With divorcing parties increasingly likely to own assets via corporate structures, family lawyers are turning more and more to forensic accountants for help.
This article looks at recent trends in valuation issues on divorce and, in particular, at Mr Justice Mostyn's recent decision in the case of WM v HM  EWCA Civ 41.
In deciding how to divide assets, the Court applies a statutory checklist found in Section 25(2)(a) of the Matrimonial Causes Act 1973. The “section 25 factors” include an assessment of the income, earning capacity, property and other financial resources of each party at the time of trial and in the foreseeable future. Corporate assets fit squarely within the resources to be considered as re-confirmed by Lord Sumption in Prest v Petrodel Resources Limited and Others  UKSC 34 when he said the following.
"This definition of the relevant resources of the parties to the marriage means that the relevant spouse's ownership and control of a company and practical ability to extract or money or money's worth from it are unquestionably relevant to the Court's assessment of what his resources really are."
In addition to conventional forensic valuations, accountants are often instructed to report on the non-marital element of a company. In broad terms, the pre-marital and sometimes post-marital element of a business is not subject to sharing on divorce unless required to meet the financially weaker party's needs. The Court's preferred approach has been consistent since the Court of Appeal's decision in Jones v Jones  EWCA Civ 41, in which the Court of Appeal applied the following method of valuation:
1. take the value of the business at the date of marriage (in Jones this was £2m);
2. adjust that value to reflect the latent potential or “springboard” (in Jones, the Court used this to increase arbitrarily the value at the date of marriage to £4m); and
3. apply passive growth throughout the marriage by applying an appropriate inflationary index to ascertain the current value of the original non-matrimonial element. In Jones this increased from £4m to £9m.
That approach went unchallenged until Mostyn's decision in the case of WM v HM  EWHC 25. Rejecting the Jones approach, he considered two alternatives.
1. He considered a linear time apportionment carried out on the assumption that the value of the business will have increased in equal proportions over the entire course of its life. On that analysis, one could plot the growth of the business on a graph from incorporation through to the current value at the date of trial. This approach calculates the value at the date of marriage by assessing the proportion of growth that had occurred prior to marriage (or to cohabitation if it lead seamlessly to marriage). By way of example, if a business were incorporated 30 years ago and the marriage had lasted for 20 of those years, 33.3% would be non-marital.
2. He considered a discounting approach based on the inflationary changes in the value of money. Based loosely on Locke's 1722 theory, he applied an annual 5% discount to the business's value at trial leading to a notional value at the date of marriage.
In conclusion, Mostyn preferred the linear approach believing that it, “more fairly and realistically reflects the potential of [the] company at the start of the marriage”. The effect of this change in methodology was stark with the linear time apportionment approach giving a non-matrimonial value of £44.5m in comparison to only £1.5-2m if the Jones approach were followed.
The linear approach is arguably more suited to cases where it is difficult to ascertain the historic value of a business at the point of marriage. While each case is fact specific, a party seeking to maximise the non-marital value of a business may seek a valuation on that basis.
During the ICAEW Forensic and Expert Witness Conference on 7 November 2017 we will take you through recent developments in family law and provide examples of how lawyers are working more effectively with forensic accountants. We will discuss practical ways accountants can add value to financial remedy cases and provide a “wish list” of services we would like, helping you to target your services more effectively.
James Copson and Will MacFarlane