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With over 800,000 businesses incorporated in the UK every year, it is no surprise that business assets and in particular the disposal of business interests are often a significant issue when dividing assets between separating spouses in financial remedy proceedings. The landmark case of White v White [2000] introduced the starting point of an equal division of capital, as Lord Nicholls held: “There should be no bias in favour of the money-earner and against the home-maker and the child-carer”. However, the concept of matrimonial and non-matrimonial assets is vital in cases involving businesses, as the non-business owning spouse may have a weaker claim against the value of the business, in circumstances where the value was generated prior to the marriage or following the parties’ separation.
In the recent High Court case of GA v EL [2023] EWFC 206, the court considered the effect of post-separation endeavour on the value of a business. In this particular case, the parties had a long marriage of 12 years and 2 children together. The former family home was transferred into the wife’s sole name, but the parties were unable to agree the division of the £70 million business proceeds which made up the bulk of their assets.
The husband’s case was that a significant part of the business proceeds derived from 2 years and 2 months of post-separation endeavour and were therefore non-matrimonial. However, the wife argued that the totality of the business was matrimonial and the increase in value was growth from matrimonial efforts and the subsequent natural growth which an established business could expect in a strong market.
The Judge concluded that:
- Post separation non-marital assets can exist at the date of trial even where there has been no undue delay. This is an important reminder that your spouse could be accruing non-matrimonial interests immediately from the point of separation;
- In assessing post separation non-marital assets, the court must guard against counting in the product of passive growth;
- The court should remain mindful of the extent to which the person claiming post separation accrual is simply benefitting from investing the unallocated funds of the other spouse;
- The court should not overlook the domestic contribution which may be taking place by the other spouse post-separation; and
- While a formulaic approach may be better than a broad brush approach, the court will have to make such assessment as best it can on the facts as the court finds them.
The parties instructed a single joint expert (‘SJE’), i.e. an expert who is appointed by the court where both of the parties have conduct of the instruction. The SJE valued the business at the date of separation (November 2019) at £28.1 million, using a ‘present day approach’, where the SJE effectively transported himself to 2019 and did not have consideration to the subsequent years, resulting in the business selling in 2021 for £70 million. The judge adopted the figures of £30 million for the valuation at separation and £60 million at the time of sale. The lower valuation was to account for the fragility of the figures as upon sale some of the consideration was deferred as equity in a holding company.
The court ordered a division of 42.5% of the proceeds to the wife and 57.5% to the husband, which put the husband’s post-separation endeavour at approximately 15%.
What does this mean for business owners?
It is clear that the court is conscious of not including passive growth of the business when considering division of business proceeds, because this growth is part and parcel of the matrimonial element of the business and the changing market conditions and trends which allowed the business to flourish should be divided equally. Careful consideration should be given to the work undertaken by the business owning spouse post-separation, and what difference this has made to the business and therefore its value.
It is vital to establish the true value of the business as early as possible, which may require the instruction of an expert. In the recent case of BR v BR [2024] EWFC 11, the court held that wherever possible, a single joint expert (‘SJE’) should be instructed by both or all of the parties to give the parties a more secure evidential foundation. While it may be tempting to instruct a separate expert, the court have warned against this approach, which can be costly both in terms of expense and emotion, increasing the time and energy spent agreeing a valuation of a fragile and discretionary asset.
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