How private companies are dealt with in divorce 19 Jun 2012

The Court of Appeal in Wells v Wells (2002) EWCA civ 476, [2002] FLR 97 gave guidance on how the court could deal with shareholdings in private limited companies in cases where there are not sufficient assets to achieve a capital clean break.

Thorpe LJ stated “In principle it seems to us that the separation of the family does not terminate the sharing of the company’s performance. This is easily achieved in any case in which the wife’s dependency is met by continuing periodical payments. It is less easy to achieve in a clean break case. In that situation, however, sharing is achieved by a fair division of both the copper-bottomed assets and the illiquid and risk laden assets.”

There are many cases since the decision in Wells where the court has ignored the capital value of privately owned shareholdings in cases where on-going maintenance is payable; V v V [2005] FLR 697, A v A [2004] EWCH 2818 ) fam.

This approach does make us question why then, at First Appointment, are expensive company valuations directed by the court in cases where there is likely to be on-going spousal maintenance? One of the answers is that the court has a duty to compute all of the parties’ resources at the first stage of its adjudication and so the court should have an independent idea of any significant company shareholding. It is also essential to know this information to ensure that fairness is achieved, even in cases where there will be on-going spousal maintenance.

When this approach is taken it is of course a risk for the spouse who remarries or agrees to a term order, as their periodical payments will fall away and they will cease to benefit from any increase in company profits in the future. A spouse therefore may try to capitalise their maintenance payments. However, the capitalisation cases make it clear that capitalisation is not an opportunity for a further redistribution of wealth. Capitalisation is the process of arriving at a Duxbury lump sum to represent the purchase of the recipient’s maintenance entitlement. The only opportunity to reflect the improved company performance would be to increase the quantum of maintenance prior to the Duxbury calculation. or, adjourn lump sum claims in the order. Another option would be to create a trust deed holding shares on trust for the wife.

The guidance in Wells cannot always be followed if fairness is to be achieved. When fairness demands something more than a simple maintenance order then creative solutions must be searched for.

For more information on this issue or any any other family law issue including if you are seeking a divorce.

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