How can accountants assist in matrimonial disputes?

Accountancy assistance with business assets in ancillary relief cases comes in many forms. Since White v White [2001] 1 AC 596 and subsequent cases, the courts place greater emphasis on understanding the capital values of the parties' assets, so that fair division of those assets may be made. Where there are business assets, then expert and advisory accountants get involved at various stages of the ancillary relief process.

So, how can an accountant help, and when? Single joint expert (SJE) is the role most favoured by the family courts, not least because it can reduce costs and forces the parties to agree joint instructions. ?But a party expert can be more appropriate than an SJE in certain circumstances, ?such as where there are grounds for believing that the business is being manipulated to the unfair advantage of one of the parties; it is unlikely that the parties could agree joint instructions for the expert, because one party would wish certain issues to be examined by the expert in ?much greater detail.

A third role, the shadow expert, can provide initial assessment, identify valuation and liquidity issues and assist in the formulation of detailed instructions to the SJE, as well as later helping to prepare questions to the SJE.

Solicitors instructing accountants are encouraged by the court to consider alternatives to expert valuation of businesses. In some cases, the income stream is more important than the capital value of the business and an unthinking approach to valuation has been criticised as an expensive waste of time. For example, in A v A [2004] EWHC 2818, the judge questioned whether the purpose of obtaining valuation evidence should be considered in a more focused way at an earlier stage, so avoiding the need for ?a full forensic investigation. In this case minority shares in a family business were producing a substantial income return. Unless the company floated or was to be sold as a whole (which was unlikely), the price that could be obtained for the shares would be below their value as an income-producing asset.

Sometimes a basic valuation, by which I mean a 'broad brush' valuation, not a detailed forensic enquiry, may be sufficient to provide an outline figure for negotiation at the FDR stage, with the ability to call for a full expert valuation being reserved for trial. This is a difficult area for instructing solicitors who can be damned if they do request a basic valuation (if thereby they fail to investigate matters in sufficient detail) and damned if they don't, on grounds of incurring unnecessary costs. Solicitors must consider these matters before instructing an expert accountant, and then provide instructions that are clear, precise, that go beyond mere valuation, and address issues that are relevant to eventual settlement.

At all times expert accountants must retain their objectivity and observe their overriding duty to the court. There can be occasional lapses, as noted by Mr Justice Singer in Miller v Miller (M v M (Short marriage: clean break) [2005] EWHC 528, who complained: 'I derive no assistance at all from the minutiae contained in these [expert accountants'] reports nor from the oral evidence of the protagonists (for such they have become) in support of the soundness of their own position and the transparent baselessness of the other's.'

Strict valuation v fairness

A tension can arise between business valuations that follow strict valuation methodology, which precludes the application of hindsight, and the overall requirement for fairness in matrimonial proceedings. A traditional business valuation can be just a starting point in the court's determination, as the following examples show.

So, when is a fair share not a fair share? Suppose that a husband and wife divorce; the husband's business is deemed at the time to be worth £50m and the court concludes that his wife is entitled to half the matrimonial assets but that the value of assets brought into the marriage should be excluded as non-matrimonial property. It turns out that at the date of marriage the business was on the cusp of great things and in the subsequent years of marriage it grew to ten times its former size.

The wife could be awarded nearly half the value of the business. She may argue that, as all this growth has happened during the marriage, this is just her husband's bad luck. But is this fair? After all, the husband could reply that the business had a latent value at the date of marriage; it was ready to begin that spurt of growth, so was actually worth more than the bare figures on paper.

Recent developments in the field of ancillary relief prove, if anything, that it is as difficult as ever to predict the outcome of a case. The courts are taking a non-formulaic approach to assessing the value of matrimonial assets and, in particular, eschewing traditional valuation of business assets in the quest for fairness

In the widely-reported case of Jones v Jones [2011] EWCA Civ 41, the court took account of the latent potential or 'springboard effect' as well as passive economic growth when assessing the value of the husband's business at the date of marriage. In making its assessment of value, the court had regard to events after the valuation date; in this case the value of the company increased from the party experts' agreed valuation of £2m at the date of marriage to £25m at its eventual sale.

At first instance, Charles J held that the company had by the date of marriage already acquired the latent capacity that would see its value increase over succeeding years and that latent value should be treated as a non-matrimonial asset. On appeal, the court accepted the principle of the 'springboard effect' but treated Charles J's figure of £15m with caution. It reduced the valuation of the business at the date of marriage to £9m, factoring in a 'springboard effect' of £4m and passive economic growth of £5m. The Court of Appeal acknowledged that its calculation and the resulting uplift were entirely arbitrary and designed to do broad brush justice between the parties.

The decisions by the court in Jones make substantial use of hindsight and use information about subsequent offers for the business and its eventual sale proceeds to inform its assessment of value at the date of marriage. This is contrary to traditional valuation methodology which, when undertaking a hypothetical valuation at a certain date, makes a number of assumptions designed to simulate the interaction between a willing buyer and willing seller of the company. One important assumption that a valuer would make is that no account should be taken of hindsight, which by definition would be available to neither the buyer nor seller. In Jones and other judgments, the courts are overriding traditional valuation methodology in an attempt to achieve fairness in the circumstances of any particular case.

Ignoring hindsight

I was the party expert instructed on behalf of the wife in SK v WL [2010] EWHC 3768. At issue in that case was the value of the husband's business at the date of separation in 2004. The business was later sold in 2008 for £37m on a cash-free, debt-free basis. While the party experts adopted similar and traditional valuation methodologies, we were each criticised by Moylan J for taking an approach that ignored the exponential growth of the company after separation and the eventual sale proceeds; in other words, for ignoring hindsight.

In his judgment, Moylan J said: 'To seek, therefore, to use [the experts'] respective valuations to create a sharp line as at the date of separation is, in the circumstances of this case, to seek to use a building block which is riven with uncertainties and which, if used to support a formulaic approach, would give no more than a spurious mathematical validity to the discretionary exercise in which I am engaged. Further, I am satisfied that the amount for which [the company] was sold to a significant extent originated in, and derived its existence from, the marriage. This is very much 'a springboard case', to use Charles J's description from Jones v Jones.'

While the court's approach to valuation is essential under the sharing principle as it is currently understood, the process and the result may appear to be shrouded in mystery. Parties contemplating litigation in the family courts should continue to seek sound expert advice and opinion as to the value of business assets before assessing what uplift (if any) the court may judge to be appropriate. Let's not forget, most ancillary relief cases do not go to trial and the parties still need an independent, objective assessment of the value of ?business assets before they can reach settlement.