and it will almost certainly not provide you with the result you seek. Instead, it is only likely to damage your case, possibly fatally.

The first and obvious point to make is that the court is likely to take an extremely dim view of a party who uses social media in an attempt to undermine the authority of the court. This could well influence future decisions made by the court.

The second point to make is that children involved in family court proceedings should usually not be identified. And that also means that it should not be possible to do a ‘jigsaw’ identification, by giving sufficient details to enable them to be identified even if they are not actually named. Courts are likely to penalise anyone identifying a child involved in family proceedings.

Note that even if you use social media anonymously and do not identify any of the parties involved, there is still a very high chance that your reader/watchers/listeners (or some of them) will be able to work out who you are. It isn’t worth the risk.

And the final point I wish to make is a non-legal one. Think of the effect upon your child of what you are doing. Do they want to be at the centre of a social media storm? Do they want the intimate details of their family life exposed to public scrutiny? And remember what you are doing may deepen the rifts within their family, leaving them with scars that may remain for the rest of their lives.

Let me be clear: unless the court has expressly forbidden you from discussing your case with anyone at all, you are not expected to keep entirely silent. It is quite normal to discuss a family case with other members of your family, or close friends. In fact, such discussions can be very useful, acting both as a relief valve and a support at an extremely stressful time in one’s life (best though to ignore any ‘legal’ advice from friends and family). But you should only of course discuss your case with people that you can trust not to discuss it with others. Being impersonal, social media doesn’t usually have that protection.

The moral of the story is very simple: the only safe course is not to mention or discuss your case on social media. Don’t be tempted to rush to your computer as soon as you get back from court: think about the implications of what you are about to do.

I realise that all of the above will have been said before, including by me. But it clearly needs to be repeated. Increasing numbers of parents are continuing to fall into the trap of taking their case to the court of social media, rather than concentrating on the only court that matters: the Family Court.

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